ABSORPTION AND VARIABLE COSTING

At the end of ACOSTA CORPORATION’s first year of operations, it was able to produce a
total of 10,000 gallons of chemical x, a highly poisonous liquid. Out of this production,
only 8,000 gallons were sold. The ingredients to produce each gallon of chemical x costs
$2.50 per gallon. Direct labor per gallon costs $1.50. Manufacturing overhead per unit,
variable and fixed are $0.50 and $2.00 respectively. Variable selling expense per unit is at
$0.40. Fixed expenses total $6,000 for the year ended. Sales price per gallon is $10.00.

1. Compute for the net income under absorption and variable costing.

ABSORPTION COSTING

Sales $ 80,000 $10.00 x 8,000 units

COGS DM (20,000) $2.50 x 8,000 units
DL (12,000) $1.50 x 8,000 units
VFOH (4,000) $0.50 x 8,000 units
FFOH (16,000) $2.00 x 8,000 units Shortcut: $6.50 x 8,000
Gross Profit 28,000
Selling & Admin. V (3,200) $0.40 x 8,000 units
F (6,000)
Net Income $ 18,800

VARIABLE COSTING

Sales $ 80,000 $10.00 x 8,000 units

Variable Costs DM (20,000) $2.50 x 8,000 units
(Mfg.) DL (12,000) $1.50 x 8,000 units
VFOH (4,000) $0.50 x 8,000 units
Manufacturing Margin 44,000
Variable Costs (S&A) (3,200) $0.40 x 8,000 units
Contribution Margin 40,800
Fixed Costs Mfg. (20,000) $2.00 x 10,000 units
S&A (6,000)
Net Income $ 14,800

2. Using the same facts, except that this time assume 11,000 gallons of chemical x
were sold, compute the net income under both absorption costing and variable
costing, respectively. We are going to assume that this is not the 1st year of operation

ABSORPTION COSTING

Sales $ 110,000 $10.00 x 11,000 units

COGS DM (27,500) $2.50 x 11,000 units
DL (16,500) $1.50 x 11,000 units
VFOH (5,500) $0.50 x 11,000 units
FFOH (22,000) $2.00 x 11,000 units Shortcut: $6.50 x 11,000
Gross Profit 38,500
Selling & Admin. V (4,400) $0.40 x 11,000 units
F (6,000)
Net Income $ 28,100

VARIABLE COSTING
Sales $ 110,000 $10.00 x 11,000 units
Variable Costs DM (27,500) $2.50 x 11,000 units
(Mfg.) DL (16,500) $1.50 x 11000 units
VFOH (5,500) $0.50 x 11,000 units
Manufacturing Margin 60,500
Variable Costs (S&A) (4,400) $0.40 x 11,000 units
Contribution Margin 56,100
Fixed Costs Mfg. (20,000) $2.00 x 10,000 units
S&A (6,000)
Net Income $ 30,100

Shortcut:

VC Income 30,100
+/- (Change in inventory x FOH rate) (2,000)
ABS Income 28,100

Problem 2 (Product costs and period costs, Roque) During January of the current year,
ALINAB Company produced and sold 1,000 units of Product A with costs as follows:

Materials 6,000
Labor 3,000
Variable factory overhead 2,500
Fixed factory overhead 1,500
Total manufacturing costs 13,000

Selling and administrative costs incurred during the month were:

Variable selling and administrative 3,000

Fixed selling and administrative 2,000
5,000

Determine the following amounts:

1. Product costs per unit under absorption costing

a. 13.50
b. 11.50
c. 13.00
d. 14.50

2. Product costs per unit under variable costing

a. 13.00
b. 11.50
c. 13.50
d. 14.50

3. Cost of goods sold per unit

 a. 13.00
b. 11.50
c. 13.50
d. 14.50

4. Variable costs per unit (which will be deducted from sales price in arriving at unit
contribution margin)
a. 13.00
b. 11.50
c. 13.50
d. 14.50

Problem 3 (Variable costing ending inventory, BOBADILLA) the following information

pertains to ANGELES corporation:

Beginning Inventory 2,000 units

Ending Inventory 5,000 units
Direct labor per unit $ 10
Direct materials per unit 8
Variable overhead per unit 2
Fixed overhead per unit 5
Variable selling costs per unit 6
Fixed selling costs per unit 8

5. What is the value of ending inventory using the absorption costing method?
a. 135,000
b. 120,000
c. 125,000
d. 128,000

6. What is the value of ending inventory using the variable costing method?
a. 125,000
b. 100,000
c. 115,000
d. 105,000

7. What is the difference in amount of operating profit between absorption costing

and variable costing?
a. 25,000
b. 10,000
c. 0
d. 15,000

Problem 3 (Volume Variance) the following information pertains to ASIS corporation

Sales price $ 200 Variable expense per unit 10
Variable production cost 120 Fixed expense 100,000
Fixed production overhead 20*

Beginning inventory 4,000 units

Normal capacity 20,000 units

*fixed production overhead per unit is based on normal capacity

Under each scenario, compute for the profit under both full costing and direct costing,
respectively.

8. Sales: 22,000 units; Production: 21,000 units

a. 1,020,000; 1,000,000
b. 1,040,000; 1,020,000
c. 1,020,000; 1,040,000
d. 1,000,000; 1,040,000

9. Sales: 15,000 units; Production: 18,000 units

a. 610,000; 550,000
b. 550,000; 610,000
c. 590,000; 550,000
d. 550,000; 550,000