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				10
Variable manufacturing overhead				4
Variable selling and administrative				2
Total variable cost per unit			$	22
Fixed costs per month:
Fixed manufacturing overhead	$	105,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	268,000

The product sells for $49 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	21,000	17,000
August	21,000	25,000

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

	July			August
Sales	$	833,000		$	1,225,000
Cost of goods sold		425,000			625,000
Gross margin		408,000			600,000
Selling and administrative expenses		197,000			213,000
Net operating income	$	211,000		$	387,000

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.

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

Answer 1

Calculation of Unit cost Under Absorption Costing July August Direct Material 6 Direct Labour 10 10 Variable Manufacturing Overhead Fixed Manufacturing Over head 105000/21000 Units Product Cost 5 5 25.00 25.00 1. Calculation of Unit cost Under Variable Costing July August Direct Material 6.0 6.0 Direct Labour Variable Manufacturing Overhead Unit Product Cost 10.0 10.0 4.0 4.0 20.00 20.00 Answers Unit Product Cost Absorprion Costing Varaible costing 25.00 20.00

2 Income Statement Under Variable Costing July August Sales (@49) Variable Expense Variable Cost Of Goods Sold (@20) Variable Selling and Administrative Expense (@2) Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income(Loss) 1225000 833000 500000 340000 34000 50000 550000 374000 459000 675000 105000 105000 163000 163000 268000 268000 191000 407000

Reconcile the variable costing and absorption costing Net income July August Variable Costing Income(Loss) Add (Deduct) Fixed Manufacturing Overheads cost Deferred in (releasedFrom) inventory Absorption Costing Income(loss) 191000 407000 20000 20000 211000 387000 Working Note -1 July August Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = ( Difference in units * fixed manufacturing OH per unit) 21000 21000 25000 17000 4000 -4000 20,000 20000