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				3
Variable selling and administrative				1
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	45,000
Fixed selling and administrative		166,000
Total fixed cost per month	$	211,000

The product sells for $48 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	15,000	11,000
August	15,000	19,000

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

	July			August
Sales	$	528,000		$	912,000
Cost of goods sold		242,000			418,000
Gross margin		286,000			494,000
Selling and administrative expenses		177,000			185,000
Net operating income	$	109,000		$	309,000

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

Requirement:1 a,b Unit product cost Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head Unit Cost Absorption 6.00 10.000 3.00 3.00 22.00 Variable 6.00 10.00 3.00 19.00

Requirement:2 Denton Company Variable Costing Income Statement July August 912000 528000 Sales Variable Expense : Variable cost of goods sold Variable Selling and Administrative Expense 209000 11000 361000 19000 220000 308000 380000 532000 Total Varible Expenses Contribution Magin Fixed Expenses : Fixed manufacturing Overheads Fixed Selling and Administrative Expenses 45000 166000 45000 166000 Total fixed Expenses Net Operating Income or loss 211000 97000 211000 321000

Requirement:3 Reconcile the variable costing and absorption costing Net income July August Variable Costing Net Operating Income (loss) 97000 321000 Add(Deduct) Fixed Manufacturing Overheads cost Deferred in (released From) inventory 12,000 -12000 Absorption Costing Net Operating Income or loss 109000 309000