Herro Corporation began operations in July and manufactured 40,000 units during the month with the following unit costs:

Direct materials $7.00

Direct labor 4.00

Variable overhead 3.00

Variable marketing cost 3.00

Total fixed factory overhead is $400,000 per month. During July, 35,000 units were sold at a price of $40, and fixed marketing and administrative expenses were $150,000.

Required:

1. Calculate the unit product cost of each unit using absorption costing and variable costing.
2. Prepare a variable costing income statement for Herro Corporation for the month of July.
3. Explain how variable costing differs from absorption costing.