Question

Denton Company manufactures and sells a single product. Cost data for the product are given: Variable costs per unit: Direct materials $ 3 Direct labor 11 Variable manufacturing overhead 2 Variable selling and administrative 2 Total variable cost per unit $ 18 Fixed costs per month: Fixed manufacturing overhead $ 90,000 Fixed selling and administrative 163,000 Total fixed cost per month $ 253,000 The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced Units Sold July 15,000 11,000 August 15,000 19,000 The company’s Accounting Department has prepared the following absorption costing income statements for July and August: July August Sales $ 583,000 $ 1,007,000 Cost of goods sold 242,000 418,000 Gross margin 341,000 589,000 Selling and administrative expenses 185,000 201,000 Net operating income $ 156,000 $ 388,000

Required: 1. Determine the unit product cost under: a. Absorption costing. b. Variable costing. 2. Prepare variable costing income statements for July and August. 3. Reconcile the variable costing and absorption costing net operating incomes.

Answer 1

Part 1

		Unit product cost
a	Absorption costing	$22
b	Variable costing	$16

Unit product cost under:

Absorption costing = direct materials + direct labor + variable overhead + (fixed manufacturing overhead) = 3+11+2+(90000/15000) = $22

Variable costing = direct materials + direct labor + variable overhead = 3+11+2 = $16

Part 2

DENTON COMPANY Variable Costing Income Statement
	July	August
Unit Sales	11000	19000
Sales	583000	1007000
Variable expenses:
Variable cost of goods sold (units sold *16)	176000	304000
Variable selling and administrative expense (units sold *2)	22000	38000
Total variable expenses	198000	342000
Contribution margin	385000	665000
Fixed expenses:
Fixed manufacturing overhead	90000	90000
Fixed selling and administrative expenses	163000	163000
Total fixed expenses	253000	253000
Net operating income (loss)	132000	412000

Part 3

Reconciliation:
Variable costing net operating income	132000	412000
Add (deduct): Fixed overhead cost deferred in (released from) inventory under absorption costing	24000	(24000)
Absorption costing net operating income	156000	388000