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				2
Variable selling and administrative				2
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	108,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	268,000

The product sells for $50 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	18,000	14,000
August	18,000	22,000

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

	July			August
Sales	$	700,000		$	1,100,000
Cost of goods sold		336,000			528,000
Gross margin		364,000			572,000
Selling and administrative expenses		188,000			204,000
Net operating income	$	176,000		$	368,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

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

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

Answer 1

a.	Under Absorption Costing
	Unit product cost:
	Direct Material		$                  6
	Direct Labor		$               10
	Variable Manufacturing overhead		$                  2
	Total Variable Cost		$               18
	Fixed Manufacturing overhead ($108000/18000)		$                  6
	Unit product cost		$               24
b.	Under Variable Costing
	Unit product cost:
	Direct Material		$                  6
	Direct Labor		$               10
	Variable Manufacturing overhead		$                  2
	Unit product cost		$               18
c.	Variable Costing Income Statement
		July	August
	Sales	$   7,00,000	$ 11,00,000
	Variable expenses:
Less:	Variable Cost of goods sold:	$   2,52,000	$   3,96,000
	Variable selling expenses	$       28,000	$       44,000
	Contribution margin	$   4,20,000	$   6,60,000
	Fixed Expenses:
Less:	Fixed Manufacturing overhead	$   1,08,000	$   1,08,000
	Fixed Selling and Administrative expenses	$   1,60,000	$   1,60,000
	Net operating Income	$   1,52,000	$   3,92,000
		July	August
d.	Variable costing net operating income (loss)	$   1,52,000	$   3,92,000
Add / (deduct)	Fixed Manufacturing overhead cost deferred in (released from) inventory under absorption costing [4000 X $6], [-4000 X $6]	24000	$     -24,000
	Absorption costing net operating income (loss)	$   1,76,000	$   3,68,000

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