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				11
Variable manufacturing overhead				3
Variable selling and administrative				1
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	90,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	253,000

The product sells for $55 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	$	605,000		$	1,045,000
Cost of goods sold		264,000			456,000
Gross margin		341,000			589,000
Selling and administrative expenses		174,000			182,000
Net operating income	$	167,000		$	407,000

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

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

Answer 1

Direct materials	4
Direct labor	11
Variable manufacturing overhead	3
Variable costing unit product cost	18
2
	July	August
Sales	605000	1045000
Variable expenses:
Variable cost of goods sold	198000	342000
Variable selling and administrative expenses	11000	19000
Total Variable expenses	209000	361000
Contribution margin	396000	684000
Fixed expenses:
Fixed manufacturing overhead	90000	90000
Fixed selling and administrative expenses	163000	163000
Total Fixed expenses	253000	253000
Net operating income(loss)	143000	431000
3
	July	August
Variable costing net operating income	143000	431000
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	24000	(24000)	=4000*6
Absorption costing net operating income	167000	407000
Workings:
Fixed manufacturing overhead per unit	6	=90000/15000
	July	August
Variable expenses:
Variable cost of goods sold	=11000*18	=19000*18
Variable selling and administrative expenses	=11000*1	=19000*1