Question

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

  

Variable costs per unit:
Direct materials	$	5
Direct labor		10
Variable manufacturing overhead		3
Variable selling and administrative		3
Total variable cost per unit	$	21
Fixed costs per month:
Fixed manufacturing overhead	$	120,000
Fixed selling and administrative		175,000
Total fixed cost per month	$	295,000

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

  

	Units Produced				Units Sold
July		30,000				26,000
August		30,000				34,000

  

The company’s Accounting Department has prepared absorption costing income statements for July and August as presented below:

	July				August
Sales	$	1,248,000			$	1,632,000
Cost of goods sold		572,000				748,000
Gross margin	$	676,000			$	884,000
Selling and administrative expenses		253,000				277,000
Net operating income	$	423,000			$	607,000

Required:

1. Determine the unit product cost under absorption costing and variable costing.

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

3. Reconcile the variable costing and absorption costing net operating income (loss) figures.

Answer 1

1	Absorption Costing
	Unit Cost:	Amount			Fixed MOH	120000
	Direct Material	5.00			Units	30000
	Direct Labor	10.00			Fixed MOH PU	4.00
	Variable MOH	3.00
	Fixed MOH	4.00
	Total	22.00
	Variable Costing
	Unit Cost:	Amount
	Direct Material	5.00
	Direct Labor	10.00
	Variable MOH	3.00
	Total	18.00
2	Variable Costing
		July	Aug
	Sales	1248000	1632000
	Less: Variable COGS	468000	612000
	Gross Contribution Margin	780000	1020000
	Less: Variable S&A	78000	102000
	Net Contribution Margin	702000	918000
	Less: Period Expense
	Fixed Manufacturing Cost	120000	120000
	Fixed S&A Cost	175000	175000
	Net Operating Income	407000	623000
3	Reconciliation of Incomes:	July	Aug
	Net Operating Income-VC	407000	623000
	Add: Fixed M.OH Deffered in Closing Inventory(4000*4)	16000
	Less: Fixed M.OH Carryover in Opening Inventory(4000*4)		-16000
	Net Operating Income-AC	423000	607000