Question

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

Selling price	$	96
Units in beginning inventory		600
Units produced		1,990
Units sold		2,140
Units in ending inventory		450
Variable costs per unit:
Direct materials	$	26
Direct labor	$	20
Variable manufacturing overhead	$	2
Variable selling and administrative	$	17
Fixed costs:
Fixed manufacturing overhead	$	43,780
Fixed selling and administrative	$	6,420

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. (Hint: Use the reconciliation method.)

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 2

a. To calculate the unit product cost for the month under variable costing, we need to consider the variable costs per unit. The unit product cost is the total variable cost per unit. We can calculate it as follows:

Unit Product Cost = Direct Materials Cost per unit + Direct Labor Cost per unit + Variable Manufacturing Overhead Cost per unit + Variable Selling and Administrative Cost per unit

Unit Product Cost = $26 + $20 + $2 + $17 = $65

b. Contribution Format Income Statement using Variable Costing:

bashCopy codePabbatti Corporation
Contribution Format Income Statement
For the Month Ended [Month]

Sales Revenue: (2,140 units x $96) $205,440
Less: Variable Costs:
   Direct Materials (2,140 units x $26) $55,640
   Direct Labor (2,140 units x $20) $42,800
   Variable Manufacturing Overhead (2,140 units x $2) $4,280
   Variable Selling and Administrative (2,140 units x $17) $36,380
Total Variable Costs $139,100

Contribution Margin (Sales Revenue - Total Variable Costs) $66,340
Less: Fixed Costs:
   Fixed Manufacturing Overhead $43,780
   Fixed Selling and Administrative $6,420
Total Fixed Costs $50,200

Net Operating Income $16,140

c. Absorption Costing Net Operating Income: To determine the absorption costing net operating income, we need to include both variable and fixed manufacturing overhead costs in the product cost. Then, we calculate the cost of goods sold using the absorption costing method and reconcile the difference in ending inventory between variable costing and absorption costing. The net operating income can be found as follows:

1. Calculate the cost of goods sold (COGS) under absorption costing: COGS = (Beginning Inventory + Units Produced) x Absorption Cost per Unit Absorption Cost per Unit = Variable Manufacturing Cost per Unit + Fixed Manufacturing Overhead per Unit

Absorption Cost per Unit = $2 + ($43,780 / 1,990) ≈ $24.81

COGS = (600 + 1,990) x $24.81 ≈ $61,884.90

2. Calculate the ending inventory under absorption costing: Ending Inventory = Units in Ending Inventory x Absorption Cost per Unit Ending Inventory = 450 x $24.81 ≈ $11,165.50

3. Calculate the COGS for the month: COGS = COGS from absorption costing + Change in Inventory (Variable Costing - Absorption Costing) COGS = $61,884.90 + ($139,100 - $11,165.50) ≈ $189,819.40

4. Calculate the net operating income: Net Operating Income = Sales Revenue - COGS - Variable Selling and Administrative Expenses - Fixed Selling and Administrative Expenses Net Operating Income = $205,440 - $189,819.40 - ($2,140 x $17) - $6,420 ≈ $12,533.60

So, the absorption costing net operating income for the month is approximately $12,533.60.