Question

Pacheo Corporation, which has only one product, has provided the following data concerning its most recent month of operations: Selling price $ 108 Units in beginning inventory 955 Units produced 2,390 Units sold 3,000 Units in ending inventory 345 Variable costs per unit: Direct materials $ 25 Direct labor $ 20 Variable manufacturing overhead $ 1 Variable selling and administrative expense $ 14 Fixed costs: Fixed manufacturing overhead $ 64,530 Fixed selling and administrative expense $ 9,000 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.

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

Direct material	25
Direct labour	20
Variable manufacturing overhead	1
Unit product cost	46

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

Sales (3000*108)	324000
Less: Variable cost of goods sold (3000*46)	(138000)
Less: Variable selling and administrative expense (3000*14)	(42000)
Contribution margin	144000
Less: Fixed manufacturing overhead	(64530)
Less: Fixed selling and administrative expense	(9000)
Net operating income	70470

c. Without preparing an income statement, determine the absorption costing net operating income for the month.

Net operating income under variable costing	70470
Less: Fixed manufacturing overhead in difference in inventory (955-345)*27	(16470)
Net operating income under absorption costing	54000