Student 1: Aldrian WIlfred Cotingjo _______________________________________________________

Student 2: ____________________________________________________________________________

Group No: ____3____ Class Schedule: _____MW 6:00 - 7:30 pm

Written Assignment No. 1

Requirements:

1. Compute the net income for each month using variable costing. (15 points)
2. Compute the monthly breakeven point under variable costing. (10 points)
3. Explain to Ms. Gale why profits have moved erratically over the three-month period shown in
the absorption costing statements above and why profits have not been more closely rated to
changes in sales volume. (5 points)
4. Identify and discuss the advantages and disadvantages of using the variable costing method for
internal reporting purposes. (5 points)
5. Reconcile the absorption costing and the variable costing net operating income figures for each
month. (15 points)

ANSWERS HERE:

Requirement 1

July August September.

Sales 1,750,000 1,875,000 2,000,000

Less: Variable cost of goods sold:

Inventory - Beginning 45,000 180,000 225,000

Variable Cost of goods manufactured (765,000 720,000 540,000

Variable cost of goods available for sale 810,000 900,000 765,000

Ending Inventory (180,000) (225,000) (45,000)

Variable cost of goods sold (630,000) (675,000) (720,000)

Gross Contribution margin 1,120,000 1,200,000 1,280,000

Less: Variable Selling and Administrative cost (420,000) (450,000) (480,000)

Final Contribution Margin 700,000 750,000 800,000

Under/Overapplied Factory Overhead 35,000 - (140,000)

Adjusted Contribution Margin 735,000 750,000 660,000

Less: Fixed expense:

Manufacturing Overhead (595,000) (560,000) (420,000)

Selling and Administrative Expense (200,000) (200,000) (200,000)

Net Income Under Variable Costing(Loss) (60,000) (10,000) 40,000

Requirement 2:

Break-even point =Total Fixed Cost/ (FC/unit sold)

= 760,000/(750,000/75,000)
 =760,000/10 = 76,000

* Considering the fixed manufacturing overhead cost is applied to units of product on the basis
of a budgeted production volume of 80,000 units per month, the month of august will show the most
accurate break-even point because the units produced for the most is 80,000.

Requirement 3:

Under absorption costing, both production and sales affect the profit. Fluctuations of inventory
level results in changes in operating profit. If there are production deferrals wherein production
exceeds sales, then a portion of the manufacturing cost will be incurred in the future or deferred in the
future period which inflates the profit of the current period, which happened in July wherein the
production is 85,000 and the sales are 70,000. On the other hand, the September period incurred a loss
due to the fact that the expected 80,000 units produced resulted in the actual production of 60,000
units, thus, making the fixed manufacturing cost capitalized in lesser units produced. For instance, the
fixed selling and administrative cost with the value of 200,000.00 are being capitalized to 85,000 units
which leads to 2.35 per unit compared to 2.86 for the month of September.

Requirement 4.

The advantages of using variable costing in operating profit are not affected by changes in the
inventory level which happens in the above income statement where it uses absorption costing.
Operating profit more closely approximates cash flow. Another point is that the variable costing
contains data needed for Cost-Variable-Profit (CVP) analysis, which is useful in determining break-even
point and income at different activity levels.

The disadvantage of using variable costing is that it is not consistent with standards. Moreover,
if a company uses Just-in-time inventory, then the variable costing is not useful because the former’s
goal is to have a low level of inventory where there is little to no issue with it comes to inventory level.
Another point is manufacturing costs are understated in the absence of fixed manufacturing overhead.
Lastly, variable costing does not include fixed manufacturing overhead but is considered an expense,
thus, it is crucial to educate the internal staff that variable costing is used to avoid confusion when it
comes to cost per unit and pricing.

Requirement 5.

Variable cost to absorption cost July August September

Net income under variable cost (60,000) (10,000) 40,000

Add: FFO in ending Inventory 140,000 175,000 35,000

Less: FFO in beginning inventory (35,000) (140,000) (175,000)

Profit using Absorption Cost 45,000 25,000 (100,000)