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				10
Variable manufacturing overhead				3
Variable selling and administrative				2
Total variable cost per unit			$	21
Fixed costs per month:
Fixed manufacturing overhead	$	90,000
Fixed selling and administrative		172,000
Total fixed cost per month	$	262,000

The product sells for $50 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	$	700,000		$	1,100,000
Cost of goods sold		336,000			528,000
Gross margin		364,000			572,000
Selling and administrative expenses		200,000			216,000
Net operating income	$	164,000		$	356,000

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

The Absorption Costing Unit Product Cost
				July	August
Direct Material				6	6
Direct labour				10	10
Variable Manufacturing overheads				3	3
Fixed Manufacturing overheads				5.00	5.00	($ 90,000 /18,000 units)
Absorption costing unit prroduct cost				24.00	24.00
The Variable costing Unit Product cost
				July	Aug
Direct Material				6	6
Direct labour				10	10
Variable Manufacturing overheads				3	3
Variable costing unit prroduct cost				19	19
The Variable Costing Income Statement
				July		August
Sales					700,000		1,100,000
Less: Variable cost
variable cost of goods sold				266,000		418,000
Variable selling expense				28,000	294,000	38,000	456,000
Contribution margin					406,000		644,000
Fixed expense:
Fixed Manufacturing overheads					90,000		90,000
Fixed selling expense					172,000		172,000
Net operating Income					144,000		382,000
Reconciliation Statement for July:
Net income as per Variable costing						144000
Add: Fixed Mfg cost defferred in ending inventory (4000 units @$5)						20000
Net Income as per absorption costing						164000
Reconciliation Staatement for August:
Net income as per Variable costing						382000
Less: Fixed Mfg OH released in beginning Inv (4000 units @5)						20000
Net Income as per absorption costing						362000
Note: Selling and admin expense in Absorption csogting for August has been taken as wrong. It should be $ 110,000. Net income shall be $362,000