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Managerial Accounting Absorption and Variable Costing 081712
Managerial Accounting Absorption and Variable Costing 081712
ARLAN C. FAJARDO
Basic principles
Variable costing is the same as marginal costing, direct costing, or
contribution margin costing.
Variable costing is an extension of CVP analysis.
The basic assumptions in the marginal costing (i.e., CVP analysis) are
followed except that production is not equal to sales.
Technically speaking, variable costing and direct costing are different.
Variable costing includes -variable production costs as part of the product cost
while direct costing includes all costs directly identified with the segment as
product costs- Another, variable costing focuses on the contribution margin
while direct costing zeroes-in on segment margin.
The unit costs from the preceding period are the same in the current
period; meaning, unit costs are assumed to be constant
Treatment of fixed overhead, and other costs and expenses
Under absorption costing, fixed overhead is a product cost,
inventoriable costs, or deferrable costs. This means theft the cost
assigned to- the product is charged against sales when the units
are sold, and is still deferred in the inventory when the units are still
unsold. This follows toe principle of matching of costs against
revenues.
Under variable costing, fixed overhead is a period cost, meaning,
outright an expense. This means the fixed overhead is immediately
charged against revenues without regard as to whether the units are
already sold or stiff unsold. This follows the immediate recognition
principle. The rationale for this treatment is because the fixed
overhead would be incurred regardless of whether the production
occurs or not, and therefore, should not be treated as product cost.
Direct materials, direct labor, and variable overhead -are product
costs, both to absorption and variable costing systems.
Variable expenses and fixed expenses are period costs> both to
absorption and variable costing-systems.
Computation guidelines
Computation of unit costs:
AC VC
Unit variable production costs
(i.e., direct materials, direct labor, and variable
factory overhead) Px Px
Unit fixed ovefhead (Budgeted fixed OH / Normal x ni
capacity)
Unit costs Px Px
(where: ni = nonincluded)
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Computation of operating income
AC VC
Sales QS x USP Px Px
Variable CGS QS x UVC (x) (x)
Fixed OH QS x UFC (x) (x) [NC x UFC]
Variable expenses QS x UVE (x) (x)
Fixed expenses NC x UFE (x) (x)
Operating income P x P x
where:
NC = normal capacity UFC = unit fixed costs
QS = quantity sold UVE = unit variable expense
USP = unit sales price UFE = unit fixed
expense
UVC = unit variable costs
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UF costs variances are added to CGS at standard or
deducted from operating income.
Favorable costs variances are deducted from CGS at
standard or added to operating income.
Volume variance is included only in the absorption costing
operating income.
Volume variance = ?
Normal capacity in units x
- Actual capacity in units __ x
Volume variance in units - under(over) absorbed x UF (F)
x Unit fixed costs Px
Volume variance in pesos P x UF (F)
STRAIGHT PROBLEMS
1. Operating income, inventoriable costs, and costs of ending inventory.
Golden Company produces an inexpensive product that sells for P160.
Selected data for the company's operations last year follow:
Units in beginning inventory 4,000
Normal capacity 50,000
Variable costs per unit:
Direct materials P 25
Direct labor 40
Manufacturing overhead 45
Selling and administrative 10
Fixed costs per unit:
Manufacturing overhead 20
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Selling and administrative 15
The fixed selling and administrative expenses are also based on normal
capacity.
Required:
a. Determine the operating income under absorption and variable costing methods
assuming the following independent cases;
Production Sales Production Sales
a. 50,000 53,000 d. 54,000 35,000
b. 50,000 48,500 e. 48,000 51,500
c. 50,000 50,000
b. Account for the difference in operating income under the absorption costing
method and variable costing method.
Beginning inventory
200
Units produced
4,400
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Fixed
P160,000
Manufacturing costs:
Direct materials cost per unit
80
Direct labor cost per unit
170
Variable overhead cost per unit
20
Fixed overhead cost (total)
P340,000
Production cost variances:
Direct materials variances, net
30,000 UF
Direct labor variances, net
7,500 F
Variable OH controllable variance
22,00 UF
MULTIPLE CHOICE
Basic Concepts
1. Under the direct costing, which is classified as product
costs?
A. Only variable production costs.
B. Only direct costs.
C. All variable costs.
D. Ail variable and fixed production costs.
2. 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.
overhead overhea
A. No d No
B. No Yes
C. Yes Yes
D. Yes No
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selling costs totaled P80,000. Under direct costing, how should these costs be
classified?
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C. Differing in as much as the difference between sales and production.
D. Less than net income under the absorption costing method.
15. If sales exceed 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 costing method.
C. Differing in as much as the difference between sales and production.
D. Less than net income under the absorption costing method.
16. Other things being equal, income computed by the direct costing method
will exceed that computed by an absorption costing method if
A. Fixed manufacturing cost increases.
B. Units sold exceed units produced.
C. Variable manufacturing costs increase.
D. Units produced exceed units sold
17. President X of WXY Corporation requested you to explain the different in
net income between the variable costing income statement presentation
and the absorption method. You would say that the difference:
A. Is none if there is no change in the fixed costs in the beginning and
ending
inventories.
B. Is equal to the fixed cost per unit times the number of units sold.
C. Is attributable to the variable costs in the inventory.
D. Is attributable to the fixed cost in ending inventory.
18. Identify the following statements as true or false.
Statement 1. In a variable costing system, fixed overhead costs are
included as
cost of inventory.
Statement 2. Under the direct costing method, the contribution margin
discloses
the excess of revenues over fixed costs.
A. Statement 1 is true, Statement 2 is true.
B. Statement 1 is true, Statement 2 is false.
C. Statement 1 is false, Statement 2 is true.
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D. Statement 1 is false, Statement 2 is false.
19. Identify the following statements as true or false.
Statement 1. In direct costing, fixed factory overhead forms part of the
inventory
value.
Statement 2. The difference in net income between variable
costing and absorption costing is due entirely to the
treatment of fixed manufacturing overhead.
A. Statement 1 is true, Statement 2 is true.
B. Statement 1 is true, Statement 2 is false.
C. Statement 1 is false, Statement 2 is true.
D. Statement 1 is false, Statement 2 is false.
Inventoriable costs
20. Excellent Writer produces and sell boxes of signing pens for P1,000 per
box. Direct
materials are P400 per box and direct manufacturing labor averages P75
per box.
Variable overhead is P25 per box and fixed overhead is P12,500,000
per year.
Administrative expenses, all fixed, run P4,500,000 per year, with sales
commissions
of P100 per box. Production is expected to be 100,000 boxes, which is
met every
year. For the year just ended, 75,000 boxes were sold. What is the
inventoriable cost,
per box using variable costing?
A. P770 C. P475
B. P500 D. P625
21. For P1,000 per box, the Majestic Producers, Inc., produces and sell
delicacies. Direct
materials are P400 per box and direct manufacturing labor averages P75
per box.
Variable overhead is P25 per box and fixed overhead is P12,500,000
per year.
Administrative expenses, all fixed, run P4,500,000 per year, with sales
commissions
of Pi 00 per box. Production is expected to be 100,000 boxes, which is
met every
year. For the year just ended, 75,000 boxes were sold. What is the
inventoriabie
costs per box using absorption costing.
A. P625 C. P770
B. P500 D. P670
22. Compute for the inventory value under the direct costing method using
the data given: units unsold a the end of the period, 45,000; raw
materials used, P6.00 per unit; raw materials inventory, beginning, P5.90
per unit; direct labor, P3.00 per unit; variable overhead per unit, P2.00
per unit; indirect labor for the month, P33.750. Total fixed costs, P67.500.
A. P 16.90 C. P 17.45
B. P 11.00 D. P 19.15
23. With a production of 200,000 units of product A during the month of
June, Bucayao
Corporation has incurred costs as follows:
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Direct materials P 200,000
Direct labor used 135,000
Manufacturing overhead:
Variable 75,000
Fixed 90,000
Selling and administrative expense
Variable 30,000
Fixed 85.000
Total P615.000
What would be Gordon's operating income for 2006 under the variable
(direct) costing method?
A. P114,000 C P234,000
B. P210,000 D. P330.000
28. 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 LIFO method?
A. Sales increased. C. Sales decreased.
B. Sales exceed production. D. Sales were less than production.
Questions 29 and 30 are based on the following information. Expected to
operate at normal capacity, Golden Corporation plans to manufacture
275,000 units of products in 2006, 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, 2005 is estimated at. 25,000
units costing P500,000. Included in this amount is the fixed manufacturing
overhead amounting to P300.000. No changes in both the fixed
manufacturing cost and the variable cost per unit of produce are expected
in 2006.
29. What is the estimated income from manufacturing using the
absorption costing
method?
A. P 3,750,000 C P 3,550,000
B. P 3,450,000 D. P 3,750,000
30. What is the estimated income from manufacturing using the variable
costing method?
A. P 3,150,000 C. P 3,450,000
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B. P 3,550,000 D. P 3,750,000
31. Taba Ching Ching Biscuits manufactures and sells boxed coconut
cookies. The
biggest market 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. This statement was the
one included
in the company's annual report to the stockholders.
Sales (400 boxes at P12.50) P 5,000.00
Less: Cost of goods sold (400 boxes at P12,50) 3.200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income P 1,000.00
Variable selling and administrative expenses are P0.90 per box unit. The
company, produced 500 boxes during the year. Variable manufacturing
costs are P5.2$ per box and fixed manufacturing overhead costs total
P1.375 for the year. What Is the company's direct costing net income?
A. P 2,540 C. P 1,000
B. P 2,265 D. P 725
32. Dotdot, Ltd., manufactures a single product for which the costs and
selling prices are:
Variable production costs P 50/unit
Selling price P 150 / unit
Fixed production overhead P 200,000 / quarter
Fixed selling and administrative overhead P 480,000 /
quarter
Normal capacity is 20,000 units per quarter Production in 1 quarter was
19,000 units
and sales volume was 16,000 units No opening inventory for the
quarter. The
absorption costing profit for the quarter was:
A. P920,000 C. P960.000
B. P950,000 D. P970.000
33. The ending finished goods inventory under absorption costing method
would be
A. P14.280 C P12,096
B. P16.968 D. P16.072
34. The net income for the month under the variable costing method would
be
A. P32,420 C P23,320
B. P25,500 D. P22,420
38. Total fixed cost charged against current year's operations in absorption
costing.
A. P35,000 C P15,000
B. P25,000 D. P43,000
Reconciliation of income
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Beginning inventory-finished goods
and work in process none
No. of units produced 40,000 units
No. of units sold at P15 32r500 units
Direct materials used P 177,500
Direct labor used P 85,000
Manufacturing costs:
Fixed P 110,000
Variable 61,500 P 171,500
Fixed administrative expenses P 30,000
39. Under variable costing, what would be the finished goods inventory as at
December 31,2006?
A. P 81,375.00 C. P 87,000.00
B. P 60,750.00 D. P 49,218.75
41. During the year 2006, 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
P20.00 variable and P50.00 fixed. What would be the effect on net
income if absorption costing is used instead of variable costing?
A. Net income is P250,000 lower
B. Net income is P250,000 higher
C. Net income is P100,Q0p lower
D. Net income is P100,000 higher
42. At the end of Kiko Company's first year operations, 1,000 units of
inventory remained
on hand. Variable and fixed manufacturing cost per unit were P90
and P20,
respectively, if Kiko uses absorption costing rather than direct (variable)
costing, the
result would be a higher pretax income of
A. P20,000 C. P 0
B. P70,000 D. P90,000
44. Sta. Maria Inc. reported the following data for 2006:
Actual hours 120,000
Denominator hours 150,000
Standards hours allowed for output 140,000
Fixed predetermined overhead rate P6 per hour
Variable predetermined overhead rate P4 per hour
-E N D-
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