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
1. Determine the unit product cost under absorption costing and variable costing.
Absorption costing:
Variable Costing:
Prepare contribution format variable costing income statements for July and August.

Answer 1

Under absorption costing, the unit product cost includes variable and fixed manufacturing costs. Under variable costing, only variable costs are included. The unit product cost under absorption costing is $43 and under variable costing it is $25.

Step-by-step explanation:

Under absorption costing, the unit product cost consists of both variable and fixed manufacturing costs. To calculate the unit product cost, we add the total variable cost per unit and the fixed manufacturing cost per unit. In this case, the total variable cost per unit is $25 and the fixed manufacturing cost per unit is ($315,000 / 17,500) = $18. The unit product cost under absorption costing is $25 + $18 = $43.

Under variable costing, only variable costs are included in the unit product cost. Therefore, the unit product cost under variable costing is equal to the total variable cost per unit, which is $25.