Question

Denton Company manufactures and sells a single product. Cost data for the product are given: Variable costs per unit: Direct materials $ 6 Direct labor 11 Variable manufacturing overhead 4 Variable selling and administrative 1 Total variable cost per unit $ 22 Fixed costs per month: Fixed manufacturing overhead $ 90,000 Fixed selling and administrative 169,000 Total fixed cost per month $ 259,000 The product sells for $55 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced Units Sold July 18,000 14,000 August 18,000 22,000 The company’s Accounting Department has prepared the following absorption costing income statements for July and August: July August Sales $ 770,000 $ 1,210,000 Cost of goods sold 364,000 572,000 Gross margin 406,000 638,000 Selling and administrative expenses 183,000 191,000 Net operating income $ 223,000 $ 447,000 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

1. Determination of the unit product cost:

	Absorption costing	Variable costing
Direct materials	$6	$6
Direct labor	$11	$11
Variable manufacturing overhead	$4	$4
Fixed manufacturing overhead ($90,000/18,000)	$5
Unit Product cost	$26	$21

2. Preparation of the variable costing income statements:

	July	August
Sales (14,000 X $55; 22,000 X $55)	$770,000	$1,210,000
Variable expenses:
Variable cost of goods sold (14,000 X $21; 22,000 X $21)	294,000	462,000
selling and administrative (14,000 X $1; 22,000 X $1)	14,000	22,000
Total variable expenses	$308,000	$484,000
Contribution margin	$462,000	$726,000
Fixed expenses:
Fixed manufacturing overhead	90,000	90,000
selling and administrative	169,000	169,000
Total fixed expenses	$259,000	$259,000
Operating income (loss)	$203,000	$467,000

3. Reconciliation of the variable costing and absorption costing net operating incomes:

	July	August
Operating variable costing income (loss)	$203,000	$467,000
Adjustment for Change in inventory during July
Production	18,000
Sales	14,000
Increase in inventory	4,000
Fixed MOH rate	$5
Fixed $ deferred in inventory	$20,000
Operating absorption costing income (loss)	$ 223,000
Adjustment for Change in inventory during August
Production		18,000
Sales		22,000
Decrease in inventory		(4,000)
Fixed MOH rate		$5
Fixed $ released from inventory		($20,000)
Operating absorption costing income (loss)		$ 447,000