Question

Pabbatti Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price	$	94
Units in beginning inventory		850
Units produced		2,660
Units sold		3,190
Units in ending inventory		320
Variable costs per unit:
Direct materials	$	23
Direct labor	$	16
Variable manufacturing overhead	$	1
Variable selling and administrative	$	19
Fixed costs:
Fixed manufacturing overhead	$	61,180
Fixed selling and administrative	$	9,570

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. (Hint: Use the reconciliation method.)

Required:

a. What is the unit product cost for the month under variable costing?

b. Prepare a contribution format income statement for the month using variable costing.

     

c. Without preparing an income statement, determine the absorption costing net operating income for the month.(Hint: Use the reconciliation method.)

Answer 1

a) Under vaiable costing, only variable manufacturing cost is included in the unit product cost and fixed manufacturing overheads are considered as period cost (not included in the unit product cost).

Calculation of Unit Product Cost for the month under Variable Costing (Amounts in $)

Direct materials	23
Direct labor	16
Variable manufacturing overhead	1
Unit Product Cost for the month	40

Therefore the unit product cost for the month under variable costing is $40 per unit.

b) Contribution Format Income Statement using Variable Costing (Amounts in $)

Sales (3,190 units*$94)		299,860
Variable cost:
Variable cost of goods sold (3,190 units*$40)	(127,600)
Variable selling and administrative (3,190 units*$19)	(60,610)
Total Variable costs		(188,210)
Contribution Margin		111,650
Fixed cost:
Fixed manufacturing overhead	(61,180)
Fixed selling and administrative	(9,570)
Total Fixed Cost		(70,750)
Net Operating Income		40,900

c) Fixed manufacturing overhead per unit = Total Fixed manufacturing overhead/Total units produced

= $61,180/2,660 units = $23 per unit

Unit product cost under Absorption costing

= Total variable manufacturing cost+Fixed Manufacturing overhead per unit

= $40+$23 = $63 per unit

Calculation of Net Operating Income using Reconciliation Method (Amounts in $)

Net operating income under Variable costing	40,900
Add: Fixed cost deferred in ending inventory (320 units*$23 per unit)	7,360
Less: Fixed cost in beginning inventory (850 units*$23 per unit)	19,550
Net operating income under Absorption costing	28,710

Therefore the absorption costing net operating income for the month is $28,710.

Note:-

1) Under absorption costing fixed cost is considered and product cost (not period cost) and included in unit product cost. The difference between operating income under variable costing and absorption costing is only due to fixed cost included in beginning and ending inventory.