Question

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

Variable costs per unit:

Direct materials $7
Direct labor $10
Variable manufacturing overhead $5
Variable selling and administrative $3
Total variable cost per unit $25

Fixed costs per month:

Fixed manufacturing overhead $ 315,000
Fixed selling and administrative $ 245,000
Total fixed cost per month $ 560,000
The product sells for $60 per unit.

Production and sales data for July and August, the first two months of operations, follow:
          Units Produced    Units Sold
July          17,500           15,000
August      17,500           20,000

The company’s Accounting Department has prepared absorption costing income statements for July and August as presented below:

                                                       July                 August
Sales                                            $900,000          $1,200,000    
Cost of goods sold                         $600,000              $800,000     
Gross margin                                 $300,000             $400,000    
Selling and administrative expenses  $290,000            $305,000     
Net operating income                       $10,000             $95,000   

Required:

1. Determine the unit product cost under absorption costing and variable costing.

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

3. Reconcile the variable costing and absorption costing net operating income figures.
*July/August
Variable costing net operating income (loss)
Add/Deduct fixed manufacturing overhead cost deferred in/released from
inventory under absorption costing
Absorption costing net operating income/loss