Professional Documents
Culture Documents
STRATEGIC COST
MANAGEMENT
MODULE
Prepared by:
Page 1 of 48
Dear Student,
Panagdait sa Tanang
Kabuhatan!
The success of this module
lies in your hands. This was
prepared for you to learn
diligently, intelligently, and
independently. This will be a
great opportunity for you to
equip yourself not only with
academic content but as well
as some invaluable skills which
you will be very proud of as a
responsible learner.
Page 2 of 48
STUDY SCHEDULE AND HOUSE RULES
Course Title: Strategic Cost Management
STUDY SCHEDULE
MODULE 1
Understanding & Classifying Costs and Variable Costing
09/14/2020 MWF
Week 6 Lesson 1 – The Basic CVP Analysis
– 09/18/2020 1:00 – 2:00 PM
09/21/2020 MWF
Week 7 Lesson 2 – CVP Sensitivity Analysis
– 09/25/2020 1:00 – 2:00 PM
10/05/2020 MWF
Week 9 Lesson 4 – Budgeting Models
– 10/09/2020 1:00 – 2:00 PM
Week 10
10/12/2020
MIDTERM EXAMINATION
– 10/16/2020
MODULE 3
Standard Costing and Variance Analysis
Page 4 of 48
WEEK TOPIC Dates Days & Time
11/02/2020 MWF
Week 13 Lesson 3 – Disposition of Variances
– 11/06/2020 1:00 – 2:00 PM
MODULE 4
Responsibility Accounting and Short-term Non-routine Decisions
11/16/2020 MWF
Week 15 Lesson 1 – Responsibility Accounting
– 11/20/2020 1:00 – 2:00 PM
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HOUSE RULES
The following guides and house rules will help you to be on track and complete
the module with a smile on your face.
1. Read and understand every part of the module. If there are some contents or tasks
which you find difficult to understand, try to re-read and focus. You may also ask
help from your family at home. If it doesn’t work, you may raise your concerns in
our FB Messenger Group Chat (ACCTG 202 –STRAT. COST. MGT.) or you may send
a private message on my Facebook account (Wilfred Paez Mondido) or you may
text me on this cellphone number 09103241123.
2. Each module begins with an overview and a list of the topics you are expected to
learn.
3. Read the module and comply the activities or requirements given on each lesson.
4. At the end of each lesson try to reflect and assess if you were able to achieve the
learning objectives. Remember that you can always read again if necessary.
5. Learn to manage your time properly. Study how you can manage to work on this
module in consideration of your other modules.
8. Lastly, the activities in the module must be done by you and not by others. Your
family and friends may support and guide you but you must not let them do the
work. DO YOUR BEST AND GOD WILL DO THE REST.
Page 6 of 48
MODULE 1
Understanding &
Classifying Costs
and Variable
Costing
Page 7 of 48
Module 1 Understanding & Classifying Costs
and Variable Costing
Introduction
The growing pressures of global competition, trade wars among countries, technological
innovation, and changes in business processes have made cost management much more
important, critical and dynamic than ever before. Business managers must think and act
competitively and doing so requires strategy.
This course will introduce us to the concepts and applications of different subject matters
included in cost management information, the first one which is apparently information about
costs. This module will achieve this objective since this module will introduce us to the concepts
and different classification of costs and some of the traditional methods/ techniques in properly
presenting and analyzing such costs, outlined in four lessons as follows:
• Lesson 1: Cost Concepts & Classifications
• Lesson 2: Costs Segregation Techniques
• Lesson 3: Variable Costing Versus Absorption Costing
• Lesson 4: Volume Variance and Its Connection to Normal Capacity
So, are you now ready to embark on this journey? I wish you an enriching and productive
learning experience.
Page 8 of 48
Module 1 Costs Concepts and
Lesson 1
Classifications
Learning outcomes:
At the end of the lesson you will be able to:
✓ Understand the importance of controlling costs.
✓ Describe the different perspective of classifying costs.
✓ Discuss the classification of costs according to accountant’s perspective, manager’s
perspective and economist’s perspective.
✓ Explain the relationship of economic costs to level of production and sales.
LECTURE NOTES
Controlling Expenses
Management accounting is about profit management that includes expenses as its vital
component. Expenses affect operating results, hence, should be understood and intelligently
managed. Operating results are summarized in the Statement of Profit or Loss. The end-point of
operating performance is to generate maximum profit performance out of the resources used.
Mathematically, profit increases when sales increase and expenses decrease, or both, as
shown below.
To increase
profit
Sales P xx
Profit (Loss) P xx
Cost Concepts
The use of the term “costs” here includes both costs and expenses. Cost is the cash or
cash equivalent value sacrificed for goods and services that are expected to bring a current
or future benefit to the organization. Costs are incurred to produce future benefits in a profit-
making firm, future benefits usually mean revenue. As costs are used up in generating
revenues, they are said to expire. Expired costs are called expenses. In each period, expenses
are deducted from revenues in the income statement to determine the period’s profit.
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Cost Classifications
Managing costs means knowing their nature, behavior, and other characteristics. Costs
may mean differently to different people. Costs may be classified in the perspectives of
accountants, managers, and economists.
Accountant’s Perspective
• Capital Expenditures – These are investing outlays normally requiring large amount of
money and resources having a long-term impact to business profitability. These
expenditures would create probable future economic value and benefit and are
capitalized as assets. These costs are converted to expenses once their related income
has been generated.
Examples of capital expenditures are those used in long-term projects and
classified as long-term assets and become an expense once consumed in the production
or sale of a product.
• Operating Expenditures – These are outlays or consumption used to directly support the
normal operating activities of the business. They are expensed in the current period
because of the following reasons:
a. Immediate recognition such as advertising, salaries and research;
b. Associating cause and effect such as cost of sales
c. Rational and systematic allocation such as depreciation
• Costs of Goods Manufactured are those incurred in producing goods and resources.
Examples are direct materials, direct labor, and factory overhead. Costs of Goods Sold are
those production costs relating to the units that are already sold.
• Both costs and expenses give benefits to the business. On the other hand, losses are
reduction in the value of assets without benefit to the business leading to impairment of
equity. Examples of losses are: loss on sale of equipment, loss on inventory obsolescence,
loss on shortages, spoilage, and loss on uncollectible.
• Product Costs are those incurred in the process of producing the product. They are
inventoriable and deferred as assets while the related units are unsold. Once sold, the cost
of inventory is transferred from the asset classification to cost of goods sold.
Direct materials, direct labor, and factory overhead are product costs. Direct materials
and direct labor are prime costs. Direct labor and factory overhead are conversion costs.
Direct materials, direct labor, and variable factory overhead are variable production costs.
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• Period Costs are those incurred outside of the production process. They are incurred to
administer a business, sell and distribute products, conduct researches, attend to
customer’s needs which are not related to the production function. They are instantly
expensed once incurred.
• Direct product costs are those that are directly identified with finished goods or services or
those that are directly attributable in the process of making goods or services. There are
only three costs of production: direct materials, direct labor and factory overhead. Direct
materials and direct labor are direct product costs.
• Factory overhead is the indirect product cost. Factory overhead costs are a varied
collection of production-related costs that cannot be practically or conveniently traced
directly to end products. Examples of the major classification of factory overhead are:
o Indirect materials and supplies: nails, rivets, lubricants, and small tools
o Indirect labor costs: lift-truck driver’s wages, maintenance and inspection labor,
engineering labor, machine helpers, and supervisors
o Other indirect factory costs: building maintenance, machinery and tool
maintenance, property taxes, property insurance, pension costs, depreciation on
plant and equipment, rent expense, and utility expense.
Manager’s Perspective
• Costs that are useful in making decisions are relevant costs. Relevant costs have two
characteristics. They differ from one alternative to another (differential costs) and they deal
about the future (future costs).
• Those costs that are not useful are irrelevant costs. Past costs, sunk costs, historical costs are
irrelevant costs in making a decision because they can no longer be changed. Remember,
management deals about the future not the past. The future could be influenced or
directed, while the past cannot.
• Direct departmental costs are those that are directly identified with the department,
process, segment or activity. They may be variable or fixed costs.
Examples of direct departmental costs are salaries of a department manager,
salaries of personnel assigned to the department, supplies purchased and used, rental of
equipment directly used in departmental activities, utilities (e.g. electricity and water )
which are directly identified with a department, telecommunications, indirect materials,
indirect labor, and depreciation of equipment used in the department.
• Indirect departmental costs are those that are not directly identified with a department.
They are sometimes referred to as “allocated costs”, “common costs”, or plainly
“unavoidable costs”.
Examples of indirect departmental costs are salaries of executives in the central
office, other central administrative costs such as advertising, system’s review and
development, interest expenses, training, research and development, real estate property
taxes, and allocated deprecation of non-current assets.
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Avoidable Cost vs. Unavoidable Cost
• Avoidable costs are those not incurred once activity is not performed. They are normally
become savings on the part of the business. These savings are considered an inflow in the
economic sense and are referred to as imputed costs.
• Unavoidable costs are those that would remain to be incurred regardless of option a
manager chooses. They remain constant, they do not change, and are irrelevant in short-
term decisions. Common examples of unavoidable costs are rent, depreciation, interest,
property taxes, and all other committed fixed costs.
• Explicit costs are actual costs. They are incurred and recorded in the accounting books.
• Implicit costs are theoretical costs. They are assumed and are not recognized in the
accounting books. The good examples of implicit costs are opportunity costs and imputed
costs.
.
Opportunity Cost vs. Imputed Cost
• Imputed costs are those costs not incurred but are implied in a given decision.
Opportunity costs and imputed costs are not recorded in the financial accounting system.
because they are not actually incurred. However, they are relevant and should be considered
when evaluating alternatives for decision-making
• Incremental costs represent a total increase in costs. Decremental costs are decreases in
costs.
The classification of costs as to fixed or variable refers to their behavior as they relate to
the changes in the activity level of production and sales.
• Fixed Cost – are those that remain constant regardless of the change in the level of
production and sales, but inversely changes on a per unit basis. Fixed costs may be
classified into two categories, depending on the ability of the management to
influence the level of these costs in the short-term.
o Committed Fixed Costs – are those which incurrence have been committed by the
business in the past by reason of contract, acquisition or agreement. Examples are
rental expense, interest expense, insurance expense, executive salaries,
depreciation expense, patent amortization, real estate, property taxes, and salaries
of production executives.
o Discretionary (or Engineered) Fixed Costs – are those which incurrence is assured
but the amount may change depending on the discretion or value judgement of
the manager. Examples are advertising expense, research and development costs,
executive training costs, salaries of security guards and janitors, and repairs and
maintenance of buildings and grounds.
Page 13 of 48
Costs Sensitivity
SAMPLE PROBLEM:
CPA Company provides the following costs structure on its product:
Total Fixed Costs P200,000
Unit Variable Costs P20.
Requirement: What will happen to fixed costs and variable costs, in total and per unit, if production
levels are: (a) zero, (b) 5,000 units, (c) 10,000 units and (d) 15,000 units.
SOLUTION:
Production Total Variable Unit Variable Total Fixed Unit Fixed
Total Costs Unit Cost
Level Costs Cost Costs Cost
0 0 20 200,000 N/A 200,000 N/A
5,000 100,000 20 200,000 40 300,000 60
10,000 200,000 20 200,000 20 400,000 40
15,000 300,000 20 200,000 13 500,000 33
Changes Changes I ncreases as
Constant,
directly, inv ersely, production Decreases as
What Constant per regardless of
increases as decreases as increases due production
happened? unit the lev els of
production production to v ariable increases
production
increases increases costs
The behavior of costs in relation to changes in the level of production and sales can be
graphically presented as follows:
Variable Cost Fixed Cost Total Cost
TOTAL
PER UNIT
Good job! Keep on reading the rest of the module to learn more.
God Bless you! Page 14 of 48
Self-check
TEST I. COST CLASSIFICATIONS. Identify the “items” listed to the left by choosing the answers from
the “Choices” given to the right.
Page 15 of 48
TEST II. COST CLASSIFICATIONS. For each of the following costs indicate whether the costs would be Fixed
(F) or Variable (V) and whether they would be Inventoriable (I) or Period (P). If the cost is an Inventoriable
cost, indicate also whether it is a Direct Material (DM), Direct Labor (DL) or Factory Overhead (FOH). If
the cost is a Period cost, indicate also whether it is a Selling (S) or Administrative (A) cost.
F or V I or P
Ex: Assembly-line worker’s wages. V I – DL
Salaries of President F P–A
1. Depreciation – Factory Building
2. Insurance – Store Building
3. Wages of Carpenters
4. Office Supplies used
5. Salary of executives
6. Indirect Labor
7. Indirect Materials
8. Wood used in Furnitures
9. Sales Commission (based on sales)
10. Freight and Handling on merchandise sold
11. Salary of Office staff
12. Factory Rent
13. Depreciation of store building
14. Fabric used in T-shirts
15. Wages of machine operators
16. Supplies used in factory
17. Sales Commission
18. Insurance on Factory equipment
19. Machine depreciation based on machine hours
20. Salary of Factory janitor
TEST III. Identification of Variable, Fixed, and Mixed Costs. Place a check mark in the appropriate
column to indicate whether the following costs are variable, fixed, or mixed.
Item ................................................................... Variable Fixed Mixed
1. Small tools .................................................
2. Patent amortization .................................
3. Health and accident insurance .............
4. Heat, light, and power .............................
5. Straight-line depreciation ........................
6. Maintenance of buildings and grounds
7. Royalties ....................................................
8. Materials handling....................................
9. Property and liability insurance...............
10. Maintenance of factory equipment ......
TEST IV. Classification of Costs. Place a check mark in the appropriate column to indicate the
proper classification of each of the following costs.
Other
Indirect Admini-
Indirect Indirect Factory Marketing strative
Materials Labor Costs Expenses Expenses
1. Factory heat, light, and power ........
2. Advertising .........................................
3. Wages of stockroom clerk ................
4. Freight out ..........................................
5. Oil for machines.................................
6. Salary of vice president of human relations
7. Legal expenses ..................................
8. Salary of the factory manager ........
9. Employer payroll taxes on controller's salary
10. Idle time due to assembly line breakdown
Page 16 of 48
TEST III. STRAIGHT PROBLEMS. Read and analyze the problems. Answer the requirements with
solutions to support your answers in good form.
PROBLEM 1. The estimated unit costs for CNR Inc., when it is operating at a production
and sales level of 12,000 units, are as follows:
Expense Item Estimated Unit Cost
Direct Materials P 32
Direct Labor 10
Variable Factory Overhead 15
Fixed Factory Overhead 6
Variable Distribution and Administrative 3
Fixed Distribution and Administrative 4
Required:
1. Compute the estimated conversion cost per unit.
2. Compute the estimated prime cost per unit.
3. Compute the estimated variable production cost per unit.
4. Compute the estimated total variable cost per unit.
5. Compute the estimated total fixed production costs.
6. Compute the estimated total fixed costs.
7. Compute the total product cost per unit.
8. Compute the total production costs.
9. Compute the total costs that would be incurred during the month with a production and
sales level of 12,000 units.
10. Compute the total costs that would be incurred during the month with a production
level of 12,000 units and a sales level of 8,000 units.
PROBLEM 2. Barrack Inc. manufactures laser printers within a relevant range of production of
50,000 to 70,000 printers per year. The following partially completed manufacturing cost
schedule has been prepared:
Number of Printers Produced
70,000 90,000 100,000
Total costs:
Total variable costs $350,000 (d) (j)
Total fixed costs 630,000 (e) (k)
Total costs $980,000 (f) (l)
PROBLEM 3. Tarsier Company produced 400,000 units in August and used the following production
costs:
Direct Materials P 750,000
Direct Labor 800,000
Factory Overhead:
Variable 80,000
Fixed 110,000
The company sold 360,000 units during the month. There was no inventory of finished goods
on August 1.
Required: Using the traditional cost accounting system, calculate the following:
1. Inventoriable cost per unit.
2. Cost of goods sold during the period.
3. Cost of inventory on August 31.
Page 17 of 48
Module 1
Lesson 2 Cost Segreggation Techniques
Learning outcomes:
At the end of the lesson you will be able to:
✓ Define and explain mixed costs.
✓ Discuss and graph the different types of mixed costs.
✓ Discuss the different techniques in segregating mixed costs into its variable and fixed
components.
✓ Separate the variable costs from fixed costs using High-low method, Least-squares
method and Scattergraph method.
LECTURE NOTES
Mixed Costs
Mixed Costs – Items of cost with fixed and variable components. Mixed costs vary with the level
of production, though not in direct relation to it, probably because part of the cost is fixed
while the rest is variable. Mixed costs could either be semi-variable costs, semi-fixed costs, or
step costs.
o Semi-variable costs – change in total but not in direct proportion to the changes in the
level of production and sales.
o Semi-fixed costs – are constant in a given level of activity but changes, not in a constant
way when a new level of activity is reached.
o Step Costs – are constant in a given level of activity and changes, also in a constant way
as new level of activity is reached.
Examples of mixed costs are electricity, inspection, inter-department services, water and
sewages, maintenance and repairs, employer contributions to government agencies, and
industrial relations expenses.
Page 18 of 48
Cost Segregation Techniques
Ideally, for both planning and for making certain types of decisions, all costs would be
classified as either fixed or variable, with mixed costs being separated into their fixed and
variable components. The different methods of separating/segregating mixed costs into fixed
and variable components are as follows:
(1) High-Low Method
(2) Least Squares Method, and
(3) Scattergraph Method.
.
High-Low Method
High-Low method is one of the several techniques used to split a mixed cost into its fixed
and variable components. Although easy to understand, high low method is relatively unreliable. This
is because it only takes two extreme activity levels (i.e. labor hours, machine hours, etc.) from a
set of actual data of various activity levels and their corresponding total cost figures .
Illustrative Example:
Variable Rate Per Direct Labor Hour = _P161_ = P7/direct labor hour
23 hours
Fixed cost can be computed from either the high or low data:
High Low
Total Cost of Electricity P 726 P 565
Less: Variable Portion (7/ direct labor hour) 329 168
Monthly Fixed Cost P 397 P 397
The formula for projecting the total monthly cost of electricity based on these data
would be P397 plus P7 multiplied by the direct labor hours expected to be worked during the
period (y = a + bx) where
y = Total Cost b = Variable Cost per cost driver
a = Fixed Cost x = Activity Level Page 19 of 48
Least Squares Method
Illustrative Example:
Direct Labor Cost of
Month xy x2
Hours (x) Electricity (y)
January 28 625 17,500 784
February 24 565 13,560 576
March 30 630 18,900 900
April 33 640 21,120 1,089
May 38 685 26,030 1,444
June 34 640 21,760 1,156
July 35 655 22,925 1,225
August 40 700 28,000 1,600
September 42 715 30,030 1,764
October 47 726 34,122 2,209
November 43 700 30,100 1,849
December 32 630 20,160 1,024
Total (∑) 426 7,911 284,207 15,620
By elimination method:
Equation 2 ∑y = na + b∑x
7,911 = 12a + 426b
Scattergraph Method
Page 20 of 48
Step 1: Draw scatter graph. Plot the data on scatter graph. Plot activity level (i.e. number of
units, labor hours etc.) along x-axis and total mixed cost along y-axis.
Step 2: Draw regression line. Draw a regression line over the scatter graph by visual inspection
and try to minimize the total vertical distance between the line and all the points. Extend the
line towards y-axis.
Step 3: Find total fixed cost. Total fixed is given by the y-intercept of the line. Y-intercept is the
point at which the line cuts y-axis.
Step 4: Find variable cost per unit. Variable cost per unit is equal to the slope of the line. Take
two points (x1,y1) and (x2,y2) on the line and calculate variable cost using the following
formula:
y2 − y 1
Variable Cost per Unit = Slope of Regression Line =
x2 − x1
Illustrative Example
Company α decides to use scatter graph method to split its factory overhead (FOH)
into variable and fixed components. Following is the data which is provided for the analysis.
To calculate slope, we will take two points on line: (0,18000) and (3500,68000)
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 21 of 48
Self-check
TEST I. Valdez Motors Co. makes motorcycles. Management wants to estimate overhead costs to plan
its operations. A recent trade publication revealed that overhead costs tend to vary with machine
hours. To check this, they collected data for the past 12 months as follows:
Machine Overhead
Month
Hours Costs
1 175 P 4,500
2 30 750
3 160 4,321
4 190 5,250
5 600 16,475
6 200 5,400
7 160 4,450
8 150 3,975
9 210 5,275
10 180 4,760
11 170 4,325
12 145 4,100
Requirements:
1. Use the high-low method to estimate the fixed and variable portion of overhead costs
based on machine hours.
2. If the plant is planning to operate at a level of 300 machine hours next period, what would
be the estimated overhead costs?
3. Use the method of least square to estimate the fixed and variable portion of overhead
costs based on machine hours. If the plant is planning to operate at a level of 300
machine hours next period, what would be the estimated overhead costs?
TEST II. Westinghouse Company manufactures major appliances. Because of growing interest in its
product, it has just had its most successful year. In preparing the budget for next year, its controller
compiled these data
Machine Electricity
Month
Hours Costs
May 6,000 P 60,000
July 5,000 53,000
August 4,500 49,500
September 4,000 46,000
October 3,500 42,500
November 3,000 39,000
December 100 1,000
Requirements: Using the (1) high-low method, (2) least-squares method and (3) Scattergraph method:
1. Compute the variable cost per machine hour
2. The monthly fixed electricity costs
3. The total electricity costs if 4,800 machine hours are projected to be used next month.
Page 22 of 48
TEST III. Herbart Company monitors its monthly usage of power and defined the relevant range of
assumption to be 20 months. On the month of July last year, there was a consumer return of power
cost by the electric cooperative which reduced the cost and that was just an isolated circumstance.
On October the same year, there was a major increase in the cost paid for power due to illegal
connections in their electric lines in the form of jumper connections, it was an unexpected occurrence
and is outside the relevant range although it happened again January of the current year, the
company assumes that these events are isolated. Regarding the company utilization of such resource,
it gathered the following information on power costs and factory machine usage for the last 20
months:
Requirements:
I. Using the high-low method of analyzing costs, answer the following questions and show
computations to support your answers.
1. What is the estimated variable portion of power costs per factory machine hour?
2. What is the estimated fixed power cost each month? Formulate the regression equation
3. If it is estimated that 10,000 factory machine hours will be run in November of the current
year, what is the expected total power cost for November?
II. Using the least square method of analyzing costs, answer the following questions and show
computations to support your answers.
1. What is the estimated variable portion of power costs per factory machine hour?
2. What is the estimated fixed power cost each month? Formulate the regression equation
3. If it is estimated that 12,000 factory machine hours will be run in November of the current
year, what is the expected total power cost for November?
Page 23 of 48
Module 1 Variable Costing versus
Lesson 3 Absorption Costing
Learning outcomes:
At the end of the lesson you will be able to:
✓ Prepare a variable costing statement of profit or loss.
✓ Identify the difference in the profit or loss statement prepared under the absorption
costing and variable costing.
✓ Explain the nature and characteristics of a product cost and period cost.
✓ Account for the difference in the profit under the absorption costing and variable
costing systems.
✓ Understand the behavior of profit in relation to level of activity under variable and
absorption costing systems.
LECTURE NOTES
Profit Modelling
There are two profit determination that are popularly used – the variable costing and
the absorption costing. The variable costing is used for management reporting while the
absorption costing is used for external reporting.
Variable Costing is premised on the philosophy that costs are either fixed or variable.
Variable costs relate to units sold. The differences between sales and variable costs is called
the contribution margin. It is the operating profit to absorb fixed costs and profit.
A condensed variable costing statement of profit or loss is shown below.
Variable Costing
Pro-Forma Statement of Profit or Loss
Sales P xx
Less: Variable Costs xx
Contribution Margin P xx
Less: Fixed Costs xx
Profit P xx
The variable costing (also called marginal costing or direct costing) income statement
is not in accordance with the established financial reporting standards. Rather, it follows the
economic model of determining profit and gives business managers more accurate
perspective on how profit and wealth are accumulated and controlled.
Page 24 of 48
The Absorption Costing
Absorption Costing
Pro-Forma Statement of Profit or Loss
Sales P xx
Less: Cost of Goods Sold xx
Gross Profit P xx
Less: Selling & Admin Exp. xx
Profit P xx
The difference between absorption and variable costing methods lies on how the fixed
overhead is treated.
Under the absorption costing, fixed overhead is treated as product cost while under
the variable costing, fixed overhead is treated as period cost. The matrix below shows how
costs and expenses are classified under absorption and variable costing systems.
Product Costs, also called inventoriable costs or deferrable costs, those that are
associated with units produced or sold. These costs are deferred to inventory if the units are
not yet sold and they are either charged to cost of goods sold and are deducted from sales
once the units are sold. These costs follow the flow of units,
Period Costs are charged outright as expenses regardless of whether the units are sold
or unsold. Once incurred, period costs are immediately deducted from sales. These costs do
not relate to the flow of units but are expenses in the period incurred.
Under absorption costing method, the fixed overhead is a product cost and therefore
is deducted from sales based on the number of units sold (units sold x unit fixed costs)
In variable costing method, the fixed overhead is a period cost and therefore the
amount deducted from sales is equal to the amount incurred or budgeted without regard to
the units sold produced and sold.
Page 25 of 48
Understanding Profit Behavior under Absorption & Variable Costing
Now, we should also say that if variable costing follows sales, then, absorption costing
follows production. That is, if production is greater than sales, absorption costing profit is greater
than that of variable costing. And if production is less than sales, absorption costing profit is less
than that of variable costing.
In variable costing, as sales increase, profit also increases; as sales decline, profit also
declines. This observation follows a manager’s normal train of thought with regard to the
relationship of sales and profit. Variable costing gives remedy to a possible report generated
under the absorption costing model where sales are increasing but profit is declining, and vice
versa.
The difference in profit between absorption and variable costing methods may be
accounted for using four methods as follows:
• Method 1. Get the difference in the amount of Fixed Overhead charged under the two
methods.
• Method 2. Get the difference between production and sales in units and multiply by the
unit fixed overhead rate.
• Method 3. Get the change in inventory between the beginning and ending inventory units
and multiply by the unit fixed overhead rate.
• Method 4. Get the changes in values of beginning and ending inventories under each
method.
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 26 of 48
Self-check
TEST I. Mela Corporation has the following standard costs and production data in 2020.
Unit Sales Price P 200
Unit Variable Cost of Production 120
Unit Fixed Overhead 20
Unit Variable Expenses 10
Unit Fixed Expenses 5
Beginning Inventory 4,000 units
Normal Capacity 20,000 units
The fixed expenses are also based on normal capacity.
Requirement:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Determine the operating income under absorption costing and variable costing under each
of the following cases:
Case Production Sales
A 20,000 22,000
B 20,000 19,000
C 20,000 20,000
TEST II. Haiyan Corporation produces a product with the following data:
A. Standard production costs per unit (Normal Capacity = 20,000 units):
Direct Materials 2lbs @ P6.00 P12.00
Direct Labor 1.25 hrs. @ P20.00 25.00
Variable Overhead 1.25 hrs. @ P4.00 5.00
Fixed Overhead 1.25 hrs. @ P8.00 10.00
Required:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Profit using variable costing and variable costing under each of the following independent
cases:
Case Production Sales
A 20,000 22,000
B 20,000 19,300
C 20,000 20,000
Page 27 of 48
TEST III. MULTIPLE CHOICE PROBLEMS. Choose the letter of the correct answer with corresponding
solutions in good form.
1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single product in 2000,
its first year of operations. Variable manufacturing costs were P30 per unit of product. Planned
and actual fixed manufacturing costs were P600,000, and marketing and administrative costs
totaled P400,000 in 2000. MNO sold 120,000 units of product in 2000 at a selling price of P40 per
unit. What is the cost of the ending inventory assuming variable costing is used?
A. P2,400,000
B. P2,750,000
C. P2,250,000
D. P2,640,000
2. LY & Company completed its first year of operations during which time the following information
were generated:
Total units produced 100,000
Total units sold @ P100 per unit 80,000
Work in process ending inventory 20,000
Costs Variable Cost per Unit Fixed Costs
Raw materials P20.00
Direct labor 12.50
Factory overhead 7.50 P1.2 million
Selling and administrative 10.00 0.7 million
If the company used variable (direct) costing method, the operating income would be
A. P2,100,000
B. P4,000,000c.
C. P2,480,000
D. P3,040,000
4. At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable
and fixed manufacturing cost per unit were $90 and $20, respectively. If Killo uses absorption
costing rather than direct (variable) costing, the result would be a higher pretax income of
A. $20,000.
B. $0.
C. $70,000.
D. $90,000.
5. Coomber Industries manufactures a single product using standard costing. Variable production
costs are $13 and fixed production costs are $125,000. Coomber uses a normal activity of 12,500
units to set its standard costs. Coomber began the year with 1,000 units in inventory, produced
11,000 units, and sold 11,500 units. The standard cost of goods sold under absorption costing
would be
A. $115,000
B. $253,000
C. $149,500
D. $264,500
Page 28 of 48
6. Z Corp. incurred the following costs in 2001 (its first year of operations) based on production of
10,000 units:
Direct material $5 per unit
Direct labor $3 per unit
Variable product costs $2 per unit
Fixed product costs (in total) $100,000
When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at
$100,000. Based on this information, which of the following statements must be true:
A. Z Corp. sold all 10,000 units that it produced.
B. Z Corp. sold 5,000 units.
C. Z Corp. had a very profitable year.
D. From the information given, one cannot tell whether Z Corp.'s financial statements were
prepared based on variable or absorption costing.
7. Fleet, Inc. manufactured 700 units of Product A, a new product, during the year. Product A’s
variable and fixed manufacturing costs per unit were $6.00 and $2.00 respectively. The inventory
of Product A on December 31, consisted of 100 units. There was no inventory of Product A on
January 1. What would be the change in the dollar amount of inventory on December 31 if
variable costing were used instead of absorption costing?
A. $800 decrease.
B. $200 decrease.
C. $0
D. $200 increase.
8. GHI Company had P100,000 income using absorption costing. GHI has no variable manufacturing
costs. Beginning inventory was P5,000 and ending inventory was P12,000. What is the income
under variable costing?
A. P100,000.
B. P107,000
C. P88,000
D. P93,000
9. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest market for these
cookies are as gifts that college students buy for their business teachers. There are 100 cookies
per box. The following income statement shows the result of the first year of operations. This
statement was the one included in the company’s annual report to the stockholders.
Sales (400 boxes at P12.50 a box) P5,000.00
Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income 1,000.00
Variable selling and administrative expenses are P0.90 per box sold. The company produced 500
boxes during the year. Variable manufacturing costs are P5.25 per box and fixed manufacturing
overhead costs total P1,375 for the year. What is the company’s direct costing net income?
A. P2,540
B. P2,265
C. P1,000
D. P 725
10. During its first year of operations, a company produced 275,000 units and sold 250,000 units. The
following costs were incurred during the year:
Variable Cost per Unit Fixed Costs
Direct materials $15.00
Direct labor 10.00
Manufacturing overhead 12.50 $2,200,000
Selling and administrative 2.50 1,375,000
The difference between operating income calculated on the absorption-costing basis and on the
variable costing basis is that absorption-costing operating income is
Page 29 of 48
A. $200,000 greater.
B. $220,000 greater.
C. $325,000 greater.
D. $62,500 lesser
12. A company manufactures 50,000 units of a product and sells 40,000 units. Total manufacturing
cost per unit is $50 (variable manufacturing cost, $10; fixed manufacturing cost, $40). Assuming
no beginning inventory, the effect on net income if absorption costing is used instead of variable
costing is that:
A. net income is $400,000 lower
B. net income is $400,000 higher
C. net income is the same
D. net income is $200,000 higher
13. A company had an income of P50,000 using direct costing for a given month. Beginning and
ending inventories for the month are 13,000 units and 18,000 units, respectively. Ignoring income
tax, if the fixed overhead application rate was P2 per unit, what was the income using absorption
costing?
A. P40,000
B. P50,000
C. P60,000
D. P70,000
15. What was the total amount of SG&A expense incurred by X Co.?
A. $30,000 B. $62,500
C. $6,000 D. $36,000
16. Based on variable costing, what would X Co. show as the value of its ending inventory?
A. $120,000 B. $64,500
C. $27,000 D. $24,000
Page 30 of 48
Module 1 Volume Variance and Its Connection
Lesson 4 to Normal Capacity
Learning outcomes:
At the end of the lesson you will be able to:
✓ Explain the importance of normal capacity to profit.
✓ Compute the volume variance and understand its connection to normal capacity.
✓ Properly treat cost variance on the statement of profit or loss.
LECTURE NOTES
Volume Variance represents the ability of the business to meet its normal capacity.
Volume variance is related to fixed overhead since it is constant per total amount but changes
per unit. In short, fixed overhead is not controlled on its total amount but is controlled in relation
to volume (i.e. production).
Over the years, a business would have developed its average capacity (i.e. normal
capacity) that settles at the middle of ups and downs of production levels.
• If normal capacity is greater than the actual capacity, there is an under-absorbed
capacity and it is unfavorable variance.
• If normal capacity is less than actual capacity, there is an over-absorbed capacity and
it is a favorable variance.
A cost variance is the difference between the actual costs and standards costs.
• If actual costs are greater than standard costs, the cost variance is unfavorable.
• If actual costs are less than standard costs, the cost variance is favorable.
Unfavorable variances are added to standard cost of goods sold while favorable
variances are deducted from standard cost of goods sold to get the actual cost of goods sold.
That is why unfavorable cost variance is also called debit variance, while favorable cost
variance is called credit variance.
Volume Variance is included only in the absorption costing income statement. Since
volume variance relates to fixed overhead which is a product cost under absorption costing,
the volume variance is considered. Under the variable costing, however, the fixed overhead
is a period cost, an expense and is not subject to cost variance analysis.
Page 31 of 48
The Normal Capacity
Normal Capacity refers to the average production level of the business over a long range
if time. Assume the following levels of production for business which has been operating in the
last seven years:
Year 1 45,000 units Year 5 55,000 units
Year 2 34,000 Year 6 35,000
Year 3 50,000 Year 7 50,000
Year 4 25,000 Year 8(estimated) 60,000
60000
50000
40000
30000
20000
10000
0
1 2 3 4 5 6 7 8
The normal capacity of the business is 42,000 units. It is the average production level of
the business in the last seven years. The company’s normal capacity is set based on past
experience in relation to production.
Normal capacity rests in the middle level of a company’s production and is therefore
stable in the long run. It is preferred to be used as a denominator in computing the fixed
overhead and fixed expenses rates.
The 60,000 units is the budgeted capacity (or expected actual capacity). Budgeted
capacity is the expected production in the next accounting cycle or business cycle which is
normally expressed in 12 months.
• If the normal capacity is not given, the budgeted capacity is used as a denominator
in determining the standard fixed overhead rate.
• If the normal capacity and the budget capacity are not available, then use the
practical capacity, next is the maximum capacity, and then the actual capacity.
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 32 of 48
Self-check
TEST I. Mela Corporation has the following standard costs and production data in 2020.
Unit Sales Price P 200
Unit variable cost of production 120
Unit fixed overhead 20
Unit Variable Expenses 10
Unit Fixed Expenses 5
Beginning Inventory 4,000 units
Normal Capacity 20,000 units
The fixed expenses are also based on normal capacity.
Requirement:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Determine the operating income under absorption costing and variable costing under each
of the following cases:
Case Production Sales
A 21,000 22,000
B 18,000 15,000
TEST II. Haiyan Corporation produces a product with the following data:
Required:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Profit using variable costing and variable costing under each of the following independent
cases:
Case Production Sales
A 23,000 23,500
B 17,500 17,200
Page 33 of 48
TEST III. MULTIPLE CHOICE PROBLEMS. Choose the letter of the correct answer with corresponding
solutions in good form.
1. Don Juan Ltd. Manufactures a single product for which the costs and selling prices are:
Variable production costs P 50 per unit
Selling price P125 per unit
Fixed production overhead P200,000 per quarter
Fixed selling and administrative overhead P80,000 per quarter
Normal capacity 20,000 units per quarter
Production in first quarter was 19,000 units and sales volume was 16,000 units. No opening
inventory for the quarter. The absorption costing profit for the quarter was
A. P920,000
B. P950,000
C. P960,000
D. P970,000
The 200,000 units budget has been adopted and will be used for allocating fixed manufacturing costs
to units of Product X. At the end of the first 6 months, the following information is available:
Units
Production completed 120,000
Sales 60,000
All fixed costs are budgeted and incurred uniformly throughout the year, and all costs incurred
coincide with the budget. Over- and under-applied fixed manufacturing costs are deferred until
year-end. Annual sales have the following seasonal pattern.
Portion of Annual Sales
First quarter 10%
Second quarter 20%
Third quarter 30%
Fourth quarter 40%
2. The amount of fixed factory costs applied to product during the first 6 months under absorption
costing is
A. Over-applied by $20,000.
B. Equal to the fixed costs incurred.
C. Under-applied by $40,000.
D. Under-applied by $80,000.
3. Reported net income (or loss) for the first 6 months under absorption costing is
A. $160,000
B. $0
C. $40,000
D. $(40,000)
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4. Reported net income (or loss) for the first 6 months under variable costing is
A. $180,000
B. $40,000
C. $0
D. $(180,000)
5. Assuming that 90,000 units of Product X were sold during the first 6 months and that this is to be
used as a basis, the revised budget estimate for the total number of units to be sold during this
year is
A. 360,000
B. 240,000
C. 200,000
D. None of the above
The planned per unit cost figures shown in the next schedule were based on the estimated
production and sale of 140,000 units in 1995. Valyn uses a predetermined manufacturing overhead
rate for applying manufacturing overhead to its product. Thus, a combined manufacturing overhead
rate of $9.00 per unit was employed for absorption costing purposes in1995. Any over- or under-
applied manufacturing overhead is closed to the cost of goods sold account at the end of the
reporting year.
Planned Cost Incurred
Per Unit Total Costs
Direct materials $12.00 $1,680,000 $1,560,000
Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing overhead 4.00 560,000 520,000
Fixed manufacturing overhead 5.00 700,000 715,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Variable administrative expenses 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000
Total $50.00 $7,000,000 $6,620,000
The 1995 beginning finished goods inventory for absorption costing purposes was valued at the
1994 planned unit manufacturing cost, which was the same as the 1995 planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end of the year. The
planned and actual unit selling price for 1995 was $70.00 per unit.
6. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the absorption
costing bases was
A. $900,000
B. $1,200,000
C. $1,220,000
D. $1,350,000
Page 35 of 48
7. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the variable
costing basis was
A. $1,400,000.
B. $1,125,000.
C. $1,000,000.
D. $750,000
8. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption costing bases were
A. $2,095,000
B. $2,120,000
C. $2,055,000
D. $2,030,000
9. Valyn Corporation’s actual manufacturing contribution margin for 1995 calculated on the
variable costing basis was
A. $4,375,000
B. $4,935,000
C. $4,910,000
D. $5,625,000.
10. The total variable costs expensed in 1995 by Valyn Corporation on the variable costing basis was
A. $4,375,000
B. $4,500,000
C. $4,325,000
D. $4,550,000
11. The difference between Valyn Corporation’s 1995 operating income calculated on the
absorption costing basis and calculated on the variable costing basis was
A. $65,000 B. $25,000
C. $40,000 D. $90,000
16. The standard cost of goods sold under variable costing would be
A. $200,000 B. $210,000 C. $367,500 D. Some other number.
17. The standard cost of goods sold under absorption costing would be
A. $200,000 B. $210,000 C. $367,500 D. Some other number.
Page 36 of 48
MODULE 1 POST TEST
Find out how much you have learned in this module, try to answer the post-test attached
below: Practice honesty in answering. God bless you.
4. An expense that is likely to contain both fixed and variable components is:
A. security guard wages
B. supplies
C. heat, light, and power
D. small tools
E. taxes on real estate
Page 37 of 48
8. Prime cost and conversion cost share what common element of total cost?
A. direct labor
B. commercial expense
C. variable overhead
D. fixed overhead
E. direct materials
11. Wages paid to factory machine operators of a manufacturing plant are an element of:
Prime Cost Conversion Cost
A. Yes No
B. Yes Yes
C. No No
D. No Yes
E. none of the above
Page 38 of 48
16. The following statement that best describes a fixed cost is:
A. it may change in total when such change depends on production within the relevant range
B. it increases on a per-unit basis as production increases
C. it decreases on a per-unit basis as production increases
D. it may change in total when such change is related to changes in production
E. it is constant per unit of production
17. Within a relevant range, the amount of variable cost per unit:
A. moves in the same direction as fixed cost per unit
B. differs at each production level
C. remains constant at each production level
D. increases as production increases
E. decreases as production increases
19. In analyzing whether to build another regional service office, the salary of the Chief Executive
Officer (CEO) at the corporate headquarters is:
A. Relevant because salaries are always relevant.
B. Irrelevant because it is a future cost that will not differ between alternatives under consideration.
C. Relevant because this will probably change if the regional service is built.
D. Irrelevant since another imputed cost for the same will be considered.
20. The salary or wage that you could be earning while you are taking this test is
A. an opportunity cost.
B. a sunk cost.
C. an incremental cost.
D. a joint cost.
23. The costs presented to management for an equipment replacement decision should be limited to
A. Relevant Costs
B. Standard Costs
C. Controllable Costs
D. Conversion Costs
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25. The variable cost of a unit of product made yesterday is
A. an incremental cost. C. a differential cost.
B. an opportunity cost. D. a sunk cost.
26. The kind of cost that can be ignored in short-term decision making is
A. a differential cost. C. a relevant cost.
B. an opportunity cost. D. a sunk cost.
27. The role of sunk costs in decision making can be summed up in which of the following sayings?
A. Nothing ventured, nothing gained.
B. Bygones are bygones.
C. A penny saved is a penny earned.
D. The love of money is the root of all evil.
32. As a part of data presented in support of a proposal to increase the production of DVD, the
sales manager of Laguna Suppliers reported the total additional cost required for the proposed
increase in production level. The increase in total cost is known as
A. Incremental Cost C. Opportunity cost
B. Out-of-pocket cost D. Controllable cost
Page 40 of 48
35. An avoidable cost is
A. The profit foregone by selecting one choice instead of another
B. A cost that does not entail any peso outlay but is relevant in the decision-making process
C. A cost that continues to be incurred even though there is no activity
D. A cost that may be saved by not adopting an alternative
E. A cost common to all choices in question and not clearly or practically allocable to all of them
41. In absorption costing, as contrasted with direct costing, the following are absorbed into inventory.
A. Only the variable manufacturing overhead.
B. All the elements of fixed and variable manufacturing overhead.
C. Only the fixed manufacturing overhead.
D. Neither fixed nor variable manufacturing overhead.
42. Which of the following is a term more descriptive of the type of cost accounting often called
direct costing?
A. Relevant Costing
B. Out-of-pocket costing
C. C. Variable Costing
D. D. Prime Costing
Page 41 of 48
43. Inventory under the variable costing includes
A. Direct materials cost, direct labor cost, but no factory overhead cost.
B. Direct materials cost, direct labor cost, and variable factory overhead.
C. Prime cost but not conversion cost.
D. Prime cost and all conversion cost.
44. If production is greater than sales (units), then absorption costing net income will generally be
A. Equal to direct costing net income.
B. Greater than direct costing net income
C. Less than direct costing net income.
D. Additional data is needed to be able to answer.
47. Under absorption costing, if sales remain constant from period 1 to period 1, the company will
report a larger income in period 2 when
A. Variable production costs are larger in period 2 than period 1
B. Period 2 production exceeds period 1 production
C. Period 1 production exceeds period 2 production
D. Fixed production costs are larger in period 2 than period 1
48. Absorption costing differs from variable costing in all of the following except
A. Acceptability for external reporting
B. Treatment of fixed manufacturing overhead
C. Treatment of variable production costs.
D. Arrangement of the income statement.
A. no no yes yes
B. yes no yes no
C. yes no yes yes
D. no no yes no
50. The variable costing method ordinarily includes in product costs the following:
A. Prime cost but not conversion cost.
B. Direct materials cost, direct labor cost, but no manufacturing overhead cost.
C. Direct materials cost, direct labor cost, and variable manufacturing overhead cost.
D. Prime cost and all conversion cost.
Page 42 of 48
Test II. MULTIPLE CHOICE PROBLEMS
Instruction: Write the letter of the correct answer with corresponding solutions in good form.
1. The following additional manufacturing cost data were available for the month of March:
Direct materials used $ 78,000
Direct labor 60,000
Factory overhead 80,000
During March, prime cost added to production was
A. $140,000
B. $138,000
C. $144,000
D. $150,000
E. none of the above
2. Pitino Company has a beginning inventory of direct materials on March 1 of $30,000 and an
ending inventory on March 31 of $36,000. The following additional manufacturing cost data were
available for the month of March:
Direct materials purchased ....................................................................... $84,000
Direct labor .................................................................................................. 60,000
Factory overhead ....................................................................................... 80,000
During March, prime cost added to production was:
A. $140,000
B. $138,000
C. $144,000
D. $150,000
E. none of the above
3. Using the same information in No. 2, the conversion cost added to production was:
A. $80,000
B. $144,000
C. $140,000
D. $138,000
E. none of the above
4. During the month of August, Amer Corporation produced 12,000 units and sold them for P20 per
unit. Total fixed cost for the period were P154,000 and the operating profit was P26,000. Based on
the foregoing information, the variable cost per unit is
A. P4.50
B. P5.00
C. P6.00
D. P7.17
5. The equation(s) required for applying the least squares method in the computation of fixed and
variable production costs could be expressed as
A. xy = ax + b x2
B. y = a + bx2
xy = na + b x
C. y = na + b x
6. The controller of Jema Company has requested a quick estimate of the manufacturing supplies
that it needs for the month of July when the expected production are 470,000 units. Below are
the actual data from the prior three months of operations.
Page 43 of 48
Production in units Manufacturing supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560
Using these data and the high-low method, what is the reasonable estimate of the cost of
manufacturing supplies that would be needed for July? (Assume that this activity is within the
relevant range.)
A. P 805,284
B. P1,188,756
C. P 755,196
D. P 752,060
7. The following activity and cost data that were provided by Hoist Corporation would help in
estimating its future maintenance costs:
Units Maintenance Cost
3 P450
7 P530
11 P640
15 P700
Using the least-squares regression method to estimate the cost formula, the expected total
cost for an activity level of 10 units would be closest to:
A. P612.50.
B. P581.82.
C. P595.84.
D. P601.50.
8. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?
A. 10,625 units.
B. 4,375 units.
C. 6,250 units.
D. 5,250 units.
10. The Shepherd Company’s president would like to know the estimated fixed and variable
components of a particular cost. Actual data for this cost for four recent periods appear below.
Activity Cost
Period 1 24 P174
Period 2 25 179
Period 3 20 165
Period 4 22 169
Using the least-squares regression method, what is the cost formula for this cost?
A. Y = P 0.00 + P7.55X
B. Y = P110.44 + P2.70X
C. Y = P103.38 + P3.00X
D. Y = P113.35 + P0.89X
Page 44 of 48
11. Samar Industries manufactures a single product. Variable production costs are P20 and fixed
production costs are P300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
volume variance under absorption costing would be
A. P20,000
B. P30,000
C. 0
D. Some other number
12. Tacloban Industries manufactures a single product. Variable production costs are P20 and fixed
production costs are P300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
standard cost of goods sold under variable costing would be
A. P735,000
B. P400,000
C. P420,000
D. Some other number.
13. If Smurf Company uses variable costing, the inventoriable costs for the current fiscal year are
A. 530,000
B. 400,000
C. C. 450,000
D. D. 490,000
15. Compute for the inventory under the direct costing method using the data given: units unsold
at the end of the period 45,000; raw materials used, P6.00 per unit; raw materials inventory,
beginning, P5.90 per unit; direct labor, P3.00 per unit; variable overhead per unit, P2.00 per
unit; indirect labor for the month, P33,750. Total fixed costs, P67,500.
A. P17.45
B. P16.90
C. P11.00
D. P19.15
16. Care Company’s 2013 fixed manufacturing overhead cost totaled P100,000 and variable
seliing costs totaled P80,000. Under direct costing, how should these costs be classified?
Period Cost Product Cost
A. P 0 P 180,000
B. P 80,000 P 100,000
C. P 100,000 P 80,000
D. P 180,000 P 0
Page 45 of 48
17. With a production of 200,000 units of product A during the month of June, Bucayao
Corporation had incurred costs as follows:
Direct Materials P 200,000
Direct labor used 135,000
Manufacturing overhead:
Variable 75,000
Fixed 90,000
Selling and administrative expenses:
Variable 30,000
Fixed 85,000
Total P 615,000
Under absorption costing, the unit cost of product A was:
A. P 2.05
B. P 2.50
C. P 2.20
D. P 3.25
18. LY & Company completed its first year of operations during which time the following
information were generated:
19. CERTS for life, Inc., manufactures a single product for which the costs and selling prices are:
Variable production costs P 50 per unit
Selling price P 125 per unit
Fixed production overhead P 200,000 per quarter
Fixed selling and administrative overhead P 80,000 per quarter
Normal capacity is 20,000 units per quarter. Production in the first quarter was 19,000 units
and sales volume was 16,000 units. No opening inventory for the quarter. The absorption
costing profit for the quarter was:
A. P 920,000
B. P 960,000
C. P 950,000
D. P 970,000
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Manufacturing overhead:
Fixed 36,080
Variable 24,000
Marketing and general expenses:
Fixed 11,000
Variable 5% of sales
Production in units 3,200 units
Beginning inventory none
20. The ending finished goods inventory under absorption costing would be:
A. P 14,280
B. P 12,096
C. P 16,968
D. P 16,072
21. The net income for the month under the variable costing method would be:
A. P 32,420
B. P 23,320
C. P 25,500
D. P 22,420
22. Under variable costing, what would be the finished goods inventory as at December 31,
2013?
A. P 81,375.00
B. P 87,000.00
C. P 60,750.00
D. P 49,218.75
23. Which costing method, variable or absorption costing, would show a higher operating
income for 2013 and by how much?
A. Variable by P 20,625
B. variable by P 26,250
C. Absorption by P 20,625
D. absorption by P 26,250
24. During the year 2013, Good Health Corporation manufactured 70,000 units of product A, a
new product. Only 65,000 units were sold during the year. There was no beginning inventory.
Manufacturing cost per unit was P20.00 variable and P50.00 fixed. What would be the effect
in net income if absorption costing is used instead of variable costing?
A. Profit is P 100,000 lower
B. Profit is P250,000 higher
C. Profit is P 250,000 lower
D. D. None of the above.
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Use the following information for questions 25 and 26
The following information has been extracted from P Co.’s financial records for its first year of
operations:
Units produced, 10,000
Units sold, 7,000
Variable costs per unit:
Direct material, P 8
Direct labor, 9
Manufacturing overhead, 3
SG&A, 4
Fixed costs:
Manufacturing overhead, P 70,000
SG&A, 30,000
25. Based on absorption costing, the Cost of Goods Manufactured for P Co.’s first year would be
A. P 200,000
B. P 300,000
C. P 270,000
D. P 210,000
26. Based on absorption costing, what amount of period costs will P Co. Deduct?
A. P 70,000
B. P 30,000
C. P 79,000
D. P 58,000
27. Eastern Co. has total budgeted fixed costs of P150,000. Actual production of 39,000 units
resulted in a P 6,000 favorable volume variance. What normal capacity was used to
determine the fixed overhead rate?
A. P 40,560
B. P 37,500
C. P 33,000
D. Cannot be determined without further information
REFERENCES
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