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				10
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	60,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	223,000

The product sells for $54 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	15,000	11,000
August	15,000	19,000

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

	July			August
Sales	$	594,000		$	1,026,000
Cost of goods sold		242,000			418,000
Gross margin		352,000			608,000
Selling and administrative expenses		174,000			182,000
Net operating income	$	178,000		$	426,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

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

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

Answer 1

Ans. 1	In Absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
		Absorption	Variable
	Direct materials	$5.00	$5.00
	Direct labor	$10.00	$10.00
	Variable manufacturing overhead	$3.00	$3.00
	Fixed manufacturing overhead ($60,000 / 15,000)	$4.00
	Total unit product cost	$22.00	$18.00
Ans. 2	DENTON COMPANY
	Variable Costing
	Income Statement
	PARTICULARS	July		August
	Sales		$594,000		$1,026,000
	Less: Variable cost of goods sold:
	Opening inventory	$0		$72,000
	Add: Cost of goods produced	$270,000		$270,000
	Variable cost of goods available for sale	$270,000		$342,000
	Less: Ending inventory	-$72,000		$0
	Variable cost of goods sold		$198,000		$342,000
	Gross Contribution Margin		$396,000		$684,000
	Less: Variable Selling and Administrative expenses		$11,000		$19,000
	Contribution Margin		$385,000		$665,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$60,000		$60,000
	Fixed selling and administrative expenses	$163,000	$223,000	$163,000	$223,000
	Net operating income		$162,000		$442,000
	*Sales   =   Units sold * Selling price
	July (11,000 * $54)	$594,000
	August (19,000 * $54)	$1,026,000
	*Cost of goods produced = Units produced * Unit product cost
	July (15,000 * $18)	$270,000
	August (15,000 * $18)	$270,000
	Ending inventory units = Beginning inventory + Units produced - Units sold
	July =   0 + 15,000 - 11,000   =   4,000 units
	August = 4,000 + 15,000 - 19,000   =   0 units
	(Ending inventory of July = Beginning inventory for August)
	Cost of ending inventory = Ending inventory units * Unit product cost
	July (4,000 * $18)	$72,000
	August (0 * $18)	$0
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	July (11,000 * $1)	$11,000
	August (19,000 * $1)	$19,000
Ans. 3	DENTON COMPANY
	Reconciling Difference in Operating Income
	Between Absorption and Variable Costing
		JULY	AUGUST
	Change in inventory in units	4000	-4000
	(*) Fixed overhead rate	$4.00	$4.00
	Difference in operating income	$16,000.00	($16,000.00)
	Change in inventory in units   =   Units produced - Units sold
	July (15,000 - 11,000)	4000
	August (15,000 - 19,000)	-4000