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				2
Total variable cost per unit			$	19
Fixed costs per month:
Fixed manufacturing overhead	$	54,000
Fixed selling and administrative		175,000
Total fixed cost per month	$	229,000

The product sells for $54 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	$	756,000		$	1,188,000
Cost of goods sold		280,000			440,000
Gross margin		476,000			748,000
Selling and administrative expenses		203,000			219,000
Net operating income	$	273,000		$	529,000

Required:

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

Prepare contribution format variable costing income statements for July and August. Denton Company Variable Costing Income Statement July August Net operating income (loss) 0 $

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

Answer 1

Solution 2:

Particulars	Variable costing
Direct Material	$4
Direct Labor	$10
Variable manufacturing overhead	$3
Fixed Manufacturing Overhead ($72000/24000)	$0
Unit Product cost	$17

Denton Company
Income Statement - Variable Costing
Particulars	July	August
Sales	$7,56,000	$11,88,000
Variable Costs:
Variable cost of goods sold (units sold*$17)	$2,38,000	$3,74,000
Variable Selling and administrative expenses ($2*units sold)	$28,000	$44,000
Total Variable Costs	$2,66,000	$4,18,000
Contribution Margin	$4,90,000	$7,70,000
Fixed Expenses:
Fixed manufacturing overhead	$54,000	$54,000
Fixed Selling & Administrative Expenses	$1,75,000	$1,75,000
Net Operating Income	$2,61,000	$5,41,000

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	July	August
Variable Costing Income (Loss)	$2,61,000	$5,41,000
Add : Fixed manufacturing overhead deferred in ending inventory ($3*4000)	$12,000	$0
Less: Fixed manufacturing overhead released in beginning inventory ($3*4000)	$0	$12,000
Absorption Costing Income (Loss)	$2,73,000	$5,29,000