Question

Denton Company manufactures and sells a single product. Cost data for the product are given: MENN Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Total variable cost per unit Fixed costs per month: Fixed manufacturing overhead Fixed selling and administrative Total fixed cost per month $ 18 ve $ 60,000 172,000 $ 232,000 $ 23 The product sells for $54 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced 15,000 15,000 Units Sold 11,000 19,000 July August The company's Accounting Department has prepared the following absorption costing income statements for July and August: Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income July $ 594,000 220,000 374,000 194,000 $ 180,000 August $1,026,000 380,000 646,000 210,000 $ 436,000 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

. Calculation of Unit cost Under Absorption Costing July August Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 60000/15000 Units Product Cost 20.00 20.00 1. Calculation of Unit cost Under Variable Costing July Direct Material 3.0 Direct Labour 11.0 Variable Manufacturing Overhead 2.0 Unit Product Cost 16.00 August 3.0 11.0 2.0 16.00 Answers Unit Product Cost Absorprion Costing Varaible costing 20.00 16.00

2 Income Statement Under Variable Costing July August Sales (@54) 594000 1026000 Variable Expense Variable Cost Of Goods Sold (@16) 176000 304000 Variable Selling and Administrative Expense (@2) 22000 38000 Total Varible Expenses 198000 342000 Contribution Magin 396000 684000 Fixed Expenses Fixed mufacturing Overheads 60000 60000 Fixed Sellingand Administrative Expenses 172000172000 Total fixed Expenses 232000 232000 Net Operating Income(Loss) 164000 452000

3 Reconcile the variable costing and absorption costing Net income July August Variable Costing Income(Loss) 164000 452000 Add (Deduct) Fixed Manufacturing Overheads cost Deferred in 16000 - 16000 (released From) inventory Absorption Costing Income(loss) 180000 436000 Working Note -1 July Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = ( Difference in units * fixed manufacturing OH per unit) August 15000 15000 11000 19000 4000 -4000 16,000 - 16000