Exercise 4 – Absorption vs Variable Costing

Borques Company produces and sells wooden pallets that are used for moving and stacking
materials. The operating costs for the past year were as follows:

Variable cost per unit

Direct materials P142.50
Direct labor 96.00
Variable overhead 80.00

Fixed cost per unit

Fixed overhead P180,000
Selling and administrative 96,000

During the year, Borques produced 200,000 wooden pallets and sold 204,300 at P450.00 each.
Borques had 8,200 pallets in beginning finished goods inventory; costs have not changed from
last year to this year. An actual costing system is used for product costing.

Required:
1. What is the per unit inventory cost that is acceptable for reporting to Borques balance
sheet at the end of the year? How many units are in ending inventory? What is the total
cost of ending inventory?
2. Compute for the absorption-costing income.
3. What would the per unit inventory cost be under the variable-costing method? Does
this differ from the unit cost computed in Requirement 1? Why?
4. Compute for the variable-costing income.
5. Suppose that Borques Company had sold 196,700 pallets during the year. What would
absorption costing operating income have been? Variable-costing operating income?