Job costing absorption and Variable costing (case study)

The company workshops Maracay, C.A. is dedicated to the production of a single

article, making their records by costing by absorption, management wants to know what
would be the results if you used variable costing, then it presents the following
information of production and sales:

PERIODS
PRODUCED
SOLD
PERIODS
PRODUCED
SOLD
SALES PRICE

1
4,000
2,000

2
4,000
4,000

3
2,000
3,000

4
6,000
7,000

1
4,000
2,000

2
4,000
4,000

3
2,000
3,000

4
6,000
7,000
US$.80
US$.20

UNIT VARIABLE COST

FIXED COST BY PERIOD
FIXED EXPENSES

US$.120,000
US$.40,000

We calculate the results of the costing by absorption:

We determine the value of the sales cost final inventory, which will divide the monetary
value of the available production of each period by the number of units available,
obtaining the unit total cost, this value is multiplied by units sold and thus to obtain the
cost of sales by absorption.

We will work in detail the period 1:

Available production = Initial inventory + units = units available

Available production = 0 units + 4.000 units = 4,000 units available

Now determine the available production value:

Available production cost = Initial inventory cost + the produced units cost = cost of the
initial inventory + ((Units Produced x Unit Cost Variable) + Total fixed cost).
Cost of the available production = 0 + ((4,000 units produced x US$.20unit) +
US$.120,000)
Cost of the available production = US$.0 + (US$.80,000 + US$.120,000) =
US$.200,000

Prof. Juan Carlos Ortega Marcano

Now we determine the unit cost of the available production:

Total unit cost = Cost of production available / available production

Total unit cost = US$.200,000/4,000 units available = US$.50 Stck.

This unit Total cost helps us to assess the cost of units sold and ending inventory:

Cost of units sold = Units sold x Unit Total cost

Cost of units sold = 3,000 units x US$.50/unit = US$.150,000

Final inventory = Cost of units sold available - production costs

Final inventory = US$.200,000 - US$.150,000 = US$.50,000

Then we apply the same methodology to each of the following periods to finish building
the following table:

PERIOD
O

1
UNITS

INITIALL
PRODUE
DS
AVAILAB
LE

000

END

000

US$
-

4.
4.
000
2.
2.

SOLD

000

200.
000
200.
000
100.
000
100.
000

UNITS
2.
000
4.
000
6.
000
2.
000
4.
000

3
US$
100.
000
200.
000
300.
000
100.
000
200.
000

UNITS
2.
000
2.
000
4.
000
1.
000
3.
000

With this information we now build the income statement:

ABSORPTION
COSTING
SALES (sold x
US$.80)
COST OF SALES
GROSS PROFIT
EXPENDITURE
FIXED

1
160,0
00
100,0
00
60,00
0
40,00
0

2
320,000
120,000
200,000
40,000

Prof. Juan Carlos Ortega Marcano

3
4
240,0 560,00
00
0
195,0 305.00
00
0
45,00 255.00
0
0
40,00
0
40,000

4
US$
UNITS
100.0
1.0
00
00
160.0
6.0
00
00
260.0
7.0
00
00
65.0
00
195.0
7.0
00
00

US$
65.0
00
240.0
00
305.0
00
305.0
00

NET INCOME
ENDING
INVENTORY

20,00
0
100,0
00

160,000
100,000

5,000
65,00
0

215,00
0
-

Calculation of variable costing:

Both the sales cost and the final inventory, are valued at the unit variable cost (US$.20)
so we will have to:

For the period 1:

Available production = Initial inventory + units = units available

Available production = 0 units + 4.000 units = 4,000 units available

We will then determine the value of the available production:

Available production cost = Cost of the initial inventory + cost of production.

Cost of the available production = US$.0 + (4,000 units produced x US$.20unit)
Cost of the available production = US$.80,000

Total unit cost = Variable cost = US$.20

Cost of units sold = Units sold x Unit Total cost

Cost of units sold = 2,000 units x US$.20 = US$.40,000

Final inventory = Cost of production available - cost of sales

Final inventory = US$.80,000 - US$.40,000 = US$.40,000

Prof. Juan Carlos Ortega Marcano

Then we apply the same methodology to each of the following periods to finish building
the following table:
PERIOD
INITIAL
PRODUCED
AVAILABLE
END
SOLD
PERIOD
INITIAL

1
UNITS
4,000
4,000
2,000
2,000

2
BS
80,000
80,000
40,000
40,000

UNITS
2,000
4,000
6,000
2,000
4,000

UNITS
-

BS
40,000
80,000
120,000
40,000
80,000

UNITS
2,000
2,000
4,000
1,000
3,000

4
BS
40,000
40,000
80,000
20,000
60,000

UNITS
1,000
6,000
7,000
7,000

BS
20,000
120,000
140,000
140,000

US$

UNITS

US$

UNITS

U$

UNITS

US$

2,000

40,000

2,000

40,000

1,000

20,000
120,00
0
140,00
0

PRODUCED

4,000

80,000

4,000

80,000

2,000

40,000

6,000

AVAILABLE

4,000

80,000

6,000

120,000

4,000

80,000

7,000

END

2,000

40,000

2,000

40,000

1,000

20,000

SOLD

2,000

40,000

4,000

80,000

3,000

60,000

7,000

Now with this information we build the State of results, taking into account the fixed
costs and fixed costs are deducted from the contribution margin. Since this method fixed
costs are not part of the cost of sales.

VARIABLE COSTING
SALES
VARIABLE COST
COSTRIBUCION MARGIN N
FIXED COST
FIXED COST
NET INCOME
ENDING INVENTORY L

1
160.0
00
40.0
00
120.0
00
120.0
00
40.0
00
40.000
40.0
00

2
320.0
00
80.0
00
240.0
00
120.0
00
40.0
00
80.0
00
40.0
00

3
240.0
00
60.0
00
180.0
00
120.0
00
40.0
00
20.0
00
20.0
00

4
560.0
00
140.0
00
420.0
00
120.0
00
40.0
00
260.0
00
-

The check is performed by the difference of the utility by costing absorption less utility
by variable costing, this result should be equal to the difference of the fixed cost
absorption less fixed cost by variable costing:
(ABSORPTION - VARIABLE UTILITY UTILITY) = (FIXED COST
ABSORPTION - VARIABLE FIXED COST)
(UTILITY BY ABSORPTION - UTILITY VARIABLE) = COST FIXED BY
ABSORPTION - (TOTAL ABSORPTION - UNIT VARIABLE COST PER UNIT
COST ) x (UNITS SOLD IN THE PERIOD)
Prof. Juan Carlos Ortega Marcano

140,00
0

Where total absorption per unit cost = cost of units sold by absorption/units sold
Let's look at the first period:
Utility by absorption - utility Variable = US$.20,000 - (-US$.40,000) = US$.60,000
Total unit cost absorption = cost of units sold by absorption / units sold
Total unit cost absorption = US$.100,000/2,000 units sold = US$.50/unit
Fixed cost absorption - cost fixed Variable = US$.120,000 - (US$.50/unit -US$.20unit)
x (2,000 units sold) = 120.000 - (US$.30unit) x 2,000 units sold = US$.60,000
As we see both differences are the same, so it is proven. We then apply the procedure to
the rest of the periods.
CHECKING:
UTILITY BY ABSORPTION
VARIABLE UTILITY
DIFFERENCE

1
20,000
-40,000
60,000

2
160,000
80,000
80,000

3
5,000
20,000
-15,000

4
215,000
260,000
-45,000

COST P/ABSORPTION FIJ0

FIXED P/VARIABLE COST
DIFFERENCE

120,000
60,000
60,000

120,000
40,000
80,000

120,000
135,000
-15,000

120,000
165,000
-45,000

Prof. Juan Carlos Ortega Marcano

Proposed exercise - workshop.

The Corporation A.G.P., C.A.., sells a single product, and you noticed that their sales
have declined for three consecutive periods.

Variable costs to produce each unit of product are as follows:

Direct materials US$.200

Direct labor 100
Cost indirect 100
Total Variable cost US$.400

Fixed manufacturing costs are US$.120.000, operation costs by period are US$.60.000,
the sales price per product is US$.500. It also provides us the following information:

UNITS
INITIAL
INVENTORY
PRODUCED
SOLD
ENDING
INVENTORY

1
0

2
1,000

3
3,000

5,000
4,000
1,000

4,000
2,000
3,000

2,000
1,000
4,000

Find the utility by the method of costing by absorption and variable costing. Comment
on the results. Explain the differences of the utility and the ending inventory value

Prof. Juan Carlos Ortega Marcano