Question

Denton Company manufactures and sells a single product. Cost data for the product are given:

Variable costs per unit:
Direct materials			$	4
Direct labor				11
Variable manufacturing overhead				2
Variable selling and administrative				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	105,000
Fixed selling and administrative		169,000
Total fixed cost per month	$	274,000

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	21,000	17,000
August	21,000	25,000

The company’s Accounting Department has prepared the following absorption costing income statements for July and August:

	July			August
Sales	$	901,000		$	1,325,000
Cost of goods sold		374,000			550,000
Gross margin		527,000			775,000
Selling and administrative expenses		203,000			219,000
Net operating income	$	324,000		$	556,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare contribution format variable costing income statements for July and August.

3. Reconcile the variable costing and absorption costing net operating incomes.

Answer 1

Answer to Part 1-a.

Unit Product Cost as per Absorption Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead

Fixed Manufacturing Overhead = 105,000 / 21,000
Fixed Manufacturing Overhead = $5

Unit Product Cost as per Absorption Costing = $4 + $11 + $2 + $5
Unit Product Cost as per Absorption Costing = $22

Answer to Part 1-b.

Unit Product Cost as per Variable Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost as per Variable Costing = $4 + $11 + $2
Unit Product Cost as per Variable Costing = $17