Question

During Denton Company's first two years of operations, the company reported absorption costing net operating income as follows: Yon 2 $ 1,200,000 $ 1,890,000 Sales (@ $63 per unit) Cost of goods sold (@ $35 per unit) 700,000 1,050.000 560,000 840,000 Gross margin Selling and administrative expenses 312,000 342,000 Net operating income 248,000 498,000 * 53 per unit variable, 5252,000 fixed each year. The company's $35 unit product cost is computed as follows: 7 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead (5425,000 - 25.000 units) Absorption costing unit product cost

Answer 1

1.

Variable Costing Income Statement
	Year 1	Year 2
Sales@$63	$1,260,000	$1,890,000
Variable expenses:
Variable cost of goods sold@$18 ($7+8+3)	360,000	540,000
Variable selling and administrative expenses@$3	60,000	90,000
Total variable expenses	420,000	630,000
Contribution margin	840,000	1,260,000
Fixed expenses:
Fixed manufacturing overhead	425,000	425,000
Fixed selling and administrative expenses	252,000	252,000
Total fixed expenses	677,000	677,000
Net operating income	$163,000	$583,000

2.

Reconciliation of variable costing and absorption costing net operating income
	Year 1	Year 2
Variable costing net operating income	163,000	583,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	85,000 (5,000*$17)	-85,000
Absorption costing net operating income	248,000	498,000