ACC 206│VARIABLE AND ABSORPTION COSTING
Straight Problems
1. Unit product costs, profit and cost of ending inventory. Northern Bicycle produces an
inexpensive motorbike that sells for P 12,000. Selected data for the company’s operations last
year follows:
Units in the beginning inventory
Units produced
Units sold
Units in ending inventory:
Direct Materials
Direct labor
Manufacturing overhead
Selling and administrative
Fixed costs per year:
Manufacturing overhead
Selling and administrative
300
1,000
800
P1,300
800
500
200
P4,000,000
2,000,000
Required:
1. Compute the unit costs under absorption and variable costing methods.
Problem 1 (1)
Direct materials
Direct labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Unit Cost
(P4,000,000/ 1,000)
Absorption
Costing
P 1,300
800
500
4,000
P 6,600
Variable
Costing
P 1,300
800
500
--P 2,600
2. Compute the operating income under absorption and variable costing methods.
Problem 1 (2)
Sales
Variable Cost of Goods Sold
Variable Selling and Administrative Cost
Fixed Manufacturing Overhead
Fixed Selling and Administrative Cost
Operating Income
(800 x 12,000)
(800 x 2600)
(800 x 200)
(800 x 4,000)
Absorption
Costing
P 9,600,000
(2,080,000)
(160,000)
(3,200,000)
(2,000,000)
P 2,160,000
Variable
Costing
P 9,600,000
(2,080,000)
(160,000)
(4,000,000)
(2,000,000)
P 1,360,000
3. Compute the value of ending inventory under absorption and variable costing methods.
Problem 1 (3)
Absorption
Costing
Ending Inventory:
(500 x 6,600)
(500 x 2,600)
Variable
Costing
P 3,300,000
P 1,300,000
4. Reconcile the difference in operating income under the absorption and variable costing
methods.
Problem 1 (4)
Abs. Costing – Operating Income
Var. Costing – Operating Income
Diff. in Operating Income
P 2,160,000 Units produced
(1,360,000) Units sold
P 800,000 Change in Inventory
Fixed Mfg. OH per unit
Diff. in Operating Income
1,000
(800)
200
x P 4,000
P 800,000
2. Complete the table below by filing out the missing values.
Sales
Variable CGS
Fixed overhead
Variable expenses
Fixed expenses
Profit
Absorption Costing
Variable Costing
Quantity Unit Price Amount Quantity Unit Price Amount
?
30.0
?
?
?
?
8,000
12.00
?
?
?
?
?
3.00
?
10,000
?
?
?
2.50
?
?
?
?
?
4.00
?
?
?
?
?
?
?
?
?
FORMULAS
Sales
Variable costs of goods sold
Variable cost of goods manufactured
=
=
=
Variable expenses
Standard Fixed Overhead Rate
=
=
Standard Fixed Expenses Rate
=
Quantity sold x Unit sales price
Quantity sold x Unit variable production costs
Quantity produced x Unit variable production
costs
Quantity sold x Unit variable expenses
Budgeted Fixed Overhead
Normal Capacity
Budgeted Fixed Expenses
Normal Capacity
Problem 2
Complete the table below.
Absorption Costing
Quantity
Unit
Amount
Price
Sales
Variable CGS
Fixed overhead
Variable
Expenses
Fixed Expenses
Profit
Variable Costing
Quantity
Unit
Amount
Price
8,000
8,000
8,000
8,000
P 30.00
12.00
3.00
2.50
P240,000
(96,000)
(24,000)
(20,000)
8,000
8,000
10,000
8,000
P30.00
12.00
3.00
2.50
P240,000
(96,000)
(30,000)
(20,000)
10,000
42,000
4.00
(40,000)
P60,000
10,000
44,000
4.00
(40,000)
P54,000
3. Inventoriable cost, profit and ending inventory values. Anton Company produces and sells
a unique type of TV antenna. It has just opened a new plant to manufacture the antenna, and the
following costs and revenue data are reported for the first month of the company’s operations.
The management is anxious to see how profitable the new antenna will be and has asked that an
income statement be prepared for the month.
Beginning inventory
Units produced
Units sold
Sales price per unit
Selling and administrative expenses:
Variable per unit
Fixed
Manufacturing costs:
Direct Materials cost per unit
Direct labor cost per unit
Variable overhead cost per unit
Fixed overhead cost (total)
0
42,000
35,000
P 80
5% of sales
P 560,000
15
7
2
640,000
Required:
1. Under variable costing and absorption costing, respectively, compute the:
a. Unit product costs.
b. Profit.
2. Reconcile the difference in profit between absorption and direct costing methods.
Problem 3 (1a)
Absorption
Costing
P 15
7
2
15.24
P 39.24
Direct materials
Direct labor
Variable Factory Overhead
Fixed Factory Overhead
Product Cost Per Unit
Variable
Costing
P 15
7
2
--P 24
Problem 3 (1b)
Sales (35,000 units x 80)
Less: Cost of Sales (35,000 units x 39.24)
Gross Income
Less: Selling & Admin Expenses
Variable
Fixed
Absorption Costing Income
P 2,800,000
(1,373,400)
1,426,600
140,000
560,000
Sales
Less: Cost of Sales (35,000 units x 24)
Manufacturing Margin
Less: Variable S&A Expenses
Contribution Margin
Less: Fixed Costs
Fixed Factory Overhead
S&A Expenses
Variable Costing Income
P 2,800,000
(840,000)
1,960,000
(140,000)
1,820,000
640,000
560,000
Problem 3 (2)
Absorption Costing Income
Variable Costing Income
Difference in Income
(700,000)
P 726,600
P 726,600
1,740,000
(P 1,014,000)
( 80,000)
P 1,740,000
4. Unit product cost, fixed cost and profit. Haiyan Corporation produces a product with the
following data:
A. Standard production costs per unit (Normal capacity = 20,000 units):
Direct Materials
2 lbs @ P 6.00
Direct Labor
1.2 hrs. @ P 20.00
Variable overhead
1.25 hrs. @ P4.00
Fixed overhead
1.25 hrs. @ P 8.00
B. Standard distribution and administrative expenses:
Variable Expenses
Fixed Expenses
C. Regular unit sales price
D. Actual data:
Beginning Inventory
Production
Sales
P 12.00
25.00
5.00
10.00
P 3.00 per unit
P 200,000 per month
P 200.00
2,200 units
19,000 units
18,400 units
Required:
a. The standard unit product cost under absorption costing and variable costing systems.
Problem 4 (a)
Direct materials
Direct labor
Variable Factory Overhead
Fixed Factory Overhead
Standard Product Cost Per Unit
Absorption
Costing
P 12.00
25.00
5.00
10.00
P 52.00
b. The budgeted fixed production costs.
Problem 4 (b)
Budgeted Fixed Expenses = Normal capacity x Standard Fixed Expenses Rate
= 20,000 units x P 10
= P 200,000
Variable
Costing
P 12.00
25.00
5.00
--P 42.00
c. Profit using absorption costing and variable costing under each of the following independent
cases:
Production
1. 20,000
2. 20,000
3. 20,000
4. 23,500
5. 17,500
Sales
22,000
19,300
20,000
23,500
17,200
Problem 4 (c)
1. Production: 20, 000; Sales: 22, 000
Sales
Variable CGS
Fixed Overhead
Variable expenses
Fixed expenses
Profit (loss)
Computation
22,000 x P 200
22,000 x P 42
22,000 x P 10
20,000 x P 10
22,000 x P 3
20,000 x P 10
Absorption
P 4,400,000
(924, 000)
(220,000)
(66,000)
(200,000)
P 2, 990,000
Variable
P 4,400,000
(924, 000)
(200,000)
(66,000)
(200,000)
P 3, 010,000
2. Production: 20, 000; Sales: 19, 300
Sales
Variable CGS
Fixed Overhead
Variable expenses
Fixed expenses
Profit (loss)
Computation
19,300 x P 200
19,300 x P 42
19,300 x P 10
19,300 x P 3
20,000 x P 10
Absorption
P 3,860,000
(810,600)
(193,000)
(57,900)
(200,000)
P 2, 598,500
Variable
P 3,860,000
(810,600)
(200,000)
(57,900)
(200,000)
P 2,591,500
3. Production: 20, 000; Sales: 20, 000
Sales
Variable CGS
Fixed Overhead
Variable expenses
Fixed expenses
Profit (loss)
Computation
20,000 x P 200
20,000 x P 42
20,000 x P 10
20,000 x P 3
20,000 x P 10
Absorption
P 4,000,000
(840,000)
(200,000)
(60,000)
(200,000)
P 2,700,000
Variable
P 4,000,000
(840,000)
(200,000)
(60,000)
(200,000)
P 2,700,000
Problem 4 (c)
4. Production: 23, 000; Sales: 23, 500
Sales
Variable CGS
Fixed Overhead
Variable expenses
Fixed expenses
Profit (loss)
Computation
23,500 x P 200
23,500 x P 42
23,500 x P 10
23,000 x P 10
23,500 x P 3
20,000 x P 10
Absorption
P 4,700,000
(987, 000)
(235,000)
(70,500)
(200,000)
P 3,207,500
Variable
P 4,700,000
(987, 000)
(230,000)
(70,500)
(200,000)
P 3,212,500
5. Production: 17, 500; Sales: 17, 200
Sales
Variable CGS
Fixed Overhead
Variable expenses
Fixed expenses
Profit (loss)
Computation
17,200 x P 200
17,200 x P 42
17,200 x P 10
17,200 x P 3
20,000 x P 10
Absorption
P 3,440,000
(722,400)
(172,000)
(51,600)
(200,000)
P2,294,000
Variable
P 3,440,000
(722,400)
(200,000)
(51,600)
(200,000)
P 2,266,000
C
Absorption
P_________
P_________
12000
P_________
P_________
P_________
144,000
118,000
P_________
P_________
72,000
D
Variable
P_________
8,000
8,200
P_________
P_________
6.00
P_________
P_________
7.00
2.00
P_________
6. Fill out the missing values in the following table:
Unit sales price
Unit sold
Units Produced
Normal Capacity
Sales in pesos
Unit var prod costs
Variable CGS
Fixed Overhead
Std. unit fixed OH rate
Unit variable expense
Variable Expenses
A
Absorption
P 300,000
20,000
23,200
23,200
P_________
P 140.00
P_________
P_________
20.00
P_________
200,000
B
Variable
P_________
32,000
30,000
30,000
P_________
P_________
P1,600,000
330,000
P_________
P_________
480.000
Unit fixed expenses
Fixed expenses
Volume Variance
Profit(loss)
Difference in profit
Profit
(loss)
other
method
12.00
P_________
None
P_________
P_________
P_________
320,000
None
4,000,000
P_________
P_________
250,000
None
(400,000)
500,000
1.20
P_________
None
P_________
P_________
P_________
P_________
P_________
29,000
Problem 6
Unit sales price
Unit sold
Units produced
Normal capacity
Sales in pesos
Unit var prod costs
Variable CGS
Fixed overhead
Std. unit fixed OH rate
Unit variable expense
Variable expenses
Unit fixed expenses
Fixed expenses
Volume variance
Profit (loss)
Difference in profit
Profit (loss) other method
a
Absorption
P 300.00
20,000
23,200
23,200
P 6,000,000
P
140.00
P 2,800,000
P 400,000
B
Variable
210.31
32,000
30,000
30,000
6,730,000
50
1,600,000
330,000
c
Variable
2.9277
62,848
12,000
12,000
184,000
2.29124
144,000
118,000
d
Absorption
20.03
8,000
8,200
8,200
160,240
6.00
48,000
56,000
P
10
P 200,000
P
12.00
P 278,400
None
P 2,321,600
64,000
15
480,000
10.67
320,000
None
4,000,000
22,000
1.14562
72,000
3.97785
250,000
None
(400,000)
500,000
2.00
16,000
1.20
9,840
None
30,400
1,400
P 3,978,000
P(900,000)
P 29,000
P 2,257,600
7. Profit inventoriable costs and costs of ending inventory. Golden Company produces an
inexpensive product branded as “Ginto”. Selected data for the company’s last year’s operations
follow:
Units:
Beginning inventory
Normal Capacity
Unit sales price
Variable cost per unit
Direct material
Direct labor
Manufacturing overhead
Selling and administrative
Fixed costs
Manufacturing overhead per unit
4,000
50,000
P 250
P 30
20
25
12
P 14
Selling and administrative, total
300,000
Required: For each of the following independent cases, determine the profit and account for
the difference in profits under absorption and variable costing methods:
Production
1. 50,000
2. 50,000
3. 50,000
4. 52,000
5. 47,500
Sales
52,000
49,500
50,000
51,000
52,500
Problem 7 (1) Sales 52,000 > Production 50,000
Sales
Variable CGS
Fixed Overhead
Variable Expenses
Fixed Expenses
Profit
Computation
52,000 x 250
52,000 x 75
52,000 x 14
50,000 x 14
52,000 x 12
Absorption
13,000,000
(3,900,000)
(728,000)
(624,000)
(300,000)
P 7,448,000
Variable
13,000,000
(3,900,000)
(700,000)
(624,000)
(300,000)
P 7,476,000
Change in Profit
Production
Less: Sales
Change in inventory
x Standard Fixed Overhead Rate
Change in Profit
P 50,000
(52,000)
(2,000)
P 14
(P 28,000)
Problem 7 (2) Sales (49,500) < Production (50,000)
Sales
Variable CGS
Fixed Overhead
Variable Expenses
Fixed Expenses
Profit
Computation
49,500 x 250
49,500 x 75
49,500 x 14
50,000 x 14
49,500 x 12
Absorption
12,375,000
(3,712,500)
(693,000)
(594,000)
(300,000)
P 7,075,500
Variable
13,000,000
(3,712,500)
(700,000)
(594,000)
(300,000)
P 7,068,500
Change in Profit
Production
Less: Sales
Change in inventory
x Standard Fixed Overhead Rate
Change in Profit
P 50,000
(49,500)
500
P 14
P 7,000
Problem 7 (3) Sales (50,000) = Production (50,000)
Sales
Variable CGS
Fixed Overhead
Variable Expenses
Fixed Expenses
Profit
Computatio
n
50,000 x 250
50,000 x 75
50,000 x 14
52,000 x 12
Absorption
12,500,000
(3,750,000)
(700,000)
(600,000)
(300,000)
P 7,150,000
Variable
12,500,000
(3,750,000)
(700,000)
(600,000)
(300,000)
P 7,150,000
* There is no difference in profit because there is no change in inventory.
Problem 7 (4) Sales 51,000 < Production 52,000
Sales
Variable CGS
Fixed Overhead
Variable Expenses
Fixed Expenses
Profit
Computation
51,000 x 250
51,000 x 75
51,000 x 14
52,000 x 14
51,000 x 12
Absorption
12,750,000
(3,825,000)
(714,000)
(612,000)
(300,000)
P 7,299,000
Change in Profit
Production
Less: Sales
Change in inventory
x Standard Fixed Overhead Rate
Change in Profit
52,000
(51,000)
1,000
P 14
P 14,000
Variable
12,750,000
(3,825,000)
(728,000)
(612,000)
(300,000)
P 7,285,000
Problem 7 (5) Sales 52,500 < Production 47,500
Computation
52,500 x 250
52,500 x 75
52,500 x 14
47,500 x 14
52,500 x 12
Sales
Variable CGS
Fixed Overhead
Variable Expenses
Fixed Expenses
Profit
Absorption
13,125,000
(3,937,500)
(735,000)
(630,000)
(300,000)
P 7,522,500
Variable
13,125,000
(3,937,500)
(665,000)
(630,000)
(300,000)
P 7,592,500
Change in Profit
Production
Less: Sales
Change in inventory
x Standard Fixed Overhead Rate
Change in Profit
47,500
(52,500)
(5,000)
P 14
(P 70,000)
8. Profit computation and reconciliation. Maggie has just obtained a patent on a small electronic
device and organized Maggie Products, Inc., in order to produce and sell the device. During the
first month of operations, the device was very well received on the market and a statement of
profit and loss shown below was prepared. The President was discouraged over the loss shown
on the profit or loss statement.
Maggie Products, Inc.
Statement of Profit or Loss
First Month
Sales (40,000 units)
Less Variable expenses:
Cost of goods sold (*)
Selling and administrative
Contribution Margin
Less fixed expenses:
Manufacturing overhead
Selling and administrative
Loss
P 200,000
P80,000
30,000
75,000
20,000
(* consist of direct materials, direct labor and variable overhead.)
110,000
90,000
95,000
(5,000)
Other data:
Units produced
Units sold
Variable cost per unit:
Direct material
Direct labor
Manufacturing overhead
Selling and administrative expenses
50,000
40,000
P 1.00
0.80
0.20
0.90
Required:
1. Calculate the unit product cost under absorption costing.
Problem 8 (1)
Unit variable costs (80,000/40,000)
Unit fixed factory overhead (75,000/50,000)
Unit cost – Absorption Costing
P 2.00
1.50
P 3.50
2. Calculate the profit (loss) under absorption costing.
Problem 8 (2)
Sales (40,000 x P 5)
Less: Cost of goods sold (40,000 x P 3.50)
Gross Profit
Less: Operating Expenses:
Fixed selling and administrative expenses
Variable selling and administrative expenses
Net Income
P 200,000
(140,000)
P 60,000
P 20,000
30,000
50,000
P 10,000
3. Reconcile the difference in profit under absorption costing and variable costing.
Problem 8 (3)
Change in net income [P 10,000 – (P 5,000)]
Change in inventory (50,000 – 40,000)
Multiply: Unit fixed factory overhead rate
Change in Net income
P 15,000
10,000 units
1.50
P 15,000
9. Profit reconciliation. Alfred Company manufactures and sells a single product. Cost data for
the product follow:
Variable cost per unit:
Material
Labor
Factory overhead
Selling and administrative
Fixed costs per month:
Factory overhead
Selling and administrative
P6
12
4
3
240,000
180,000
The product sells for P 40 per unit. Production and sales data for May and June, the first two
months of operations are as follows:
May
June
Unit Produced
30,000
30,000
Units Sold
26,000
34,000
Income statements prepared by the accounting department, using absorption costing, are
presented below:
Sales
Less Cost of goods sold:
Beginning inventory
Add: Cost of goods manufactured
Goods Available for Sale
Less: Ending Inventory
Cost of goods sold
Gross Margin
Less:
Selling
and
administrative
expenses
Profit
May
P 1,040,000
June
P 1,360,000
0
900,000
900,000
120,000
780,000
260,000
120,000
900,000
1,020,000
0
1,020,000
340,000
258,000
282,000
P 2,000
P 58,000
Required:
1. Prepare the statement of profit or loss for May and June using the contribution approach.
Problem 9 (1)
For the month of May
Sales (26,000 x P 40)
Less: Variable costs:
Cost of goods sold (26,000 x P 22*)
Selling and Administrative expenses (26,000 x P 3)
Contribution Margin
Less: Fixed costs:
Factory overhead
Selling and Administrative expenses
Profit (Loss)
P 1,040,000
572,000
78,000
240,000
180,000
(650,000)
390,000
(420,000)
P (30,000)
For the month of June
Sales (34,000 x P 40)
Less: Variable costs:
Cost of goods sold (34,000 x P 22)
Selling and Administrative expenses (34,000 x P 3)
Contribution Margin
Less: Fixed costs:
Factory overhead
Selling and Administrative expenses
Profit (Loss)
P 1,360,000
748,000
102,000
240,000
180,000
(850,000)
510,000
(420,000)
P 90,000
* [Materials P 6 + Labor 12 + Factory overhead 4]
2. Account for the difference in profit between variable costing and absorption costing.
Problem 9 (2)
May
Change in Net Income
[(P 2,000) – (P 30,000)]
[P 58,000 – P 90,000]
Change in Inventory
(30,000 – 26,000)
(30,000 – 34,000)
Multiply: Fixed factory overhead
Change in Net Income
June
P 32,000
P 32,000
4,000 units
P8
P 32,000
4,000 units
P8
P 32,000
10. Reconciliation of profit and volume variance. Aldrin Products has organized a new
division to manufacture and sell specially designed tables for mounting and using personal
computers. Its new plant is highly automated and requires high monthly fixe cost as shown
below:
Manufacturing costs:
Variable costs per unit:
Direct Materials
P 60
Direct labor
26
Overhead cost
24
Fixed overhead cost
240,000
Selling and administrative costs:
Variable
12% of sales
Fixed
160,000
During the month of operations, the following activity was recorded:
Units produced
5,500
Units sold
5,200
Selling price per unit
P 410
Net materials variance-unfavorable
12,000
Net direct labor variance- favorable
5,000
Net variable overhead variance- favorable 2,500
The company has a normal capacity of 6,000 units.
Required:
1. Unit inventoriable costs under absorption costing and variable costing.
Problem 10 (1)
Direct Materials
Direct Labor
Variable Factory Overhead
Fixed Factory Overhead (240,000/6,000)
Unit Inventoriable Costs
Absorptio
n Costing
P 60
26
24
40
P 150
Variable
Costing
P 60
26
24
P 110
2. Calculate the volume variance.
Problem 10 (2)
Normal Capacity
6,000 units
Actual Capacity
Volume Variance in Units
Standard Fixed Overhead Rate
Volume Variance in Pesos
(5,500 units)
500 units - Unfavorable
x 40
P 20,000– Unfavorable
3. Cost of goods sold at actual under absorption costing and variable costing.
Problem 10 (3)
Cost of Goods Sold, at Standard
o Absorption (5,200 x 150)
o Variable (5,200 x 110)
Fixed Overhead
Net Materials Variance – Unfavorable
Net Direct Labor Variance – Favorable
Net Variable Overhead Variance - Favorable
Volume Variance – Unfavorable
Cost of Goods Sold, at Actual
Absorption
Costing
P 780,000
12,000
(5,000)
(2,500)
20, 000
P 804,5000
Variable Costing
P 572,000
240, 000
12,000
(5,000)
(2,500)
P 816, 500
4. Operating income under absorption costing and variable costing.
Problem 10 (4)
Sales (5,200 x 410)
Less: Cost of Goods Sold, at Actual
Variable Selling and Administrative Expense
o (2,132,000 x 12%)
Fixed Selling and Administrative Expense
Operating Income
Absorption
Costing
P 2,132,000
(804, 500)
Variable Costing
P 2,132,000
(816,500)
(255,840)
(255,840)
(160,000)
P 911, 660
(160,000)
P 899, 660
5. Reconciliation of income under absorption costing and variable costing.
Problem 10 (5)
Absorption Costing Income
Variable Costing Income
Change in Operating Income
P 911,660
P 899,660
P 12, 000
Production
5,500 units
Sales
(5,200 units)
Change in inventory
300 units
Unit Fixed Factory Overhead
x 40
Change in Operating Income
P 12, 000
11. Volume variance units and in hours. Consider the following standard cost per unit based on
a normal capacity of 40,000 units:
Direct Materials
Direct Labor
Variable overhead
Fixed overhead
1.4 kgs @ P 20
0.2 hr. @ P 80
0.2 hr. @ P 100
0.2 hr. @ P 50
P 28.00
16.00
20.00
10.00
Compute the volume variance under each of the following independent actual production
conditions (identify the variances as unfavorable or favorable):
a. 40,000 units.
Problem 11 (a)
Normal Capacity in units
Less: Actual Capacity in units
Volume Variance
Standard Fixed Overhead rate
Volume Variance in Pesos
x
P 40,000
(40,000)
0
10
P0
b. 43,200 units
Problem 11 (b)
Normal Capacity in units
Less: Actual Capacity in units
Volume Variance
Standard Fixed Overhead rate
Volume Variance in Pesos
x
P 40,000
43,200
(3,200) F
10
P 32,000 F
c. 37,800 units.
Problem 11 (c)
Normal Capacity in units
Less: Actual Capacity in units
Volume Variance
Standard Fixed Overhead rate
Volume Variance in Pesos
x
P 40,000
(37,800)
2,200 U
10
P 22,000 U
d. 40,000 units and 8,000 hours.
Problem 11 (d)
Normal Capacity in units
Less: Actual Capacity in units
Volume Variance
Standard Fixed Overhead rate
Volume Variance in Pesos
x
P 40,000
(40,000)
0
10
P0
x
P 8,000
(8,000)
0
10
P0
e. 41,400 units and 7,650 hours.
Problem 11 (e)
Normal Capacity in units
Less: Actual Capacity in units
Volume Variance
Standard Fixed Overhead rate
Volume Variance in Pesos
x
P 40,000
(41,400)
(1,400) F
10
P (1,400) F
x
P 8,000
(7,650)
350 U
10
P 3,500 U
f. 38,800 units and 9,800 hours.
Problem 11 (f)
Normal Capacity in units
Less: Actual Capacity in units
Volume Variance
Standard Fixed Overhead rate
Volume Variance in Pesos
x
P 40,000
(38,800)
1,200 U
10
P 12,000 U
x
P 8,000
(9,800)
(1,800) F
10
P 18,000 F
12. Statement of profit or loss. Bark Manufacturing Company began its operations on January
1, 20CY, and produces a single product that sells for P 12 per unit. During 20CY, 100,000 units
of the product were produced, 90,000 of which were sold. There was no work in process
inventory at the end of the year. Manufacturing costs and marketing and administrative expenses
for 20CY were as follows:
Materials
Direct labor
Factory overhead
Marketing and administrative
Fixed
P 200,000
100,000
Variable
P 2.00 per unit produced
1.50 per unit produced
.50 per unit produced
.20 per unit produced
Required: Prepare the statement of profit or loss for 20CY using direct costing.
Problem 12
Bark Manufacturing Company
Statement of Profit or Loss For the Year Ended 20CY
P 1,080,000
Less: Variable Cost of Goods
Materials
Labor
Variable Factory Overhead
P 180,000
135,000
45,000
Manufacturing Margin
720,000
Less: Variable Selling and Administrative
Expenses
Contribution Margin
(18,000)
Sales
Less: Fixed Factory Overhead
200,000
Fixed Selling and Administrative
Expenses
100,000
Profit
(360,000)
702,000
300,000
P 402,000
13. Profit and Volume Variance. Holland Products began operations on January 3 of the current
year. Standards were established in early January assuming a normal production volume of
160,000 units. However, the company produced only 140,000 units of product and sold 100,000
units at a selling price of P 180 per unit during the current year. Variable cost totaled P 7,000,000
of which 60% were manufacturing and 40% were selling. Total fixed costs amount to P
11,200,000 of which 50% comes from manufacturing. There were no raw materials or work in
process inventories at the end of the year. Actual input prices per unit of product and actual input
quantitative per unit of product were equal to standard.
Required:
1. Determine the cost of goods sold at standard cost, using full absorption costing (excluding
standard cost variances).
Problem 13 (1)
Unit variable costs [(P7, 000,000 x 60%)/140,000 units]
Unit fixed costs [(P11, 200,000 x 50%)/160,000 units]
Total Unit Cost – Absorption Costing
CGS- absorption costing (100,000 units x P65)
P 30.00
35.00
P 65.00
P6, 500,000
2. How much cost would be assigned to ending inventory using direct costing?
Problem 13 (2)
Ending inventory- direct costing [(140,000-10,000) x P30]
P 1,200,000
3. Compute the factory overhead volume variance for the year.
Problem 13 (3)
Normal Capacity
Less: Actual Capacity
Volume Variance in units
Unit Fixed Overhead
Volume Variance in Pesos
P 160,000 units
140,000 units
20,000 U
P
35
P 700,000 U
4. How much would operating income be, using direct costing?
Problem 13 (4)
Sales (100,000 units x P 180)
Variable Cost of goods sold (100,000 units x P 30)
Variable expenses (P7, 000,000 x 40%)
Fixed costs and expenses
Operating Income- direct costing
P 18,000,000
(3,000,000)
(2,800,000)
(11,200,000)
P 1,000,000
15. Statement of profit or loss and reconciliation of profit. The Mass Company manufactures
and sells a single product. The following data cover the two latest years of operations:
Selling Price
Sales in units
Beginning inventory in units
Ending inventory in units
Fixed manufacturing costs
Fixed marketing and administrative costs
Standard variable costs per unit:
Direct materials
Direct labor
Variable manufacturing overhead
Variable marketing and
administrative
20PY
P 40
25,000
1,000
1,000
P 120,000
P 190,000
20CY
P 40
25,000
1,000
5,000
P 120,000
P 190,000
P 10.000
9.50
4.00
1.20
The denominator level is 30,000 output units per year. Mass Company’s accounting records
produce variable costing information, and year-end adjustments are made to produce external
reports showing absorption costing information. Any variances are charged to cost of goods
sold.
Required:
1. Prepare two statements of profit or loss for 20PY and 20CY, one under variable and
one under absorption costing.
2. Explain briefly why the profit figured computed in requirement “a” agrees or do not
agree.
3. Give two advantages and two disadvantages of using variable costing.
Problem 15 (1)
MASS COMPANY
Comparative Income Statement
Sales (25,000 x P40)
Less: Variable Cost of goods
sold
(25,000 X P23.50)
Fixed CGS (25,000 X P4)
Volume variance
Total
20PY
Absorption
Variable
Costing
Costing
P 1,000,000 P 1,000,000
587,500
100,000
20,000 U
707,500
587,500
587,500
587,500
100,000
12,000 U
699,500
587,500
587,500
292,500
412,500
300,500
412,500
-
30,000
-
30,000
292,500
30,000
190,000
220,000
382,500
120,000
190,000
310,000
300,500
30,000
190,000
220,000
382,500
120,000
190,000
310,000
P 72,500
P 72,500
P 80,500
P 72,500
Gross profit/Mfg. Margin
Less: Variable Expenses
(25,000 x P1.20)
Gross profit
Contribution margin
Less: Variable expenses
Fixed overhead
Fixed expenses
Total
Net Income
20CY
Absorption
Variable
Costing
Costing
P 1,000,000 P 1,000,000
Supporting Analysis:
a. Unit fixed manufacturing costs = P 120,000/30,000 units
= P 4.00 units
b.
Normal capacity
Less: Actual capacity
(25,000 + 3,000 – 1,000)
Under (Over) absorbed capacity
x Unit Fixed Overhead rate
Volume Variance – U (F)
20PY
30,000 units
25,000
5,000 U
P4
P 20,000 U
20CY
30,000 units
3,000 U
P4
P 12,000 U
Problem 15 (2)
Change in net income
Production
Less: Sales
Change in inventory
x Unit Fixed Overhead
Change in Net Income
20PY
P0
25,000 units
25,000
0
P4
P0
20CY
P 8,000
27,000 units
25,000
2,000
P4
P 8,000
Problem 15 (3)
Advantages of variable costing:
1. It classifies costs and expenses into either fixed or variable which leads to the
use of contribution margin model for profit prediction.
2. It more significantly relates to the managerial concept of performance
measurement and evaluation where the concept of cost and profit
controllability is at utmost importance.
Disadvantages of variable costing:
1. It is not accordance with the generally accepted accounting principles. GAAP
uses the traditional principle that fixed overhead is a necessary cost of
production and should be classified as product costs.
2. It treats fixed overhead as a period cost (i.e. expenses) which may lead to
lower inventoriable cost and, consequently; lower sales price thereby negating
the potentials of maximizing income.
16. Statement of profit or loss and reconciliation of profit. RGB Corporation is a
manufacturer of a synthetic element. A. B. Cruz, president of the company, has been eager to
obtain the operating results for the fiscal year just completed. Cruz was surprised when the
income statement revealed that operating income dropped to P645,000 from P900,000, although
sales volume had increased by 100,000 units. This drop in operating income occurred even
though Cruz had implemented the following changes during the past 12 months to improve the
profitability of the company.
(1) In response to a 10% increase in production costs, the sales price of the company’s product
was increased by 12%. This action took place on December 3,20PY.
(2) The management of the selling and administrative departments were given strict instructions
to spend no more in fiscal 20CY than they did in fiscal 20PY.
RGB’s accountants prepared the following schedule of selected data to assist management. The
company’s comparative income statement also appears below. RGB uses the FIFO method for
finished goods.
RGB Corporation
Selected Operating and Financial Data
For 20PY and 20CY
Sales price per unit
20PY
P 10.00
20CY
P 11.20
Materials cost per unit
Direct labor cost per unit
1.50
2.50
1.55
2.75
Variable factory overhead per unit
Fixed factory overhead per unit
Total fixed factory overhead
Total selling and administrative expenses
Quantity of units budgeted (normal capacity)
Quantity of the units actually produced
Quantity of units sold
Quantity of units in beginning inventory
1.00
3.00
P3,000,000
1,500,000
1,000,000
1,200,000
900,000
0
1.10
3.30
P3,300,000
1,500,000
1,000,000
850,000
1,000,000
300,000
Quantity of units in ending inventory
300,000
150,000
RGB Corporation
Statement of Operating Income
For The Years Ended November 30, 20PY, and 20CY
Sales revenue
20PY
P 9,000
20CY
P 11,200
Cost of goods sold
Volume variance (favorable) unfavorable
Gross profit
Selling and administrative expenses
Operating income
P 7,200
( 600)
_6,600
2,400
_1,500
P 900
P 8,700
___495
__9,195
2,005
__1,500
P 505
Required:
1. Explain to A. B. Cruz why RGB Corporation’s profit decreased in the current fiscal year,
despite the sales price and sales volume increase.
2. A member of RGB’s Accounting Department has suggested that the company adopt direct
costing for internal reporting purposes.
a. Prepare and operating income statement for the fiscal years ended November 30, 20PY and
20CY, for RGB Corporation using the direct costing method.
b. Present a numerical reconciliation of the difference in operating income between the
absorption costing method currently in the use and the direct costing method proposed.
c. Identify and discuss some of the advantages and disadvantages of using direct costing method
for internal reporting purposes.
Problem 16 (1)
RGB Corporation’s profit decreased in the current fiscal year, although the sales price
and sales volume increased. It may be due to some factors like the increase in production
costs and the opening inventory balance from the past year. The fixed factory overhead
expense of the beginning inventories from the past year were applied to the cost of goods sold
of the current year, which made the current costs incurred higher than the past year. This
factor resulted in increased in the cost of goods sold and decreased in gross margin as well as
the recognized profit.
Problem 16 (2a)
RGB Corporation
Statement of Operating Income
For the year ended November 30, 20PY, and 20CY.
20PY
Sales
(900,000 x 10)
20CY
P 9,000,000 (1,000,000 x 11.20)
P 11,200,000
Less: Var. Expenses
Materials
(900,000 x 1.50)
(1,350,000)
(1,000,000 x 1.55)
(1,550,000)
Direct Labor
(900,000 x 2.50)
(2,250,000)
(1,000,000 x 2.75)
(2,750,000)
Var. FOH
(900,000 x 1.00)
(900,000)
(1,000,000 x 1.10)
(1,100,000)
Contribution Margin
Fixed Expenses:
P 4,500,000
P 5,800,000
Problem 16 (2a)
RGB Corporation
Statement of Operating Income
For the year ended November 30, 20PY, and 20CY.
20PY
Sales
(900,000 x 10)
20CY
P 9,000,000 (1,000,000 x 11.20)
P 11,200,000
Less: Var. Expenses
Materials
(900,000 x 1.50)
(1,350,000)
(1,000,000 x 1.55)
(1,550,000)
Direct Labor
(900,000 x 2.50)
(2,250,000)
(1,000,000 x 2.75)
(2,750,000)
Var. FOH
(900,000 x 1.00)
(900,000)
(1,000,000 x 1.10)
(1,100,000)
Contribution Margin
P 4,500,000
P 5,800,000
Fixed FOH
(3,000,000)
(3,300,000)
Selling & Admin.
Exp.
(1,500,000)
(1,500,000)
P0
P 1,000,000
Fixed Expenses:
Operating Income
Problem 16 (2b)
Computation of Difference in Operating Income
20PY
20CY
ABS OI
P 900,000 ABS OI
P 505,000
VAR OI
(0) VAR OI
(1,000,000)
Difference in OI
P 900,000 Difference in OI
P (495,000)
Problem 16 (2b)
Reconciliation of Absorption Costing and Variable Costing Operating Income
20PY
VAR OI
Add: (300,000 x 3)
ABS OI
20CY
P 0 VAR
900,000 Add: (-150,000 x 3.30)
P 900,000 ABS OI
P 1,000,000
(495,000)
P 505,000
Problem 16 (3)
Advantages
1. Variable costing provides a better understanding of the effect of fixed costs on the net
profits because total fixed cost for the period is shown on the income statement.
2. Various methods of controlling costs such as the standard costing system and flexible
budgets have close relation with the variable costing system. Understanding variable costing
systems makes the use of those methods easy.
3. Companies using variable costing systems prepare income statements in a contribution
margin format that provides necessary information for cost volume profit (CVP) analysis.
This data cannot be directly obtained from a traditional income statement prepared under an
absorption costing system.
4. The net operating income figure produced by variable costing is usually close to the flow of
cash. It is useful for businesses with a problem of cash flows.
5. Under the absorption costing system, income of different periods changes with the change
of inventory levels. Sometimes income and sales move in opposite directions. But it does not
happen under variable costing.
Disadvantages
1. Financial statements prepared under variable costing methods do not conform to generally
accepted accounting principles (GAAP). The auditors may refuse to accept them.
2. Tax laws of various countries require the use of absorption costing.
3. Variable costing does not assign fixed cost to units of products. So, the production costs
cannot be truly matched with revenues.
4. Absorption costing is usually the base for evaluating a top executive’s efficiency.
Reco. Content by accountingformanagement.org [Rashid Javed (M.Com, ACMA)]
Retrieved from: https://www.accountingformanagement.org/advantages-and-disadvantagesof-variable-costing/
Basic concepts
A. 1. In absorption costing, as contrasted with direct costing, the following are absorbed into
inventory.
a. All the elements of fixed and variable manufacturing overhead.
b. Only the fixed manufacturing overhead.
c. Only the variable manufacturing overhead.
d. Neither fixed nor variable manufacturing overhead.
A. 2.
Under the direct costing, which is classified as product costs?
a. Only variable production costs.
b. Only direct costs.
c. All variable costs.
d. All variable and fixed production costs.
A. 3.
Which one of the following considers the impact of fixed overhead costs?
a. Full absorption costing.
b. Marginal costing.
c. Direct costing.
d. Variable costing.
B. 4. When all manufacturing cost used in production are attached to the products, whether
direct, or indirect, variable of fixed, this is called:
a. Process costing
b. Absorption costing.
c. Variable costing
d. Job Order costing
B. 5. An operation costing system is
a. Identical to a process costing system except that actual cost is used for manufacturing
overhead.
b. The same as a process costing system except that materials are allocated on the
basis of batches of production.
c. The same as a job order costing system except that materials are accounted for in the
same way as they are in a process costing system.
d. The same as a job order costing system except that no overhead allocations are made
since actual costs are used throughout.
A. 6. If production is greater than sales (units), then absorption costing net income will generally
be
a. greater than direct costing net income.
b. less than direct costing net income.
c. equal to direct costing net income.
d. additional data is needed to be able to answer.
B. 7. Which of the following statements is correct?
a. When production is higher than sales, absorption costing net income is lower than
variable costing net income,
b. If all the products manufactured during the period are sold in that period,
variable costing net income is equal to absorption costing net income.
c. When production is lower than sales, variable costing net income is lower than
absorption costing net income.
d. When production and sales level are equal, variable costing net income is lower than
absorption costing net income.
D. 8. Which of the following is an argument against the use of direct (variable) costing?
a. Absorption costing overstates the balance sheet value of inventories.
b. Variable factory overhead is a period cost.
c. Fixed factory overhead is difficult to allocate properly.
d. Fixed factory overhead is necessary for the production of a product.
B. 9. The difference between variable costs and fixed costs is
a. Variable costs per unit fluctuate and fixed costs per unit remain constant.
b. Variable costs per unit are fixed over the relevant range and fixed costs per unit
are variable.
c. Total variable costs are variable over the relevant range and fixed in the long term,
while fixed costs never change.
d. Variable costs per unit change in varying increments, while fixed costs per unit
change in equal. Increments.
D. 10. Determine the following statements as true or false.
Statement 1. Direct costing and variable costing are different terms that mean the same
thing.
Statement 2. In a variable costing income statement, sales revenue is typically lower than
in absorption costing income statement.
D. 11. Jansen, Inc. pays bonuses to its managers based on operating income. The company uses
absorption costing, and overhead is applied on the basis of direct labor hours. To increase
bonuses, Jansen's managers may do all of the following except
a. Produce those products requiring the most direct labor.
b. Defer expenses such as maintenance to a future period.
c. Increase production schedules independent of customer demands.
d. Decrease production of those items requiring the most direct labor.
C. 12. The management of a company computes et income using both the absorption and
variable costing approaches to product costing. This year, the net income under the variable
costing approach was greater than the net income under the absorption costing approach. This
difference is most likely the result of
a. A decrease in the variable marketing expenses.
b. An increase in the finished goods inventory.
c. Sales volume exceeding production volume.
d. Inflationary effects on overhead costs.
C. 13. When comparing absorption costing with variable costing, which of the following
statements is not true?
a. Absorption costing enables managers to increase operating profits in the short run
by increasing inventories.
b. When sales volume is more than production volume, variable costing will result
in higher operating profit.
c. A manager who is evaluated based on variable costing operating profit would
be tempted to increase production at the end of a period in order to get a
more favorable review.
d. Under absorption costing, operating profit is a function of both sales volume and
production volume.
B. 14. Which one of the following statements is correct regarding absorption costing variable
costing?
a. Overhead costs are treated in the same manner under both costing methods.
b. If finished goods inventory increases, absorption costing results in higher
income.
c. Variable manufacturing costs are lower under variable costing.
d. Gross margins are the same under both costing methods.
C. 15. When comparing absorption costing with variable costing, which of the following
statements is not true?
a. Absorption costing enables managers to increase operating profits in the short run
by increasing inventories.
b. When sales volume is more than production volume, variable costing will result
in higher operating profit.
c. A manager who is evaluated based on variable costing operating profit would
be tempted to increase production at the end of a period in order to get a
more favourable review.
d. Under absorption costing, operating profit is a function of both sales volume and
production volume.
D. 16. Which of the following is an argument against the use of direct (variable) costing?
a. Absorption costing overstates the balance sheet value of inventories.
b. Variable factory overhead is a period cost.
c. Fixed factory overhead is difficult to allocate properly.
d. Fixed factory overhead is necessary for the production of a product.
Inventoriable costs

The next 2 questions are based on the following data:

Lina company produced 100,000 units of Product Zee during the month of June.
Costs incurred during June were as follows.
Direct materials
P 100,000
Direct labor
80,000
Variable manufacturing overhead
40,000
Fixed manufacturing overhead
50,000
Variable selling and general expenses
12,000
Fixed selling and general expenses
46,000
P 327,000
B. 17. What was product Zee’s unit cost under absorption costing?
a. P 3.27
b. P 2.70
c. P 2.32
d. P 1.80
17.
Direct materials (P 100,000/100,000 units)
Direct labor (P 80,000/100,000 units)
Variable overhead (P 40,000/100,000 units)
Fixed overhead (P 50,000/100,000 units)
Unit product cost – absorption costing (P 270,000/100,000 units)
P 1.00
0.80
0.40
0.50
P 2.70
D. 18. What was product Zee’s unit cost under variable (direct) costing?
a. P 2.82
b. P 2.70
c. P 2.32
d. P 2.20
18.
Direct materials (P 100,000/100,000 units)
Direct labor (P 80,000/100,000 units)
Variable overhead (P 40,000/100,000 units)
Unit product cost-variable costing (P 220,000/100,000 units)
P 1.00
0.80
0.40
P 2.20
B. 19. Excellent Writer produces and sell boxes of signing pens for P 1,000 per box. Direct
materials are P 400 per box and direct manufacturing labor averages P 75 per box. Variable
overhead is P 25 per box and fixed overhead is P 12,500,000 per year. Administrative expenses,
all fixed, run P4, 50000,000 per year, with sales commissions of P 100 per box. Production is
expected to be 100,000 boxed, which is met every year. For the year just ended, 75,000 boxed
were sold. What is the inventoriable cost per box using variable costing?
a. P 770
b. P 500
c. P 475
d. P 625
19.
Direct materials
Direct labor
Variable overhead
Unit product cost- variable costing
P 400
75
25
P 500
A. 20. For P 1,000 per box, the Majestic Producers, Inc., produces and sell delicacies. Direct
materials are P 400 per box and direct manufacturing labor averages P 75 per box. Variable
overhead is P 25 per box and fixed overhead is P 12,500,000 per year. Administrative expenses,
all fixed, run P 4,50000,000 per year, with sales commissions of P 100 per box. Production is
expected to be 100,000 boxed, which is met every year. For the year just ended, 75,000 boxed
were sold. What is the inventoriable cost per box using absorption costing?
a. P 625
b. P 500
c. P 770
d. P 670
20.
Direct materials
Direct labor
Variable overhead
Fixed overhead (P 12,500,000/100,000)
Unit product cost- variable costing
P 400
75
25
125
P 625
B. 21. Compute for the inventory value under the direct costing method using the data given:
units unsold at the end of the period, 45,000; raw materials used, P 6.00 per unit; raw materials
inventory, beginning, P 5.90 per unit; direct labor, P 3.000 per unit; variable overhead per unit, P
2.00 per unit, indirect labor for the month, P 33,750. Total fixed costs, P 67,500.
a. P 16.90
b. P 11.00
c. P 17.45
d. P 19.15
21.
Direct materials
Direct labor
Variable overhead
Unit product cost- variable costing
P 6.00
3.00
2.00
P 11.00
C. 22. The absorption costing method includes in inventory.
a.
b.
c.
d.
Fixed Factory overhead
No
No
Yes
Yes
Variable factory overhead
No
Yes
Yes
No
C. 23. In an income statement prepared as an internal report using the direct (variable) costing
method, fixed selling and administrative expenses would
a. not be used.
b. Be used in the computation of the contribution margin.
c. Be used in the computation of operating income but not in the computation of the
contribution margin.
d. Be treated the same as variable selling and administrative expense.
B. 24. In an income statement prepared as an internal report using the variable costing method,
variable selling and administrative expenses would
a. not be used.
b. Be used in the computation of the contribution margin.
c. Be used in the computation of operating income but not in the computation of the
contribution margin.
d. Be treated the same as variable selling and administrative expense.
D. 25. Care Company’s 20CY fixed manufacturing overhead cost totaled P 100,000 and variable
selling costs totaled P 80,000. Under direct costing, how should these costs be classified?
Period Cost
Product Cost
P0
P 180,000
b. P 80,000
P 100,000
c.
P 100,000
P 80,000
d
.
P 180,000
P0
a.
25.
Manufacturing overhead cost
Variable selling costs
Total period cost
P 100,000
80,000
P 180,000
B. 26. With a production of 200,000 units of product A during the month of June, Bucayao
Corporation has incurred costs as follows:
Direct materials
P 200,000
Direct labor used
135,000
Manufacturing overhead:
Variable
75,000
Fixed
90,000
Selling and administrative expenses:
Variable
30,000
Fixed
85,000
Total
615,000
Under absorption costing, the unit cost of product A was:
a. P 2.20
b. P 2.50
c. P 3.25
d. P 2.05
26.
Direct materials (P200,000/200,000 units)
Direct labor (P135,000/200,000 units)
Variable overhead (P75,000/200,000 units)
Fixed overhead (P 90,000/200,000 units)
Unit product cost- absorption costing
P 1.000
0.675
0.375
0.450
P 2.500
Profit determination
C. 27. The Blue Company has failed to reach its planned activity level during its first 2 years of
operation. The following table shows the relationship among units produced, sales, and normal
activity for these years and the projected relationship for Year 3. All prices and costs have
remained the same for the last 2 years and are expected to do so in Year 3. Income has been
positive in both Year 1 and Year 2.
Units Produced
Sales
Planned Activity
Year 1
90,000
90,000
100,000
Year 2
95,000
95,000
100,0000
Year 3
90,000
90,000
100,000
Because Blue Company uses an absorption-costing system, one would predict gross
margin for Year 3 to be
a. Greater than Year 1
b. Greater than Year 2
c. Equal to Year 1
d. Equal to Year 2
A. 28. HY & Company completed its first year of operations during which time the following
information were generated:
Total units produced
100,000
Total units sold
80,000 at 100 per unit
Work in process ending inventory costs:
Fixed cost
Factory overhead
P 1.2 million
Selling and administrative
P 0.7 million
Per unit variable cost:
Raw materials
P 20.00
Direct labor
12.50
Factory overhead
7.50
Selling and administrative
10.00
If the company used the variable (direct) costing method, the operating income would be
a. P 2, 100,000
b. P 4,000,000
c. P 2, 480,000
d. P 3,040,000
28.
Sales (P80,000 x P100)
Variable costs and expenses (P80,000 x P50)
Fixed costs and expenses
Operating Income
P8,000,000
(4,000,000)
(1,900,000)
P2,100,000
B. 29. Gordon Company began its operations on January 20CY, and produces a single product
that sell for P 10 per unit. Gordon uses an actual (historical) cost system. In 20CY, 100,000 units
were produced and 80,000 units were sold. There was no work-in-process inventory at December
31, 20CY. Manufacturing costs and selling and administrative expenses for 20CY were as
follows:
Fixed costs
Variable costs
Raw materials
-
P 2.00 per unit produced
Direct labor
-
P 1.25 per unit produced
Factory overhead
P 120,000
0,75 per unit produced
Selling and administrative
70,000
1.00 per unit produced
What would be Gordon’s operating income for 20CY under the variable (direct) costing method?
a. P 114,000
c. P 234,000
b. P 210,000
d. P 330,000
29.
Contribution margin (P80,000 x P5)
Fixed costs and expenses
Operating Income
P400,000
190,000
P210,000
B. 30. If net earnings were higher using standard direct costing than using standard absorption
costing, what can be said about sales during the period if inventory is priced using the FIFO
method?
a. Sales increased.
c. Sales decreased.
b. Sales exceed production.
d. Sales were less than production
FURTHER EXPLANATION FOR THEORIES (#s 1-30)
1. A. All the elements of fixed and variable manufacturing overhead.
All manufacturing costs, whether variable or fixed, are included in the determination of
product costing using the absorption costing method.
2. A. Only variable production costs.
Under the direct costing model, only variable production costs such as direct materials,
direct labor, and factory overhead are include in the determination of the product costs. Fixed
factory overhead is classified as a period costs, that is automatically deducted from sales as an
expense regardless of sales volume level.
3. A. Full absorption costing
Full absorption costing treats fixed factory overhead costs as product costs. Thus,
inventory and cost of goods sold include (absorb) fixed factory overhead.
4. B. Absorption costing
Absorption costing includes all manufacturing costs, whether direct or indirect, foxed or
variable, controllable or not as part of product costs.
5. B. The same as process costing system except those materials are allocated on the basis of
batches of production.
Operation costing is used in a situation in which a company produces similar items that
differ mostly in the materials that are used.
6. A. greater than direct costing net income.
The unit product cost of absorption costing (AC) which includes the fixed factory
overhead is greater than that of the variable costing (VC). Therefore, if production is greater than
sales, the cost of ending inventory under absorption costing method shall be much higher.
Because of this, the net income under absorption costing shall also be much higher.
7. B. If all the products manufactured during the period are sold in that period, variable
costing net income is equal to absorption costing net income.
If production and sales are equal, the net income under the absorption costing and
variable costing methods are also equal, under the assumption that the unit cost remains constant.
8. D. Fixed factory overhead is necessary for the production of a product.
Fixed factory overhead is necessary part for the production of a product.
9. B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are
variable.
Variable cost per unit cost always fixed, total variable cost will change according to unit
of products total fixed cost will remain constant, per unit fixed cost will change according to
units of products.
10. D. Statement 1 – True; Statement 2 – False
Technically, direct costing and variable costing mean differently. Direct costing deals
with the process of underlining the importance of segment of margin (direct margin) while
variable costing emphasizes the contribution margin in its analysis. In practice, however, some
accountants interchange direct costing to variable costing as having the same meaning. Hence,
statement 1 is true.
Statement 2 is false because the sales revenue under absorption costing method are the
same under the variable costing method.
11. D. Decrease production of those items requiring the most direct labor.
Under an absorption costing system, income can be manipulated by producing more
products than are sold because more fixed manufacturing overhead will be allocated to the
ending inventory. When inventory increases, some fixed costs are capitalized rather than
expensed. Decreasing production, however, will result in lower income because more of the
fixed manufacturing overhead will be expensed.
12. C. Sales volume exceeding production volume
When sales exceed production, this means that inventory decreased. When inventory
decreases, the income under the variable method is greater than under the absorption method.
This is because under the absorption method, some of the prior period’s fixed costs are being
expensed as part of cost of goods sold this period.
13. C. A manager who is evaluated based on variable costing operating profit would be
tempted to increase production at the end of a period in order to get more favourable
review.
Absorption (full) costing is the accounting method that considers all manufacturing costs
as product costs. These costs include variable and fixed manufacturing costs whether direct or
indirect. Variable (direct) costing considers only variable manufacturing costs to be product
costs, i.e., inventoriable. Fixed manufacturing costs are considered period costs and are expensed
as incurred. If production is increased without increasing sales, inventories will rise. However,
all fixed costs associated with production will be an expense of the period under variable costing.
Thus, this action will not artificially increase profits and improve the manager’s review.
14. B. If finished goods inventory increases, absorption costing results in higher income.
Under variable costing, inventories are charged only with the variable costs of
production. Fixed manufacturing costs are expensed as period costs. Absorption costing charges
to inventory all costs of production. If finished goods inventory increases, absorption costing
results in higher income because it capitalizes some fixed costs that would have been expensed
under variable costing. When inventory declines, variable costing results in higher income
because some fixed costs capitalized under the absorption method in prior periods are expensed
in the current period.
15. C. A manager who is evaluated based on variable costing operating profit would be
tempted to increase production at the end of a period in order to get more favourable
review.
Absorption (full) costing is the accounting method that considers all manufacturing costs
as product costs. These costs include variable and fixed manufacturing costs whether direct or
indirect. Variable (direct) costing considers only variable manufacturing costs to be product
costs, i.e., inventoriable. Fixed manufacturing costs are considered period costs and are expensed
as incurred. If production is increased without increasing sales, inventories will rise. However,
all fixed costs associated with production will be an expense of the period under variable costing.
Thus, this action will not artificially increase profits and improve the manager’s review.
16. D. Fixed factory overhead is necessary part for the production of a product.
Fixed manufacturing costs are necessary part of the production.
17. B. P2.70
Direct materials (P 100,000/100,000 units)
Direct labor (P 80,000/100,000 units)
Variable overhead (P 40,000/100,000 units)
Fixed overhead (P 50,000/100,000 units)
Unit product cost – absorption costing (P 270,000/100,000 units)
18. D. P2.20
Direct materials
Direct labor
Variable overhead
Unit product cost – variable costing
P 1.00
0.80
0.40
P 2.20
Direct materials
Direct labor
Variable overhead
Unit product cost – variable costing
P 400
75
25
P 500
19. B. P500
20. A. P625
Direct materials
Direct labor
Variable overhead
Fixed overhead (P 12,500,000/100,000)
Unit product cost – absorption costing
P 400
75
25
125
P 625
Direct materials
P 6.00
21. B. P11.00
P 1.00
0.80
0.40
0.50
P 2.70
Direct labor
3.00
Variable overhead
2.00
Unit product cost – variable costing
P 11.00
Indirect labor is not included because it is a fixed cost and is not a product cost under the
direct costing method.
22. C. Fixed overhead – Yes; Variable factory overhead – Yes
The following items are included in the inventory cost using the absorption costing
method: Direct material, direct labor, variable overhead, and fixed overhead.
23. C. Be used in the operating income but not in the computation of the contribution
margin.
Under direct (variable) costing, fixed selling and administrative expenses are treated as
period costs (or expenses) and are charged against revenues in computing operating income.
Contribution margin s sales less variable costs and expenses and does not include in fixed costs
and expenses in the computation thereof.
24. B. Be used in the computation of the contribution margin.
Under variable costing method, variable selling and administrative expenses, are treated
as period cost and are included in the computation of contribution margin.
25. D. Period cost – P 180,000; Product cost – P 0
Manufacturing overhead cost
P 100,000
Variable selling costs
80,000
Total period cost
P 180,000
Using direct costing method, fixed manufacturing overhead is a period cost, and variable
selling costs are also period costs. Period costs are those charged against sales in the period
incurred.
26. B. P2.50
Direct materials (200,000/200,000 units)
Direct labor (135,000/200,000 units)
Variable overhead (75,000/200,000 units)
Fixed overhead (90,000/200,000 units)
Unit product cost – absorption costing
P 1.000
0.675
0.375
0.450
P2.500
27. C. Equal to Year 1
Gross margin is calculated as sales minus cost of goods sold. Since all of the costs have
remained the same over the period and there has been no change in inventory for any period
(since sales have been equal to production each year), the gross margin for Year 3 will be equal
to the gross margin from the year in which sales were the same level, and this is Year 1. Because
this is a new company and for every year since its beginning, sales have been equal to
production, inventory at year end for each year has been zero. Because of this, we do not need to
know whether the company closes out under- and over-applied overhead to cost of goods sold
only, or whether the company prorates it between cost of goods sold and inventory. Since
inventory is zero, all under- or over-applied overhead will have been closed to cost of goods sold
only. And for each year since its beginning, the company has had under-applied fixed overhead,
because actual production has been lower than planned production. Unless fixed overhead has
been very different in Year 3 than it was in Year 1, the gross margin for the two years should be
substantially the same.
28. A. P 2,100,000
The total unit variable costs and expenses is P50 (P20+12.50+7.50+10.00).
Sales (P80,000 x P100)
Variable costs and expenses (P80,000 x P50)
Fixed costs and expenses
Operating Income
P8,000,000
(4,000,000)
(1,900,000)
P2,100,000
29. B. P 210,000
The total unit variable costs and expenses is P5 (2.00+1.25+0.75+1.00) and the unit
contribution margin is P5 (P10.00-P5.00).
Contribution margin (P80,000 x P5)
Fixed costs and expenses
Operating Income
P400,000
190,000
P210,000
30. B. Sales exceed production.
The difference in operating income between variable (direct) costing and absorption
costing is in the treatment of fixed overhead, not in the type of costing method used in the
valuation on inventory (as if in this case, FIFO method).
If variable costing income is higher than the absorption costing income, then sales
exceeds production. Remember, variable costing follows the pattern of sales.
A. 31. If sales equal production, one would expect net income under the variable costing method
to be
a. the same as net income under the absorption costing method.
b. Greater than net income under the absorption method.
c. Differing in as much as the difference between sales and production.
d. Less than net income under the absorption costing method.
C. 32. When a firm prepares financial reports by using absorption costing
a. Profits will always increase with increases in sales.
b. Profit will always decrease with decreases in sales.
c. Profits may decrease with increased sales even if there is no change in selling
prices and costs.
d. Decreased output and constant sales result in increased profits.
The next two questions are based on the following information:
Expected to operate at normal capacity, Golder Corporation plans to manufacture 275,000 units
of products in20CY, and the following estimates with respect to sales:
Sales in units
250,000
Unit selling price
P 35.00
Finished goods inventory on December 31, 20PY is estimated at 25,000 units costing P 500,000.
Included in this amount is the fixed manufacturing overhead amounting to P 300,000. No change
in both the fixed manufacturing cost and the variable cost per unit of produce are expected
in20CY.
A. 33. What is the estimated income from manufacturing using the absorption costing method?
a. P 3,750,000
b. P 3,450,000
c. P 3,550,000
d. P 3,550,000
33.
Sales (P250,000 x P35)
Costs of goods sold (P250,000 x P20)
Manufacturing Income( Gross profit)
P8,750,000
(5,000,000)
P3,750,000
C. 34. What is the estimated income from manufacturing using the variable costing method?
a. P 3,150,000
c. P 3,450,000
b. P 3,550,000
d. P 3,750,000
34.
Sales (P250,000 x P35)
Variable Costs of goods sold (P250,000 x P8)
Fixed factory overhead (P275,000 x P12)
Manufacturing Income( Gross profit)
P8,750,000
(2,000,000)
(3,300,000)
P3,450,000
D. 35. Oldies Biscuits manufactures and sells boxed coconut cookies. The biggest markets for
these cookies are as gift that college students buy for their business teachers. There are 100
cookies per box. The following income statement shows the results of the first year of operations.
The statement was the one included in the company’s annual report to the shareholders.
Sales (400 boxes at P 12.50)
Less: Cost of goods sold (400 boxes at P 8.00)
Gross Margin
Less: selling and administrative expenses
Profit
P 5,000.00
3,200.00
1,800.00
800
1,000.00
Variable selling and administrative expenses are P 0.90 per box unit. The company produced 500
boxes during the year. Variable manufacturing costs are P 5.25 per box and fixed manufacturing
overhead costs total P 1,375 for the year. What is the company’s direct costing net income?
a. P 2,540
b. P 2,265
c. P 1,000
d. P 725
35.
Sales (400 boxes at P12.50)
Variable Costs of goods sold (400 boxes at P5.25)
Fixed factory overhead
Selling and administrative expenses
Net Income
P5,000
(2,100)
(1,375)
(800)
P 725
B. 36. Don Papot Ltd., manufactures a single product for which the costs and selling prices are:
Variable production costs
Selling price
Fixed production costs
Fixed selling and administrative overhead
P 50 per unit
P 150 per unit
P 200,000 per quarter
P 480,000 per quarter
Normal capacity is 20,000 units per quarter. Production in 1 quarter was 19,000 per units and
sales volume was 16,000 units. No opening inventory for the quarter. The absorption costing
profit for the quarter was:
a. P 920,000
b. P 950,000
c. P 960,000
d. P 970,000
36.
Normal Capacity
Less: Actual production
Under absorbed capacity
Unit fixed overhead (P200,000/20,000)
Volume Variance
x
20,000 units
19,000
1,000 U
P
10
P 10,000 U
The next two questions are based on the following information:
The following operating data are available from the records of Jonathan Company for the month
of January 20CY:
Sales (P 70 per unit)
Direct materials
Direct labor
Manufacturing overhead:
Fixed
Variable
Marketing and general expenses:
Fixed
Variable
Production in units – 3,280 units
Beginning inventory- none
P 210,000
59, 200
48,000
36,080
24,000
11,000
5% of sales
A. 37. The ending finished goods inventory under absorption costing method would be:
a. P 14,280
b. P 16,968
c. P 12,096
d. P 16,072
37.
The cost of the ending inventory shall be the ending inventory in units multiplied by
the unit cost. Since there were 3,000 units sold (i.e., P210,000 / P70), then the ending
inventory in units would be 280 units (i.e., 3,280 – 3,000). The unit cost under the absorption
costing method is P51.00 [(P59,200 + P48,000 + P24,000 + P36,080) / 3,280 units).
Therefore, the cost of the ending inventory under the absorption costing method shall
be P14, 280 (280 units x P51).
A. 38. The profit for the month under the variable costing method would be:
a. P 32,420
b. P 25,500
c. P 23,320
d. P 22,420
38.
Sales
Variable Costs of goods sold (3,000 units x P40)
Variable expenses (210,000 x 5%)
Fixed factory overhead
Fixed expenses
Net Income
P210,000
(120,000)
(10,500)
(36,080)
(11,000)
P 32,420
The next four questions are based on the following information:
Sales per unit
Variable production cost
Annual fixed production cost
Variable office expense (unit)
Annual fixed selling expense
Produced 12,500 units during the period
No inventory at January 1 (beg.)
Sold 10,000 units
P 15,000
8.00
35,000.00
3.00
5,000.00
C. 39. The ending inventory under direct costing is
a. P 25,000
b. P 27,500
c. P 20,000
d. P 32,500
39.
The unit inventoriable cost under direct costing is P8.00 per unit and the ending
inventory in units is 2,500 (i.e., 12,500 units – 10,000 units). The cost of the ending inventory
under direct costing shall be P 20,000 (i.e., 2,500 units x P8).
D. 40. Ending inventory under absorption costing is
a. P 32,500
b. P 20,000
c. P 25,000
d. P 27,000
40.
The unit fixed overhead is P2.80 (i.e., P 35,000 / 12,500 units). The total unit inventoriable
cost under absorption costing method is P10.80 (i.e. P8.00 + P2.80). Since, the ending
inventory in units is 2,500, then the cost of the ending inventory under the absorption costing
method is P 27,000 (i.e., 2,500 units x P10.80).
A. 41. Total variable annual cost charged to expense in direct costing
a. P 110,000
b. P 117,500
c. P 80,000
d. P 100,000
41.
Variable Costs of goods sold (10,000 X P8)
Variable expenses (10,000 x P3)
Total
P80,000
30,000
P 32,420
D. 42. Total fixed cost charged against current year’s operations in absorption costing.
a. P 35,000
b. P 25,000
c. P 15,000
d. P 43,000
42.
Fixed overhead (10,000 X P2.80)
Fixed expenses
Total
P28,000
15,000
P 43,000
Reconciliation of profit
The next two (2) questions are based on the following information:
The books of Mariposa Company pertaining to the year ended Dec 31,20CY operations showed
the following figures relating to product A:
Beginning inventory- finished goods and work-in-process
No. of units produced
No. of units sold at P 15
Direct materials used
Direct labor used
Manufacturing costs:
Fixed
Variable
Fixed administrative expenses
None
40,000 units
32,500 units
P 177,500
P 85,000
P 110,000
61,500
171,500
P 30,000
B. 43. Under variable costing, what would be the finished goods inventory as at December 31,
20CY?
a. P 81,375.00
b. P 60,750.00
c. P 87,000.00
d. P 49,218.00
e. Answer not given
43.
Ending inventory in units (P40,000-32,500)
Unit product costs
[(P177,500+P85,000+P61,500)/40,0000 units)]
Ending inventory in pesos
P7,500
x 8.10
P60,750
A. 44. Which costing method, variable or absorption costing, would show a higher operating
income for 20CY, and by how much?
a. Variable by P 20,625
b. Absorption by P 20,625
c. Variable by P 26,250
d. Absorption by P 26,250
e. Answer not given
44.
Change in inventory (P40,000-32,500)
Unit fixed overhead (P110,000/40,000)
Change in net income (in favor of absorption
costing)
P7,500
x 2.75
P 20,625
A. 46. During its first year of operations, a company produced 275,000 units and sold 250,000
units. The following cost were incurred during the year:
Variable cost per unit:
Direct materials
P 15.00
Direct labor
10.00
Manufacturing overhead
12.50
Selling and administrative
2.50
Total fixed costs:
Manufacturing overhead
P 2,200,000
Selling and administrative
1,375,000
What is the difference between operating income calculated on the absorption-costing basis and
on the variable-costing basis?
a. Absorption-costing operating income is greater than variable-costing operating
income by P200,000
b. Absorption-costing operating income is greater than variable-costing operating
income by P220,000
c. Absorption-costing operating income is greater than variable-costing operating
income by P325,000
d. Variable-costing operating income is greater than absorption-costing operating
income by P62,500.
B. 47. A manufacturing company employs variable costing for internal reporting and analysis
purposes. However, it converts to absorption costing for external reporting. The Accounting
Department always reconciles the two operating income figures to assure that no errors have
occurred in the conversion. Financial data for the year are presented below. The fixed
manufacturing cost per unit was based on the planned level of production of 480,000 units.
Budgeted and Actual levels for sales and production
`
Budget
Sales (in units)
Production (in units)
Actual
495,000
480,000
510,000
500,000
Standard Unit Manufacturing Costs
Variable Costs
Fixed manufacturing
overhead
Total unit manufacturing cost
Variable Costing
P 10.00
0
Absorption Costing
P 10.00
6.00
P 10.00
P 16.00
The difference between the operating income calculated under the variable costing method and
the operating income calculated under absorption costing method would be
a. P 57,600
b. P 60,000
c. P 90,000
d. P 120,000
47.
The difference between variable costing and absorption costing is that the former
treats fixed manufacturing overhead as a period cost. The latter method treats it as a product
cost. Given that sales exceeded production, both methods expense all fixed manufacturing
overhead incurred during the year. However, 10,000 units (510,000 sales – 500,000
production) manufactured in a prior period were also sold. These units presumably recorded
at P10 under variable costing and P16 under absorption costing. Consequently, absorption
costing operating income is P 60,000 (10,000 x P6) less than that under variable costing.
B. 48. During the year 20CY, Catara Corporation manufactured 70,000 units of product A, a new
product. Only 65,000 units were sold during the year. There was no beginning inventory.
Manufacturing cost per unit was P 20.00 variable and P 50.00 fixed.
What would be the effect on net income if absorption costing is used instead of variable costing?
a. Net income is P 250,000 lower.
b. Net income is P 250,000 higher.
c. Net income is P 100,000 lower.
d. None of the above.
48.
Change in units (P70,000-65,000)
Unit fixed overhead
Change in net income (in favor of absorption costing)
P5,000
x 50
P 250,000
C. 49. Bajada Industries manufactures a single product. Variable production costs are P 20 and
fixed production costs are P 300,000. Bajada uses a normal activity of 20,000 units to sets its
standard costs. Bajada began the year with no inventory, produced 22,000 units, and sold P21,
0000 units. Ending inventory under absorption costing would be
a. P 30,000
b. P 35,000
c. P 20,000
d. P 25,000
C. 50. Last year, Ben Company’s income under absorption costing was P 4,400 lower than its
income under variable costing. The company sold 8,000 units during the year, and its variable
costs were P 8 per unit, of which P 3 was variable selling expense. Fixed manufacturing
overhead was P1 per unit in beginning inventory under absorption costing. How many units did
the company produce during the year?
a. 7,450 units
b. 7,120 units
c. 3,600 units
d. 12,400 units
C. 51. Last year, Vulcan Company’s variable production costs totaled P 7,500 and its fixed
manufacturing overhead costs totaled P 4,500. The company produced 3,000 units during the
year and sold 2,400 units. There were no units in the beginning inventory. Which of the
following statements is true?
a. The net income under absorption costing for the year will be P 900 lower than the net
income under variable costing.
b. Under absorption costing, the units in ending inventory will be costed at P 2.50 each.
c. The ending inventory under variable costing will be P 900 lower than the ending
inventory under absorption costing
d. Under variable costing, the units in the ending inventory will be costed at P4 each.
Volume Variance
B. 52. The production volume variance occurs when using
a. The absorption costing approach because of production exceeding the sales.
b. The absorption costing approach because of production differs from that use in
setting the fixed overhead rate used in applying fixed overhead to production.
c. The variable costing approach because of sales exceeding the production for the period.
d. The variable costing approach because of production exceeding the sales for the
period.
A. 53. Unabsorbed fixed overhead cost in an absorption costing system are
a. fixed manufacturing costs not allocated to units produced.
b. variable overhead costs not allocated to units produced.
c. excess variable overhead costs.
d. costs that cannot be controlled.
C. 54. How will favorable volume variance affect net income under each of the following
method?
Absorption
a Reduce
b Reduce
c Increase
d Increase
Variable
No effect
Increase
No effect
Reduce
A. 55. An unfavorable production-volume variance occurs when
a. production exceeds the denominator level
b. the denominator level exceeds production
c. production exceeds unit sales
d. unit sales exceed production
Use the following information for the next questions:
Frances Corporation incurred fixed manufacturing costs of P 6,000 during 20CY. Other
information for 20CY includes:
The budgeted denominator level is 1,000 units
Units produced total 750 units
Units sold total 600 units
Beginning inventory was zero
The company uses absorption costing and the fixed manufacturing rate is based on the budgeted
denominator level. Manufacturing variances are closed to cost of goods sold.
A. 56. Fixed manufacturing cost expensed on the income statement (excluding adjustments of
variances) total
a. P 3,600
b. P 4,800
c. P 6,000
d. Zero
56.
Fixed manufacturing costs incurred
Divided by budgeted denominator level(P6,000/1,000)
Sold total units
Total
P6,000
6
x
600
P 3,600
C. 57. Fixed manufacturing costs included in ending inventory total
a. P 1,200
b. P 1,500
c. P 900
d. Zero
57.
Fixed manufacturing costs incurred
Divided by budgeted denominator level(P6,000/1,000)
Sold total units
Fixed manufacturing costs included in ending inventory
x
P6,000
6
150
P 900
B. 58. The production-volume variance is
a. P 2,000
b. P 1,500
c. P 2,400
d. Zero
58.
Fixed manufacturing costs incurred
Divided by budgeted denominator level(P6,000/1,000)
Sold total units
Fixed manufacturing costs included in ending inventory
P6,000
6
x
250
P 1,500
B. 59. Operating income using absorption costing will be ___________ than operating income if
using variable costing.
a. P 2,400 higher
b. P 2,400 lower
c. P 900 higher
d. P 3,600 lower
59.
Units produced
Less: units sold
Total
Fixed manufacturing costs /denominator level
Operating income
x
750
600
150
6
P 900