Cornerstone Exercise 2.

4 Variable Costing, Value of Ending Inventory, Operating

Income

Required:

1. Cost of each unit using variable costing

Direct materials $5.00

Direct labor 3.00
Variable overhead 1.50
Total cost $9.50

2. Units in ending inventory = Units, beginning inventory + Units produced – Units

sold
Units in ending inventory = 0 + 40,000 – 38,400
Units in ending inventory = 1,600 units

Using variable costing:

Cost of ending inventory = 1,600 units x $9.50
Cost of ending inventory = $15,200

3. Income statement of Pattison Products, Inc using absorption costing.

Pattison Products, Inc.

Variable-Costing
Income Statement for the Month of October

Percent of sales
Sales ($24 × 38,400) $921,600 100.00%
Less:
Variable cost of goods sold ($9.50 × 38,400) (364,800) (39.58%)
Variable marketing expenses ($1.20 × 38,400) (46,080) (5.00%)
Contribution margin $510,720 55.42%
Less:
Fixed factory overhead (280,000) (30.38%)
Fixed marketing and administrative expenses (130,500) (14.16%)
Operating income $100,220 10.88%

4. Units in ending inventory = Units, beginning inventory + Units produced – Units

sold
Units in ending inventory = 1,600 + 40,000 – 41,000
Units in ending inventory = 600 units
 Using variable costing:
Cost of ending inventory = 600 units x $9.50
Cost of ending inventory = $5,700

Pattison Products, Inc.

Variable-Costing
Income Statement for the Month of November

Percent of sales
Sales ($24 × 41,000) $984,000 100.00%
Less:
Variable cost of goods sold ($9.50 × 41,000) (389,500) (39.58%)
Variable marketing expenses ($1.20 × 41,000) (49,200) (5.00%)
Contribution margin $545,300 55.42%
Less:
Fixed factory overhead (280,000) (30.38%)
Fixed marketing and administrative expenses (130,500) (14.16%)
Operating income $134,800 13.70%