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 | 1 | |||
Total variable cost per unit | $ | 18 | ||
Fixed costs per month: | ||||
Fixed manufacturing overhead | $ | 96,000 | ||
Fixed selling and administrative | 163,000 | |||
Total fixed cost per month | $ | 259,000 | ||
The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow:
Units Produced |
Units Sold |
|
July | 24,000 | 20,000 |
August | 24,000 | 28,000 |
The company’s Accounting Department has prepared the following absorption costing income statements for July and August:
July | August | ||||
Sales | $ | 1,060,000 | $ | 1,484,000 | |
Cost of goods sold | 420,000 | 588,000 | |||
Gross margin | 640,000 | 896,000 | |||
Selling and administrative expenses | 183,000 | 191,000 | |||
Net operating income | $ | 457,000 | $ | 705,000 | |
Required:
1. Determine the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare contribution format variable costing income
statements for July and August.
3. Reconcile the variable costing and absorption costing net
operating incomes.
1.
Variable costing | Absorption costing | |
Direct material | $4 | $4 |
Direct labor | 10 | 10 |
Variable manufacturing overhead | 3 | 3 |
Fixed manufacturing overhead ($96,000/24,000) | 0 | 4 |
Unit product cost | $17 | $21 |
2.
Denton Company Variable costing income statement |
||
July | August | |
Sales | $1,060,000 | $1,484,000 |
Variable cost: | ||
Variable cost of goods sold | 340,000 (20,000*$17) | 476,000 (28,000*$17) |
Variable selling and administrative expenses | 20,000 | 28,000 |
Total variable costs | 360,000 | 504,000 |
Contribution margin | 700,000 | 980,000 |
Fixed cost: | ||
Fixed manufacturing overhead | 96,000 | 96,000 |
Fixed selling and administrative expenses | 163,000 | 163,000 |
Total fixed cost | 259,000 | 259,000 |
Net operating income | $441,000 | $721,000 |
3.
Reconciliation of variable costing and absorption costing Net operating income | ||
July | August | |
Variable costing net operating income | $441,000 | $721,000 |
Add (deduct) Fixed manufacturing overhead cost deferred in (released from) | 16,000 | (16,000) |
Absorption costing net operating income | $457,000 | $705,000 |
Denton Company manufactures and sells a single product. Cost data for the product are given: Variable...
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