PAMANTASAN NG LUNGSOD NG VALENZUELA

STRATEGIC BUSINESS ANALYSIS (MAC3)

LECTURE: ABSORPTION COSTING, VARIABLE COSTING AND THROUGHPUT COSTING

ABSORPTION COSTING (also called full costing, conventional costing) – costing method that includes all
manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) in the cost of a
unit of product. It treats fixed manufacturing overhead as a product cost.

VARIABLE COSTING (also called direct costing) – costing method that includes only variable manufacturing costs
(direct materials, direct labor and variable manufacturing overhead) in the cost of a unit of product. It treats fixed
manufacturing overhead as a period cost.

Distinctions Between Period Costs and Product Costs:

PERIOD COST PRODUCT COST
1. Refers to an item changed against current revenue on 1. Refers to an item included in product costing which is
the basis of time period regardless of the difference apportioned between the sold and unsold units.
between production and sales volume.

2. Does not form part of the cost of inventory 2. The portion of the cost, which has been allocated to
the unsold units, becomes part of the inventory.

3. Diminishes income for the current period by its full 3. Diminishes current income by that portion thereof
amount. identified with the sold units only with the remainder
being deferred to the next accounting period as part of
the cost of ending inventory.

Principal Differences Between Variable and Conventional Absorption Costing

ABSORPTION COSTING VARIABLE COSTING
1. Cost segregation Seldom segregates costs into variable and Costs are segregated into variable and
fixed costs fixed
2. Cost of inventory Cost of inventory includes all manufacturing Cost of inventory includes only the
costs: materials, labor, variable and fixed variable manufacturing costs: materials,
FOH labor, and variable FOH.
3. Treatment of fixed Product cost Period cost
FOH
4. Income Statement Distinguishes between production and other Distinguishes between variable and fixed
costs. costs.
5. Net income Net income between the two methods may differ from each other because of the difference
in the amount of fixed overhead costs recognized as expense during an accounting period.
In the long run, however, both methods give substantially the same results since sales
cannot continuously exceed production, nor production can continually exceed sales.

Difference in Net Income under Absorption and Variable Costing:

Variable and absorption costing methods of accounting for fixed manufacturing overhead result in different levels
of net income in most cases. The difference are timing differences, i.e., when to recognize the fixed manufacturing cost
as an expense. In variable costing, it is expensed during the period when the fixed overhead is incurred, while in
absorption costing, it is expensed in the period when the units to which such fixed overhead has been related are sold.

Production Equals Sales:

When production is equal to sales, there is no change in inventory. Fixed overhead expensed under absorption
costing equals fixed overhead expensed under variable costing. Therefore, absorption costing income equals variable
costing income.

Production is Greater Than Sales:

When production is greater than sales, there is an increase in inventory. Fixed overhead expensed under absorption
costing is less than fixed overhead expensed under variable costing. Therefore, absorption costing income is greater
than variable costing income.

MAC3: Lecture: Absorption, Variable and Throughput Costing jvacpa Page 1 of 8

Production is Less Than Sales:
When production is less than sales, there is decrease in inventory. Fixed overhead expensed under absorption is
greater than fixed overhead expenses under variable costing. Therefore, absorption income is less than variable costing
income.

Sir Jem’s Note:

Ang difference lang talaga ng absorption costing at variable costing ay ang “fixed factory overhead”. Ano ulet and
pinagkaiba nila? Eto ang kanilang pinagkaiba
Absorption Costing: No. of units sold x Fixed OH Cost/unit*
*Naka’base to minsan budgeted fixed overhead cost (priority if given) OR actual fixed OH cost, divided by
normal capacity (priority if given) OR actual number of units produced.

Variable Costing: Actual fixed overhead incurred (priority if given) OR Budgeted fixed overhead

Medyo maiiba lang to ng very slight kapag magkaiba na yung actual production sa normal capacity. Bakit? Kase
magkakaroon na ng variances yung fixed factory overhead (Chap7) na kailangan mong iconsider sa computation.
Dalawa lang naman ang variance ng fixed factory overhead dba? Spending fixed foh variance at volume variance.

Dahil ditto, mababago yung computation ng fixed factory overhead natin, ganito na sya:
Absorption Costing: No. of units sold x Standard Fixed OH Cost/unit* +/- “UF/(U) Fixed FOH Variances”
*Naka’base na ‘to talaga sa budgeted fixed overhead cost divided by normal capacity.

Variable Costing: *SAMEDT*

Kunware, gamitin naten yung illustration sa Chap4 ng book nyo

Page 155-158 sa 2014 Edition at Page 150-154 sa 2020 Edition

Magfocus nalang tayo sa fixed factory overhead ok? Eto yung pinagkaiba using the two computations na binigay ko:

Absorption costing = (12,000 units x P6.00/unit*) + (P18,000 UF VV + P3,000 UF SV)**

= P72,000 + P21,000
= P93,000

Variable costing = P99,000 (Actual Fixed FOH given)

* Standard fixed OH Rate = Budgeted fixed OH / Normal capacity

= P96,000 / 16,000 units
= P6.00 per unit

** Actual Fixed OH 99,000

Budgeted Fixed OH 96,000 > 3,000 UF Spending Variance
Standard Fixed OH (13,000 x P6.00) 78,000 > 18,000 UF Volume Variance

So mas mataas yung fixed factory overhead ng variable costing kumpara sa absorption costing, therefore, mas mataas
yung net income ng absorption costing sa variable costing. Masusuportahan din ito ng mga concept naten sa taas na
kapag “Production is greater than sales”, ang kakalabasan ay “absorption costing income is greater than variable
costing income”. Oh dba magic?

At eto pa yung isang malupet, pwede din nating ma’compute directly kung magkano yung difference ng net income ng
absorption costing at variable costing kahit hindi naten macompute mismo yung net income. Paano ulet yon?

Difference in NI = (Difference of units produced and units sold) x Standard fixed overhead rate per unit
= (13,000 – 12,000) x P6.00
= P6,000

O kaya pwede mo ding kunin yung difference ng beginning at ending inventory kapalit ng production at sales.
Connected naman sila dba? Ganito kase yun guys, ano ba ulet yung formula ng pagcompute naten ng COGS?
Generally, ganito sya dba
Beginning inventory xx
+ Purchases/”Produced” xx
COGM xx
- Ending inventory xx
COGS (Sold) xx

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 Pwede rin naming gawin ko syang ganito
Beginning inventory xx
+ Purchases/”Produced” xx
COGM xx
- Sold xx
Ending inventory xx

Mag’meditate ka sa formula na ‘yan, lagyan mo kunwari ng amount. Tapos ikumpara mo yung difference ng
“Beginning at Ending Inventory” pati ng “Produced at Sold”. D’ba palagi silang parehas?

Tapos eto pa, mapapansin mo dyan na “kapag mas mataas yung production mo sa units sold”, nagiging “mas
mataas yung ending inventory mo kumpara sa beginning inventory mo”, vice versa.

So pwede nating dagdagan yung concept sa taas.

IF “Production is greater than sales” OR “Ending inventory is greater than beginning inventory” or “There is
increase in inventory level”, then, absorption costing income is greater than variable costing income.

IF “Sales is greater than production” OR “Beginning inventory is greater than ending inventory” or “There is
decrease in inventory level”, then, variable costing income is greater than absorption costing income.

Arguments for the Use of Variable Costing

1. Variable costing reports are simpler and more understandable.
2. Data needed for break-even and cost-volume-profit are readily available.
3. The problems involved in allocating fixed costs are eliminated.
4. Variable costing is more compatible with the standard cost accounting system.
5. Variable costing reports provide useful information for pricing decisions and other decision-making problems
encountered by management.

Arguments Against Variable Costing

1. Segregation of costs into fixed and variable might be difficult, particularly in the case of mixed costs.
2. The matching principle is violated by using variable costing which excludes fixed overhead from product costs and
charges the same to period costs regardless of production and sales.
3. With variable costing, inventory costs and other related accounts, such as working capital, current ratio, and acid-
test ratio are understated because the exclusion of fixed overhead in the computation of product cost.

Throughput Costing (or Supervariable Costing) – An extreme form of variable costing in which only direct costs are
included as inventoriable costs. All other costs are costs of the period in which they are incurred.

Sir Jem’s Note:

So meron nanaman tayong costing method na pwede ring gamitin para sa ating production, eto ay tinatawag na
“throughput costing.” Anong bago sa costing method na ito? Dito, tanging ang “direct materials cost” lang ang
considered na product cost. Lahat nang natitirang cost mo ay considered na bilang period cost. OO LAHAT. Pati yung
direct labor tsaka variable FOH.

Eh ano mangyayari kapag ginawang period cost yung direct labor at variable FOH? Anong amount ang gagamitin para
sa mga costs na iyon? Kapag sinabing period cost, kung saang period mo ginastos yung cost, sa parehas na period mo
sya irereport as expense. Lahat ay ma’eexpense, walang amount na magiging asset at mafoforward sa kasunod na
period.

So ganito iyon, kung magkano lahat ng nagastos mon a direct labor at variable FOH sa period na iyon (DL/Var FOH
Rate x Production) ay irereport mo lahat as expense sa mismong period na iyon. Tandaan na hindi ganito ‘yung
treatment naten sa DL at Var FOH sa Absorption Costing at Variable Costing. Dati nakabased sa units sold and amount
na na’eexpense na DL at Var FOH, iba na ngayon. Ganon talaga.

So ayun lang naman yung bago sa thtoughput accounting. Kung gets mo naman na yung absorpotion costing at variable
costing e konting adjustments nalang ang gagawin mo. Syempre dapat gets mo din silang tatlo at alam mo yung
pagkakaiba nila. Lagyan naten ng illustration para kunware magegets mo sya pero pagdating sa exam hindi mo parin
masolve.

MAC3: Lecture: Absorption, Variable and Throughput Costing jvacpa Page 3 of 8

Kunware, gamitin naten yung illustration sa Chap4 ng book nyo
Page 155-158 sa 2014 Edition at Page 150-154 sa 2020 Edition

Ang gagawin naten eh magcocompute at gagawa tayo ng income statement para sa problem na ito. Additional given
lang mga paps para masolve naten. Yung given na P20 variable cost per unit ay kailangan nating hatiin sa DM, DL at
Var FOH components. I’assume nalang natin na P10 and DM, P6 at P4 and Var FOH.

Tandaan mga lods na magiging katulad sa Fixed FOH na ang magiging treatment naten sa DL at FOH dahil period cost
na din sila. So, under throughput costing and treatment sa DM, Var FOH at Fixed FOH ay:

Throughput Costing: Actual cost incurred (priority if given) OR Budgeted cost

Gotong Company
Statement of Profit or Loss
For the month ended July 31, 2014

Sales P 600,000 (12,000 x P50.00)

Less: Cost of goods sold
Inventory, beginning P 40,000 ( 4,000 x P10.00)
Add: Cost of goods manufactured 130,000 (13,000 x P10.00)
Total goods available for sale 170,000
Less: Inventory, ending 50,000 ( 5,000 x P10.00)
Cost of goods sold, standard 120,000
Add (deduct) cost variances:
Net materials variances 5,000
Cost of goods sold, actual 125,000
Gross profit 475,000

Less:
Direct labor* 75,000
Variable factory overhead** 51,000
Fixed factory overhead 99,000
Variable expenses 40,000
Fixed expenses 30,000
Total expenses 295,000
Profit P 180,000

* Direct labor
Standard direct labor cost (P6.00 x 13,000) 78,000
Less: Net direct labor cost variance F ( 3,000)
Actual direct labor cost 75,000

** Variable factory overhead

Standard variable overehad cost (P4.00 x 13,000) 52,000
Less: Net direct labor cost variance F ( 1,000)
Actual variable overhead cost 51,000

Reconciliation of income from absorption costing and from throughput costing (same rules)
Change in inventory (13,000 units – 12,000 units) 1,000 units
x DL, Var FOH and Fixed FOH per unit 16
Difference in profit or loss P 16,000 (P196,000 – P180,000)

Reconciliation of income from variable costing and from throughput costing (same rules)
Change in inventory (13,000 units – 12,000 units) 1,000 units
x DL and Var FOH per unit 10
Difference in profit or loss P 10,000 (P190,000* – P180,000) *OO, Typoerror yung NI

Absorption Costing >> Variable Costing >> Throughput Costing

Fxd FOH DL & Var FOH Reconciling items used

to reconcile different
costing methods

DL, Var FOH & Fxd FOH

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EXERCISES:
1. Yogi, Inc., produces nonfat frozen yogurt which it sells to restaurants and ice cream shops. The product is sold in
10-gallon containers, which have the following price and variable costs:
Sales price P30 Direct materials P10
Direct labor 4 Variable overhead 6
Budgeted fixed costs in 2016, the company’s first year of operations, was P600,000. Actual production was
150,000 10-gallon containers, of which 125,000 were sold. Yogi, Inc. incurred the following selling and
administrative expenses.
Fixed P100,000 for the year Variable P2 per container sold
Required:
a. Compute the variable product cost per container of frozen yogurt under (a) variable costing (b) absorption
costing.
b. Prepare operating income statements for 2016 using (a) absorption costing and (b) variable costing.
c. Reconcile the operating income reported under two methods.

2. Refer to Item 1. Compute the throughput margin and income under throughput costing.

3. Pulbosapaa manufactures foot powder. The company uses a standard costing system. Following are data pertaining
to the company’s operating to the company’s operations for 2016:
Production for the year 170,000 units Beginning 2016 Invty 10,000 units
Sales for the year (sales price per unit, P1.20) 175,000 units
Standard costs to produce one unit
Direct material P0.15 Variable overhead P0.05
Direct labor 0.10 Fixed overhead 0.20
Selling and administrative costs
Variable (per unit sold) P0.14 Fixed (per year) P 80,000
Fixed manufacturing overhead is assigned to units of production based on a predetermined rate using a normal
capacity of 200,000 units per year. The actual fixed overhead cost incurred was equal to the budgeted amount
during the year. Actual variable manufacturing costs incurred during the year amounted to P48,000. All variances
are closed to cost of goods sold.
Required:
a. What is the estimated annual fixed manufacturing overhead?
b. What is the amount of under- or overapplied overhead in 2016 under absorption costing?
c. How much is income under absorption costing? Under variable costing?

4. Kotsekotsehan Motors assembles and sells miniature toy motor vehicles and uses standard costing. Actual data
relating to April and May 2016 are as follows:
Unit data: April May
Beginning inventory 0 150
Production 500 400
Sales 350 520

Variable Costs:
Manufacturing cost per unit produced P10,000 P10,000
Operating (marketing) cost per unit sold 3,000 3,000

Fixed Costs:
Manufacturing costs P2,000,000 P2,000,000
Operating (marketing) costs 600,000 600,000

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 The selling price per toy vehicle is P24,000. The budgeted level of production used to calculate the budgeted fixed
manufacturing cost per unit is 500 units. There are no price, efficiency, or spending variances. A production-
volume variance is written off to cost of goods sold in the month in which it occurs.
Required:
1. Prepare April and May 2016 income statements for KotseKotsehan Motors under (a) variable and (b)
absorption costing.
2. Prepare a numerical reconciliation and explanation of the difference between operating income for each month
under variable costing and absorption costing.
3. The variable manufacturing cost per unit of KotseKotsehan Motors are as follows:
April May
Direct materials P 6,700 P 6,700
Direct labor 1,500 1,500
Factory overhead 1,800 1,800

4. Prepare income statements for KotseKotsehan Motors in April and May of 2016 under throughput costing.

5. The following information is available for Yamyam Company’s new product line:
Sale price per unit P15 Total annual fixed manufacturing cost P 25,000
Variable manufacturing cost per unit of production 8 Total annual fixed admin expenses 15,000
Variable administrative cost per unit 3
There was no inventory at the beginning of the year. Normal capacity is 12,500 units. During the year, 12,500 units
were produced and 10,000 units were sold.

Required:
1. Ending inventory, assuming the use of direct costing.
2. Ending inventory, assuming the use of absorption costing.
3. Total variable cost charged to expense for the year, assuming the use of direct costing.
4. Total fixed cost charged to expense for the year, assuming the use of absorption costing.

6. Lorrea Company was organized just a year ago. The results of the company’s first year of operations are shown
below (absorption costing basis)
LORREA COMPANY
Income Statement

Sales (2,000 units) P 135,000

Less: Cost of goods sold
Beginning inventory P -0
-
Cost of goods manufactured
105,000
Goods available for sale P 105,000
Ending inventory
21,000 84,000
Gross margin 51,000
Less: Selling and administrative expenses
42,000
Net income P 9,000

The company’s selling and administrative expenses consist of P32,000 per year in fexed expenses and P5 per unit
sold in variable expenses. The company’s unit product cost is computed as follows:
Variable manufacturing cost P32
Fixed manufacturing overhead (based on normal capacity of 2,500 units) 10
Unit product cost P42
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 Required:
1. Redo the company’s income statement in the contribution format using variable costing.
2. Reconcile any difference between the net income figure on your variable costing income statement and the net
income figure on the absorption costing income statement above.

7. The following information pertains to Nickos Company:

Maximum productive capacity 24,000 units per yr Fixed factory overhead P40,000
Normal capacity 20,000 units Fixed selling expenses 30,000
Standard variable mfg. cost per unit P 10 Unit sales price 20
Variable selling expense per unit P 4

2016 operating results:

Sales 19,000 units Net unfavorable variance for standard
Production 19,200 units variable manufacturing cost P10,000
Required:
1. Income under both costing methods.
2. Break-even point.
3. Margin of safety for 2016.
4. Required sales to earn after-tax-profit of P140,000 (Tax rate is 30%)
5. Required sales to earn profit of 10% of sales.

8. M. Raagas Company produces and sells a single product. The following costs relate to its production and sales:
Variable costs per unit: Fixed costs per year:
Materials P 9 Manufacturing overhead P150,000
Labor 10 Selling and administrative expenses 400,000
Manufacturing overhead 5
Selling and administrative expenses 3
During the last year, 25,000 units were produced and 22,000 units were sold. The finished Goods Inventory
account at the end of the year shows a balance of P72,000 for the 3,000 unsold units.
Required:
1. Is the company using absorption costing or variable costing to cost units in the Finished Goods Inventory
account?
2. Assume that the company wishes to prepare financial statements for the year to issue to its stockholders.
a. Is the P72,000 figure for Finished Goods Inventory the correct amount to use on these statements for
external reporting purposes? Explain.
b. At what peso amount should the 3,000 units be carried in the inventory for external reporting purposes?

9. During its first year of operations, Sugar Ray Company produced 55,000 jars of hand cream based on a formula
containing 10% glycolic acid. Unit sales were 53,500 jars. Fixed overhead was applied at P0.50 per unit produced.
This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The
results of the year’s operations are as follows (on an absorption costing basis):
Sales (53,500 units @ P8.50) P454,750
Less: Cost of Goods Sold (170,500)
Gross Margin P284,250
Less: Selling and administrative (all fixed) (120,000)
Net income P164,250
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 Required:
1. Give the cost of the firm’s ending inventory under absorption costing. What is the cost of ending inventory
under variable costing?
2. Compute the income under variable costing. Reconcile the difference between the two figures.

10. Blanco Company began operations on January 1 to produce a single product. It used a standard absorption costing
system with a planned production volume of 100,000 units. During its first year of operations, no variances were
incurred and there were no fixed selling or administrative expenses. Inventory on December 31 was 20,000 units,
and net income for the year was P240,000.
If Blanco had used variable costing, its net income would have been P220,000.
Required: Compute the breakeven point in units.

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