Question

Denton Company manufactures and sells a single product. Cost data for the product are given:

Variable costs per unit:
Direct materials			$	4
Direct labor				10
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	18
Fixed costs per month:
Fixed manufacturing overhead	$	96,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	259,000

The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	24,000	20,000
August	24,000	28,000

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

	July			August
Sales	$	1,060,000		$	1,484,000
Cost of goods sold		420,000			588,000
Gross margin		640,000			896,000
Selling and administrative expenses		183,000			191,000
Net operating income	$	457,000		$	705,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

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

Denton Company Variable Costing Income Statement July August Net operating income (loss)

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

Answer 1

1.

	Variable costing	Absorption costing
Direct material	$4	$4
Direct labor	10	10
Variable manufacturing overhead	3	3
Fixed manufacturing overhead ($96,000/24,000)	0	4
Unit product cost	$17	$21

2.

Denton Company Variable costing income statement
	July	August
Sales	$1,060,000	$1,484,000
Variable cost:
Variable cost of goods sold	340,000 (20,000*$17)	476,000 (28,000*$17)
Variable selling and administrative expenses	20,000	28,000
Total variable costs	360,000	504,000
Contribution margin	700,000	980,000
Fixed cost:
Fixed manufacturing overhead	96,000	96,000
Fixed selling and administrative expenses	163,000	163,000
Total fixed cost	259,000	259,000
Net operating income	$441,000	$721,000

3.

Reconciliation of variable costing and absorption costing Net operating income
	July	August
Variable costing net operating income	$441,000	$721,000
Add (deduct) Fixed manufacturing overhead cost deferred in (released from)	16,000	(16,000)
Absorption costing net operating income	$457,000	$705,000