College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 137

VARIABLE COSTING VS. ABSORPTION COSTING

Multiple Choice
1. All of the following are inventoried under absorption costing EXCEPT
a. Sales commission.
b. Raw materials used in production.
c. Utilities cost consumed in manufacturing.
d. Machine lubricant used in production.
2. The underlying difference between absorption costing and variable costing lies in the treatment of
a. Fixed manufacturing overhead.
b. Variable manufacturing overhead.
c. Fixed selling and administrative costs.
d. Direct labor.
3. All of the following are expensed under variable costing EXCEPT
a. Variable manufacturing overhead.
b. Fixed manufacturing overhead.
c. Variable selling and administrative costs.
d. Fixed selling and administrative costs.
4. MAGLANA’s inventory increased during the year. On the basis of this information, income reported under absorption costing will be
a. Different from that reported under variable costing, the direction of which cannot be determined.
b. Less than that reported in the previous period.
c. Higher than that reported under variable costing.
d. Lower than that reported under variable costing.
5. Which of the following situations would cause variable-costing net income to be lower than absorption-costing net income?
a. Units sold and units produced were both 42,000.
b. Units sold equaled 39,000 and units produced equaled 42,000.
c. Units sold equaled 55,000 and units produced equaled 49,000.
d. Sales prices decreased by P7 per unit during the accounting period.

VARIABLE COSTING VS. ABSORPTION COSTING

EXERCISES
Problem 1
MAGShop produces ladies’ bags and men’s bags. Below are selected data in 2021.
Ladies bags Men bags
Production (units) 1,000 2,000
Sales (units) 900 2,100
Selling price P550 P450
Direct labor hours 500 800
Manufacturing costs:
DM P 75,000 P100,000
DL 250,000 400,000
Variable OH 20,000 24,000
Fixed OH:
Direct 50,000 40,000
Common* 20,000 20,000
Nonmanufacturing costs:
Variable selling 30,000 60,000
Direct fixed selling 35,000 40,000
Common fixed selling** 25,000 25,000

*Common OH totals P40,000 divided equally between the two products

**Common fixed selling costs totals P50,000 divided equally between the two products

Budgeted fixed OH for the year, P130,000, equaled the actual fixed OH. Fixed OH is assigned to products using a plantwide rate based on expected
direct labor hours, which were 1,300. The company had 100 men’s bags in inventory at the beginning of the year. These bags had the same unit cost
as the men’s bags produced during the year

Required:
1. Compute the unit cost for the ladies’ bag and the men’s bag using a) variable costing and b) absorption costing.

PRODUCT UNIT Ladies’ bag Unit Cost Men’s bag Unit Cost
COST
DM 75,000/1,000 P 75 100,000/2,000 P 50
DL 250,000/1,000 250 400,000/2,000 200
Variable OH 20,000/1,000 20 24,000/2,000 12
VARIABLE UNIT P 345 P 262
COST
Budgeted Fixed OH: 100/DLH x 500 DLH = 50,000 100/DLH x 800 DLH = 80,000
130,000/1,300DLH =
100/DLH 50,000/1,000 80,000/2,000
50 40
ABSORPTION UNIT P 395 P 302
MYRA T. MIRAFLORES, CPA Page 1 of 2
 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

COST

2. Prepare a segmented income statement (per product) under a) absorption costing and b) variable costing.
3. Prepare MAGShop’s Income Statement for 2021 under a) absorption costing and b) variable costing.

ABSORPTION INCOME STATEMENT Ladies’ bag Men’s bag Total

Sales [P550 x 900] + [P450 x 2,100] P 495,000 P 945,000 P1,440,000
Less: COGS [P395 x 900] + [P302 x 2,100] (355,500) (634,200) (989,700)
Gross Profit P 139,500 P 310,800 P 450,300
Less: Selling Expenses [30,000+35,000+25,000] + [60,000+40,000+25,000] (90,000) (125,000) (215,000)
Net Operating Income P 49,500 P 185,800 P 235,300

VARIABLE INCOME STATEMENT Ladies’ bag Men’s bag Total

Sales [P550 x 900] + [P450 x 2,100] P 495,000 P 945,000 P1,440,000
Less: Variable OH [P345 x 900] + [P262 x 2,100] (310,500) (550,200) (860,700)
Product Contribution Margin P 184,500 P 394,800 P 579,300
Less: Variable SE [30,000+60,000] (30,000) (60,000) (90,000)
Contribution Margin P 154,500 P 334,800 P 489,300
Less: Fixed OH [50,000+80,000] (50,000) (80,000) (130,000)
Less: Fixed Selling Expenses [35,000+25,000] + [40,000+25,000] (60,000) (65,000) (125,000)
Net Operating Income P 44,500 P 189,800 P 234,300

4. Reconcile the difference between the two income statements.

RECONCILING INCOME Ladies’ bag Men’s bag Total

Absorption Costing Net Operating Income P 49,500 P 185,800 P 235,300
Add: Fixed OH in Inventory beginning [P50 x 0] + [P40 x 100] 0 4,000 4,000
Less: Fixed OH in Inventory ending [P50 x 100*] + [P40 x 0**] (5,000) (0) (5,000)
Variable Costing Net Operating Income P 44,500 P 189,800 P 234,300

*Inventory (Ladies’ bag) ending: 0 + 1,000 – 900 = 100

**Inventory (Men’s bag) ending: 100 + 2,000 – 2,100 = 0

**********************************************END OF
MATERIAL**********************************************

MYRA T. MIRAFLORES, CPA Page 2 of 2