Denton Company manufactures and sells a single product. Cost data for the produc

Question

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

The product sells for $50 per unit. Production and sales data for July and August, the first two months of operations, follow:

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

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.

Variable costs per unit: Direct materials $ 6 Direct labor 10 Variable manufacturing overhead 3 Variable selling and administrative 2 Total variable cost per unit $ 21 Fixed costs per month: Fixed manufacturing overhead $ 90,000 Fixed selling and administrative 172,000 Total fixed cost per month $ 262,000

Explanation / Answer

The Absorption Costing Unit Product Cost July August Direct Material 6 6 Direct labour 10 10 Variable Manufacturing overheads 3 3 Fixed Manufacturing overheads 5.00 5.00 ($ 90,000 /18,000 units) Absorption costing unit prroduct cost 24.00 24.00 The Variable costing Unit Product cost July Aug Direct Material 6 6 Direct labour 10 10 Variable Manufacturing overheads 3 3 Variable costing unit prroduct cost 19 19 The Variable Costing Income Statement July August Sales 700,000 1,100,000 Less: Variable cost    variable cost of goods sold 266,000 418,000    Variable selling expense 28,000 294,000 38,000 456,000 Contribution margin 406,000 644,000 Fixed expense:    Fixed Manufacturing overheads 90,000 90,000    Fixed selling expense 172,000 172,000 Net operating Income 144,000 382,000 Reconciliation Statement for July: Net income as per Variable costing 144000 Add: Fixed Mfg cost defferred in ending inventory (4000 units @$5) 20000 Net Income as per absorption costing 164000 Reconciliation Staatement for August: Net income as per Variable costing 382000 Less: Fixed Mfg OH released in beginning Inv (4000 units @5) 20000 Net Income as per absorption costing 362000 Note: Selling and admin expense in Absorption csogting for August has been taken as wrong. It should be $ 110,000. Net income shall be $362,000

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