Question

Denton Company manufactures and sells a single product. Cost data for the product are given:

Variable costs per unit:
Direct materials			$	5
Direct labor				11
Variable manufacturing overhead				3
Variable selling and administrative				3
Total variable cost per unit			$	22
Fixed costs per month:
Fixed manufacturing overhead	$	105,000
Fixed selling and administrative		160,000
Total fixed cost per month	$	265,000

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	21,000	17,000
August	21,000	25,000

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

	July			August
Sales	$	816,000		$	1,200,000
Cost of goods sold		408,000			600,000
Gross margin		408,000			600,000
Selling and administrative expenses		211,000			235,000
Net operating income	$	197,000		$	365,000

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