MANAGEMENT ACCOUNTING

Quizzer – Absorption vs. Variable Costing (Comprehensive Problems)

Problem I: Variable- and Absorption-Costing Income Statements, Volume Variance

Outdoors Company manufactures sleeping bags that sell for P30 each. The variable standard costs of production are P19.50.
Budgeted fixed manufacturing overhead is P100,000, and budgeted production is 10,000 sleeping bags. The company
actually manufactured 12,500 bags, of which 11,000 were sold. There were no variances during the year except for the fixed-
overhead volume variance. Variable selling and administrative costs are P0.50 per sleeping bag sold; fixed selling and
administrative costs are P5,000.

Required:
A. Calculate the standard product cost per sleeping bag under absorption costing and variable costing.
B. Compute the fixed-overhead volume variance.
C. Prepare income statements for the year by using absorption costing and variable costing.

Problem II: Throughput Costing

Highline Company reported the following costs for the year just ended:

Throughput manufacturing costs P 180,000

Non-throughput manufacturing costs 600,000
Selling and administrative costs 125,000

If Highline uses throughput costing and had sales revenues for the period of P950,000, which of the following choices correctly
depicts the company's cost of goods sold and net income?

Problem III: Characteristics of Absorption Costing and Variable Costing

Consider the statements that follow.

1. Variable selling costs are expensed when incurred.

2. The income statement discloses a company’s contribution margin.
3. Fixed manufacturing overhead is attached to each unit produced.
4. Direct labor becomes part of a unit’s cost.
5. Sales revenue minus cost of goods sold equals contribution margin.
6. This method must be used for external financial reporting.
7. Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing overhead.
8. This method is sometimes called full costing.
9. This method requires the calculation of a fixed manufacturing cost per unit.

Required:
Determine which of the nine statements:
A. Relate only to absorption costing.
B. Relate only to variable costing.
C. Relate to both absorption costing and variable costing.
D. Relate to neither absorption costing nor variable costing.

Problem IV: Miscellaneous Calculations: Variable and Absorption Costing

Information taken from Grille Corporation's May accounting records follows.

Direct materials used P 150,000

Direct labor 80,000
Variable manufacturing overhead 30,000
Fixed manufacturing overhead 100,000
Variable selling and administrative costs 51,000
Fixed selling and administrative costs 60,000
Sales revenues 625,000

Required:
A. Assuming the use of variable costing, compute the inventoriable costs for the month.
B. Compute the month's inventoriable costs by using absorption costing.
C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units were sold during May.
Determine the amount of fixed manufacturing overhead and fixed selling and administrative costs that would be expensed
for the month under (1) variable costing and (2) absorption costing.
D. Assume the same data as in requirement "C." Compute the contribution margin that would be reported on a variable-
costing income statement.

Answer:
A. Direct materials used P150,000
Direct labor 80,000
Variable manufacturing overhead 30,000
Total P260,000

B. Direct materials used P150,000

Direct labor 80,000
Variable manufacturing overhead 30,000
Fixed manufacturing overhead 100,000
Total P360,000

C. 1. Fixed manufacturing overhead: P100,000

Fixed selling and administrative costs: P60,000

2. Fixed manufacturing overhead: (P100,000 ÷ 20,000 units) x 18,000 units = P90,000

Fixed selling and administrative costs: P60,000

D. Variable manufacturing costs: P150,000 + P80,000 + P30,000 = P260,000

Variable manufacturing costs per unit: P260,000 ÷ 20,000 units = P13
Contribution margin: P625,000 - [(18,000 x P13) + P51,000] = P340,000

Problem V: Miscellaneous Calculations: Variable and Absorption Costing

Sosa, Inc., began operations at the start of the current year, having a production target of 60,000 units. Actual production
totaled 60,000 units, and the company sold 90% of its manufacturing output at P55 per unit. The following costs were
incurred:

Manufacturing:
Direct materials used P300,000
Direct labor 420,000
Variable manufacturing overhead 360,000
Fixed manufacturing overhead 600,000
Selling and administrative:
Variable 120,000
Fixed 630,000

Required:
A. Assuming the use of variable costing, compute the cost of Sosa's ending finished-goods inventory.
B. Compute the company's contribution margin. Would Sosa disclose the contribution margin on a variable-costing income
statement or an absorption-costing income statement?
C. Assuming the use of absorption costing, how much fixed selling and administrative cost would Sosa include in the ending
finished-goods inventory?
D. Compute the company's gross margin.

Answer:
A. Variable production costs total P1,080,000 (P300,000 + P420,000 + P360,000), or P18 per unit
(P1,080,000 ÷ 60,000 units). Since 6,000 units remain in inventory [0 + 60,000 - (60,000 x 90%)],
the ending finished goods totals P108,000 (6,000 x P18).

B. Sales revenue (60,000 units x 90% x P55) P2,970,000

Less: Variable cost of goods sold
(60,000 units x 90% x P18) P972,000
Variable selling and administrative 120,000 1,092,000
Contribution margin P1,878,000

The contribution margin is disclosed on a variable-costing income statement.

C. None. All fixed selling and administrative cost is treated as a period cost and expensed against
revenue.

D. The cost of a unit would increase by P10 (P600,000 ÷ 60,000 units) because of the addition of
fixed manufacturing overhead. Thus:

Sales revenue P2,970,000

Cost of goods sold (60,000 units x 90% x P28) 1,512,000
Gross margin P1,458,000

Problem VI: Absorption- and Variable-Costing Income Calculations

The following data relate to Venture Company, a new corporation, during a period when the firm produced and sold 100,000
units and 90,000 units, respectively:

Direct materials used P400,000

Direct labor 200,000
Fixed manufacturing overhead 250,000
Variable manufacturing overhead 120,000
Fixed selling and administrative expenses 300,000
Variable selling and administrative expenses 45,000

The company met its original planned production target of 100,000 units. There were no variances during the period, and the
firm's selling price is P15 per unit.

Required:
A. What is the cost of Venture's end-of-period finished-goods inventory under the variable-costing method?
B. Calculate the company's variable-costing net income.
C. Calculate the company's absorption-costing net income.

Answer:
A. Ending finished-goods inventory (units): 0 + 100,000 - 90,000 = 10,000
Inventoriable costs under variable costing:

Direct materials used P400,000

Direct labor 200,000
Variable manufacturing overhead 120,000
Total P720,000

Variable cost per unit produced: P720,000 ÷ 100,000 units = P7.20 per unit
Ending inventory: 10,000 units x P7.20 = P72,000

B. Sales revenue (90,000 units x P15) P1,350,000

Less: Variable costs [(90,000 units x P7.20) + P45,000] 693,000
Contribution margin P 657,000
Less: Fixed costs (P250,000 + P300,000) 550,000
Net income P 107,000

C. Predetermined fixed overhead rate: P250,000 ÷ 100,000 units = P2.50

Absorption cost per unit: P7.20 + P2.50 = P9.70

Sales revenue (90,000 units x P15) P1,350,000

Less: Cost of goods sold (90,000 units x P9.70) 873,000
Gross margin P 477,000
Less: Operating costs (P300,000 + P45,000) 345,000
Net income P 132,000

Problem VII: Absorption- and Variable-Costing Inventory/Income Calculations

The following data relate to Hunter, Inc., a new company:

 Planned and actual production 200,000 units
Sales at P48 per unit 170,000 units
Manufacturing costs:
Variable P18 per unit
Fixed P840,000
Selling and administrative costs:
Variable P7 per unit
Fixed P925,000

There were no variances during the period.

Required:
A. Determine the number of units in the ending finished-goods inventory.
B. Calculate the cost of the ending finished-goods inventory under (1) variable costing and (2) absorption costing.
C. Determine the company's variable-costing net income.
D. Determine the company's absorption-costing net income.

LO: 1, 2, 3 Type: A

Answer:
A. Ending finished-goods inventory: 0 + 200,000 - 170,000 = 30,000 units

B. Variable costing: 30,000 units x P18 = P540,000

Absorption costing:
Predetermined fixed overhead rate: P840,000 ÷ 200,000 units = P4.20;
30,000 units x (P18.00 + P4.20) = P666,000

C. Sales revenue (170,000 units x P48) P8,160,000

Less: Variable costs [170,000 units x (P18 + P7)] 4,250,000
Contribution margin P3,910,000
Less: Fixed costs (P840,000 + P925,000) 1,765,000
Net income P2,145,000

D. Sales revenue (170,000 units x P48) P8,160,000

Less: Cost of goods sold [170,000 units x (P18.00 + P4.20)] 3,774,000
Gross margin P4,386,000
Less: Operating costs [(170,000 units x P7) + P925,000] 2,115,000
Net income P2,271,000

Problem VIII: Conversion of Absorption-Cost Data to Variable-Cost Data; Working Backwards

45. Kim, Inc., began business at the start of the current year and maintains its accounting records on an absorption-cost basis.
The following selected information appeared on the company's income statement and end-of-year balance sheet:

Income-statement data:
Sales revenues (35,000 units x P22) P770,000
Gross margin 210,000
Total sales and administrative expenses 160,000
Balance-sheet data:
Ending finished-goods inventory (12,000 units) 192,000

Kim achieved its planned production level for the year. The company's fixed manufacturing overhead totaled P141,000, and
the firm paid a 10% commission based on gross sales dollars to its sales force.

Required:
A. How many units did Kim plan to produce during the year.
B. How much fixed manufacturing overhead did the company apply to each unit produced?
C. Compute Kim's cost of goods sold.
D. How much variable cost did the company attach to each unit manufactured?

Answer:
A. Sales (35,000 units) + ending finished-goods inventory (12,000 units) = production (47,000 units).
Note: There is no beginning finished-goods inventory.

B. Since planned and actual production figures are the same, Kim applied P3 to each unit (P141,000
÷ 47,000 units).

C. Sales revenue P770,000

Gross margin 210,000
Cost of goods sold P560,000

D. Kim attached P13 to each unit. This figure can be derived by analyzing cost of goods sold:

Cost of goods sold P560,000

Fixed cost in cost of goods sold (35,000 units x P3) 105,000
Variable cost of goods sold P455,000

P455,000 ÷ 35,000 units = P13

The same P13 figure can be obtained by studying the ending finished-good inventory:

Ending finished-goods inventory P192,000

Fixed cost (12,000 units x P3)     36,000
Variable cost P156,000

P156,000 ÷ 12,000 units = P13

Problem IX: Reconciliation of Absorption- and Variable-Costing Income

Houston Company has per-unit fixed and variable manufacturing costs of P40 and P15, respectively. Variable selling and
administrative costs are P9 per unit. Consider the two cases that follow for the firm.

Case A: Variable-costing net income, P110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing net income, P178,000; sales, 7,500 units; production, 7,100 units

Required:
A. From a product-costing perspective, what is the basic difference between absorption costing and variable costing?
B. Compute Houston's absorption-costing net income in Case A.
C. Compute Houston's absorption-costing net income in Case B.

Answer:
A. The difference between absorption costing and variable costing lies in the treatment of fixed manufacturing overhead.
Under absorption costing, fixed manufacturing overhead is a product cost and attached to each unit produced. In
contrast, under variable costing, it is written off (expensed) as a period cost.

B. Since the number of units sold equals the number of units produced, variable- and absorption-income figures are the
same: P110,000.

C. With sales of 7,500 units and production of 7,100 units, income computed under absorption costing includes P16,000 (400
units x P40) of prior-period fixed manufacturing overhead. Absorption income is therefore P162,000 (P178,000 -
P16,000).

Problem X: Reconciliation of Absorption- and Variable-Costing Income

Beachcraft Corporation has fixed manufacturing cost of P12 per unit. Consider the three independent cases that follow.

Case A: Absorption- and variable costing net income each totaled P240,000 in a period when the firm produced
18,000 units.

Case B: Absorption-costing net income totaled P320,000 in a period when finished-goods inventory levels rose by
7,000 units.

Case C: Absorption-costing net income and variable-costing net income respectively totaled P220,000 and P250,000
in a period when the beginning finished-goods inventory was 14,000 units.
Required:
A. In Case A, how many units were sold during the period?
B. In Case B, how much income would Beachcraft report under variable costing?
C. In Case C, how many units were in the ending finished-goods inventory?

Answer:
A. Absorption- and variable costing income will be the same amount when inventory levels are unchanged. Thus, sales
totaled 18,000 units.

B. The difference between absorption-costing income and variable-costing income is P84,000 (7,000 units x P12). Given
that inventories are rising, variable-costing net income will amount to P236,000 (P320,000 - P84,000).

C. The P30,000 difference in income (P250,000 - P220,000) is explained by the change in inventory units, multiplied by the
fixed overhead per unit. Thus, the inventory changed by 2,500 units (P30,000 ÷ P12). Given that absorption income is
less than income computed by the variable-costing method, inventory levels must have decreased, resulting in an ending
inventory level of 11,500 units (14,000 - 2,500).