Question

Variable Costing, Value of Ending Inventory, Operating Income

Pattison Products, Inc., began operations in October and manufactured 49,000 units during the month with the following unit costs:

Direct materials	$4.50
Direct labor	2.50
Variable overhead	1.25
Fixed overhead*	6.50
Variable marketing cost	0.95

^* Fixed overhead per unit = $318,500 / 49,000 units produced = $6.50

Total fixed factory overhead is $318,500 per month. During October, 48,000 units were sold at a price of $24.75, and fixed marketing and administrative expenses were $118,500.

Required:

1. Calculate the cost of each unit using variable costing. Round your final answer to the nearest cent.

$ per unit

2. How many units remain in ending inventory?
units

What is the cost of ending inventory using variable costing?

3. Prepare a variable-costing income statement for Pattison Products, Inc., for the month of October.

Pattison Products, Inc.
Variable-Costing Income Statement
For the Month of October
	$
Less:
Contribution margin	$
Less:
Operating income	$

4. What if November production was 49,000 units, costs were stable, and sales were 50,000 units? What is the cost of ending inventory? If an amount is zero, enter "0".
$

What is operating income for November?
$

Answer 1

1.In Variable Costing,Only variable costs of production(Direct Material,Direct Labour and variable manufacturing overheads) are included in product costs and other costs are expensed.Variable marketing costs are not included in cost of product even though they are variable cost as they are period costs and are expensed.

Cost per unit of each product

Details	Amount
Direct Material	4.50
Direct Labour	2.50
Variable Overheads	1.25
Cost per unit of each product	8.25

2.Units remaining in inventory:-

Opening Stock+Production-Sales=0+49000-48000=1000 units

Cost of ending inventory=1000*8.25=8250.

3.Income Statement October

Details		Amount
Sales(48000*24.75)		1188000
Variable Costs:-
Cost of Goods Sold(48000*8.25)	396000
Variable marketing Expenses(48000*0.95)	45600
Total Variable Costs		441600
Contribution margin		746400
Fixed Costs:-
Fixed Manufacturing Overhead	318500
Fixed marketing and administrative Overhead	118500
Total Fixed Costs		437000
Net Operating Income		309400

4.For November

Units remaining in inventory:-

Opening Stock+Production-Sales=1000+49000-50000=0 units

Cost of ending inventory=0

Income Statement November

Details		Amount
Sales(50000*24.75)		1237500
Variable Costs:-
Cost of Goods Sold(50000*8.25)	412500
Variable marketing Expenses(50000*0.95)	47500
Total Variable Costs		460000
Contribution margin		777500
Fixed Costs:-
Fixed Manufacturing Overhead	318500
Fixed marketing and administrative Overhead	118500
Total Fixed Costs		437000
Net Operating Income		340500