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				11
Variable manufacturing overhead				4
Variable selling and administrative				1
Total variable cost per unit			$	21
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 $54 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	$	1,404,000		$	1,836,000
Cost of goods sold		598,000			782,000
Gross margin		806,000			1,054,000
Selling and administrative expenses		195,000			203,000
Net operating income	$	611,000		$	851,000

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

1a
Direct materials	5
Direct labor	11
Variable manufacturing overhead	4
Fixed manufacturing overhead	3	=90000/30000
Absorption costing unit product cost	23
1b
Direct materials	5
Direct labor	11
Variable manufacturing overhead	4
Variable costing unit product cost	20
2
	July	August
Sales	1404000	1836000
Variable expenses:
Variable cost of goods sold	520000	680000
Variable selling and administrative expenses	26000	34000
Total Variable expenses	546000	714000
Contribution margin	858000	1122000
Fixed expenses:
Fixed manufacturing overhead	90000	90000
Fixed selling and administrative expenses	169000	169000
Total Fixed expenses	259000	259000
Net operating income(loss)	599000	863000
3
	July	August
Variable costing net operating income	599000	863000
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	12000	(12000)	=4000*3
Absorption costing net operating income	611000	851000
Workings:
	July	August
Sales	=26000*54	=34000*54
Variable expenses:
Variable cost of goods sold	=26000*20	=34000*20
Variable selling and administrative expenses	=26000*1	=34000*1