ie ; follows = +g p34 unit product cost is computed aS The company’s e Direct materials . iG Btabonidsncat-cteewenlise ‘ 4 Pable manufacturing overhead. vac Fixed manufacturing ‘overhead (P350, m ia “£25,000 units) sere : A a Unit product cost. Production and cost data for the two years are given below: Year 1 Year 2 25,000 Units produced .. 25,000 , Units sold ... 20,000, 30,000 Required: A 1. Prepare an income statement for each year in the contribution format using variable costing. 2 Reconcile the absorption costing and variable costing net operating income figures for each year. 3 Problem 4 (Prepare and Interpret Statements; Changes in Both Sales and Production; JIT) Nemo, Inc. manufactures and sells a unique electronic part. Operating oe for the first three years of activity were as follows (absorption costing asis): . Year I Year 2 Year 3 Sales... P1,000,000 P800,000 P:1,000,000 Cost of goods so Beginning inventory Add cost of goods manufactured 0 0 280,000 Goods available for sale road -H40.000 760,000 ‘SI ——? 190,000 ross agin insure 550,000 __ 850 0 selling and administrative § 240,00 150,000 Netopetating income (loss). p00 _150,00 170,000 Sale: B.99,000 | P. 2,000 0. les dropped by 20% dur ) B.(20.000) petitors ito ing Year 2 due to th the market. Nemo had ex, ae Of several foreign pected Temain constant at ee).aa , x Variable Costing 547 Fixed 1 marketing and administrative expense Sales price ra per unit i Stand i : ae Variable manufacturing cost per unit R % le marketing expense per unit sold ie 1 For the year, the following data are available: Budgeted producti iction i Actual production Pa the ales ; ale 4 28,000. units Finished goods inventory, January 1 P1,000 Unfavorable variances from standard ; variable manufacturing costs 5,000 ‘All variances are written off directly at year-end as an adjustment to Cost of Goods Sold. Required: 1. Prepare the income statement under the direct costing method. 2. Prepare the income statement under the absorption costing method. Problem 3 (Variable Costing Income Statement; Reconciliation) During Floppy Company’s first two years of operations, the company reported net operating income as follows (absorption costing basis): Year I Year 2 Sales (at P50 per unit) P1,000,000 P1,500,000 Less cost of goods sol Beginning inventory « ‘Add cost of goods manufactured (at P34 per unit) Goods available for sale. . Less ending inventory (at P34 per unit). Cost of goods sold.. Gross margin... . Less selling and administrative expenses Net operating income... variable; P250,000 fixed each year. 0 170,000 850,000 850,000 $50,000 —‘1,020,000 170,000 0 680,000 1,020,000 320,000 480,000 310,000 340,000 P_140,000 smi * P3 per unitje jer 13. — 550. ng Year 2 and Year 3, what would ), IF JIT had Been income (or 1088) have been in each Seder absorption ‘costing? Explain the reason for any differen, between these income figures and the figures reported by company in the statements above. b. IV, Muttiple Choice 1. Under variable costing, fixed manufacturing overhead is: a. carried ina liability account. b. carried in an asset account. c. ignored. i d. immediately charged against sales as a period cost Which one of the following statements is true for a firm that uses variable costing? a. The unit product cost changes because of changes in the number of units manufactured. Profit fluctuates with sales . Any underapplied overhead is late the product cost Product costs include vari iminis ind absorption costing : jould be included as product costs. whether fixed manufacturVariable Ci 50,000 units for the year: production was set at 60,000 units in order f0 build, a buffer of protection against unexpected spurts in demand By the start of Year 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, Nemo cut back production during Year 3, as shown below Year I Year 2 Year 3 50,000 60,000 40,000 Production in units. 30,000 40,000 50,000 Sales in units... ‘Additional information about the company follows: utomated, Variable manufacturing costs d variable manufacturing overhead) total total P600,000 per year a. The company’s plant is highly al (direct materials, direct labor, anc only P4 per unit, and fixed manufacturing costs plied to units of product on the basis of ad rate is computed b. Fixed manufacturing costs are ap} each year’s production. (That is, a new fixed overhe each year) ¢. Variable selling and administrative expenses are P2 per unit sold. Fixed selling and administrative expenses total P70,000 per year. d. The company uses a FIFO inventory flow assumption. Required: 1. Prepare a new income statement for each year using the contribution approach with variable costing. 2. Refer to the absorption costing income statements above. a. Compute the unit product cost in each year under absorption costing. (Show how much of this cost is variable and how much is fixed). b. Reconcile the’ variable costing and absorption costing net operating income figures for each year. 3. Refer again to the absorption costing income statements. Explain why 1 was higher in Year 2 than it was in Year | under net operating incom light of the fact that fewer units were sold in the absorption approach, in Year 2 than in Year |. 4. Refer again to the absorption costing income statements. Explain why the company suffered a loss in Year 3 but reported a profit in Year |, although the same number of units was sold in each year. 5. a. Explain how operations would have differed in Year 2 and Year 3 if the company had been using JIT inventory methods.CHAPTER 13 VARIABLE COSTING Definition Variable costing (Di ; Brick, rogards Fae eo) is @ method of recording and reporting costs ; mai ; mening eng Pd Fd Underlying Concept Brcponents ze is ae eoaits method maintain that the fixed part of factory aaa b ly related to the capacity to produce than to the production of specific units and therefore should be charged off as expense in the period incurred. Furthermore, the use of this system will permit construction of an income statement which highlights the contribution margin of the product and therefore facilitates managerial decision-making process. The use of variable costing for external reporting is, however, still the center of considerable controversy. It is contended that under this method, assets (inventory) are being understated and that it is not an accepted accounting practice. Until variable costing becomes a generally accepted accounting practice, companies who wish to use it must convert inventory and cost of goods sold figures to an absorption costing basis for external reporting. This conversion is a relatively simple process in most cases and is no deterrent to the use of variable costing for internal management purpose. Advantages of Using Variable Costing ii ing i it the three objectives of On advantage of variable costing !s that it meets tl pete neat control systems by showing separately those costs that can be traced to, and controlled by each strategic business unit (SBU). Also, net income using Seiabic costing is not affected by changes in inventory ee because al fed costs i in the period in which they occur. For this Be ot ae cor other segments of the business reason apprai: f performance of produc e can be Seed acid the need for arbitrary allocations of fixed cost.aero Ss ft 532_ hep te inversely with fluctuations in the leve| c.tend to fluctuat production. 4. none of these. 0 units last year. The ending inven: 11 Mange, ne ut There was ho beginning inventory. Vari cot cing eosts were P6,00 pet unit and fixed manufacturing cc ation unit. What would be the change in the peso amount Joep inventory if variable tosting| was used instead of absorpri costing? a. 800 decrease b. 200 decrease. c. PO d. P200 increase 12. Variable production costs are P12 per unit and variable selling anc administrative expenses are P3 per unit. overhead totals P36,000 and fixed selling and administration expenses Fixed manufacturing total P40,000. Assuming a beginning inventory of zero, production of 4,000 units and sales of 3,600 units, the peso value of the ending inventory under variable costing would be: a P4,800. re b. P8400. f ©. P6,000. A dd. P3,600. The following data pertain to last year’s Units in beginning inventory Units produced Units sold Selling price per unit Variable costs per unit: Direct materials ' Variable Manufacturing overh J i n verhead Variable selling and admin; tral ‘ 20.000 19,000 P100.00 P12.00. Variable Costing 551 When sales are constant, but the production level fluctuates, net income determined by the variable costing method will 2. fluctuate in direct proportion to changes in production. b. remain constant fluctuate inversely with changes in production be greater than net income under absorption costing. The costing method that treats all fixed costs as period costs is: a. absorption costing. b. _ job-order costing. ©. variable costing d. process costing. Under absorption costing, fixed factory overhead costs: a. are deferred in inventory when production exceeds sales. b. are always treated as period costs. c. are released from inventory when production exceeds sales. d. none of these. WB Company computes net income under both the absorption costing approach and the variable costing approach. For a given year, the absorption costing net income was greater than the variable costing net income. This fact suggests that: a. variable manufacturing cots were less than fixed manufacturing costs. b. more units were produced during the year than were sold. c. more units were sold during the year than were produced. d. common costs were greater than variable costs for the year. Net income computed using variable costing would exceed net income computed using absorption costing if: a. _ units sold exceed units produced. b. units sold are less than units produced. c. units sold equal units produced. d. the unit fixed cost is zero, When sales are constant, but the production level fluctuates, net income determined by the absorption costing method will: a. tend to fluctuate in the same direction as fluctuations in the level of production. b. tend to remain constant.2, As to net operating income aa is not affected by changes in production under variable Bichtich aa however is affected by changes in production when approach ji tng is in use. Net income goes up under the absorption 3 in response to the increase in production for a particular year ia ete down when production goes down. The reason for this effect € traced to the shifting of fixed manufacturing cost between periods under the absorption costing method as explained below: Relationship between Production (P) and Sales (S) Net Income a) PAS AC = VC b) Pas: AC> VC °) P 15,000 = 150,000 units * Paz0.000 Answer: b 2. Value to be assigned to the finished goods inventory at the end under absorp costing: a * Direct materials used P 35,000 Direct labor ; 500,000 Manufacturing overhead Fixed P365,000 Poerenie --300,000 665,000 Total manufacturing cost 1,500,000 1,500,000 NN 150,000 units”). 1000. = B1s0.000 Answer: € cA Illustrative Problem 10.4. Conversion of Income Statement from Variable Costing method to Absorption Costing method ment from Var An income statement for the manufacturing operati f ies, Ine for 2018 is given below. The company ae Bee tna cv during 2018 and applied the fixed manufacturing costs to the products *° standard rate per unit of product. The inventory at the beginning of the ¥¢ consisted of 40,000 units of product and the inventory at the end of the eat consisted of 30,000 units. The company sold 88,000 units of product during the year. Inventories and production are stated on a standard cost basis. ‘ se A