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				3
Variable selling and administrative				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	180,000
Fixed selling and administrative		166,000
Total fixed cost per month	$	346,000

The product sells for $51 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	30,000	26,000
August	30,000	34,000

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

	July			August
Sales	$	1,326,000		$	1,734,000
Cost of goods sold		598,000			782,000
Gross margin		728,000			952,000
Selling and administrative expenses		218,000			234,000
Net operating income	$	510,000		$	718,000

Required:

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

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

Answer 1

1.

Denton Company
Variable Costing Income Statement
	July	August
Sales	1326000	1734000
Variable expenses:
Cost of goods sold	442000	578000
Selling and administrative expenses	52000	68000
Total variable expenses	494000	646000
Contribution margin	832000	1088000
Fixed expenses:
Manufacturing overhead	180000	180000
Selling and administrative expenses	166000	166000
Total fixed expenses	346000	346000
Net operating income (loss)	486000	742000

Working:

	Absorption	Variable
	Costing	Costing
Direct materials	3	3
Direct labor	11	11
Variable manufacturing overheads	3	3
Fixed manufacturing overheads ($180000/30000)	6
Per unit cost $	23	17

2.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	July	August
Variable costing net operating income (loss)	486000	742000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing (4000 x $6)	24000
Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing (4000 x $6)		24000
Absorption costing net operating income (loss)	510000	718000