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VARIABLE COSTING – Lecture Notes

PROBLEM 1

Golden Company produces an inexpensive product branded as “My Bi”. Selected data for the
company’s last year’s operations follow:

Units:
Beginning inventory 4,000
Normal capacity 50,000
Unit sales price P250
Variable costs per unit:
Direct materials 30
Direct labor 20
Manufacturing overhead 25
Selling and administrative 12
Fixed costs:
Manufacturing overhead per unit P14
Selling and administrative, total 300,000

Required:

For each of the independent cases:

a. Determine the profit under the absorption and variable costing methods:

Production Sales
1 50,000 52,000
2 50,000 49,500
3 50,000 50,000
4 52,000 51,000
5 47,500 52,500

b. Account for the difference in operating income under the absorption costing method and
variable costing method.

c. Determine the adjusted cost of good sold and ending inventories.


VARIABLE COSTING – Lecture Notes

PROBLEM 2

Dexter Corporation produces and sells a single product, a wooden hand loom for weaving small
items such as scarves. Selected cost and operating data relating to the product for two years are
given below:

Selling price per unit P 50


Manufacturing costs:
Variable per unit produced:
Direct materials 11
Direct labor 6
Variable overhead 3
Fixed per year 120,000
Selling and administrative costs:
Variable per unit sold 4
Fixed per year 70,000

Year 1 Year 2
Units in beginning inventory - 2,000
Units produced during the year 10,000 6,000
Units sold during the year 8,000 8,000
Units in ending inventory 2,000 -

REQUIRED:
1. Assume the company uses absorption costing.
a. Compute the unit product cost in each year.
b. Compute the ending inventory balance each year.
c. Compute the costs of goods sold each year.
d. Prepare an income statement for each year.
2. Assume the company uses variable costing
a. Compute the unit product cost in each year.
b. Compute the ending inventory balance each year.
c. Compute the costs of goods sold each year.
d. Prepare an income statement for each year.
3. Reconcile the variable costing and absorption costing net operating incomes.