Question

Problem 6-22 Variable Costing Income Statements; Income Reconciliation [LO6-1, LO6-2, LO6-3]

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

Variable costs per unit:
Direct materials			$	6
Direct labor				11
Variable manufacturing overhead				3
Variable selling and administrative				2
Total variable cost per unit			$	22
Fixed costs per month:
Fixed manufacturing overhead	$	120,000
Fixed selling and administrative		163,000
Total fixed cost per month	$	283,000

The product sells for $46 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	30,000	26,000
August	30,000	34,000

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

	July			August
Sales	$	1,196,000		$	1,564,000
Cost of goods sold		624,000			816,000
Gross margin		572,000			748,000
Selling and administrative expenses		215,000			231,000
Net operating income	$	357,000		$	517,000

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare variable costing income statements for July and August.

3. Reconcile the variable costing and absorption costing net operating incomes.

Answer 1

1.

Per Unit costs	(a) Absorption costing	(b) Variable costing
Direct materials	$6	$6
Direct labor	11	11
Variable manufacturing overhead	3	3
Fixed manufacturing overhead ($120,000 / 30,000)	4	-
Total product cost per unit	$24	$20

2.

Denton Company
Variable Costing Income statement
	July		August
Sales*		1,196,000		1,564,000
Less : Variable expenses
Variable production costs*	520,000		680,000
Variable selling and administrative             expense*	52,000	(572,000)	68,000	(748,000)
Contribution margin		624,000		816,000
Less : Fixed expenses
Fixed manufacturing overhead	120,000		120,000
Fixed selling and administrative                expenses	163,000	(283,000)	163,000	(283,000)
Net operating income		$341,000		$533,000

*Calculation part :

==> Sales :

- July = 26,000 X $46 per unit = $1,196,000

- August = 34,000 X $46 per unit = $1,564,000

==> Variable production costs :

- July = 26,000 X $20 per unit = $520,000

- August = 34,000 X $20 per unit = $680,000

==> Variable selling and administrative expense :

- July = 26,000 X $2 per unit = $52,000

- August = 34,000 X $2 per unit = $68,000

3. Reconciliation of variable costing and absorption costing net operating incomes.

	July	August
Variable costing net operating income	$341,000	$533,000
Add: Fixed overhead cost deferred in ending inventory (4,000 X $4)	16,000	-
Less: Fixed overhead cost recognized from beginning inventory	-	(16,000)
Absorption costing net operating income	$357,000	$517,000