Tuesday 22 October 2013

During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

Year 1 Year 2
  Sales (@ $50 per unit) $ 1,000,000     $ 1,500,000    
  Cost of goods sold (@ $34 per unit) 680,000     1,020,000    




  Gross margin 320,000     480,000    
  Selling and administrative expenses* 310,000     340,000    




  Net operating income $ 10,000     $ 140,000    









* $3 per unit variable; $250,000 fixed each year.

The company’s $34 unit product cost is computed as follows:

  Direct materials $ 8   
  Direct labor 10   
  Variable manufacturing overhead 2   
  Fixed manufacturing overhead ($350,000 ÷ 25,000 units) 14   


  Absorption costing unit product cost $ 34   





   
Production and cost data for the two years are given below:

Year 1 Year 2
  Units produced 25,000 25,000
  Units sold 20,000 30,000


Required:
1.
Prepare a variable costing contribution format income statement for each year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Variable Costing Income Statement
              Year 1               Year 2
  Sales $   $  


  Variable expenses:   
       Variable cost of goods sold    
       Variable selling and administrative expenses    


  Total variable expenses    


  Contribution margin    


  Fixed expenses:
       Fixed manufacturing overhead    
       Fixed selling and administrative expenses    


  Total fixed expenses    


  Net operating income (loss) $   $  






2.
Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
             Year 1              Year 2
  Variable costing net operating income (loss) $   $  
  Add (deduct) fixed manufacturing overhead
  deferred in (released from) inventory under
  absorption costing
   


  Absorption costing net operating income (loss) $   $  







Explanation:

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