Question

Denton Company manufactures and sells a single product. Cost data for the product are given: Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Total variable cost per unit Fixed costs per month: Fixed manufacturing overhead Fixed selling and administrative Total fixed cost per month $ 21 $162,000 163,000 $325,000 The product sells for $46 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced July 27,000 August 27,000 Units Sold 23,000 31,000 < Prev 20 of 22 Next >

Answer 1

1. Unit product cost:

	Absorption costing	Variable costing
Direct material	$6	$6
Direct labor	10	10
Variable manufacturing overhead	4	4
Fixed manufacturing overhead ($162,000/27,000)	6	0
Unit product cost	$26	$20

2.

Variable Costing Income Statement
	July	August
Sales	$1,058,000	$1,426,000
Variable costs:
Variable costs of goods sold	460,000 (23,000*$20)	620,000 (31,000*$20)
Variable selling and administrative expenses	23,000 (23,000*$1)	31,000 (31,000*$1)
Total variable costs	483,000	651,000
Contribution margin	575,000	775,000
Fixed costs:
Fixed manufacturing overhead	162,000	162,000
Fixed selling and administrative expenses	163,000	163,000
Total fixed costs	325,000	325,000
Net operating income	$250,000	$450,000

3.

	Year 1	Year 2
Net operating income as per variable costing	$250,000	$450,000
Add: Fixed manufacturing overhead deferred in ending inventory (4,000*$6)	24,000
Less: Fixed manufacturing overhead released from beginning inventory		(24,000)
Net operating income as per absorption costing	$274,000	$426,000