Solution : Sample problem on variable costing

Year 1 Absorption costing

Sales (1,000 x 15 ) 15,000 LESS : Cost of goods sold

(1,000 x 8) 8,000 Gross income 7,000 Less : Selling and
administrative expenses
Variable (1,000 x 1.50) 1,500
Fixed 800 2,300 Income 4,700
Variable costing
Sales (1,000 x 15 ) 15,000 Less : Variable costs
Cost of goods sold ( 1,000 x P6 ) 6,000 Manufacturing
Margin 9,000
Less : Variable selling and administrative expenses
(1,000 x 1.50) 1,500 Contribution Margin 7,500 Less :
Fixed Costs
Factory overhead 2,000
Selling and administrative expenses 800 2,800 Income
4,700

Year 2 Absorption Variable Sales ( 800 x 15) 12,000 12,000 Less : Cost of
goods manufactured
(1,000 x P8) 8,000 (1,000 x 6) 6,000 Less: Ending inventory
( 200 x P8) 1,600 6,400 (200 x 6) 1,200 4,800 Gross profit/ Manufacturing
Margin 5,600 7,200 Less : Variable selling expenses 1,200 Contribution
margin 6,000 Less :
Variable selling expenses 1,200 Fixed overhead 2,000 Fixed selling expenses
800 2,000 Fixed selling 800 2,800 Income 3,600 3,200

Net income, absorption 3,600

Add: FFOH in beg inventory _
Total 3,600
Less: FFOH in ending inventory (200 x 2) 400
Net income, variable 3,200
Year 3

Absorption Costing

Sales (1,100 x 15 ) 16,500 Less: Cost of goods sold

Beginning inventory ( 200 x 8 ) 1,600 Add : Cost of goods
manufactured
( 1,000 x 8) 8,000 Cost of goods available for sale 9,600 Less :
Ending inventory (100 x 8) 800 8,800 Gross income 7,700 Less:
Selling and administrative expenses
Variable ( 1,100 x 1.50) 1,650 Fixed 800 2,450 Income 5,250

Variable Costing
Sales 16,500 Less Variable cost of goods sold
Beginning inventory (200 x 6) 1,200 Add: Cost of goods
manufactured :
( 1,000 x 6) 6,000 Goods available for sale 7,200 Less : Ending
inventory (100 x 6) 600 6,600 Manufacturing margin 9,900 Less:
Variable selling expenses (1,100 x 1.50) 1,650 Contribution margin
8,250 Less : Fixed costs and expenses
Fixed overhead 2,000 Fixed selling and administrative expenses
800 2,800 Income 5,450

Reconciliation of net income :

Net income, Absorption 5,250 Add : FFOH in beginning
inventory (200 x 2) 400 Total 5,650 Less : FFOH in ending
inventory ( 100 x P2) 200 Net income, Variable 5,450