Question

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

Selling price	$	113
Units in beginning inventory		860
Units produced		2,290
Units sold		2,770
Units in ending inventory		380
Variable costs per unit:
Direct materials	$	25
Direct labor	$	18
Variable manufacturing overhead	$	2
Variable selling and administrative expense	$	21
Fixed costs:
Fixed manufacturing overhead	$	66,410
Fixed selling and administrative expense	$	5,540

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

Answer to Question 1:

Calculation of unit product cost under Variable Costing:-
Particulars	Amount($)
Direct Material per unit	25
Direct Labor per unit	18
Variable Manufacturing OH	2
Variable Cost of goods sold per unit	45
Answer to Question 2:
Variable Costing Income Statement:-
Particulars	Amount($)
Sales (2770 units * $113)	313010
Less:
Variable Cost of goods sold(2770 units * $45)	124650
Variable Selling & Admin OH(2770 units * $21)	58170
Total Variable Expenses	182820
Contribution Margin	130190
Less:
Fixed Manufacturing Overhead	66410
Fixed Selling & Admin OH	5540
Total Fixed Expenses	71950
Net Operating Income	58240

Answer to Question 3:

Reconciliation of Variable Costing and Absorption Costing Net Operating Income
Particulars	Amount($)
Variable Costing Net Operating Income	58,240
Less: Fixed Manufacturing OH deferred in inventory under absorption costing(380 units X $ 29)	(11020)
Absorption costing Net Operating Income	47,220

Working Note:

Fixed Manufacturing Overhead = $66,410

No of units produced = 2290 units

Fixed Manufacturing OH per unit = $29