Variableabsorption Costing

Republic of the Philippines
BATANGAS STATE UNIVERSITY

COLLEGE OF ACCOUNTANCY BUSINESS ECONOMICS AND
INTERNATIONAL HOSPITALITY MANAGEMENT
CITE Building, Pablo Borbon Main 1, Rizal Avenue, Batangas City
VARIABLE & ABSORPTION COSTING
In Partial fulfillment of the Requirements for

ACC 206: Strategic Cost Management
2nd Semester, AY 2020-2021
Presented by:
Balanza, Mariel
Datingaling, EJ Mcfelle
De Guzman, Godwin
Del carmen, Jeremy
Jasa, Jochebed
Llaneta, Reina Odessa
Manuel, Maria Rose
Matala, Michael John Ritchelle
Mortel, Aphol Joyce
Ona, Ma. Sophia
Patupat, Mark Adrian
Supnet, John Christopher
GROUP 2
BSA 2202
Submitted to:
MS. KIMBERLY CAMILLE G. MENDOZA

Acc 206, Instructor
JUNE 2021
STRAIGHT PROBLEMS
SP-1
Unit product costs, profit and cost of ending inventory. Northern Bicycle produces
an inexpensive motorbike that sells for P12,000. Selected data for the company’s
operations last year follow:
Units in beginning inventory 300
Units produced 1,000
Units sold 800
Units in ending inventory 500
Variable cost per unit:
Direct Materials P 1,300
Direct Labor 800
Manufacturing overhead 500
Selling and 200
administrative
Fixed costs per year:
Manufacturing overhead P 4,000,000
Selling and 2,000,000
administrative
Required:
1. Compute the unit costs under absorption and variable costing methods.
Solution:
Absorption Costing Variable
Costing
Direct Material 1,300 1,300
Direct Labor 800 800
Variable Manufacturing Overhead 500 500
Fixed Manufacturing Overhead 5000 0
Units produced Cost 7,600 2,600
2. Compute the operating income under absorption and variable costing.
Solution:
Absorption Costing
Variable Costing
Sales (800*12,000) 9,600,000
9,600,000
Less: Cost of Goods Sold (800*7600) 6,080,000
(800*2,600)
2,080,000
Gross Profit/Manufacturing Margin 3,520,000
7,520,000
Less: Variable Expense
1,000,000
Contribution Margin
6,520,000
Less: Fixed Manufacturing Overhead
4,000,000
Fixed Administrative and Selling 2,000,000
2,000,000
Net Income P 1,520,000 P
520,000
3. Compute the value of ending inventory under absorption and variable

methods,
Solution:
Value of Closing Inventory
As per Absorption Costing

Beginning Inventory 300
Units Produced 1000
Units Sold (800)
Ending Inventory 500
Total Ending Inventory Cost (500*7600) = P 3,800,000
As per Variable Costing
Beginning Inventory 300

Units Produced 1000
Units Sold (800)
Ending Inventory 500
Total Ending Inventory Cost 500*2600 = P 1,300,000
4. Reconcile the difference in operating income under the absorption and

variable costing methods.
Units produced 1000

Units Sold 800
Change in Inventory 200
FFOH per Unit x 5000
Difference P 1,000,000
SP-2
Complete the table below by filling out the missing values.
Absorption Costing Variable Costing

Quantity Unit Amount Quantity Unit Amount
Price Price
Sales ? P30.00 ? ? ? ?
Variable CGS 8,000 12.00 ? ? ? ?
Fixed overhead ? 3.00 ? 10,000 ? ?
Variable ? 2.50 ? ? ? ?
expenses
Fixed expenses ? 4.00 ? ? ? ?
Profit ? ? ? ? ?
Solution:

Quantity Unit Amount Quantity Unit Amount
Price Price
Sales 8,000 P30.00 P2,400,000 8,000 P30.00 P
2,400,000
Variable CGS 8,000 12.00 (96,000) 8,000 12.00 (96,000)
Fixed overhead 8,000 3.00 (24,000) 10,000 3.00 (30,000)
Variable 8,000 2.50 (20,000) 8,000 2.50 (20,000)
expenses
Fixed expenses 10,000 4.00 (40,000) 10,000 4.00 (40,000)
Profit P P
2,240,000 2,234,000
SP-3
Inventoriable cost, profit and ending inventory values. Anton Company produces
and sells a unique type of TV antenna. It has just opened a new plant to manufacture the
antenna, and the following costs and revenue data are reported for the first month of the
company's operations. The management is anxious to see how profitable the new
antenna will be and has asked that an income statement be prepared for the month.
Beginning inventory 0
Units sold 35,000
Sales price per unit ₱ 80
Selling and administrative expenses:
Variable per unit 5 % of sales
Fixed ₱ 560,000
Manufacturing costs:
Direct materials cost per
unit 15
Direct labor cost per unit 7
Variable overhead cost
per unit 2
Fixed overhead cost
(total) 640,000
Required:
1. Under variable costing and absorption costing, respectively, compute the:
a. Unit product costs
Solution:
Absorption
Costing Variable Costing
Direct materials 15 15
Direct labor 7 7
Variable mfg. overhead 2 2
Fixed mfg. overhead
(640,000/42,000) 15.24 -
Unit product Cost 39.24 24
b. Profit
Solution:
Absorption Costing Income Statement
P2,800,00
Sales (35,000 x 80) 0
(1,373,400
Cost of goods sold (35,000 x 39.24) )
Gross margin 1,426,600
Selling and administrative expenses (700,000)
[(2,800,000 x 5%) + 560,000]
Net operating income P 726,600
Variable Costing Income Statement

P2,800,00
Sales (35,000 x 80) 0
Variable expenses:
840,00
Variable COGS 0
140,00
Variable Selling and administrative 0 (980,000)
Contribution margin 1,820,000
Fixed expense:
640,00
Fixed mfg. overhead 0
560,00 (1,200,000
Fixed selling and administrative 0 )
Net operating profit P 620,000
c. Ending inventory value
Beginning Inventory P0
Production 42,000
Sales (35,000)
Ending inventory 7000
Absorption Costing: 7,000 x 39.24 = P274,680

Variable Costing: 7,000 x 24 = P168,000
2. Reconcile the difference in profit between the absorption and direct costing
method.
Variable net income 620,000

Fixed cost (7,000 x
15.24) 106,600
Absorption net income P 726,600
SP-4
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
B. Standard distribution and administration expenses:
Variable expenses P3.00 per unit

Fixed expenses P200,000 per month
C. Regular unit sales price P200.00
D. Actual data:
Beginning Inventory 2,200 units
Production 19,000 units
Sales 18,400 units
Required:
a. The standard unit product cost under absorption costing and variable costing
systems.
Solution:

Direct materials P12.00 P12.00
Direct labor 25.00 25.00
Variable overhead 5.00 5.00
Fixed overhead 10.00 _____
Total P52.00 P42.00
b. The budgeted fixed production costs.
Solution:
20,000 units × P10 = P 200,000
c. Profit using absorption costing and variable costing under each of the following
independent cases:
Production Sales
1. 20,000 22,000
2. 20,000 19,300
3. 20.,000 20,000
4. 23,000 23,500
5. 17,500 17,200
Solution:
Absorption Variable
Sales 22,000×P200 P4,400,000 P4,400,000
Variable COGS 22,000×42 (924,000) (924,000)
Fixed Overhead 22,000×10 (220,000)
20,000×10 (200,000)
Variable expenses 22,000×3 (66,000) (66,000)
Fixed expenses (200,000) (200,000)
Profit (loss) P2,990,000 P3,010,000
Absorption Variable
Sales 19,300×P200 P3,860,000 P3,860,000
Variable COGS 19,300×42 (810,600) (810,600)
Fixed Overhead 19,300×10 (193,000)
20,000×10 (200,000)
Fixed expenses (200,000) (200,000)
Profit (loss) P2,598,500 P2,591,500
Absorption Variable
Sales 20,000×P200 P4,000,000 P4,000,000
Variable COGS 20,000×42 (840,000) (840,000)
Fixed Overhead 20,000×10 (200,000)
20,000×10 (200,000)
Fixed expenses (200,000) (200,000)
Profit (loss) P2,700,000 P2,700,000
Absorption Variable
Sales 23,500×P200 P4,700,000 P4,700,000

Variable COGS 23,500×42 (987,000) (987,000)
Fixed Overhead 23,500×10 (235,000)
20,000×10 (200,000)
Fixed expenses (200,000) (200,000)
Profit (loss) 3,207,500 3,242,500
Absorption Variable
Sales 17,200×P200 P3,440,000 P3,440,000
Variable COGS 17,200×42 (722,400) (722,400)
Fixed Overhead 17,200×10 (172,000)
20,000×10 (200,000)
Fixed expenses (200,000) (200,000)
Profit (loss) P2,294,000 P2,266,000

SP-6
Fill out the missing values in the following table:
A B C D
Absorption Variable Variable Absorption
Unit sales price P300.00
Unit sold 20,000 32,000 8,000
Units produced 23,200 30,000 12,000 8,200
Normal capacity 30,000
Sales in pesos
Unit var prod costs P140.00 P6.00
Variable CGS P1,600,000 P144,000
Fixed overhead P330,000 P118,000
Std. unit fixed OH P20.00 P7.00
rate
Unit variable P2.00
expense
Variable expenses P200,000 P480,000 P72,000
Unit fixed expenses P12.00 P1.20
Fixed expenses P320,000 P250,000
Volume variance None None None None
Profit(loss) P4,000,000 (P400,000)
Difference in profit P500,000
Profit(loss)other P29,000
method
Solution:
a. b. c.
d. e. f.
g. h. i.
j. k. l.
m. n. o.
p. q. r.
s. t. u.
v. w. x.
y. z. aa.
bb. cc. dd.
ee. ff. gg.

hh. ii. jj.
Absorption
Variable
Sales
P 6,000,000
P6,000,000
Variable CGS
(2,800,000)
(2,800,000)
Fixed Overhead
(400,000)
(464,000)
Variable Exp.
(200,000)
(200,000)
Fixed Exp.
(278,400)
(278,400)
Profit
P 2,321,600
P2,257,600
Produced
P 23,200
Sold
(20,000)
Total
P 3,200
Std. Unit Fixed OH Rate

x 5
Total
P 64,000
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Absorption
Variable
Sales
P 6,752,000
P6,752,000
Variable CGS
(1,600,000)
(1,600,000)
Fixed Overhead
(352,000)
(330,000)
Variable Exp.
(480,000)
(480,000)
Fixed Exp.
(320,000)
(320,000)
Profit
P 4,000,000
P4,022,000
Produced
P 30,000
Sold
(32,000)
Total
P (2,000)

x 11
Total
P (22,000 )
ttt. uuu. vvv.
www. xxx. yyy.

zzz. aaaa. bbbb.
cccc. dddd. eeee.
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iiii. jjjj. kkkk.
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Absorption
Variable
Sales
P 184,000
P 184,000
Variable CGS
(144,000)
(144,000)
Fixed Overhead
(618,000)
(118,000)
Variable Exp.
(72,000)
(72,000)
Fixed Exp.
(250,000)
(250,000)
Profit
P 900,000
P 400,000
500,000
/ 9.83
50,865
(12,000)
units produced
38,865
sold units
oooo.
Absorption
Variable
Sales
P 158,840
P 158,840
Variable CGS
(48,000)
(48,000)
Fixed Overhead
(56,000)
(57,400)
Variable Exp.
(16,000)
(16,000)
Fixed Exp.
(9,840)
(9,840)
Profit
P 29,000
P 27,600
Produced
P 8,200
Sold
(8,000)
Total
P 200

x 7
Total
P 1, 400
SP-7
Profit, inventoriable costs and costs of ending inventory. Golden Company
produces an inexpensive product branded as “Ginto”. Selected data for the company’s
last year’s operations follow:
Units:
Beginning Inventory 4,000
Normal Capacity 50,000
Unit sales price ₱ 250

Variable costs per unit:
Direct materials ₱ 30
Direct labor 20
Manufacturing overhead 25
Selling and administrative 12
Fixed costs:
Manufacturing overhead per unit ₱ 14
Selling and administrative, total 300,000
Required: For each of the following independent cases, determine the profit and account
for the difference in profits under the absorption and variable costing methods:
Production Sales
1. 50,000 52,000
2. 50,000 49,500
3. 50,000 50,000
4. 52,000 51,000
5. 47,500 52,500
CASE 1 (Production 50,000; Sales 52,000)

Absorption Costing
Sales P13,000,00
0
Less: COGS
Direct Materials 1,560,000
Direct Labor 1,040,000
Variable Overhead 1,300,000
Fixed Overhead
4,628,000
728,000
Gross Profit 8,372,000
Less: Operating Expenses
Variable Selling and Administrative
624,000
Fixed Selling and Administrative
924,000
300,000
Net Profit P7,448,000
Variable Costing
Sales P13,000,000
Less: Variable Costs
Variable Selling and Administrative 624,000 4,524,000
Contribution Margin 8,476,000
Less: Fixed Costs
Fixed Overhead 700,000
Fixed Selling 300,000 1,000,000
Difference in Profits
Absorption Costing Income P 7,448,000
Variable Costing Income 7,476,000
Difference in Income P (28,000)
Production 50,000
Sales 52,000
Change in Inventory 2,000
Fixed FOH per unit 14
Difference in Income P 28,000

Absorption Costing
P12,375,00
Sales 0
Less: COGS
990,00
Direct Labor 0
Fixed Overhead 693,00 4,405,500
0
594,00
Variable Selling and Administrative 0
300,00 894,00
Fixed Selling and Administrative 0 0
Variable Costing
Sales P12,375,000
990,00
Direct Labor
0
594,00
Variable Selling and Administrative 4,306,500
0
Less: Fixed Costs
700,00
Fixed Overhead
0
300,00
Fixed Selling and Administrative 1,000,000
0
Production 50,000
Sales 49,500
Sales P12,500,000
Less: COGS


Variable Selling and Administrative 600,000
Fixed Selling and Administrative 300,000 900,000
Variable Costing
Sales P12,500,000
Less: COGS


Difference in Income P0
Production 50,000
Sales 50,000
Difference in Income P0

Absorption Costing
Sales P12,750,000
Less: COGS


Variable Costing
Sales P12,750,000


Less: Fixed Costs

Fixed Selling and Administrative 300,000 1,028,000
Production 52,000
Sales 51,000
Change in Inventory 1,000

Absorption
Sales P13,125,000
Less: COGS


Variable Costing
Sales P13,125,000

Less: Fixed Costs

Production 47,500
Sales 52,500
Change in Inventory (5,000)
SP-8
Profit computation and reconciliation. Maggie has just obtained a patent on a
small electronic device and organized Maggie Products, Inc., in order to produce
and sell the device. During the first month of operations, the device was very well
received on the market and a statement of profit or loss shown below was
prepared. The President was discouraged over the loss shown on the profit or
loss statement.
Maggie Products, Inc.
Statement of Profit or Loss
First Month
Sales (40,000 units) 200,000

Less Variable Expenses:
Cost of goods sold (*) 80,000
Selling and administrative 30,000 110,000
Contribution margin 90,000
Less fixed expenses:
Manufacturing overhead 75,000
Selling and administrative 20,000 95,000
Loss (5000)
(*consists of direct materials, direct labor and variable overhead)
Other data:
Units sold 40,000
Direct materials 1.00
Direct labor 0.80
Manufacturing overhead 0.20
Selling and administrative expenses 0.90
1. Calculate the unit product cost under absorption costing.

Solution:
Absorption Costing
Direct Materials 1.00
Direct Labor 0.80
Variable Factory Overhead 0.20
Fixed Factory Overhead (75,000/50,000) 1.50
Product cost per unit 3.50
2. Calculate the profit (loss) under absorption costing.
Solution:
Maggie Products, Inc.
Statement of Profit or Loss (Absorption)
First Month
Sales 200,000
Less: Cost of Goods Sold
Direct Materials 40,000
(40,000 x 1.00)
Direct Labor 32,000
(40,000 x 0.80)
Variable Factory Overhead 8,000
(40,000 x 0.20)
Fixed Factory Overhead 60,000 (140,000)
(40,000 x 1.50)
Gross Profit 60,000
Less: Expenses
Variable Selling and 30,000
Administrative
Fixed Selling and 20,000 (50,000)
Administrative
Profit (10,000)
3. Reconcile the difference in profit under absorption costing and variable costing
Solution:
Absorption Costing Variable Costing Change
Sales 200,000 200,000 -
Variable Cost of Goods (140,000) (140,000) -
Sold
Fixed Overhead (60,000) (75,000) (15,000)
Variable Expenses (110,000) (110,000) -
Fixed Expenses (95,000) (95,000) -
Profit 605,000 620,000 (15,000)
SP-9
Profit reconciliation. Alfred Company manufactures and sells a single product.

Cost data for the product follow:

Materials P6
Labor 12
Factory Overhead 4
Selling and Administrative 3
Fixed costs per month:
Factory Overhead 240, 000
Selling and Administrative 180, 000
The product sells for P40 per unit. Production and sales data for May and June, the first
two months of operation are as follows:
Units Produced Units Sold
May 30, 000 26, 000
June 30, 000 34, 000
Income statements prepared by the accounting department, using absorption costing are
presented below:
May June
Sales P1, 040, 000 P1, 360, 000
Less: Cost of goods sold
Beginning Inventory 0 120, 000
Add: Cost of goods manufactured 900, 000 900, 000
Goods available for sale 900, 000 1, 020, 000
Less: Ending Inventory (120, 000) 0
Cost of goods sold 780, 000 1, 020, 000
Gross Margin 260, 000 340, 000
Less: Selling and Administrative Expenses (258, 000) (282, 000)
Profit P2, 000 P58, 000
Required:
1. Prepare the statement of profit or loss for May and June using the contribution
approach.
Solution:
MAY JUNE
Sales P 1,040,000 P1,360,000
Less: COGS
Beginning Inventory 0 88,000
Add: Variable CGM (30,000 x 22) 660,000 660,000
Total Goods Available for Sale 660,000 748,000
Less: Ending Inventory 88,000 0
Variable Cost of Goods Sold 572,000 612,000
Manufacturing Margin 468,000
Less: Variable Expenses (26,000 x P3) 78,000
(34,000 x P3) 102,000
Contribution Margin 390,000 510,000
Less Fixed costs and expenses:

Fixed overhead 240,000 510,000
Fixed expenses 180,000 240,000
Total 420,000 180,000
Net Income (loss) P(30,000) P420,000
2. Account for the difference in profit between variable costing and absorption
costing.
MAY JUNE
Change in Net Income
[(P2,000)-(-P30,000)] P 32,000
[(P58,000)-(P90,000)] P 32,000
Change in Inventory
(30,000- P 4,000
26,000)
(30,000-34,000) P4,000
X Unit Fx OH P8 P8
Change in net income P 32,000 P 32,000
SP-10
Reconciliation of profit and volume variance

Aldrin Products has organized a new division to manufacture and sell
specially designed tables for mounting and using personal computers. Its new
plant is highly automated and requires high monthly fixed costs as shown below.
Manufacturing costs:
Direct Materials P 60
Direct Labor 26
Overhead 24
Fixed overhead 240,000
Selling and Administrative costs:

Variable 12% of sales
Fixed 160,000
During the month of operations, the following activity was recorded:

Units produced P 5,500
Units sold 5,200
Selling price per unit 410
Net Materials variance-unfavorable 12,000
Net direct labor variance-favorable 5,000
Net variable overhead variance-favorable 2,500
Required:
1. Unit inventoriable costs under absorption costing and variable costing.

Solution:
Direct materials P 60 P 60
Direct labor 26 26
Variable Overhead 24 24
Fixed Overhead (240,000/5,500) 40 0
Inventoriable costs P 150 P 110
2. Calculate the volume variance

Solution:
Normal Capacity 6,000 units
Less: Actual capacity 5,500 units
Capacity (volume) variance-

units 500 unfavorable
Multiply by: Unit Fixed Overhead 40 units
Capacity variance P 20,000 unfavorable
3. Cost of goods sold at actual under absorption and variable costing

Solution:
Absorption Variable
Costing Costing
Variable Cost of Goods Sold
(5,200 x 150) P 780,000
(5,200 x 110) - P 572,000
Fixed Overhead - 240,000
Net material variance-unfavorable 12,000 12,000
Net direct labor variance- favorable (5,000) (5,000)

Net variable Overhead variance-
favorable (2,500) (2,500)
Capacity variance- unfavorable 20,000 -
Cost of Goods Sold- actual P 804500 P 816500
4. Operating income under absorption costing and variable costing.

Solution:
Absorption Variable
Costing Costing
Sales (5,200 x 410) P 2,132,000 P 2,132,000
Cost of Goods Sold- actual (804,500) (816,500)
Variable selling and administrative

expenses
(2,132,000 x 12%) (255,840) (255,840)
Fixed selling and administrative expenses (160,000) (160,000)
Operating income P 911,660 P 899,660
5. Reconciliation of income under absorption costing and variable costing.

Solution:
Change in income (911,660 - 899,660) P 12,000
Change in inventory (5,500 - 5,200) 300 units
Multiply by: Unit Fixed Overhead P 40
Changed in net income P 12,000
SP-11
Volume variance in units and in hours. Consider the following standard cost per unit
based on a normal capacity of 40,000 units:
Direct materials 1.4 kgs. @ P20 P28.00
Direct labor 0.2 hr, @ P80 16.00
Variable overhead 0.2 hr. @ P100 20.00
Fixed overhead 0.2 hr. @ P50 10.00
Compute the volume variance under each of the following independent actual production
conditions (identify the variances as unfavorable or favorable):
a. 40,000 units.
Volume Variance = (Normal Capacity in Units-Actual Capacity in Units)*Standard Fixed
Overhead Rate
Volume Variance = (40,000 - 40,000) * 10 = 0
b. 43,200 units.
Volume Variance = (43,200 - 40,000) * 10 = 32,000 F
c. 37,800 units.
Volume Variance = (37,800 - 40,000) * 10 = 22,000 UF
d. 40,000 units and 8,000 hours.

Volume Variance = (40,000 - 40,000) * 10 = 0
e. 41,400 units and 7,650 hours.

Volume Variance = (41,400 - 40,000) * 10 = 14,000 F
f. 38,800 units and 9,800 hours.

Volume Variance = (38,800 - 40,000) * 10 = 12,000 UF
SP-12
Statement of profit or loss. Bark Manufacturing Company began its operations on
January 1, 20CY, and produces a single product that sells for P 12 per unit. During
20CY, 100,000 units of the product were produced, 90,000 of which were sold. There
was no work in process inventory at the end of the year.
Manufacturing costs and marketing and administrative expenses for 20CY were as
follows:
Fixed Variable
Materials P 2.00 per unit

produced
Direct labor 1.50 per unit
produced
Factory overhead P200,000 .50 per unit produced
Marketing and Administrative 100,000 .20 per unit produced
Required: Prepare the statement of profit or loss for 20CY using direct costing. (aicpa)
Solution:
Bark Manufacturing Company
Direct Costing Income Statement
For the Year Ended, December 21,2006
Sales (90,000 x P12) P1,080,000
Less: Cost of Goods Sold
Beginning Inventory P0
Add: Var CGM (100,00 x P4.00) 400,000
Total goods available for sale 400,000
Less: Ending Inventory (10,000 x P4.00) 40,000 380,000
Manufacturing margin 700,000
Less: Variable Expenses (90,000 x P0.20) 18,000
Manufacturing margin 682,000
Less: Fixed costs and expenses:
Fixed factory overhead 200,000
Fixed marketing and administrative expenses 100,000 300,000
Net Income P382,000
SP-13
Profit and volume variance. Holland products began operations on January 3 of the
current year. Standards were established in early January assuming a normal production
volume of 160,000 units. However, the company produced only 140,000 units of product
and sold 100,000 units at a selling price of P180 per unit during the current year.
Variable costs totaled P7,000,000, of which 60% were manufacturing and 40% were
selling. Total fixed costs amount to P11,200,000 which 50% comes from the
manufacturing. There were no raw materials or work in process inventories at the end of
the year. Actual input prices per unit of product and actual input quantitative per unit of
product were equal to standard.
Required:
1. Determine the cost of goods sold at standard cost, using full absorption costing
(excluding standard cost variances).
Solution:
1. P6,500,000
Variable cost per unit:
total variable cost 7,000,000
manufacturing cost portion 60%
total variable manufacturing cost P 4,200,000
total variable manufacturing cost P 4,200,000

units actually produced 140,000 = P30 per unit
Fixed cost per unit:
total fixed cost 11,200,000
manufacturing cost portion 50%
total fixed manufacturing cost P 5,600,000
total fixed manufacturing cost P 5,600,000

units normal production volume 160,000 = 35 per unit
Full cost per unit at standard 65
Number of units sold during the year x 100,00
Cost of goods sold at standard under absorption P6,500,000
costing
2. How much cost would be assigned to ending inventory using direct costing?
Solution:
P1,200,000
Units actually produced during the year 140,000
Units sold during the year (100,000)
Units increase in inventory 40,000
Standard variable manufacturing cost x 30
per unit
Ending inventory at standard direct P1,200,000
cost
3. Compute the factory overhead volume variances for the year.
Solution:
P700,000
Normal production volume 160,000
Units actually produced during the year (140,000)
Excess of budget over actual production 20,000
Fixed factory overhead per unit x 35
Factory overhead volume variance P700,000
4. How much would operating income be, using direct costing?

Solution:
P1,000,000
Sales (100,000 units x 180) P180,000
Standard variable COGS (100,000 units x 30 unit variable 3,000,000
cost)
Gross contribution margin P15,000,000
Variable selling expense (P7,000,000 variable cost x 40%) (2,800,000)
Contribution margin P12,200,000
Less: Fixed costs (11,200,000)
Operating income under direct costing P1,000,000
SP-14
Explaining the profit decline. Star Company, a wholly owned subsidiary of Orbit Inc .,
produces and sells three main product lines. The company employs a standard cost
accounting system for sound-keeping purposes.
At the beginning of the year, the president of Star Company presented the budget to the
parent company and accepted a commitment to contribute P15,800 to Orbit's
consolidated profit in 2020. The president has been confident that the year's profit would
exceed the budget target, because the monthly sales reports have shown that sales for
the year will exceed the budget by 10%. The president is both disturbed and confused
when the controller presents an adjusted forecast as of November 30, indicating that
profit will be 11% under budget. The two forecasts follow:
Forecasts
as of
January 1 November
30
Sales P 268,000 P 294,800
Cost of goods sold at standards 212,000 (*) 233,300
Gross profit at standard 58,000 61,500
Less: Underapplied factory overhead - 6,000
Gross profit at actual 58,000 55,600
Marketing expense 13,400 14,740
Administrative expense 26,800 26,800
Total commercial expense 40,200 41,540
Income operations P 15,800 P 13,960
There have been no sales price changes or product mix shifts since the January 1
forecast. (budgeted fill materials. forecast. overhead. all sales machine The only cost
variance on the income statement is underapplied factory overhead. This arose because
the company used only 16,000 standard machine hours (budgeted machine hours were
20,000) during the year as a result of a shortage of raw materials. Fortunately, Star
Company's finished goods inventory was large enough to fill all sales orders received.
Required:
1. Analyze and explain the forecast profit decline, in spite of increased sales and good
cost control.
Profit decline may happen in spite of increased sales and good control because of either
decreased sales or increased overhead expenses. There is an increased overhead
expense. It was mentioned that underapplied factory overhead occurred in the situation.
Underapplied factory overhead is when overhead expenses are more than what the
company actually budgets in running the operations. This happens when sales exceed
production which causes the shortage of raw materials. This will cause the cost of fixed
overhead recorded in absorption costing greater than that of variable costing because
the amount of overhead charged against the income is determined by the number of
units sold. Therefore, as much as sales in units are exceeding production, fixed
overhead under absorption costing is greater, this will result in higher cost of goods sold
and lower profit in spite of increased sales and good cost control.
SP-15
Statement of profit or loss and reconciliation. The Mass Company manufactures and
sells single product. The following data cover the two latest years of operations:
20PY 20CY
Selling price P 40 P 40
Sales in unit 25,000 25,000
Beginning inventory in units 1,000 1,000
Ending inventory in units 1,000 5,000
Fixed manufacturing costs P 120,000 P 120,000
Fixed marketing and administrative costs P 190,000 P 190,000
Standard variable costs per unit:

Direct materials P10.00
Direct labor 9.50
Variable manufacturing overhead 4.00
Variable marketing and administrative 1.20
The denominator level is 30,000 output units per year. Mass Company’s accounting
records produce variable costing information, and year-end adjustments are made to
produce external reports showing absorption costing information. Any variances are
charged to cost of goods sold.
Required:
1. Prepare two statements of profit or loss for 20PY and 20CY, one under variable and
one under absorption costing.
Solution:
MASS COMPANY
Statement of Profit and Loss (Absorption Costing)
20PY
Sales (25,000 x P 40) P 1,000,000
Less: COGS
Beginning Inventory (1,000 x P 27.5) P 27,500
Add: COGM (30,000 x P 27.5) 825,000
Total Goods Available for 852,500
Sale
Less: Ending Inventory (1,000 x P 27.5) (27,500)
COGS, Standard 825,000 (825,000)
Gross Profit 175,000
Less:
Expenses
Variable S&A (25,000 x P 1.20) 30,000
Fixed S&A 190,000 (220,000)
Profit P45,000
MASS COMPANY
Statement of Profit and Loss (Variable Costing)
20PY
Sales (25,000 x P 40) P 1,000,000

Less: COGS
Add: COGM (30,000 x P 23.5) 705,000
Total Goods Available 728,500
for Sale
COGS, Standard 705,000 (705,000)
Less: Variable S&A (25,000 x P 1.20) (30,000)
Contribution Margin 265,000
Less: Fixed Expenses
Fixed Factory OH 120,000
Fixed S&A 190,000 (310,000)
Profit P 45,000
MASS COMPANY
Statement of Profit and Loss (Absorption Costing)
20CY
Sales (25,000 x P 40) P 1,000,000

Less: COGS
Add: COGM (30,000 x P 27.5) 825,000
Total Goods Available for 852,500
Sale
COGS, Standard 715,000 (715,000)
Gross Profit 285,000
Less:
Expenses
Variable S&A (25,000 x P 1.20) 30,000
Fixed S&A 190,000 (220,000)
Profit P65,000
MASS COMPANY
Statement of Profit and Loss (Variable Costing)
20CY
Sales (25,000 x P 40) P 1,000,000

Less: COGS
Add: COGM (30,000 x P 23.5) 705,000
Total Goods Available 728,500
for Sale
COGS, Standard 611,000 (611,000)
Less: Variable S&A (25,000 x P 1.20) (30,000)
Less: Fixed Expenses
Fixed Factory OH 120,000
Fixed S&A 190,000 (310,000)
Profit P 49,000
2. Explain briefly why the profit figures computed in requirement “a” agree or do not
agree.
In 20PY, there is no difference in the beginning and ending inventories meaning

both operating income should be equal. On the other hand, in 20CY, the ending
inventory is greater than the beginning inventory meaning absorption costing operating
income should be greater than variable costing. Hence, as shown in the computation in
requirement (1), both profit figures to 20PY and 20CY, agrees.
3. Give two advantages and two disadvantages of using variable costing.
Advantages of variable costing:

1. It provides a better understanding of the effect of fixed costs on the net profits
because total fixed cost for the period is shown on the income statement.
2. Companies using variable costing system prepare income statement
in contribution margin format that provides necessary information for cost volume
profit (CVP) analysis. This data cannot be directly obtained from a traditional
income statement prepared under absorption costing system.
Disadvantages of variable costing;
1. Financial statements prepared under variable costing method do not conform to
generally accepted accounting principles (GAAP). The auditors may refuse to
accept them.
2. Variable costing does not assign fixed cost to units of products. So, the
production costs cannot be truly matched with revenues.
SP-16
Statement of profit or loss and reconciliation of profit. RGB Corporation is a
manufacturer of a synthetic element. A.B. Cruz, president of the company, has been
eager to obtain the operating results for the fiscal year just completed. Cruz was
surprised when the income statement revealed that operating income dropped from
P645,000 from P900,000, although sales volume has increased by 100,000 units. This
drop in operating income occurred even though Cruz had implemented the following
changes during the past 12 months to improve the profitability of the company.
(1) In response to a 10% increase in production costs, the sales price of the company’s
product was increased by 12%. This action took place on December 3, 20PY.
(2) The management of the selling and administrative departments were given strict
instructions to spend no more in fiscal 20CY than they did in fiscal 20PY.
RGB’s accountants prepared the following schedule of selected data to assist
management. The company’s comparative income statement also appears below. RGB
uses FIFO method for finished goods.
RGB Corporation
Selected Operating and Financial Data
For 20PY and 20CY
20PY
20CY
Sales price per unit
P 10.00
P 11.20
Materials cost per unit
1.50
1.55
Direct labor cost per unit
2.50
2.75
Variable factory overhead per unit
1.00
1.10
Fixed factory overhead per unit
3.00
3.30
Total fixed factory overhead
P3,000,000
P3,300,000
Total selling and administrative expenses
1,500,000
1,500,000
Quantity of units budgeted (normal capacity)
1,000,000
1,000,000
Quantity of the units actually produced
1,200,000
850,000
Quantity of units sold
900,000
1,000,000
Quantity of units in beginning inventory
0
300,000
Quantity of units in ending inventory
300,000
150,000
RGB Corporation
Selected Operating and Financial Data
For 20PY and 20CY
20PY
20CY
Sales revenue
P 9,000
P 11,200
Cost of goods sold
P 7,200
P 8,500
Volume variance, (favorable) unfavorable

(600)
6,600
(495)
8,995
Gross profit
2,400
2,205
Selling and administrative expenses
1,500
1,600
Operating income
P 900
P 605
Required:
Explain to A. B. Cruz why RGB Corporation’s profit decreased in the current fiscal year,
despite the sales price and sales volume increase.
Solution:
Statement of profit or loss and reconciliation of profit

A . The decrease in in net income under absorption costing is P 405,000, computed as
follows:
2013 Income as Reported P900,000
2014 income as reported 495,000
Decrease in net income P405,000
B.
Decrease in net income accounted for as follows:
Increase in Sales (11,200,000- P9,000,000)

P 2,200,000
Increase in Variable CGS:
2014 balance (900,000 x 5) P 4,500,000
2014 balance (1,000,000x 5.40) 5,400,000

(900,000)
Increase in Operating Expense
(P 1,600,000 – P 1,500,000)
(100,000)
Increased in fixed overhead per statement
2013 (P6,600,00 0- P4,500,000) P 2,100,000
2014 (8,995,000- P5,400,000) 3,595,000

(1,495,000)
Increase in fixed overhead as corrected
P 3,210,000-(P 8,500,000- P5,400,000)

(110,000)
Decrease in net income

P 405,000
C. The true operating income under absorption costing in 2014 should be:
Sales
P 11,120,000
Var CGS
(P 1,000,000 x P 5.40)
5,400,000
Fixed CGS
(300,000 x P 3)
P 900,000
(700,000 x P 3.30)
2,130,000
(3,120,000)
Volume Variance
(495,000) UF
Operating Expenses
(1,600,000)
Net Income
P 495,000
A member of RGB’s Accounting Department has suggested that the company adopt
direct costing for internal reporting purposes.
Prepare an operating income statement for the fiscal years ended November 30, 20PY
and 20CY, for RGB Corporation using direct costing method.
Solution:
RGB Corporation
Income Statement Variable Costing
For the years Ended, December 31,2013 and 2014
2013
2014
Sales
P 9,000,000
P 11,200,000
Variable CGS (900,000 x P 5)
(4,500,000)
(1,000,000 x P 5.40)
(5,400,000)
Fixed Overhead
(3,000,000)
(3,300,000)
Operating Expenses
(1,500,000)
(1,600,000)
Net Income
P0
P 900,000
Present a numerical reconciliation of the difference in operating income between the

absorption costing method currently in the use and the direct costing method proposed.
Solution:
2013
2014
P 900,000
(P 900,000 – P 495,000)
P 405,000
Change in Inventory
(1,200,000 – 900,000)
300,000 units
(850,000 – 1,000,000)
150,000 units
x Unit F x OH
P 3.00
P 3.30
Change in net income before
Change in unit fixed OH rate

900,000
495,000
Increase in unit fixed OH in relation to
the beginning inventory
(300,000 xP0.30)
__________
(90,000)
P900,000
P 405,000
Identify and discuss some of the advantages and disadvantages of using direct costing
method for internal reporting purposes.
Advantages of direct costing:
1) It segregates costs and expenses into their fixed or variable elements thereby
facilitating the use of contribution margin analysis.
2) It controls costs as to rate (i.e., variable) or volume (i.e., fixed), hence, giving
managers directions as to the model to be used in controlling costs and expenses.
3) It could be used for more relevant segmentized reporting where managers are
evaluated based on items that they control.
a. Disadvantages of direct costing:
1) It is not in accordance with GAAP.

2) It treats fixed overhead as period costs which may not reflective of the process of
manufacturing a product.
MULTIPLE CHOICE
1. In absorption costing, as contrasted with direct costing, the following are absorbed
into inventory.
a. All the elements of fixed and variable manufacturing overhead
b. Only fixed manufacturing overhead
c. Only variable manufacturing overhead
d. Neither fixed nor variable manufacturing overhead
2. Under the direct costing, which is classified as product costs?

a. Only variable production costs
b. Only direct costs
c. All variable costs
d. All variable and fixed production costs
3. Which one of the following considers the impact of fixed overhead costs?
a. Full absorption costing
b. Marginal costing
c. Direct costing
d. Variable costing
4. When all manufacturing cost used in production are attached to the products,
whether direct, or indirect, variable or fixed, this is called:
a. Process costing
b. Absorption costing
c. Variable costing
d. Job order costing
5. An operation costing system is

a. Identical to a process costing system except that actual cost is used for
manufacturing overhead.
b. The same as a process costing system except that materials are allocated on
the basis of batches of production.
c. The same as job order costing system except that materials are accounted
for in the same way as they are in a process costing system.
d. The same as job order costing system that except that no overhead
allocations are made since actual costs are used throughout.
6. If production is greater than sales (units), then absorption costing net income will
generally be
a. Greater than direct costing income
b. Less than direct costing net income
c. Equal to direct costing net income
d. Additional data is needed to be able to answer
7. Which of the following statements is correct?

a. When production is higher than sales, absorption costing net income is lower
than variable costing net income
b. If all the products manufactured during the period are sold in that period
variable costing net income is equal to absorption costing net income
c. When production is lower than sales, variable costing net income is lower
than absorption costing net income
d. When production and sales level are equal variable costing net income is
lower than absorption costing net income
8. Which of the following is an argument against the use of direct (variable) costing?
a. Absorption costing overstates the balance sheet value of inventories
b. Variable factory overhead is period cost.
c. Fixed factory overhead is difficult to allocate properly
d. Fixed factory overhead is necessary for the production of a product.
9. The difference between variable cost and fixed cost is

a. Variable cost per unit fluctuate and fixed cost per unit remained constant
b. Variable cost per unit are fixed over the relevant range and fixed costs per
unit are variable
c. Total variable costs are variable over the relevant range and fixed in the long
term, while fixed costs never change
d. Variable cost per unit change in varying increments, while fixed costs per unit
change in equal increments.
10. Determine the following statements are true or false.

Statement 1. Direct costing and variable costing are different terms that mean the
same thing
Statement 2. In a variable costing income statement sales revenue is typically
lower than in absorption costing income statement.
a. False, True
b. False, False
c. True, True
d. True, False
11. Jansen, Inc. pays bonuses to its managers based on operating income. The
company uses absorption costing, and overhead is applied on the basis of direct
labor hours. To increase bonuses, Jansen’s manager may do all of the following
except:
a. Produce those products requiring the most direct labor.
b. Defer expenses such as maintenance to a future period.
c. Increase productions schedules independent of customer demands.
d. Decrease production of those items requiring the most direct labor
12. The management of a company computes net income using both the absorption and
variable costing approaches to product costing. This year, the net income under the
variable costing approach was greater than the net income under the absorption
costing approach. This difference is most likely the result of.
a. A decrease in the variable marketing expenses.
b. An increase in the finished goods inventory.
c. Sales volume exceeding production volume.
d. Inflationary effects on overhead costs.
13. When comparing absorption costing with variable costing, which of the following
statement is not true?
a. Absorption costing enables managers to increase operating profits in the
short run by increasing inventories.
b. When sales volume is more than production volume, variable costing will
result in higher operating profit.
c. A manager who is evaluated based on variable costing operating profit would
be tempted to increase production at the end of a period in order to get a
more favorable review.
d. Under absorption costing, operating profit is a function of both sales volume
and production volume.
14. Which one of the following statement is correct regarding absorption costing variable
costing?
a. Overhead costs are treated in the same manner under both costing methods.
b. If finished goods inventory increases, absorption costing results in higher
income.
c. Variable manufacturing costs are lower under variable costing.
d. Gross margins are the same under both costing methods.
15. When comparing absorption costing with variable costing, which of the following
statement is not true?
a. Absorption costing enables managers to increase operating profits in the
short run by increasing inventories.
b. When sales volume is more than production volume, variable costing will
result in higher operating profit.
c. A manager who is evaluated based on variable costing operating profit would
be tempted to increase production at the end of a period in order to get a
more favorable review.
d. e.
f. g.
h. i.
j. k.
l. m.
n. o.
p. r.
t.
v.
x.
Which of the following is an argument against the use of direct (variable) costing?
Absorption costing overstates the balance sheet value of inventories.
Variable factory overhead is a period cost.
Fixed factory overhead is difficult to allocate properly.
Fixed factory overhead is necessary for the production of a product.
Inventoriable costs
The next 2 questions are based on the following data:

Lina Company produced 100,000 units of Product Zee during the month of June. Costs
incurred during June were as follows:
Direct materials
P 100,000
Direct labor
80,000
Variable manufacturing overhead
40,000
Fixed manufacturing overhead
50,000
Variable selling and general expenses
12,000
Fixed selling and general expenses
46,000
P 327,000
What was product Zee’s unit cost under absorption costing?

3.27
2.70
2.32
1.80
Solution:
Direct materials
P 100,000/100,000 units = P 1
Direct labor
P 80,000/100,000 units = 0.80
P 40,000/100,000 units = 0.40
Fixed manufacturing overhead
P 50,000/100,000 units = 0.50
P 2.70
What was product Zee’s unit cost under variable (direct) costing?
2.82
2.70
2.32
2.20
Solution:
Direct materials
P 100,000/100,000 units = P 1
Direct labor
P 80,000/100,000 units = 0.80
P 40,000/100,000 units = 0.40
P 2.20
Excellent Writer produces and sell boxes of signing pens for P1,000 per box. Direct
materials are P400 per box and direct manufacturing labor averages P75 per box.
Variable overhead is P25 per box and fixed overhead is P12,500,000 per year.
Administrative expenses, all fixed, run P4,500,000 per year, with sales commissions of
P100 per box. Production is expected to be 100,000, which is met every year. For the
year just ended, 75,000 boxes were sold. What is the inventoriable cost per box using
variable costing?
P770
P500
P475
P625
Solution:
Direct materials
P 400
Direct manufacturing labor
75
Variable overhead
25
P 500
For P1,000 per box, the Majestic Producers, Inc., produces and sell delicacies. Direct
materials are P400 per box and direct manufacturing labor averages P75 per box.
Variable overhead is P25 per box and fixed overhead is P12,500,000 per year.
Administrative expenses, all fixed, run P4,500,000 per year, with sales commissions of
P100 per box. Production is expected to be 100,000 boxes, which is met every year. For
the year just ended, 75,000 boxes were sold. What is the inventoriable costs per box
using absorption costing?
P625
P500
P770
P670
Solution:
Direct materials
P 400
Direct manufacturing labor
75
Variable Overhead
25
Fixed Overhead
125
P 625
16. Compute for the inventory value 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. P16.90
b. P11.00
c. P17.45
d. P19.15
Solution:
Direct materials P6.00
Direct labor 3.00
Variable factory overhead 2.00
Unit cost- direct costing P11.00
17. The absorption costing method includes in inventory

Fixed factory overhead Variable factory overhead
a. No No
b. No Yes
c. Yes Yes
d. Yes No
18. In an income statement prepared as internal report using the direct (variable) costing
method, fixed selling and administrative expenses would
a. Not be used.
b. Be used in the computation of the contribution margin.
c. Be used in the contribution of operating income but not in the computation of
the contribution margin.
d. Be treated the same as variable selling and administrative expense.
19. In an income statement prepared as an internal report using the variable costing
method, variable selling and administrative expense would
a. Not be used.
b. Be used in the computation of the contribution margin.
c. Be used in the contribution of operating income but not in the computation of
the contribution margin.
d. Be treated the same as fixed selling and administrative expense.
20. Care company’s 20CY fixed manufacturing overhead cost totaled P100,000 and
variable selling costs totaled P80,000. Under direct costing, how should there costs
be classified?
Period Cost Product Cost
a. P0 P 180,000
b. P 80,000 P 100,000
c. P 100,000 P 80,000
d. P 180,000 P0
*Classification of costs under direct costing.

The total period cost is P 180,000 (P100,000 + 80,000) since using direct costing
method, fixed manufacturing overhead is a period cost and variable selling costs are
also period cost. Period costs are those charged against sales in the period incurred.
21. With a production of 200,000 units of product A during the month of June, Bucayao
Corporation has incurred costs as follows:
Direct materials 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 615,000
Under absorption costing, the unit cost of product A was:

a. 2.20
b. 2.50
c. 3.25
d. 2.05
Solution:
Absorption Costing
Direct Materials 1.00
Direct Labor 0.675
Variable Factory Overhead 0.375
Fixed Factory Overhead 0.45
Product cost per unit 2.50
22. The Blue Company has failed to reach its planned activity level during its first 2 years
of operation. The following table shows the relationship among units produced,
sales, and normal activity for these years and the projected relationship for Year 3.
All prices and costs have remained the same for the last 2 years and are expected to
do so in Year 3. Income has been positive in both Year 1 and Year 2.
Units Produced Sales Planned Activity
Year 1 90,000 90,000 100,00
Year 2 95,000 95,000 100,00
Year 3 90,000 90,000 100,00
Because Blue Company use an absorption costing system, one would predict gross
margin for Year 3 to be
a. Greater than Year 1
b. Greater that Year 2
c. Equal to Year 1
d. Equal to Year 2
23. HY & Company completed its first year of operations during which time of the
following information were generated:
Total units produced 100,000
Total units sold 80,000 at 100 per unit
Work in process ending inventory
Costs:
Fixed Cost
Factory overhead 1.2 million
Selling and administrative 0.7 million
Per unit variable cost
Raw materials 20.00
Direct labor 12.50
Factory overhead 7.50
Selling and administrative 10.00
If the company used the variable (direct) costing method, the operating income would be
a. 2,100,00
b. 4,000,000
c. 2,480,000
d. 3,040,000
Solution:
HY& Comapny
Statement of Profit or Loss (Variable Costing)
Sales (80,000 x 100) 8,000,000
(80,000 x 20.00)
(80,000 x 12.50)
(80,000 x 7.50)
Variable Selling and Administrative 800,000 (4,000,000)
(80,000 x 10)
Less: Fixed Costs
Fixed Factory Overhead 1,200,000
Fixed Selling and Administrative 700,000 (1,900,000)
Net Profit 2,100,000
24. Gordon Company began its operation on January 1, 20CY, and produces a single
product that sell for 10 per unit. Gordon uses an actual (historical) cost system. In
20CY, 100,000 units were produced and 80,000 units were sold. There was no work-
in-process inventory at December 31, 20CY. Manufacturing costs and selling and
administrative expenses for 20CY were as follows:
Fixed Costs Variable Costs
Raw Materials - 2.00 per unit produced
Direct labor - 1.25 per unit produced
Factory overhead 120,000 0.75 per unit produced
Selling and administrative 70,000 1.00 per unit produced
What would be Gordon’s operating income for 20CY under the variable (direct) costing
method?
a. 114,000
b. 210,000
c. 234,000
d. 330,000
Solution:
HY& Comapny
Statement of Profit or Loss (Variable Costing)
Sales (80,000 x 100) 8,000,000
Direct Materials 160,000
(80,000 x 2.00)
Direct Labor 100,000
(80,000 x 1.25)
(80,000 x 0.75)
Variable Selling and Administrative 80,000 (400,000)
(80,000 x 1.00)
Less: Fixed Costs
Fixed Factory Overhead 120,000
Fixed Selling and Administrative 70,000 (190,000)
Net Profit 210,000
25. If net earnings were higher using standard direct costing than using standard
absorption costing, what can be said about sales during the period if inventory is
priced using the FIFO method?
a. Sales increased.
b. Sales exceed production.
c. Sales decreased.
d. Sales were less than production.
26. If sales equals production, one would expect net income under the variable costing
method to be
a. The same as net income under the absorption costing method
b. Greater than net income under the absorption costing method
c. Differing in as much as the difference between sales and production
d. Less than net income under the absorption costing method.
27. When a firm prepares financial reports by using absorption costing

a. Profits will always increase with increases in sales
b. Profit will always decrease with decreases in sales
c. Profits may decrease with increased sales even if there is no change in
selling price and costs
d. Decreased output and constant sales result in increased profits
The next two questions are based on the following information:
Expected to operate at normal capacity, Golden Corporation plans to manufacture
275,000 units of products in 20CY, and the following estimates with respect to sales:
Sales in units 250,000
Unit selling price P 35.00
Finished goods inventory on December 31, 20 PY is estimated at 25,000 units costing P
500,000. Included in this amount is the fixed manufacturing overhead amounting to P
300,000. No changes in both the fixed manufacturing cost and the variable cost per unit
of product are expected in 250 CY.
Absorption Variable
Sales 250,000 x P 35 8,750,000.00 8,750,000.00
Variable
250,000 x P 8 2,000,000.00 2,000,000.00
CGS
FOH 250,000 x P 12 (absorption) 3,000,000.00 3,300,000.00
Profit 3,750,000.00 3,450,000.00
28. What is the estimated income from manufacturing using the absorption costing
method?
a. P 3,750,000 c. P 3,550,000
b. P 3,450,000 d. P 3,550,000
29. What is the estimated income from manufacturing using the variable costing
method?
a. P 3,150,000 c. P 3,450,000
b. P 3,550,000 d. P 3,750,000
30. Oldies Biscuits manufactures and sells boxed coconut cookies.The biggest market
for these cookies are as gift that college students buy for their business teachers.
There are 100 cookies per box. The following income statement shows the results of
the first year of operations. This statement was the one included in the company’s
annual report to the shareholders.
Sales (400 boxes at P12.50) P 5,000.00
Less: Cost of goods sold (400 boxes at P8.00) (3,200.00)
Gross Margin 1,800.00
Less: Selling and administrative expenses (800.00)
Profit P 1000.00
Variable selling and administrative expenses are P 0.90 per box unit. The company
produced 500 boxes during the year. Variable manufacturing costs are P 5.25 per box
and fixed manufacturing overhead costs total P1,375 for the year. What is the
company’s direct costing net income?
Sales 5,000 5,000
Variable COGS (2,100) (2,100)
Variable Expense (360) (360)
Contribution Margin 2,540 2,540
FOH (1,100) (1,375)
Net Profit 1,440 1,165
a. P2,540
b. P2,265
c. P1,000
d. P725
31. Don Papot Ltd., manufactures a single product for which the costs and selling prices
are:
Variable production costs P 50 per unit
Selling price P 150 per unit
Fixed production overhead P 200,000 per quarter
Fixed selling and administrative overhead P 480,000 per quarter
Normal capacity is 20,000 units per quarter. Production in 1 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
Solution:
AC
Variable Production Cost P 50
Fixed Production Overhead (20000÷20000) 10
Unit Inventoriable Cost P 60
Normal Capacity 20 000 units

Actual Capacity (19 000 units)
Volume Variance in Units 1 000 units Unfavorable
Standard Fixed Overhead Rate ×10
Volume Variance in Pesos P 10 000 Unfavorable
Sales (16000×150) P 2 400 000

Cost of Goods Sold, at Actual (16 000×60)+10000 (970 000)
Fixed Selling and Administrative Overhead (480 000)
Absorption Costing Income P 950 000
Questions 37 and 38 are based on the ff. information.

The following operating data are available from the records of Jonathan Company for the
month of January 2014:
Sales (P 70 per unit) P 210,000
Direct materials 59,200
Direct labor 48,000
Manufacturing overhead:
Fixed 36,080
Variable 24,000
Marketing and general expenses:
Fixed 11,000
Variable 5% of sales
Production in units – 3,280 units Beginning inventory – none
32. The ending finished goods inventory under absorption costing method would be:
a. P14,280
b. P16,968
c. P12,096
d. P16,072
Solution:
AC
Direct Materials (59200÷3280) P 18
Direct Labor (48000÷3280) 15
Variable Factory Overhead (24000÷3280) 7
Production 3 280 units
Sales (210000÷70) (3 000 units)
Ending Inventory - Units 280 units
Product Cost per Unit ×51
Fixed Factory Overhead (36080÷3280)
Cost of Ending Inventory P 14 280 11
Unit Inventoriable Costs P 51
33. The net income for the month under the variable costing method would be:
a. P32,420
b. P25,500
c. P23,320
d. P22,420
Solution:
VC
Sales P 210 000
Direct
Cost ofMaterials P 18
Goods Sold, at Actual (3000×40)+36080 (156 080)
(59200÷3280)
Marketing and General Expenses
Direct Labor 15 (11 000)
(48000÷3280)
Variable (210000×.05) (10 500)
Variable Factory
Variable CostingOverhead
Income 7 P 32 420
(24000÷3280)
Unit Inventoriable Costs P 40
Question 39 and 40 are based on the following information.
Sales per unit P 15.00

Variable production cost 8.00
Annual fixed production cost 35,000.00
Variable office expense (unit) 3.00
Annual fixed selling expense 5,000.00
Produced 12,500 units during the period
No inventory at January 1 (beg.)
Sold 10,000 units
34. The ending inventory under direct costing is

a. P25,000
b. P27,500
c. P20,000
d. P32,500
Production P 12 500 units

Sales (10 000 units)
Ending Inventory - Units 2 500 units
Product Cost per Unit ×8
Cost of Ending Inventory P 20 000
35. Ending inventory under absorption costing is

a. P 32,500
b. P 20,000
c. P 25,000
d. P 27,000
Solution:
Unit fixed overhead 2.80
Variable overhead 8.00
Total unit inventoriable cost 10.80
Ending inventory: 2,500 x 10.80 P 27,000
36. Total variable annual cost charged to expense in direct costing
a. P 110,000
b. P 117,500
c. P 80,000
d. P 100,000
Solution:
Variable COGS (10,000 x P 8) 80,000
Add: variable expense (10,000 x P 3) 30,000
Total Variable cost P110,000
37. Total fixed cost charged against current year’s operations in absorption costing.
a. P 35,000
b. P 25,000
c. P 15,000
d. P 43,000
Solution:
Fixed overhead (10,000 x 2.80) 28,000
Add: fixed expense 15,000
Total fixed cost P 43,000
Reconciliation of Profit
The next two (2) questions are based on the following information:
The books of Mariposa Company pertaining to the year ended December 31, 2021
operations showed the following figures relating to product A:
Beginning inventory-finished goods and work in
process none
No. of units produced 40,000 units
No. of units sold at P 15 32,500 units
Direct materials used P 177,500
Direct labor used P 85,000
Manufacturing cost:
Fixed P 110,000
Variable 61,500 171,500
Fixed administrative expenses P 30,000
38. Under variable costing, what would be the finished goods inventory as of December
31, 2021?
a. P 81,375.00
b. P 60,750.00
c. P 87,000.00
d. P 49,218.75
Solution:
Ending inventory in units (40,000-32,500) 7,500 units
X unit product cost (177,500+85,000+61,500)/40,000 units 8.10
Ending inventory in peso P
60,750.00
39. Which costing method, variable or absorption costing, would show a higher operating
income for 20CY and by how much?
a. Variable by P20,065.
b. Absorption by P20,065.
c. Variable by P26,250.
d. Absorption by P26,250.
e. Answer not given.
Solution:
Less: Sales (32,500)
Change in Inventory 7,500 units
40. At the end x Standard fixed overhead rate 2.75 of Kiko

Company's first year
operations, Change in profit P20,625 1000 units of
inventory remained on
hand. Variable and
fixed manufacturing cost per unit were P90 and P20, respectively. If Kiko uses
absorption costing rather than direct (variable) costing, the result would be a higher
pretax income of
a. P20,000
b. P70,000
c. P 0
d. P90,000
Solution:
Change in Inventory (Increase) 1,000 units

Fixed manufacturing cost per unit x 20
Higher pretax income under
absorption P20,000
41. 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:
Direct Materials P15.00
Direct Labor 10.00
Manufacturing overhead 12.50
Selling and administrative 2.50
Total Fixed Costs:
Manufacturing overhead P2,200,000
Selling and administrative 1,375,000
What is the difference between operating income calculated on the absorption-costing

basis and on the variance-costing basis?
a. Absorption-costing operating income is greater than variable costing operating
income by P200,000.
b. Absorption-costing operating income is greater than variable-costing operating
income by P220,000.
c. Absorption-costing operating income is greater than variable-costing operating
income by P325,000.
d. Variable-costing operating income is greater than absorption-costing operating
income by P62,500.
Fixed factory
Fixed factory overhead per unit = overhead
Production
Fixed factory overhead per unit = P 2,200,000
275,000 units
Fixed factory overhead per unit = 8
Inventory increased (in

units) 25,000
x Fixed factory overhead per unit 8
Difference in Operating income 200,000
between absorption and variable
Absorption Variable Change

Sales 13,250,000 13,250,000
Variable CGS (9,375,000) (9,375,000)
Fixed
OH (2,000,000)
(2,200,000) 200,000
Variable expenses (625,000) (625,000)
Fixed expenses (1,375,000) (1,375,000)
Loss (125,000) (325,000) 200,000
42. A manufacturing company employs variable costing for internal reporting and
analysis purposes. However, it converts its records to absorption costing for external
reporting. The Accounting Department always reconciles the two operating income
figures to assure that no errors have occurred in the conversion. Financial data for
the year are presented below. The fixed manufacturing overhead cost per unit was
based on planned level of production of 480,000 units.
Budgeted and Actual Levels of sales and production
Budgeted Actual
Sales (in units) 495,000 510,000
Production (in units) 480,000 500,000
Standard Unit Manufacturing Costs

Variable costing Absorption costing
Variable Costs P 10.00 P 10.00
Fixed manufacturing overhead 0 6.00
Total Manufacturing costs P10.00 P 16.00
The difference between the operating income calculated under the variable costing
method and the operating income calculated under the absorption costing method would
be
a. P57,600
b. P60,000
c. P90,000
d. P120,000
Solution:
Production 500,000
Sales (510,000)
Change in Inventory (10,000)
x Fixed OH rate 6
Change in profit P(60,000)
43. During the year 20CY, Catara Corporation manufactured 70,000 units of product A, a
new product. Only 65,000units 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 on net income if absorption costing is used instead of
variable costing?
a. Net income is P250,000 lower. c. Net income is P100,000 lower.
b. Net income is P250,000 higher. d. None of the above.
Solution:
Sales (65,000)
Change in Invertory 5,000 units
x Fixed overhead rate per unit x P 50
Change in Profit P250,000
44. Bajada Industries manufactures a single product. Variable production cost are P20
and fixed production cost are P300,000. Bajada uses a normal capacity of 20,000
units to set its standard costs. Bajada began the year with no inventory, produced
22,000 units and sold 21,000 units. Ending inventory under absorption coting would
be
a. P30,000 c. P20,000
b. P35,000 d. P25,000
Solution:
Production 22,000
Sales (21,000)
Ending Inventory 1,000
Cost per unit x P 35 [P20 + (P300,000 ÷ 20,000)]
Ending Inventory in pesos P35,000
45. Last year, Ben Company’s income under absorption costing was P4,400 lower than
its income under variable costing. The company sold 8,000 units during the year and
its variable cost were P8 per unit, of which P3 was variable selling expense. Fixed
manufacturing overhead was P1 per unit beginning inventory under absorption
costing. How many units did the company produce during the year?
a. 7,450 units c. 3,600 units
b. 7,120 units d. 12,400 units
Solution:
Sales (8,000)
Change in Invertory (4,400) units
x Fixed overhead rate per unit x P 1
Change in profit P(4,400)
46. Last year, Vulcan Company’s variable production cost totaled P7,500 and its fixed
manufacturing overhead costs totaled P4,500. The company produced 3,000 units
during the year and sold 2,400 units. There were no units in the beginning inventory.
Which of the following statement is true?
a. The net income under absorption costing for the year will be P900 lower than
the net income under variable costing.
b. Under absorption costing, the units in ending will be costed at P2.50 each.
c. The ending inventory under variable costing will be P900 lower than the
ending inventory under absorption costing.
d. Under variable costing, the units in the ending inventory will be costed at
P4 each.
Solution:
Sales (2,400)
Change in Invertory / Inventory, End 600 units
x Fixed overhead rate per unit x P 1.5 (4,500 ÷ 3,000)
Difference variance in pesos P 900
Volume Variance
47. The production volume variance occurs when using
a. The absorption costing approach because of production exceeding the sales.
b. The absorption costing approach because production differs from that use in
setting the fixed overhead rate used in applying fixed overhead to
production.
c. The variable costing approach because of sales exceeding the production for
the period.
d. The variable costing approach because of production exceeding the sales for
the period.
48. Unabsorbed fixed overhead costs in an absorption costing system are

a. Fixed manufacturing costs not allocated to units produced.
b. Variable overhead costs not allocated to units produced.
c. Excess variable overhead costs.
d. Costs that cannot be controlled.
49. How will a favorable volume variance affect net income under each of the following
methods?
Absorption Variable
a. Reduce no effect
b. Reduce increase
c. Increase no effect
d. Increase reduce
50. An unfavorable production-volume variance occurs when
a. Production exceeds the denominator level
b. The denominator level exceeds production
c. Production exceeds unit sales
d. Unit sales exceed production
Use the following information for the next four questions:

Frances Corporation incurred fixed manufacturing costs of P6,000 during 20CY. Other
information for 20CY includes:
The budgeted denominator level is 1,000 units
Units produced total 750 units
Units sold total 600 units
Beginning inventory was zero
The company uses absorption costing and the fixed manufacturing cost rate is based on
the budgeted denominator level. Manufacturing variances are closed to cost of goods
sold.
51. Fixed manufacturing costs expensed on the income statement (excluding

adjustments for variances) total.
a. P3,600
b. P4,800
c. P6,000
d. Zero
Solution:
P6,600 Fixed OH/ 1,000 units (Normal Capacity)= P6 Standard Fixed OH Rate
P6*600 (Units Sold)= P3,600 Fixed Manufacturing Costs
52. Fixed manufacturing costs included in ending inventory level total.

a. P1,200
b. P1,500
c. P900
d. Zero
Solution:
Units Produced 750 units
Units Sold (600)
Ending Inventory 150 units
P6*150 (Ending Inventory Units)= P900
53. The production-volume variance is.

a. P2,000
b. P1,500
c. P2,400
d. Zero
Solution:
Normal Capacity 1,000 units
Less: Actual Capacity (750)
Volume variance in units 250 UF
Multiply: SFOH Rate P6
Production-volume P1,500 UF
variance
54. Operating income using absorption costing will be __________ than operating
income if using variable costing.
a. P2,400 higher
b. P2,400 lower
c. P900 higher
d. P3,600 lower
Solution:
Production 750 units
Less: Sales (600)
Change in inventory 150
Multiply: SFOH Rate P6
Change in Profit P900

Variableabsorption Costing

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Variableabsorption Costing

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Republic of the Philippines

BATANGAS STATE UNIVERSITY

VARIABLE & ABSORPTION COSTING

In Partial fulfillment of the Requirements for

MS. KIMBERLY CAMILLE G. MENDOZA

2. Compute the operating income under absorption and variable costing.

3. Compute the value of ending inventory under absorption and variable

Value of Closing Inventory

As per Absorption Costing

As per Variable Costing

Beginning Inventory 300

4. Reconcile the difference in operating income under the absorption and

Units produced 1000

Complete the table below by filling out the missing values.

Absorption Costing Variable Costing

Absorption Costing Variable Costing

Variable Costing Income Statement

c. Ending inventory value

Absorption Costing: 7,000 x 39.24 = P274,680

Variable net income 620,000

Direct materials 2lbs. @ P6.00 P12.00

B. Standard distribution and administration expenses:

Variable expenses P3.00 per unit

C. Regular unit sales price P200.00

Absorption Costing Variable Costing

b. The budgeted fixed production costs.

Sales 22,000×P200 P4,400,000 P4,400,000

Variable COGS 22,000×42 (924,000) (924,000)

Fixed Overhead 22,000×10 (220,000)

Fixed expenses (200,000) (200,000)

Profit (loss) P2,990,000 P3,010,000

Sales 19,300×P200 P3,860,000 P3,860,000

Variable COGS 19,300×42 (810,600) (810,600)

Fixed Overhead 19,300×10 (193,000)

Variable expenses 19,300×3 (57,900) (57,900)

Fixed expenses (200,000) (200,000)

Profit (loss) P2,598,500 P2,591,500

Sales 20,000×P200 P4,000,000 P4,000,000

Variable COGS 20,000×42 (840,000) (840,000)

Fixed Overhead 20,000×10 (200,000)

Variable expenses 20,000×3 (60,000) (60,000)

Fixed expenses (200,000) (200,000)

Profit (loss) P2,700,000 P2,700,000

Sales 23,500×P200 P4,700,000 P4,700,000

Fixed Overhead 23,500×10 (235,000)

Variable expenses 23,500×3 (70,500) (70,500)

Fixed expenses (200,000) (200,000)

Profit (loss) 3,207,500 3,242,500

Sales 17,200×P200 P3,440,000 P3,440,000

Variable COGS 17,200×42 (722,400) (722,400)

Fixed Overhead 17,200×10 (172,000)

Variable expenses 17,200×3 (51,600) (51,600)

Fixed expenses (200,000) (200,000)

Profit (loss) P2,294,000 P2,266,000

Fill out the missing values in the following table:

ee. ff. gg.

Std. Unit Fixed OH Rate

Std. Unit Fixed OH Rate

www. xxx. yyy.

Std. Unit Fixed OH Rate

Unit sales price ₱ 250

CASE 1 (Production 50,000; Sales 52,000)

CASE 2 (Production 50,000; Sales 49,500)