ABSORPTION AND

VARIABLE
COSTING

PREPARED BY: TAGUINOD, ANSHERINA,

 Explain the differences between
LEARNING 01
Absorption and Variable Costing

OBJECTIVES:
Distinguish the difference
02 between product and period cost

Prepare income statement based on

03 Absorption and Variable costing
method

Account for the difference in net

04 income between Absorption and
Variable Costing
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 ABSORPTION
COSTING
A product costing method that
includes “all” manufacturing
costs in the cost of a unit product.
Fixed Factory Overhead is
treated as “Product cost.”
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VARIABLE
COSTING
A product costing method
that includes “only” variable
manufacturing costs in the
cost of a unit product.
Fixed Factory Overhead
is treated as “Period cost.”
 ABSORPTION
COSTING

Direct Direct labor Factory overhead

Materials
Fixed FOH Variable
FOH
PRODUCT
COST
 VARIABLE
COSTING

Direct Direct labor Variable FOH

Materials

PRODUCT
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 PRODUCT COST
COMPONENT
ABSORPTION VARIABLE COSTING
COSTING
Direct Materials Direct Materials
+Direct Labor +Direct Labor
+Variable FOH +Variable FOH
+Fixed FOH -
PRODUCT COST PRODUCT COST
Fixed FOH is treated
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as “Period Cost”
 ABSORPTION VARIABLE
COSTING COSTING

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DISTINCTIONS BETWEEN PRODUCT
COSTS
AND PERIOD COSTS
 DISTINCTIONS BETWEEN PRODUCT
COSTS
AND PERIOD COSTS
PRODUCT
COST
Cost that is included in the
computation of product cost
that is apportion between
sold and unsold.
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PERIOD
COST
Cost that is charged against
current revenue during the
time period regardless of the
difference between production
and sales.
 DISTINCTIONS BETWEEN PRODUCT
COSTS
AND PERIOD COSTS
PRODUCT PERIOD
COST COST
An inventoriable cost. Does not form a part of the
cost of inventory.
Reduces current income
by the portion allocated to Reduces income for the current
the sold units. period by its full amount.

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 DIFFERENCE BETWEEN ABSORPTION
AND VARIABLE COSTING METHOD

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 DIFFERENCE BETWEEN ABSORPTION
AND VARIABLE COSTING METHOD

ABSORPTIO VARIABL
N E

Seldom segregates costs into Cost are segregated into

Cost Segregation Variable and Fixed costs.
Variable and Fixed Costs.
 DIFFERENCE BETWEEN ABSORPTION
AND VARIABLE COSTING METHOD

ABSORPTIO VARIABL
N E

Cost of inventory Includes ALL the Cost of inventory Includes ONLY

manufacturing costs: the variable manufacturing costs:
Cost of Inventory
 Materials  Materials
 Labor  Labor
 Variable FOH  Variable FOH
 Fixed FOH
 DIFFERENCE BETWEEN ABSORPTION
AND VARIABLE COSTING METHOD

ABSORPTIO VARIABL
N E

Treatment of FOH Product Cost Period Cost

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 DIFFERENCE BETWEEN ABSORPTION
AND VARIABLE COSTING METHOD

ABSORPTIO VARIABL
N E
Sales xx Sales xx
Less: COGS(Production cost) xx Less: Variable cost xx
Gross profit xx Contribution margin xx
Income Statement Less: S&A Costs xx Less: Fixed costs xx
Profit/net income xx Profit/Net income xx

o Production Cost (DM,DL,VFOH & o Variable cost (DM,DL,V.FOH, V. S&A

FXFOH) )
o Period Costs (Both FX and VARIABLE o Fixed costs (FX FOH, FX S&A)
S&A)
 DIFFERENCE BETWEEN ABSORPTION
AND VARIABLE COSTING METHOD

ABSORPTIO VARIABL
N E

Net income between the two methods may differ from each
Net Income other because of the difference in the amount of “FIXED
FOH” Costs recognized as Expense during an accounting
period.

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 DIFFERENCE IN NET
INCOME

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 PRODUCTION VS
SALES
P=S
1 Production Equals Sales

P>S
2 Production is Greater than Sales

P<S
3 Production is Less than Sales
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 PRODUCTION VS
SALES

P VS S EI VS BI AI VS VI

< < <

> > >

= = =

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 PRODUCTION VS
Beginning Inventory xx
SALES
Add: Production
Goods available for sale
xx
xx P VS S EI VS BI AI VS VI
Less: Ending Inventory xx
Sales xx < < <
SCENARIO
1
Beginning Inventory 10 > > >
Add: Production 100
Goods available for sale 110 = = =
Less: ending inventory 5
Sales 105

Production < Sales Ending Inventory < Beg. Inventory

Absorption Inc. < Variable
100 105 5 10
Inc.

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 PRODUCTION VS
SALES
SCENARIO
2
Beginning Inventory 10
Add: Production 150
Goods available for sale 160 P VS S EI VS BI AI VS VI
Less: ending inventory 30
Sales 120 < < <
Production > Sales
150 120 > > >
Ending Inventory > Beg. = = =
Inventory
30 10
Absorption Inc. > Variable
Inc.
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 PRODUCTION VS
SALES
SCENARIO
3
Beginning Inventory 10
Add: Production 150
Goods available for sale 160 P VS S EI VS BI AI VS VI
Less: ending inventory 10
Sales 150
< < <
Production = Sales
150 150 > > >
Ending Inventory = Beg. Inventory = = =
10 10

Absorption Inc. = Variable

Inc.
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 ACCOUNTING FOR DIFFERENCE IN
INCOME
Change in Inventory (P-S) xx
x Fixed FOH cost/unit xx
Difference in income xx

Absorption Income xx
Less: Variable Income xx
Difference in income xx

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 RECONCILLATION OF ABSORPTION
AND VARIABLE COSTING INCOME
FIGURES
Absorption Costing Income xx
+FIXED FOH in the Beg. Inventory xx
Total xx
- FIXED FOH in the End. Inventory xx
Variable Costing Income xx

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 Absorption & variable costing-
exercises

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 Absorption & Variable Costing-EXERCISES

MULTIPLE
CHOICE
1. What costs are treated as product cost under variable costing?

A. All Variable Costs

B. All Direct Costs Only

C. All Manufacturing Costs

D. Only Variable Production

Cost

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 Absorption & Variable Costing-EXERCISES

MULTIPLE
CHOICE
2. If production is less than sales (in units), then Absorption
costing net income will generally be,?

A. Greater than Variable Costing net income P Vs s EI vs Bi Ai Vs Vi

B. Less than Variable Costing net income < < <
C. Equal to Variable Costing net income > > >
D. Less than expected. = = =

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 Absorption & Variable Costing-EXERCISES

MULTIPLE
CHOICE
3. Which of the following statements is correct?

A. In a variable costing income statement, sales C. In a variable costing system, fixed

revenue is typically higher than in absorption overhead cost is included as part of the cost of
costing income statement. inventory.

B. When production is not equal sales, income D. In an absorption costing system, fixed
under absorption costing differs from income under overhead cost is treated as period cost.
variable costing due to the difference in treatment
(product cost and period cost) of the fixed overhead
cost under the two costing methods.

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Absorption & Variable Costing-EXERCISES

MULTIPLE
CHOICE
4. Which of the following statements regarding absorption and
variable costing is correct?

A. Absorption costing results in higher income

when finished goods inventory increases. P Vs s EI vs Ai Vs
Bi Vi
B. Variable manufacturing costs are lower under
absorption costing < < <
C. Overhead costs are treated in the same manner
under both variable and absorption costing.
> > >
D. Profits are always the same under the two = = =
costing methods.
 Absorption & Variable Costing-EXERCISES

MULTIPLE
CHOICE
5.Galang corp. produced 10,000 units of product a during the
month of November. Cost incurred during the month were as What were product a’s product cost per unit
under absorption and variable costing?
follows:
AC VC
A. P6.54 P5.64
Direct Materials used P20,000 B. P4.40 P5.40
Direct Labor 16,000 C. P3.60 P4.46
D. P5.40 P4.40
Variable manufacturing overhead 8,000
Fixed manufacturing overhead 10,000
Variable S&A expenses 2,400
Fixed S&A expenses 9,000
P65,400

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 What were product a’s product cost per unit
Absorption & Variable Costing-EXERCISES under absorption and variable costing?
AC VC
A. P6.54 P5.64
B. P4.40 P5.40
MULTIPLE C. P3.60 P4.46
CHOICE D. P5.40 P4.40

Absorption Costing
Variable Costing
Direct Materials P20,000
Direct Materials P20,000
Direct Labor 16,000
Direct Labor 16,000
Variable Overhead 8,000
Variable Overhead 8,000
Fixed Overhead 10,000
TOTAL Product Cost P44,000
TOTAL Product Cost P 54,000
DIV. # OF UNITS 10,000
DIV. # OF UNITS 10,000
PRODUCT COST/UNIT P4.40
PRODUCT COST/UNIT P5.40

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Absorption & Variable Costing-EXERCISES

Exercise 1

During the month of May, LAJOWA Corp. produced and sold 12,000 units of a product.
Manufacturing and selling costs incurred during May were:

Direct materials and direct labor P480,000

Variable factory overhead P108,000
Fixed factory overhead P24,000
Variable selling costs P12,000
 

Required:
1. Product’s unit cost under variable costing.
2. Product’s unit cost under absorption costing.
 Absorption & Variable Costing-EXERCISES

Exercise 1

Required:
1. Product’s unit cost under variable costing. P49
2. Product’s unit cost under absorption costing. P51

Direct Materials & Direct Labor P480,000

Direct Materials & Direct Labor P480,000
+Variable Overhead 108,000
+Variable Overhead 108,000
Fixed Factory Overhead 24,000
Total Product Cost 588,000
Total Product Cost P612,000
Divide by units produced 12,000
Divide by units produced 12,000
Product cost per unit – Variable costing P49
Product cost per unit – Absorption costing P51

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 Absorption & Variable Costing-EXERCISES

Exercise 2

Anne Dali Corporation began its operations on January 1, 200A. It produces single product that sells for
P13.50 per unit. The company uses an actual (historical) cost system. During 200A, 150,000 units were
produced and 135,000 units were sold. There was no work-in-process inventory at December 31, 200A.
Manufacturing costs and selling and administrative expenses for 200A were as follows:
Fixed costs Variable costs
Raw materials - P3.50/ unit produced
Direct labor - 2.50 / unit produced
Factory overhead P195,000 1.00 / unit produced
Selling and administrative 140,000 1.20 /unit sold
P335,000 P8.20

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Absorption & Variable Costing-EXERCISES

Exercise 2

Required:
1. Product Cost /unit under:
a. Variable costing method.
b. Absorption costing method.

2. Operating income/net income under:

a. Variable costing method.
b. Absorption costing method.

3. Costs of ending inventory under:

a. Variable costing method.
b. Absorption costing method
 Absorption & Variable Costing-EXERCISES

Exercise 2

Required:
1. Product cost /unit under:
a. Variable costing method. P7.00
b. Absorption costing method. P8.30

Absorption costing
Variable costing
Direct Materials P3.50
Direct Materials P3.50
Direct Labor 2.50
Direct Labor 2.50
Variable Overhead 1.00
Variable Overhead 1.00
Fixed Overhead 1.30
Product Cost/unit P7.00
Product Cost/unit P8.30
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Absorption & Variable Costing-EXERCISES

Exercise 2

Required:
2. Operating income/net income under:
a. Variable costing method. P380,500
b. Absorption costing method. P400,000

Variable costing
SALES(135,000*P13.50) P1,822,500
-VARIABLE OH (135,000*P7) 945,000
-Variable S&A EXPENSE(135,000*P1.20) 162,000
CONTRIBUTION MARGIN P715,500
-FIXED OH 195,000
-FIXED S&A EXPENSES 140,000
Operating income P380,50O
Absorption & Variable Costing-EXERCISES

Exercise 2

Required:
2. Operating income/net income under:
a. Variable costing method. P380,500
b. Absorption costing method. P400,000

Absorption costing
SALES(135,000*P13.50) P1,822,500
-COGS (135,000*P8.30) 1.120,500
Gross profit P702,000
-FIXED S&A EXPENSES 140,000
-Variable S&A EXPENSE 162,000
Operating income P400,000
 Absorption & Variable Costing-EXERCISES

Exercise 2

Required:
3. Costs of ending inventory under:
a. Variable costing method. P105,000
b. Absorption costing method. P124,500

Variable costing Absorption costing

No. of units produced 150,000 No. of units produced 150,000
-no. of units sold 135,000 -no. of units sold 135,000
No. of Units unsold 15,000 No. of Units unsold 15,000
X product cost/Unit P7.00 X product cost/Unit P8.30
Costs of ending inventory P105,000 Costs of ending inventory P124,500

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PREPARED BY: TAGUINOD,