Cost Sensitivity; Variable Costing vs.

Absorption Costing

A. The Makati Manufacturing has determined the cost of manufacturing a unit of product to be
as follows, based on normal production of 50,000 units per year; Direct materials P 20; Direct
labor P 15; Variable factory overhead P 10; Fixed factory overhead P 12;
Operating statistics for the month of August and September include:
August Sept
Units produced 4,200 4,000
Units sold 3,500 4,200
Selling & administrative P 25,000 P 28,500

The selling price is P 70 per unit. There were no inventories on August 1, and there is no work in
process at September 30.
Prepare comparative income statements for each month using absorption and direct costing
method.

B. Red Company has just completed its first year of operations. The unit cost on a normal-
costing basis are as follows:
Manufacturing cost (per unit):
Direct materials (2 lb. at P 20) P 40
Direct labor (1.5 hr. at P 90) 135
Variable overhead (1.5 hr. at P 20) 30
Fixed overhead (1.5 hr. at P 30) 45
Total P 250

Selling and administrative cost:

Variable P 15/ unit
Fixed P 1,090,000

During the year, the company had the following activity:

Units produced 24,000
unit sold 21,500
unit selling price P 420
Direct labor hours 36,000

Actual fixed overhead was P 12,000 less than the budgeted fixed overhead. Budgeted variable
overhead was P 5,000 less than the actual variable overhead. The company used an expected
actual activity level of 36,000 direct labor hours to compute the predetermined overhead rates.
Any overhead variances are closed to cost of goods sold.
Required:
a. Compute the unit cost using (a) absorption costing and (b) variable costing;
b. Compute the operating income using (a) absorption costing and (b) variable costing;
c. Reconcile the difference between the two incomes.

3. Belle Company produces and sells rattan baskets. The number of units produced and the
corresponding total production costs for the six months, which are representatives for the year,
are as follows:
Month Units produced Production costs
April 500 4,000
May 700 8,000
June 900 6,000
July 600 7,500
August 800 8,500
September 550 7,250

Based on the given information and using the least square method of computation,
compute the variable production cost per unit, and the monthly fixed productions cost. Compare
it with high-low method.

D. As part of a cost study, the cost accountant of Shinly Corporation has recorded the cost of
operations at seven different levels of materials usage. The records show the following:
Kinds of materials Cost of operation
80 P 800
60 480
20 320
120 1,200
140 1,280
40 480
100 1,040
3.1. Using the high low method, the variable cost of operations per kilo of materials used is?
3.2. Using the high low method, the fixed cost of operations is?
3.3. Using the least squares method, the average rate of variability per kilo of material used is?
3.4. using the least square method, the fixed portion of the cost is?

E. Bryan Corporation produces and sells a single product, a wooden hand loom for weaving
small items such as scarves. Selected cost and operating data relating to the product for two years
are given below:

Selling price per unit P 50

 Manufacturing costs:
Variable manufacturing cost per unit produced
Direct materials P 11
Direct labor 6
Variable manufacturing overhead 3
Fixed manufacturing overhead per year P 120,000
Selling and administrative expenses:
Variable selling and administrative per unit sold P4
Fixed selling and administrative per year P 70,000

Year 1 Year 2
Units in beginning inventory 0 2,000
Units produced during the year 10,000 6,000
Units sold during the year 8,000 8,000
Units in ending inventory 2,000 0

Required:

1. Assume the company uses absorption costing.

a. Compute the unit product cost in each year.
b. Prepare an income statement for each year

2. Assume the company uses variable costing.

a. Compute the unit product cost in each year.
b. Prepare an income statement for each year.

3. Reconcile the variable costing and absorption costing net operating incomes.