STANDARD COST UNDER ABSORPTION AND VARIABLE COSTING

When a form uses the standard costing system and income statements are prepared under the
use of absorption and variable costing methods:
1. Cost of Goods sold are computed at standard
2. The standard cost of goods sold is adjusted to actual costs by adding unfavorable variances
and/ or deducting favorable variances
3. In absorption costing, both the variable and fixed manufacturing cost variances are used as
adjustment to the standard cost of goods sold
4. In variable costing, only the variable manufacturing cost variances are used as adjustments
to the standard cost of goods sold
 Illustrative example:
ABC Corporation uses a standard costing system for a product that it manufactures. For the year
200A, the following standards were established based on normal production of 1,000 units:
Materials 2 pcs @ P6 per piece P 12
Labor 5 hrs @ P4 per hour 20
Variable overhead 5 hrs @ P3 per hour 15
Fixed factory overhead (5 hrs @P2) 10
Total standard cost per unit P 57

Following are the actual data for the year 200A:

Production 1,100 units
Sales 950 units
Selling price P 80.00
Materials (2250 @ P5.80) 13,050.00
Labor (5,420 hrs @ P4.30 per hour) 23,306.00
Variable overhead 15,718.00
Fixed FOH 12,000.00
Selling and Administrative expense
Variable 5,700.00
Fixed 8,000.00

REQUIRED:
1. Variances for each cost element of production
Variable Fixed
Materials Labor FOH FOH

Actual costs P 13,050.00 P 23,306.00 P 15,718.00 P 12,000.00

Standard
13,200.00 22,000.00 16,500.00 11,000.00
costs*

Variances P 150.00 F P 1,306.00 U P 782.00 F P 1,000.00 U

*Standard costs= actual production X standard cost per unit

Materials 1100 x P 12 P 13,200.00

Labor 1100 x P 20 22,000.00
Variable FOH 1100 x P 15 16,500.00
Fixed FOH 1100 x P 10 11,000.00
2. Comparative Income statements- Absorption and Variable costing
Absorption Variable
Costiing costing

Sales (950 units X P80) P 76,000.00 P 76,000.00

COGS/ Variable cost
Standard cost of (950 units X (950 units X
Goods sold P57) 54,150.00 P47) 44,650.00
Add (deduct)
variances:
Materials-
favorable (150.00) (150.00)
Labor- Unf avorable
 Variable OH-
favorable 1,306.00 1,306.00
Fixed OH-
(782.00) 782.00
Unfavorable
Actual Cost of 1,000.00
good sold -
Add: Variable selling and Admin
P 55,524.00 45,024.00
Exp P
Total Cost of Goods sold/ Variable - 5,700.00
costs
55,524.00
50,724.00
Gross income/ Contribution Margin
Less operating expenses/ fixed costs
20,476.00 25,276.00
Fixed Foh

Fixed Selling and admin expense P - P 12,000.00 **

Variable selling and admin
expense 8,000.00
8,000.00
-
Total operating expenses/ Fixed costs 5,700.00

Income 13,700.00 20,000.00

6,776.00
5,276.00

*The total actual fixed overhead cost incurred during the period
Difference in income (P6,776- P5,276) P 1,500

Accounted as follows:
Change in inventory [(production-sales)(1,100-950)] 150 units
X fixed FOH cost per unit P 10
Difference in income P1,500