Question

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

Variable costs per unit:
Direct materials			$	3
Direct labor				12
Variable manufacturing overhead				2
Variable selling and administrative				3
Total variable cost per unit			$	20
Fixed costs per month:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative		172,000
Total fixed cost per month	$	244,000

The product sells for $53 per unit. Production and sales data for July and August, the first two months of operations, follow:

	Units Produced	Units Sold
July	24,000	20,000
August	24,000	28,000

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

	July			August
Sales	$	1,060,000		$	1,484,000
Cost of goods sold		400,000			560,000
Gross margin		660,000			924,000
Selling and administrative expenses		232,000			256,000
Net operating income	$	428,000		$	668,000

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