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 Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Total variable cost per unit $ 23 Fixed costs per month: Fixed manufacturing overhead Fixed selling and administrative Total fixed cost per month $ 90,000 172,000 262,000 The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced 15,000 15,000 Units Sold 11,000 19,000 July August The company's Accounting Department has prepared the following absorption costing income statements for July and August: July 583,000 286.000 August Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income 297,00000 205,000 229,000 $ 92,000 284,000 1,007,000 494,000 513,000 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

Explanation / Answer

1. Determination of Unit product cost

a.   Absorption costing :

Direct Material = $ 6

Direct Labor = $ 11

Variable Manufacturing overhead = $ 3

Fixed Manufacturing cost = $ 6 ( i.e. $ 90,000/15,000 units)

Total = $ 26

b. Variable Costing :

Direct Material = $ 6

Direct Labor = $ 11

Variable Manufacturing overhead = $ 3

Totals = $ 20

2.

Denton Company

Variable Costing Income Statement

3.

Reconciliation of variable costing and absorption costing Net Operating Income July August Variable Costing Net Operating Income (loss) 68,000 308,000 Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing 24,000 (24,000) absorption costing net operating income (loss) 92,000 284,000

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