Colegio de San Gabriel Arcangel
Area E, City of San Jose del Monte, Bulacan
LEARNING MODULE IN STRATEGIC COST MANAGEMENT
Unit Title: Product Costing
Duration: 3 hours
Introduction:
Income is one of the many important measures used to evaluate the
performance of both segments and the company as a whole. That is why managers
strive to make their performances look good by making decisions that would increase
income. But the question is “how income be correctly measured?”
In this Module we will discuss product costing which include Variable costing
method (Direct Costing) and Absorption costing method, the preparation of income
statement and inventory valuation under both methods
Objectives / Competencies:
At the end of the session, the learner will be able to:
1. Know what is variable costing as against absorption costing.
2. Differentiate inventory valuation under variable and absorption costing
3. Identify cost included in variable and absorption costing
4. Prepare income statement under variable costing
5. Prepare income statement under absorption costing
6. Learn how to reconcile income under variable costing and absorption costing
method.
7. Know the proper treatment of volume variance under absorption costing when
sales and production in a period differs.
Pretest
Multiple choice. Select your answer by encircling the letter of the correct answer.
1. Which cost is not charged to product under variable costing?
a. Direct materials b. Direct labor
c. Variable manufacturing d. Fixed manufacturing overhead
overhead
2. Which cost is not charged to product under absorption costing?
a. Direct materials
b. Direct labor
c. Variable manufacturing overhead
d. Fixed manufacturing overhead
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3. Net income under absorption costing is gross profit less:
a. Cost of goods sold
b. Fixed manufacturing overhead and fixed selling administrative expenses
c. Fixed manufacturing overhead and variable manufacturing overhead
d. Variable selling and administrative expenses and fixed selling and
administrative expenses
4. The primary difference between variable costing and absorption costing is the
treatment of:
a. Direct materials
b. Direct labor
c. Variable manufacturing overhead
d. Fixed manufacturing overhead
5. Net income under absorption costing is higher than net income under variable
costing when:
a. Units produced exceeds units sold
b. Units produced equals units sold
c. Units produced are less than units sold
d. Regardless of the relationship between units produced and units sold
Lesson Proper / Course Methodology:
A. Introduction of New Lesson
ABSORPTION COSTING
• Absorption costing is required for external financial reports and for tax reporting.
• Under absorption costing, product costs include all manufacturing costs:
• Direct materials.
• Direct labor.
• Variable manufacturing overhead.
• Fixed manufacturing overhead.
• Under absorption costing, the following costs are treated as period expenses and are excluded
from product costs:
• Variable selling and administrative costs.
• Fixed selling and administrative costs.
VARIABLE COSTING
• Variable costing is an alternative for internal management reports.
• Under variable costing, product costs include only the variable manufacturing costs:
• Direct materials.
• Direct labor (unless fixed).
• Variable manufacturing overhead.
• Under variable costing, the following costs are treated as period expenses and are
excluded from product costs:
• Fixed manufacturing overhead.
• Variable selling and administrative costs.
• Fixed selling and administrative costs.
Absorption = Product cost = DM + DL + VO + FO
Variable = Product Cost = DM + DL +_VO
Expense
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Absorption = V Selling & Administrative expenses + Fixed Selling & Adm
Expenses
Variable = V Selling & Administrative expenses + Fixed Selling & Adm Expenses
+ Fixed Overhead
B. Activity
Activity 1 – Units produced equals Units sold
ZKB company manufactures a unique device that is used by internet users to boost Wi-Fi
signals. The following data relates to the first month of operation:
Beginning inventory: 0 units
Units produced: 40,000 units
Units sold: 40,000 units
Selling price: P120 per unit
Marketing and administrative expenses:
Variable marketing and administrative expenses per unit: P4
Fixed marketing and administrative expenses per month: P1,120,000
Manufacturing costs:
Direct materials cost per unit: P30
Direct labor cost per unit: P14
Variable manufacturing overhead cost per unit: P4
Fixed manufacturing overhead cost per month: P1,280,000
Management is anxious to see the success as well as profitability of newly designed
unique booster.
Required:
1. Calculate unit product cost and prepare income statement under variable costing
system and absorption costing system.
2. Prepare income statement under two costing system.
3. Prepare a schedule to reconcile the net operating income under variable and
absorption costing system.
Requirement 1
Product Cost per Unit
Absorption Costing Variable Costing
Direct materials 30.00 30.00
Direct labor 14.00 14.00
Variable mfg. overhead 4.00 4.00
Fixed mfg. overhead 32.00
(1,280,000 / 40,000)
Total Product cost per 80.00 48.00
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unit
Absorption costing Variable costing
Sales ( 40,000 x 120) 4,800,000 4,800,000
Cost of goods sold
Beginning inventory -0- -0-
Cost of goods manufactured
(40,000 x 80.00) 3,200,000 1,920,000
(40,000 x 48.00)
Goods available for sale 3,200,000 1,920,000
Ending inventory -0- 3,200,000 -0- 1,920,000
Gross profit 1,600,000 2,880,000
Less expenses
Fixed manufacturing overhead 1,280,000
Variable selling and administrative
expenses (40,000 x 4) 160,000 160,000
Fixed selling and administrative 1,120,000 1,280,000 1,120,000 2,560,000
expense
Income from operation 320,000 320,000
CGS = Absorption (3,200,000) – CGS (Variable)(1,920,000) = 1,280,000 Fixed Mfg.
Overhead
Activity 2 – Units produced is greater than Units sold
ZKB company manufactures a unique device that is used by internet users to boost Wi-Fi
signals. The following data relates to the first month of operation:
Beginning inventory: 0 units
Units produced: 40,000 units
Units sold: 35,000 units
Selling price: P120 per unit
Marketing and administrative expenses:
Variable marketing and administrative expenses per unit: P4
Fixed marketing and administrative expenses per month: P1,120,000
Manufacturing costs:
Direct materials cost per unit: P30
Direct labor cost per unit: P14
Variable manufacturing overhead cost per unit: P4
Fixed manufacturing overhead cost per month: P1,280,000
Management is anxious to see the success as well as profitability of newly designed
unique booster.
Required:
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1. Calculate unit product cost and prepare income statement under variable costing
system and absorption costing system.
Absorption costing Variable costing
Sales ( 35,000 x 120) 4,200,000 4,200,000
Cost of goods sold
Beginning inventory -0- -0-
Cost of goods manufactured
(40,000 x 80.00) 3,200,000
(40,000 x 48.00) 1,920,000
Goods available for sale 3,200,000 1,920,000
Ending inventory
(5,000 x 80.00) 400,000 2,800,000 240,000 1,680,000
(5,000 x 48.00)
Gross profit 1,400,000 2,520,000
Less expenses
Fixed manufacturing overhead 1,280,000
Variable selling and administrative
expenses (35,000 x 4) 140,000 140,000
Fixed selling and administrative 1,120,000 1,260,000 1,120,000 2,540,000
expense
Income from operation 140,000 (20,000)
140,000 – (20,000) = 160,000 5,000 x 32.00 = 160,000
2. Prepare income statement under two costing system.
3. Prepare a schedule to reconcile the net operating income under variable and
absorption costing system.
Activity 3 – Units produced is less than Units sold
ZKB company manufactures a unique device that is used by internet users to boost Wi-Fi
signals. The following data relates to the second month of operation:
Beginning inventory: 5,000 units
Units produced: 40,000 units
Units sold: 42,000 units
Selling price: P120 per unit
Marketing and administrative expenses:
Variable marketing and administrative expenses per unit: P4
Fixed marketing and administrative expenses per month: P1,120,000
Manufacturing costs:
Direct materials cost per unit: P30
Direct labor cost per unit: P14
Variable manufacturing overhead cost per unit: P4
Fixed manufacturing overhead cost per month: P1,280,000
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Management is anxious to see the success as well as profitability of newly designed
unique booster.
Required:
1. Calculate unit product cost and prepare income statement under variable costing
system and absorption costing system.
Absorption costing Variable costing
Sales ( 42,000 x 120) 5,040,000 5,040,000
Cost of goods sold
Beginning inventory
5,000 x 80.00 400,000
5,000 x 48.00 240,000
Cost of goods manufactured
(40,000 x 80.00) 3,200,000
(40,000 x 48.00) 1,920,000
Goods available for sale 3,600,000 2,160,000
Ending inventory
3,000 x 80.00 240,000 3,360,000 2,016,000
3,000 x 48.00 144,000
Gross profit 1,680,000 3,024,000
Less expenses
Fixed manufacturing overhead 1,280,000
Variable selling and administrative
expenses (42,000 x 4) 168,000 168,000
Fixed selling and administrative 1,120,000 1,288,000 1,120,000 2,568,000
expense
Income from operation 392,000 456,000
If unit produced = units sold = income under absorption and variable costing are
equal
Unit produced > units sold = Income under AC > income Under VC
Units produced < unit sold = Income under AC < Income under VC
2. Prepare income statement under two costing system.
3. Prepare a schedule to reconcile the net operating income under variable and
absorption costing system.
Activity 4
Super Bike Manufacturing Company presents the following data for year 2016:
Opening inventory: 0 Units
Sales: 8,000 Units @ P1,000 per unit
Production: 10,000 Units
Closing inventory: 2,000 Units
Direct materials: P240
Direct labor: P280
Variable manufacturing overhead expenses: P100
Variable selling and administrative expenses: P40
Fixed manufacturing overhead expenses: P1200,000
Fixed selling and administrative expenses: P800,000
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Required: Using the data given above, compute the unit product cost of one bike under:
1. absorption costing system.
2. variable costing system.
Activity 5
The following is the absorption costing income statement of Alpha Manufacturing Company for
the year ended December 31, 2016:
ALPHA MANUFACTURING COMPANY
INCOME STATEMENT (ABSORPTION COSTING)
FOR THE PERIOD ENDED DECEMBER 31, 2016
Sales (40,000 units x P67.50) P 2,700,000
Less cost of goods sold
Beginning inventory P -0-
Add Cost of goods manufactured (50,000 x P42) 2,100,000
Cost of goods available for sale P 2,100,000
Less ending inventory (10,000 x P42) 420,000 1,680,000
Gross profit P 1,020,000
Less selling and administrative expenses 840,000
Net operating income P 180,000
Fixed selling and administrative expenses are P600,000. Variable selling and administrative
expenses are P6 per unit sold. The unit product cost under absorption costing is computed as
follows: Direct material – P20, Direct labor – P8, Variable manufacturing overhead – P4, Fixed
manufacturing overhead (P500,000 / 50,000) – P10
Required:
1. Prepare an income statement of Alpha Manufacturing Company using variable costing
system.
2. Reconcile any difference in net operating income figure under variable costing
system and under absorption costing system.
Activity 6
Beta company manufactures and sells large size tables to be used in the offices of the executives.
One table is sold for P400. The selected data for year 2016 is given below:
Manufacturing expenses:
Direct materials per unit: P120
Direct labor per unit: P60
Variable manufacturing overhead per unit: P20
Fixed manufacturing overhead per year: P600,000
Non-manufacturing expenses:
Variable selling and administrative expense per unit: P40
Fixed selling and administrative expense per year: P900,000
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Inventory information:
Units in opening inventory: 0 units
Units produced during 2016: 10,000 units
Units sold during 2016: 9,000 units
Units in closing inventory: 1,000 units
Required:
1. Compute cost of one table under variable costing.
2. Prepare income statement if variable costing is used.
3. Compute break even point both in units and in dollars.
4. Calculate net operating income of the company under absorption costing by preparing a
reconciliation schedule. (Do not prepare absorption costing income statement).
ACTIVITY 7
The production and sales data of Alzabri company for the year 2016 is as follows:
Variable costs per unit:
Direct materials: P20
Direct labor: P10
Variable manufacturing overhead: P4
Variable selling and administrative expenses: P8
Fixed costs per year:
Fixed manufacturing overhead: P180,000
Fixed selling and administrative expenses: P600,000
During the year 2016, Alzabri company manufactured 30,000 units out of which 25,000 units
were sold. At the end of 2016, the finished goods inventory account showed a balance of
P170,000.
Required:
1. What costing method is used by Alzabri to compute finished goods inventory?
2. Should company use P170,000 finished goods inventory figure for external reports? if
not what is the correct amount in pseo that the company should use for external reporting
purpose?
ACTIVITY 8
AGA company manufactures and sells a product for P20 per Kg. The data for the year 2016 is
given below:
Sales in kgs: 75,000 kgs
Finished goods inventory at the beginning of the period: 12,000 kgs
Finished goods inventory at the closing of the period: 17,000 kgs
Manufacturing costs:
Variable cost: P8 per Kg
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Fixed manufacturing overhead cost: P320,000 per year
Marketing and administrative expenses:
Variable expenses: P2 per Kg of sale
Fixed expenses: P300,000 per year
Required:
1. Income statement using absorption and variable costing methods.
2. Explanation of the cause of difference in net operating income under two concepts.
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