Question

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

Variable costs per unit:
Direct materials			$	5
Direct labor				9
Variable manufacturing overhead				3
Variable selling and administrative				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	63,000
Fixed selling and administrative		175,000
Total fixed cost per month	$	238,000

The product sells for $49 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	$	833,000		$	1,225,000
Cost of goods sold		340,000			500,000
Gross margin		493,000			725,000
Selling and administrative expenses		209,000			225,000
Net operating income	$	284,000		$	500,000

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. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

	Absorption costing	Variable costing
Direct material	5	5
Direct labour	9	9
Variable manufacturing overhead	3	3
Fixed manufacturing overhead (63000/21000)	3
Unit product cost	20	17

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

	July	August
Sales	833000	1225000
Less: variable expense
Variable cost of goods sold	(289000)	(425000)
Variable selling and administrative expense	(34000)	(50000)
Total variable expense	(323000)	(475000)
Contribution margin	510000	750000
Less: Fixed expense
Fixed manufacturing overhead	(63000)	(63000)
Fixed selling and administrative expense	(175000)	(175000)
Total fixed expense	(238000)	(238000)
Net operating income	272000	512000

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

	July	August
Absorption costing net operating income	284000	500000
Fixed manufacturing overhead cost in ending inventory (4000*3)	(12000)	12000
Variable costing net operating income	272000	512000