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

Variable costs per unit:
Direct materials $5
Direct labor 11
Variable manufacturing overhead 3
Variable selling and administrative 1
Total variable cost per unit $20
Fixed costs per month:
Fixed manufacturing overhead $120,000
Fixed selling and administrative 169,000
Total fixed cost per month $289,000

The product sells for $52 per unit. Production and sales data for July and August, the first two months of operations, are as follows:

Units Produced Units Sold
July 27,000 23,000
August 27,000 31,000

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

July August
Sales $1,196,000 $1,612,000
Cost of goods sold 483,000 651,000
Gross margin 713,000 961,000
Selling and administrative expenses 241,000 265,000
Net operating income $472,000 $696,000

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.

1. The unit product cost under absorption costing and variable costing.

Product Cost : Absorption Costing = $23,44

Product Cost : Variable Costing = $19.00

2. Contribution format variable costing income statements for July and August.

                                                                       July                 August

Sales                                                         1,196,000            1,612,000

Less Cost of Sales :                                 (437,000)             (513,000)

Opening Stock                                                0                      76,000

Add Production                                         513,000               513,000

Less Closing Stock                                   (76,000)               (76,000)

Contribution                                             759,000            1,099,000

Less Expenses :

Selling and administrative expenses

Variable :                                                   (23,000)               (21,000)

Fixed :                                                      (169,000)             (169,000)

Net operating income                             567,000              909,000

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

                                                                          July                      August

Absorption costing net operating income   $584,760               $891,240

Add Fixed Costs in Opening Inventory                                          $17,760

Less Fixed Costs in Closing Inventory          ($17,760)

Variable costing net operating income       $567,000              $909,000

Explanation:

Product Cost : Absorption Costing = All Manufacturing Costs (Fixed and Variable)

                                                          = $5+$11+$3+($120,000/27,000)

                                                          = $5+$11+$3+$4.44

                                                          = $23,44

Product Cost : Variable Costing = Variable Manufacturing Costs

                                                     = $5+$11+$3

                                                     = $19.00

(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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