Absorption and

Variable Costing
Activity in Variable and Absorption Costing

Provide answers to the following items:

1. What is an absorption costing

2. What is a variable costing
3. What is the basic difference between variable and absorption costing?
4. Are selling and administrative expense treated as product costs or as period
costs under variable costing? Why?
5. Prepare income statement for both years using the variable costing method
and absorption costing method
Problem #5

Selling Price per unit P50

Manufacturing costs:
Variable per unit produced:
Direct Materials P11
Direct Labor P6
Variable Overhead P3
Fixed cost per year P120,000
Selling and administrative costs
Variable per unit sold P4
Fixed cost per year P70,000

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