2.

Hey Company, which has only one product, has provided the following data concerning its most
current month of operations:

Selling price......................................................…..……............. P138

Units in beginning inventory......………………………............… 500
Units produced........................................................…….......… 4,100.
Units sold.................................…...................................…....… 4,300
Units in ending inventory........….….................................…….. 300

Variable costs per unit:

Direct materials....................……………………………………. P31
Direct labor.................................................................…......… 59
Variable manufacturing overhead...............................….....… 4
Variable selling and administrative................................……... 9

Fixed costs in total:

Fixed manufacturing overhead..………………………….…..... P94,300
Fixed selling and administrative.....................................….… 47,300

Required:
1. What is the unit product cost for the month under variable costing?
2. What is the unit product cost for the month under absorption costing?
3. Prepare an income statement for the month using the contribution format and the variable costing
method.
4. Prepare an income statement for the month using the absorption costing method.
5. Reconcile the variable costing and absorption costing net operating incomes for the month.
Solution:

1. Direct materials P31

Direct labor 59
Variable manufacturing overhead 4
Variable costing unit product cost P94

2. Direct materials P31

Direct labor 59
Variable manufacturing overhead 4
Fixed manufacturing overhead (P94,300/4,100 units) 23
Absorption costing unit product cost P117

3. Contribution Format and the Variable Costing Method

Hey Company
Income Statement
For the Month Ended

Sales (4,300 units sold * P138) P593,400

Less: Variable Cost and Expenses
Variable cost of goods sold:
Beginning inventory (500 * P94) P47,000
Add: Variable manufacturing costs (4,100 units produced * 385,400
P94)
Goods available for sale P432,400
Less: Ending inventory (300 * P94) (28,200)
Variable Cost of Goods Sold P404,200
Variable selling & administrative (4,300 units sold * P9) 38,700 (442,900)
Contribution margin P150,500
Less: Fixed costs and expenses:
Fixed manufacturing overhead P94,300
Fixed selling & administrative 47,300 (141,600)
Net operating income (VC) P8,900

Contribution margin [4,300 units * (P138 - 94 - 9) P150,500

Less: Fixed costs and expenses (P94,300 + P47,300) 141,600
Net operating income (VC) P8,900
4. Absorption Costing Method

Hey Company
Income Statement
For the Month Ended

Sales (4,300 units sold * P138) P593,400

Cost of goods sold:
Beginning inventory (500 * P117) P58,500
Add: Cost of goods manufactured (4,100 units produced * 479,700
P117)
Goods available for sale P538,200
Less: Ending inventory (300 * P117) (35,100) 503,100
Gross Margin P90,300
Less: Selling and Administrative Expenses
Variable selling & administrative (4,300 units sold * 38,700
P9)
Fixed selling & administrative 47,300 86,000
Net operating income (VC) P4,300

5. Income Reconciliation
Production < Sales ; Therefore: AC < VC
Income Difference = (4,300 units sold - 4,100 units produced) * P23 fixed manufacturing overhead
Income Difference = 200 units * P23
Income Difference = P4,600

Operating Income (Variable Costing) P8,900

Income Difference (4,600)
Operating Income (Absorption Costing) P4,300