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Denton Company: Absorption Costing

During Denton Company's first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ $63 per unit) $ 1,197,000 $ 1,827,000
Cost of goods sold (@ $39 per unit) 741,000 1,131,000

Gross margin 456,000 696,000
Selling and administrative expenses* 308,000 338,000

Net operating income $ 148,000 $ 358,000

* $3 per unit variable; $251,000 fixed each year.

The company's $39 unit product cost is computed as follows:
Direct materials $ 7
Direct labor 11
Variable manufacturing overhead 2
Fixed manufacturing overhead ($456,000 รท 24,000 units) 19

Absorption costing unit product cost $ 39

Production and cost data for the two years are given below:
Year 1 Year 2
Units produced 24,000 24,000
Units sold 19,000 29,000

Required:
1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and variable costing net operating income figures for each year.

Solution Summary

Your tutorial is in excel, attached. Click in cells to see computation. The variable costing financial statements and the reconciliation give you the structure you need to solve similar problems.

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