Question

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

Selling price	$	81
Units in beginning inventory		500
Units produced		1,500
Units sold		1,600
Units in ending inventory		400
Variable costs per unit:
Direct materials	$	19
Direct labor	$	16
Variable manufacturing overhead	$	1
Variable selling and administrative expense	$	11
Fixed costs:
Fixed manufacturing overhead	$	22,500
Fixed selling and administrative expense	$	3,200

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.

Unit Product Cost
Direct Material	$              19
Direct Labor	$              16
Variable Manufacturing Overhead	$                1
Total Product cost per unit	$              36

b.

Income Statement (Variable Costing)
Sales Revenue		$     1,29,600
Less Variable Costs
Cost of Goods Sold	$      57,600
Variable selling and administrative expense	$      17,600
Total Variable Costs		$        75,200
Contribution Margin		$        54,400
Less Fixed Costs
Fixed manufacturing overhead	$      22,500
Fixed selling and administrative expense	$        3,200
Total Fixed Costs		$        25,700
Net Operating Income		$        28,700

c. Fixed overhead per unit = $22500 / 1500 = $15 per unit

Income as per Variable Costing	$      28,700
Add : Fixed Overhead Carried Forward in ending inventory	$        7,500	=500*15
Less : Fixed Overhead Brought Forward in beginning inventory	$       -6,000	=-400*15
Income as per Absorption Costing	$      30,200