Question

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

Variable costs per unit:
Direct materials			$	5
Direct labor				12
Variable manufacturing overhead				4
Variable selling and administrative				1
Total variable cost per unit			$	22
Fixed costs per month:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative		175,000
Total fixed cost per month	$	247,000

The product sells for $51 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	18,000	14,000
August	18,000	22,000

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

	July			August
Sales	$	714,000		$	1,122,000
Cost of goods sold		350,000			550,000
Gross margin		364,000			572,000
Selling and administrative expenses		189,000			197,000
Net operating income	$	175,000		$	375,000

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.

Answer 1

SOLUTION

1. Unit product cost under Absorption costing and Variable costing

	Absorption costing ($)	Variable costing ($)
Direct materials	5	5
Direct labor	12	12
Variable manufacturing overhead	4	4
Fixed manufacturing overhead ($72,000/18,000)	4	0
Unit product cost	25	21

2. Variable costing income statements

	July ($)	August ($)
Sales	714,000	1,122,000
Variable expenses:
Variable cost of goods sold (14,000 * $21), (22,000 * $21)	294,000	462,000
Variable selling & administrative (14,000 * $1), (22,000 * $1)	14,000	22,000
Total variable expenses	308,000	484,000
Contribution margin	406,000	638,000
Fixed expenses:
Fixed manufacturing overhead	72,000	72,000
Fixed selling & administrative	175,000	175,000
Total fixed expenses	247,000	247,000
Operating income (loss)	159,000	391,000