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				12
Variable manufacturing overhead				2
Variable selling and administrative				2
Total variable cost per unit			$	22
Fixed costs per month:
Fixed manufacturing overhead	$	108,000
Fixed selling and administrative		169,000
Total fixed cost per month	$	277,000

The product sells for $48 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	$	672,000		$	1,056,000
Cost of goods sold		364,000			572,000
Gross margin		308,000			484,000
Selling and administrative expenses		197,000			213,000
Net operating income	$	111,000		$	271,000

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

Vulcan Company’s contribution format income statement for June is as follows:

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	900,000
Variable expenses		408,000
Contribution margin		492,000
Fixed expenses		465,000
Net operating income	$	27,000

Management is disappointed with the company’s performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:

1. The company is divided into two sales territories—Northern and Southern. The Northern Territory recorded $400,000 in sales and $168,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $212,000 and $130,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories.
2. The company is the exclusive distributor for two products—Paks and Tibs. Sales of Paks and Tibs totaled $200,000 and $200,000, respectively, in the Northern territory during June. Variable expenses are 25% of the selling price for Paks and 59% for Tibs. Cost records show that $90,000 of the Northern Territory’s fixed expenses are traceable to Paks and $40,000 to Tibs, with the remainder common to the two products.

Required:

1-a. Prepare contribution format segmented income statements for the total company broken down between sales territories.

1-b. Prepare contribution format segmented income statements for the Northern Territory broken down by product line.

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	14
Direct labor	$	3
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	290,000
Fixed selling and administrative	$	200,000

During the year, the company produced 29,000 units and sold 22,000 units. The selling price of the company’s product is $42 per unit.

Required:

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

Answer 1

Requirement 1a. Compute unit product cost under absorption costing as follows

Particulars	Amount
Direct material	$6.0
Direct labor	$12.0
Variable manufacturing overhead	$2.0
Fixed manufacturing overhead ($108,000 ÷ 18,000)	$6.0
Unit Product cost	$26.0

Requirement 1b. Compute unit product cost under variable costing as follows

Particulars	Amount
Direct material	$6.0
Direct labor	$12.0
Variable manufacturing overhead	$2.0
Unit Product cost	$20.0

Requirement 2: Prepare variable costing income statements for July and August as follows

Particulars	July	August
Unit Sales	14,000	22,000
Sales Revenue (July: 14,000 × $48; August 22,000 × $48) (a)	$672,000	$1,056,000
Deduct: Variable Expenses:
Cost of goods sold (July: 14,000 × $20; August: 22,000 × $20)	$280,000	$440,000
Selling and admin expenses (July: 14,000 × $2; August: 22,000 × $2)	$28,000	$44,000
Total variable expenses (b)	$308,000	$484,000
(c) Contribution margin (a) − (b)	$364,000	$572,000
Deduct: Fixed Expenses
Manufacturing overhead	$108,000	$108,000
Selling and admin expenses	$169,000	$169,000
Total fixed expenses (d)	$277,000	$277,000
Net operating income (c) − (d)	$87,000	$295,000

Requirement 3:  Reconcile the variable costing and absorption as follows

Particulars	July	August
Operating income under variable costing	$87,000	$295,000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	$24,000	$0
Deduct: Fixed manufacturing overhead cost released inventory under absorption costing	$0	($24,000)
Operating income under absorption costing	$111,000	$271,000

Notes: Compute fixed manufacturing overhead deferred or released as follows

Particulars	July	August
Beginning inventory in units	0	4000
Add: Units produced	18,000	18,000
Deduct: Units sold	14,000	22,000
Ending inventory in units	4,000	0
Fixed manufacturing overhead in ending inventory (4,000 × $6)	$24,000
Fixed manufacturing overhead in beginning inventory (4,000 × $6)		($24,000)
Manufacturing overhead in deferred / (released from) inventory	$24,000	($24,000)