Problem II $(10$ marks$)$

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

Selling price

Units in beginning inventory

Units produced

Units sold

Units in ending inventory

Variable costs per unit:

Direct materials

Direct labour

Variable manufacturing overhead

Variable selling and administrative

Fixed costs:

Fixed manufacturing overhead

Fixed selling and administrative

$$112$

$5002,8002,900400$

$$37$

$19$

$7$

$5$

$$109,200$

$5,800$

The company prodluces 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: $(10$ marks $25$ minutes$)$

a$)$ Prepare an income statement for the month using the contribution format and the variable costing method.

b$)$ Prepare an income statement for the month using the absorption costing method.

c$)$ Explain why the operating income under absorption costing is different than the operating income under variable costing.