Question

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

Selling price	$	107
Units in beginning inventory		910
Units produced		2,560
Units sold		3,160
Units in ending inventory		310
Variable costs per unit:
Direct materials	$	21
Direct labor	$	21
Variable manufacturing overhead	$	1
Variable selling and administrative expense	$	15
Fixed costs:
Fixed manufacturing overhead	$	71,680
Fixed selling and administrative expense	$	9,480

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.)

Prepare an income statement for the month using absorption costing.

Absorption Costing Income Statement
	0
	0

Answer 1

a.

Direct materials	$21
Direct labor	21
Variable manufacturing overhead	1
Variable costing unit product cost	$43

b.

Sales (3160 X $107)		$338,120
Variable expenses:
Variable cost of goods sold (3160 X $43)	135,880
Variable selling and administrative expenses (3160 X $15)	47,400	183,280
Contribution margin		154,840
Fixed expenses:
Manufacturing overhead	71,680
Selling and administrative expenses	9,480	81,160
Net operating income		$73,680

c.

Variable costing net operating income	$73,680
Add: Fixed overhead absorbed in ending inventory (71680 / 2560 x 310)	8,680
Less: Fixed overhead released in beginning inventory (71680 / 2560 x 910)	25,480
Absorption costing Net operating income	$56,880