#MASReview1stSEM2018 MAS05

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY
ACCO 4113 – Management Services

VARIABLE AND ABSORPTION COSTING

 Nature and treatment of fixed factory overhead costs

 Distinction between product cost and period cost
 Inventory costs between variable costing and absorption costing
 Reconciliation of operating income under variable costing and absorption costing

Absorption Costing or Full Costing System:

Absorption costing is a costing system which treats all costs of production as product costs, regardless weather they are variable or
fixed. The cost of a unit of product under absorption costing method consists of direct materials, direct labor and both variable and
fixed overhead. Absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the
variable manufacturing cost. Because absorption costing includes all costs of production as product costs, it is frequently referred to as
full costing method.

Variable, Direct or Marginal Costing:

Variable costing is a costing system under which those costs of production that vary with output are treated as product costs. This
would usually include direct materials, direct labor and variable portion of manufacturing overhead. Fixed manufacturing cost is not
treated as a product costs under variable costing. Rather, fixed manufacturing cost is treated as a period cost and, like selling and
administrative expenses, it is charged off in its entirety against revenue each period. Consequently the cost of a unit of product in
inventory or cost of goods sold under this method does not contain any fixed overhead cost. Variable costing is some time referred to
as direct costing or marginal costing. To complete this summary comparison of absorption and variable costing, we need to consider
briefly the handling of selling and administrative expenses. These expenses are never treated as product costs, regardless of the
costing method in use. Thus under either absorption or variable costing, both variable and fixed selling and administrative expenses
are always treated as period costs and deducted from revenues as incurred.

Explanation of the difference in net operating income:

Notice that the when net operating income under absorption costing is higher than the net operating income under variable costing,
the difference is because of fixed manufacturing overhead that becomes the part of ending inventory under absorption costing system.
The ending inventory absorbs a portion of fixed manufacturing overhead and reduces the burden of the current period. In this way a
portion of fixed cost that relates to the current period is transferred to the next period.

Under variable costing, the fixed manufacturing overhead cost is not included in the product cost but charged to the income statement
of the relevant period in its entirety. Therefore no portion of fixed cost is absorbed by the ending inventory.

Note:
1. The net operating income under absorption costing systems is always higher than variable costing system when inventory
increases.
2. The net operating income under variable costing systems is always higher than absorption costing system when inventory
decreases.
3. When inventory increases, the fixed manufacturing overhead cost is deferred to inventory.
4. When inventory decreases, the fixed manufacturing overhead cost is released from inventory.

Question 1 - CIA 1193 IV-10 - Variable and Absorption Costing

Themanagementofacompanycomputesnetincomeusingboththeabsorptionandvariablecostingapproachesto product costing.

This year, the net income under the variable costing approach was greater than the net income
undertheabsorptioncostingapproach.Thisdifferenceismostlikelytheresultof

A. Adecreaseinthevariablemarketingexpenses.
B. Anincreaseinthefinishedgoodsinventory.
C. Salesvolumeexceedingproductionvolume.
D. Inflationaryeffectsonoverheadcosts.

Question 2 - IMA 08-P2-111 - Variable and Absorption Costing

Consider the following situation for Weisman Corporation for the prior year.
• Thecompanyproduced1,000unitsandsold900units,bothasbudgeted.
• Therewerenobeginningorendingwork-in-processinventoriesandnobeginningfinishedgoodsinventory.
• Budgetedandactualfixedcostswereequal,allvariablemanufacturingcostsareaffectedbyvolumeof
productiononly,andallvariablesellingcostsareaffectedbysalesvolumeonly.
• Budgetedperunitrevenuesandcostswereasfollows.
Per Unit
Sales price P100
Direct materials 30
Direct labor 20
Variable manufacturing costs 10
Fixed manufacturing costs 5
Variable selling costs 12
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Fixed selling costs (P3,600 total) 4

Fixed administrative costs (P1,800 total) 2

The operating income for Weisman for the prior year using absorption costing was

A. P13,600.
B. P14,200.
C.P15,300.
D.P15,840

Question 3 - CMA 697 3-3 - Variable and Absorption Costing

Whichmethodofinventorycostingtreatsdirectmanufacturingcostsandmanufacturingoverheadcosts,both
variableandfixed,asinventoriablecosts?

A. Conversioncosting.
B. Absorptioncosting.
C. Directcosting.
D. Variablecosting.

Question 4 - CIA 591 IV-13 - Variable and Absorption Costing

Productsales: 1,000 units

atP10eachVariablemanufacturingcosts: P5.50 perunit
Fixedmanufacturingoverhead: P1,200
Variablesellingandadministrativecosts: P.50 perunitsoldFixed
selling andadministrativecosts: P1,000
Nobeginninginventory
Unitsproduced: 1,200

Operating income under variable (direct) costing is

A. P700
B. P1,800
C. P2,300
D. P600

Question 5 - CIA 594 III-46 - Variable and Absorption Costing

When comparing absorption costing with variable costing, which of the following statements is not true?

A. Whensalesvolumeismorethanproductionvolume,variablecostingwillresultinhigheroperatingprofit.
B. Underabsorptioncosting,operatingprofitisafunctionofbothsalesvolumeandproductionvolume.
C. Amanagerwhoisevaluatedbasedonvariablecostingoperatingprofitwouldbetemptedtoincreaseproduction
attheendofaperiodinordertogetamorefavorablereview.
D. Absorptioncostingenablesmanagerstoincreaseoperatingprofitsintheshortrunbyincreasinginventories.

Question 6 - CIA 1194 III-42 - Variable and Absorption Costing

Using absorption costing, fixed manufacturing overhead costs are best described as

A. Indirectperiodcosts.
B. Indirectproductcosts.
C. Direct periodcosts.
D. Direct productcosts.

Question 7 - CMA Sample Q3-2 - Variable and Absorption Costing

Consider the following information for Richardson Company for the prior year.
The company produced 1,000 units and sold 900 units, both as budgeted.
There were no beginning or ending work-in-process inventories and no beginning finished goods inventory.
Budgetedandactualfixedcostswereequal,allvariablemanufacturingcostswereaffectedbyproduction
volumeonly,andallvariablesellingcostswereaffectedbysalesvolumeonly.

Budgeted per unit revenues and costs were as follows:

Per unit
Salesprice P100
Directmaterials 30
Directlabor 20
Other variablemanufacturingcosts 10
Fixedsellingcosts 5
Variablesellingcosts 12
Fixed selling costs(P3,600total) 4
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Fixed administrative costs(P1,800total) 2

The contribution margin earned by Richardson for the prior year was

A. P31,500
B. P35,000
C.P25,200
D.P28,000

Question 9 - CIA 1187 IV-9 - Variable and Absorption Costing

Which of the following is an argument against the use of direct (variable) costing?

A. Fixedfactoryoverheadisnecessaryfortheproductionofaproduct.
B. Fixedfactoryoverheadisdifficulttoallocateproperly.
C. Variablefactoryoverheadisaperiodcost.
D. Absorptioncostingoverstatesthebalancesheetvalueofinventories.

Question 10 - IMA 08-P2-106 - Variable and Absorption Costing

Dremmon Corporation uses a standard cost accounting system. Data for the last fiscal year are as follows.
Units
Beginning inventory offinishedgoods 100
Production duringtheyear 700
Sales 750
Ending inventory offinishedgoods 50

Per Unit
Productsellingprice P200
Standard variablemanufacturingcost 90
Standard fixedmanufacturingcost 20*

Budgetedsellingandadministrativecosts(allfixed) P45,000
* Denominator level of activity is 750 units for the year.

Therewerenoprice,efficiency,orspendingvariancesfortheyear,andactualsellingandadministrativeexpenses
equaledthebudgetamount.Anyvolumevarianceiswrittenofftocostofgoodssoldintheyearincurred.Thereare nowork-in-
processinventories.

AssumingthatDremmonusedabsorptioncosting,theamountofoperatingincomeearnedinthelastfiscalyearwas

A.P28,000
B. 21,500
C. P27,000
D. P30,000

Question 11 - CMA 1285 4-14 H2 - Variable and Absorption Costing

Osawa,Inc.plannedandactuallymanufactured200,000unitsofitssingleproductinitsfirstyearofoperations.
VariablemanufacturingcostswereP30perunitofproduct.Plannedandactualfixedmanufacturingcostswere
P600,000,andsellingandadministrativecoststotaledP400,000.Osawasold120,000unitsofproductataselling price of P40 perunit.

Osawa'soperatingincomefortheyearusingvariablecostingis

A.P600,000
B. P800,000
C. P440,000
D. P200,000

Question 12 - CIA 1187 IV-51 - Variable and Absorption Costing

Assuming absorption costing, which of the following columns includes only product costs?
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A. II.
B. I.
C. III.
D. IV.

Question 13 - CIA 591 IV-14 - Variable and Absorption Costing

Productsales: 1,000 units

atP10eachVariablemanufacturingcosts: P5.50 perunit
Fixedmanufacturingoverhead: P1,200
Variablesellingandadministrativecosts: P.50 perunitsoldFixed
selling andadministrativecosts: P1,000
No beginning inventory

Unitsproduced: 1,200

AssumingoperatingincomeundervariablecostingisP1,800,operatingincomeunderabsorptioncostingis

A.P1,800
B. P2,000
C.P2,167
D.P1,967

Question 15 - CMA Sample Q3-3 - Variable and Absorption Costing

The change in period-to-period operating income when using variable costing can be explained by the change in the

A. Finishedgoodsinventorylevelmultipliedbytheunitsalesprice.
B. Unitsaleslevelmultipliedbytheunitsalesprice.
C. Finishedgoodsinventorylevelmultipliedbyaconstantunitcontributionmargin.
D. Unitsaleslevelmultipliedbyaconstantunitcontributionmargin.

Question 16 - CMA 1286 4-18 H1 - Variable and Absorption Costing

A manufacturer at the end of its fiscal year recorded the data below:

Prime cost P800,000

Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000

Using absorption (full) costing, inventoriable costs are

A. P1,080,000
B. P900,000
C.P1,060,000
D. P800,000

Question 17 - CIA 577 IV-18 - Variable and Absorption Costing

In the application of direct costing as a cost-allocation process in manufacturing,

A. Nonvariabledirectcostsaretreatedasproductcosts.
B. Nonvariableindirectcostsaretreatedasproductcosts.
C. Variableindirectcostsaretreatedasproductcosts.
D. Variabledirectcostsaretreatedasperiodcosts.

Question 19 - CMA 697 3-10 - Variable and Absorption Costing

Which one of the following statements is correct regarding absorption costing and variable costing?

A. Variablemanufacturingcostsarelowerundervariablecosting.
B. Overheadcostsaretreatedinthesamemannerunderbothcostingmethods.
C. Iffinishedgoodsinventoryincreases,absorptioncostingresultsinhigherincome.
D. Grossmarginsarethesameunderbothcostingmethods.

Question 20 - CMA 1273 4-1 - Variable and Absorption Costing

Which of the following statements is true for a firm that uses variable costing?

A. Profitsfluctuatewithsales.
B. Anidlefacilityvariationiscalculated.
C. Thecostofaunitofproductchangesbecauseofchangesinnumberofunitsmanufactured.
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D. Productcostsincludevariableadministrativecosts.

Question 22 - CIA 585 IV-5 - Variable and Absorption Costing

TheBlueCompanyhasfailedtoreachitsplannedactivitylevelduringitsfirst2yearsofoperation.Thefollowingtable shows the

relationship among units produced, sales, and normal activity for these years and the projected
relationshipforYear3.Allpricesandcostshaveremainedthesameforthelast2yearsandareexpectedtodoso in
Year3.IncomehasbeenpositiveinbothYear1andYear2.

Units Produced Sales Planned Activity

Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000

Because Blue Company uses an absorption-costing system, one would predict gross margin for Year 3 to be

A. Greater than Year1.

B. Greater than Year2.
C. Equal to Year2.
D. Equal to Year1.

Question 23 - CMA 1286 H1 - Variable and Absorption Costing

Presented are Valenz Company's records for the current fiscal year ended November 30:

Direct materials used P300,000

Direct labor 100,000
Variable factory overhead 50,000
Fixed factory overhead 80,000
Selling and admin. costs-variable 40,000
Selling and admin. costs-fixed 20,000

Using absorption (full) costing, inventoriable costs are

A. P400,000
B. P530,000
C.P450,000
D.P590,000

Question 24 - CMA 1292 3-26 - Variable and Absorption Costing

Jansen,Inc.paysbonusestoitsmanagersbasedonoperatingincome.Thecompanyusesabsorptioncosting,and overhead is applied

on the basis of direct labor hours. To increase bonuses, Jansen's managers may do all of the followingexcept

A. Increaseproductionschedulesindependentofcustomerdemands.
B. Deferexpensessuchasmaintenancetoafutureperiod.
C. Decreaseproductionofthoseitemsrequiringthemostdirectlabor.
D. Producethoseproductsrequiringthemostdirectlabor.

Question 26 - CMA 694 3-6 - Variable and Absorption Costing

The term "gross margin" for a manufacturing firm refers to excess of sales over

A. Manufacturingcosts,excludingfixedmanufacturingcosts.
B. Costofgoodssold,includingfixedindirectmanufacturingcosts.
C. Costofgoodssold,excludingfixedindirectmanufacturingcosts.
D. Allvariablecosts,includingvariablesellingandadministrativeexpenses.

Question 27 - CIA 1190 IV-12 - Variable and Absorption Costing

Duringitsfirstyearofoperations,acompanyproduced275,000unitsandsold250,000units.Thefollowingcosts
wereincurredduringtheyear:

Variable costs per unit:

Directmaterials P15.00
Directlabor 10.00
Manufacturingoverhead 12.50
Sellingandadministrative 2.50

Total fixed costs:

Manufacturingoverhead
P2,200,000Selli
ngandadministrative 1,375,000
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Whatisthedifferencebetweenoperatingincomecalculatedontheabsorption-costingbasisandonthe variable-
costingbasis?

A. Absorption-costingoperatingincomeisgreaterthanvariable-costingoperatingincomebyP220,000.
B. Absorption-costingoperatingincomeisgreaterthanvariable-costingoperatingincomebyP200,000.
C. Absorption-costingoperatingincomeisgreaterthanvariable-costingoperatingincomebyP325,000.
D. Variable-costingoperatingincomeisgreaterthanabsorption-costingoperatingincomebyP62,500.

Question 30 - CMA 689 4-9 - Variable and Absorption Costing

HitchcockIndustrieshasdevelopedtwonewproductsbuthasonlyenoughplantcapacitytointroduceoneofthese
productsthisyear.Thecompanycontrollerhasgatheredthefollowingdatatoassistmanagementindecidingwhich
productshouldbeselectedforproduction.

Hitchcock'sfixedoverheadincludesproportionalrentandutilities,machinerydepreciation,andsupervisorysalaries.
Sellingandadministrativeexpensesarenotallocatedtoproducts.

Cost per unit: Power Drill Power Saw

Raw materials P 22.00 P 18.00
Machining at P12/hr. 9.00 7.50
Assembly at P10/hr. 15.00 5.00
Variable O/H at P8/hr. 18.00 9.00
Fixed O/H at P4/hr. 9.00 4.50
Total unit cost: P73.00 P44.00
Suggested selling price P 88.98 P 49.95
Actual research and development costs P180,000 P95,000
Proposed advertising and promotion costs P300,000 P250,000

ThedifferencebetweentheP49.95sellingpriceofHitchcock'spowersawanditstotalunitcostofP44.00represents the unit

A. Grossprofit.
B. Contributionmarginratio.
C. Contributionmargin.
D. Grossprofitmarginratio.

Question 31 - CMA 1290 3-12 - Variable and Absorption Costing

Which one of the following considers the impact of fixed overhead costs?

A. Directcosting.
B. Fullabsorptioncosting.
C. Marginalcosting.
D. Variablecosting.

Question32-CMA12864-18H2-VariableandAbsorptionCosting

Amanufacturerattheendofitsfiscalyearrecordedthedatabelow:

Prime cost P800,000

Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000

If the manufacturer uses variable costing, the inventoriable costs for the fiscal year are

A. P900,000
B. P980,000
C. P1,060,000
D. P800,000

Question 33 - CMA 1285 4-14 H1 - Variable and Absorption Costing

Osawa,Inc.plannedandactuallymanufactured200,000unitsofitssingleproductinitsfirstyearofoperations.
VariablemanufacturingcostswereP30perunitofproduct.Plannedandactualfixedmanufacturingcostswere
P600,000,andsellingandadministrativecoststotaledP400,000.Osawasold120,000unitsofproductataselling price of P40 perunit.

Osawa's operating income using absorption (full) costing is

A. P440,000
B. P200,000
C. P840,000
D. P600,000
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Question 34 - CMA 1286 H2 - Variable and Absorption Costing

Presented are Valenz Company's records for the current fiscal year ended November 30:

Direct materials used P300,000

Direct labor 100,000
Variable factory overhead 50,000
Fixed factory overhead 80,000
Selling and admin. costs-variable 40,000
Selling and admin. costs-fixed 20,000

If Valenz Company uses variable costing, the inventoriable costs for the fiscal year are

A. P400,000
B. P450,000
C.P490,000
D.P530,000

Question 35 - CIA 1186 IV-8 - Variable and Absorption Costing

Under variable (direct) costing, fixed manufacturing overhead costs are classified as

A. Sellingcosts.
B. Inventoriablecosts.
C. Periodcosts.
D. Administrativecosts.