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.)

If the company produces the same number of units every month, although the sales in units vary from month to month.  

a. Calculation of per unit Variable Cost of Goods sold

Direct Material Per unit  $25

Direct Labor Per unit  $20

Variable Manufacturing overhead $1

Variable Cost of Goods sold Per unit $46

b. The income statement for the month using variable costing

Income statement

Variable Costing Income Statement

Sales  $324,000

($108×3,000)

Variable Expenses:  

Variable Cost of Goods Sold $138,000

(3,000×46)

Variable Selling and Administrative Expense $42,000

(3,000×$14)

Contribution Margin $144,000

[$324,000-($138,000+$42,000)]

Fixed Expenses:  

Fixed manufacturing overhead  $ 64,530  

Fixed selling and administrative expense $9,000  

Total Fixed Expenses$73,530

( $64,530+$9,000)

Net operating income$70,470

($144,000-$73,530)  

c. The absorption costing net operating income for the month

First step is to calculate the  Fixed manufacturing overhead per unit

Using this formula

Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced

Let plug in the formula

Fixed manufacturing overhead per unit=  $ 64,530÷ 2,390 units

Fixed manufacturing overhead per unit= $27 per units

Second step is to calculate the Manufacturing overhead deferred in  inventory using this formula

Manufacturing overhead deferred in  inventory = Fixed manufacturing overhead in ending inventory – Fixed manufacturing overhead in beginning inventory

Let plug in the formula

Manufacturing overhead deferred in  inventory = [$27 per unit × 955 units-345 units]) – $0

Manufacturing overhead deferred in  inventory = $16,470

Third step is to compute the Absorption costing net operating income

Variable costing net operating income $70,470

Add fixed manufacturing overhead costs deferred in inventory under absorption costing $16,470

Absorption costing net operating income $86,940

($70,470+$16,470)

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Answer and Explanation:

The computation is shown below:

a. Unit product cost under variable costing is

Direct material$25

Add: Direct labor$20

Add: Variable manufacturing overhead $1

Unit product cost$46

b. The preparation of the contribution income statement is presented below:

Sales (3,000 units × $108)$324,000

Less: Variable cost of

goods sold (3,000 units × $46)($138,000)

Less: Variable selling

and administrative expense (3,000 units × $14)($42,000)

Contribution margin$144,000

Less: Fixed manufacturing overhead($64,530)

Less: Fixed selling and administrative expense($9,000)

Net operating income$70,470

c. The absorption costing net operating income is

Net operating income under variable costing$70,470

Less: Fixed manufacturing

overhead  (955 units - 345 units) × $27($16,470)

Net operating income under absorption costing $54,000

The $27 come from

= $64,530 ÷ 2,390 units

= $27

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