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Problem 6-22 Variable Costing Income Statements; Income Reconciliation [LO6-1, LO6-2, LO6-3] Denton Company manufactures and sells...

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.

Homework Answers

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
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