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

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		2
Variable selling and administrative		2
Total variable costs per unit		$20
Fixed costs per month:
Fixed manufacturing overhead	$	126,000
Fixed selling and administrative		169,000
Total fixed cost per month	$	295,000

 

The product sells for $49 per unit. Production and sales data for July and August, the first two months of operations, are as follows:

 

	Units Produced	Units Sold
July	21,000	17,000
August	21,000	25,000

 

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

 

	July		August
Sales	$	833,000	$	1,225,000
Cost of goods sold		408,000		600,000
Gross margin		425,000		625,000
Selling and administrative expenses		203,000		219,000
Net operating income	$	222,000	$	406,000

 

Required: Explanation: 1.   Absorption costing Variable costing   Direct materials $ 5          $ 5          Direct labor   11            11          Variable manufacturing overhead   2            2          Fixed manufacturing overhead   ($126,000 ÷ 21,000 units)   6            -            Unit product cost $ 24          $ 18            2.   July August   Variable cost of goods sold @ $18 per unit $ 306,000      $ 450,000       Variable selling and administrative expenses @ $2 per unit $ 34,000      $ 50,000       3.   Year 1 Year 2   Units in beginning inventory 0   4,000     + Units produced 21,000   21,000     − Units sold 17,000   25,000       = Units in ending inventory 4,000   0     Fixed manufacturing overhead cost deferred in inventory under absorption costing (4,000 units × $6 per unit) = $24,000   Fixed manufacturing overhead cost released from inventory under absorption costing (4,000 units × $6 per unit) = $(24,000)