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Lesson 3 Sample Problem #3

Under absorption costing, Gong Company reported a profit of P196,000 for July 2019. Variable costing also resulted in a profit, but of P190,000. The difference of P6,000 is due to the change in ending inventory valued at standard fixed overhead rate of P6 per unit. Both costing methods produced income statements with supporting computations for cost variances and capacity variance of P18,000 unfavorable due to actual production being 3,000 units below normal capacity.

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159 views

Lesson 3 Sample Problem #3

Under absorption costing, Gong Company reported a profit of P196,000 for July 2019. Variable costing also resulted in a profit, but of P190,000. The difference of P6,000 is due to the change in ending inventory valued at standard fixed overhead rate of P6 per unit. Both costing methods produced income statements with supporting computations for cost variances and capacity variance of P18,000 unfavorable due to actual production being 3,000 units below normal capacity.

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ACA 212 Strategic Cost Management

The P/L Statements: Absorption Costing and Variable Costing


The profit and loss statement under the absorption costing follows the international financial
reporting standards and the variable costing follows the economic model of determining profit.
Sample Problem #3. Income Statements under variable costing and absorption costing
Gong Company disclosed the following data relative to its July 2019 operations:
Actual production 13,000 units Budgeted fixed factory overhead P96,000
Actual units sold 12,000 units Total fixed expenses 30,000
Normal capacity 16,000 units Net materials cost variance 5,000 U
Budgeted capacity 15,000 units Net direct labor cost variance 3,000 F
Beginning inventory 4,000 units Net variable overhead cost variance 1,000 F
Sales price per unit P 50 Total variable expenses 40,000
Variable cost per unit 20 Actual fixed FOH 99,000
Required:
1. Prepare the statement of profit or loss under absorption costing and variable costing
systems.
2. Show supporting computations for the capacity variance.
Solutions/Discussions:
The Profit (Loss) Statement
• The absorption statement of profit or loss is presented below. In the right side are
computational guidelines:
Absorption Costing
Gong Company
Statement of Profit or Loss
For the Month Ended, July 31, 2019

Sales P600,000 (12,000 x P50)


Less: Cost of goods sold
Inventory, beginning P104,000 ( 4,000 x P26)
Add: cost of goods manufactured 338,000 (13,000 x P26)
Total goods available for sale 442,000
Less: Inventory, ending 130,000 ( 5,000 x P26)
Cost of Goods, at standard 312,000 (12,000 x P26)
Add (Deduct) cost variances:
Net materials variance 5,000 U
Net direct labor variance ( 3,000) F
Net variable OH variance ( 1,000) F
Fixed OH spending variance ( 3,000) F
Fixed OH volume variance 18,000 U
Cost of goods, at actual 334,000
Gross Profit 266,000
Less: Variable expenses 40,000
Fixed expenses 30,000 70,000
Profit P 196,000
• The variable statement of profit or loss is presented below. In the right side are
computational guidelines:
Variable Costing
Gong Company
Statement of Profit or Loss
For the Month Ended, July 31, 2019

Sales P600,000 (12,000 x P50)


Less: Cost of goods sold
Inventory, beginning P 80,000 ( 4,000 x P20)
Add: cost of goods manufactured 260,000 (13,000 x P20)
Total goods available for sale 340,000
Less: Inventory, ending 100,000 ( 5,000 x P20)
Cost of Goods, at standard 240,000 (12,000 x P20)
Add (Deduct) cost variances:
Net materials variance 5,000 U
Net direct labor variance ( 3,000) F
Net variable OH variance ( 1,000) F
Cost of goods, at actual 241,000
Contribution Margin 319,000
Less: Variable expenses 99,000
Fixed expenses 30,000 129,000
Profit P 196,000

The volume variance is not considered in the computation of variable costing profit or loss
statement. In variable costing, fixed overhead is a period cost, an expense, and is not subject to
cost variance analysis.

The unit product costs are:

Variable cost per unit P20 P20


Fixed overhead per unit (96,000/16,000 units) 6 -
Total unit costs P26 P20

The ending inventory is 5,000 units (i.e., 4,000 beginning inventory + 13,000 sales – 12,000
production)

Production cost variances are considered in computing the actual cst of goods sold. Unfavorable
cost variance (U) means that actual production cost is greater than standard production cost.
Favorable cost variance (F) indicates that actual production cost is lesser than standard production
cost. The cost of goods sold to be deducted from sales should be the actual ocst of goods sold. To
compute the actual cost of goods, the unfavorable cost variance is added to, and the favorable
cost variance is deducted from, the standard cost of goods sold.

• The volume variance is computed as follows:


Normal capacity 16,000 units
– Actual capacity 13,000
Capacity variance in units 3,000 U
x Standard fixed overhead rate P 6
Capacity variance in pesos P18,000 U
• The difference in operating profit between absorption costing and variable costing is P6,000
(i.e., P196,000 of absorption costing – P190,000 of variable costing). This difference in
operating profit is accounted for as:
Change in inventory (13,000 units – 12,000 units) 1,000 units
x fixed overhead rate per unit P 6
difference in profit (loss) P6,000 U

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