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 $ 20 Fixed costs per month: Fixed manufacturing overhead Fixed selling and administrative Total fixed cost per month 135,000 172,000 307,000 The product sells for $49 per unit. Production and sales data for July and August, the first two months of operations, follow: Units Produced 27,000 27,000 Units Sold 23,000 31,000 July August The company's Accounting Department has prepared the following absorption costing income statements for July and August July August Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income $1,127,000 1,519,000 529,000 713,000 806,000 218,000 234,000 $ 380,000 572,000 598,000 Requirec 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

Denton Company Income Statement (Variable costing) July August Sales $                                           1,127,000 $                                           1,519,000 Variable cost of goods sold   ($4+$11+$3)*23,000 = $414,000 ($4+$11+$3)*31,000 = $558,000 Variable selling administrative expenses $2*23,000 = $46,000 $2*31,000 = $62,000 Total Variable expenses $                                               460,000 $                                               620,000 Contribution margin $                                               667,000 $                                               899,000 Fixed Expenses Fixed Manufacturing overhead $                                               135,000 $                                               135,000 Fixed selling and administrative expenses $                                               172,000 $                                               172,000 Total Fixed Expenses $                                               307,000 $                                               307,000 net operating income (Loss) $                                               360,000 $                                               592,000 Reconciliation Net Income (Variable costing) $                                                   360,000 $                                                   592,000 Add: Fixed Manufacturing overhead carried forward (closing inventories) $135,000/27,000*4,000 = $20,000 Less: Fixed Manufacturing overhead brought in (opening inventories) $135,000/27,000*4,000 = $20,000 Net Income (Absorption Costing) $                                                   380,000 $                                                   572,000

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