Management Services by Luzviminda S.

Payongayong
Y2006 edition

Chapter 6 Variable Costing as a Tool to Management Planning

I TRUE OR FALSE
1 TRUE 11 FALSE 21 FALSE
2 TRUE 12 TRUE 22 TRUE
3 FALSE 13 FALSE 23 TRUE
4 TRUE 14 TRUE 24 FALSE
5 TRUE 15 TRUE 25 FALSE
6 FALSE 16 TRUE 26 FALSE
7 TRUE 17 FALSE 27 FALSE
8 FALSE 18 TRUE 28 TRUE
9 FALSE 19 FALSE
10 TRUE 20 TRUE

II MULTIPLE CHOICE QUESTIONS

1 D 11 B 21 A
2 D 12 B 22 D
3 A 13 C 23 A
4 C 14 A 24 B
5 D 15 B 25 D
6 B 16 C 26 A
7 D 17 C 27 A
8 A 18 A 28 B
9 B 19 D 29 B
10 A 20 C

III MULTIPLE CHOICE PROBLEMS

1 C P26.00 P10 + P6 + P2 +(P480,000 / 60,000) = 26.00

2 B P18.00 P10 + P6 + P2 = 18.00

3 C P1,300,000 P26 X 50,000 units 1,300,000.00

4 A P180,000 produced 60,000 units

sold 50,000 units
ending inventory 10,000 units x P18.00 cost per unit 180,000.00

5 B P80,000 produced 60,000 units

sold 50,000 units
ending inventory 10,000 units x P8.00 cost per unit 80,000.00
Factory overhed per unit = P480,000 / 60,000 units = P8.00

6 B P14,000 y2007 y2008 y2009

beginning 0 - 4.00
+ units produced 20 20 20.00
- units sold -20 -16 -24
= ending inventory 0 4 0
Sales 16 units at P11,000 176,000.00
cost of sales :
variable cost 6,000.00
fixed overhead P30,000 / 20 units 1,500.00
7,500.00
units sold 16 120,000.00
gross profit 56,000.00
Less, operating expenses:
variable selling & administrative P125 x 16 = 2,000.00
fixed selling and administrative 40,000.00 42,000.00
Net income 14,000.00

7 C P41,000 Sales 24 units at P11,000 264,000.00

cost of sales :
variable cost 6,000.00
fixed overhead P30,000 / 20 units 1,500.00
7,500.00
units sold 24 180,000.00
gross profit 84,000.00

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Less, operating expenses:

variable selling & administrative P125 x 24 = 3,000.00
fixed selling and administrative 40,000.00 43,000.00
Net income 41,000.00

8 A P8,000 Sales 16 units at P11,000 176,000.00

variable costs
cost of sales 6,000.00
selling & administrative 125.00
6,125.00
units sold 16 98,000.00
contribution margin 78,000.00
Less, fixed costs:
factory overhead 30,000.00
selling and administrative costs 40,000.00 70,000.00
Net income 8,000.00

9 D P47,000 Sales 24 units at P11,000 264,000.00

variable costs
cost of sales 6,000.00
selling & administrative 125.00
6,125.00
units sold 24 147,000.00
contribution margin 117,000.00
Less, fixed costs:
factory overhead 30,000.00
selling and administrative costs 40,000.00 70,000.00
Net income 47,000.00

Production
10 D P17 & P16 under 40,000 under 50,000
variable cost per unit 12.00 12.00
fixed cost per unit
at 40,000 = P200,000 / 40,000 5.00
at 50,000 = P200,000 / 50,000 4.00
total cost per unit 17.00 16.00

11 D P12 & P12 only variable manufacturing costs

Production
12 B P390,000 & P430,000 under 40,000 under 50,000
Sales 40,000 units 1,200,000.00 1,200,000.00
total costs of sales 680,000.00 640,000.00
gross profit 520,000.00 560,000.00
Less Expenses variable selling P2 per unit 80,000.00 80,000.00
fixed selling & administrative 50,000.00 50,000.00
total expenses 130,000.00 130,000.00
net income 390,000.00 430,000.00

Production
13 A P390,000 & P390,000 under 40,000 under 50,000
Sales 40,000 units 1,200,000.00 1,200,000.00
variable costs: Cost of sales 480,000.00 480,000.00
Selling & administrative 80,000.00 80,000.00
560,000.00 560,000.00
contribution margin 640,000.00 640,000.00
less, Fixed expenses Manufacturing 200,000.00 200,000.00
Selling & administrative 50,000.00 50,000.00
total expenses 250,000.00 250,000.00
net income 390,000.00 390,000.00

14 A refer to number 12

15 B Note There was no inventory at January 1, 2007.

P200 decrease Variable costing (P6 x 100 ) 600.00
Absorption costing ( P8 x 100) 800.00
difference (200.00)

16 C P19.00 Cost per unit under AC P5 + P 6 + P1 + (P21000/ 3000) = P19.00

17 A P3,600 Net income per AC 7,800.00

Fixed Factory OH in EI (2,000 x [P18,500 /6,000]) (4,200.00)
Net income per VC 3,600.00

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18 B P4,000 loss Net income per AC 2,000.00

Less, Fixed Factory OH in EI [2,000 x (P18,000/6000)] (6,000.00)
Net loss per VC (4,000.00)
OR
Sales 40,000.00
Variable cost of sales (4000 x P5.00) 20,000.00
Variable Selling Expenses 4,000.00
Total variable costs 24,000.00
CM 16,000.00
Fixed costs manufacturing costs 18,000.00
Fixed selling 2,000.00
Total fixed costs 20,000.00
Net loss (4,000.00)

19 B P4,000 Net income per VC 2,000.00

Add, Fixed FOH in EI [1,000 x (P12,000/6,000)] 2,000.00
Net income per AC 4,000.00
OR
Sales 65,000.00
Cost of sales
Production - variable 5,000 x P7 35,000.00
Production - fixed (P12,000 / 6,000) x 5,000 10,000.00
Total variable costs 45,000.00
Gross Profit 20,000.00
Expenses: Fixed selling 6,000.00
Variable 10,000.00 16,000.00
Net loss 4,000.00

20 B P16.00 P4.00 + P2.00 + P10.00 = 16.00

21 A P10.00 Cost per unit = [P4 + P2 + (P10 x 40%)] = 10.00

22 D (P2,000) Net income per AC 6,000.00

Less, Fixed FOH in EI 2,000 x P4.00 (8,000.00)
Net income (loss) per VC (2,000.00)

23 A P36,000 Fixed cost expensed:

From COGS 6,000 x P4.00 24,000.00
From sellingP18,000 x 2/3 12,000.00

24 A P2,400 greater Variable Absorption

Costing Costing
Sales (300 x P50) 15,000.00 15,000.00
Less, Cost of goods sold
Variable costs (300 x P10) 3,000.00 3,000.00
Fixed FOH (P6,000/500) x P300 - 3,600.00
Total 3,000.00 6,600.00
CM/GP 12,000.00 8,400.00

Less, Fixed Costs/Operating Exp.

Manufacturing fixed costs 6,000.00 -
Variable selling 2,000.00 2,000.00
Fixed selling 4,500.00 4,500.00
Total 12,500.00 6,500.00
Net income (500.00) 1,900.00
Net income per AC 1,900.00
Net loss per VC (500.00)
Net income per AC greater than Net income per VC 2,400.00

25 B P2,000 Ending inventory 200 x P10.00 = 2,000.00

26 C P20,000 Net income per VC 10,000.00

Add, Fixed FOH in ending inventory (P22 -P12) x 1,000 10,000.00
Net income per AC 20,000.00

27 D P20,000 Production 12,500

Sold 10,000
Ending Inventory 2,500 x P8.00 per unit 20,000.00

28 D P25,000 Units in ending inventory 2,500

Cost per unit P8.00 + (P25,000/ 12,500) = P10 x 2,500 = 25,000.00

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29 B P117,500 Cost of sales 10,000 x P8.00 = 80,000.00

Selling & Administrative expense 12,500 x P3.00 = 37,500.00
117,500.00

30 A P35,000 Cost of sales 10,000 x (P25,000 / 12,500) = 20,000.00

Selling and Administrative expense 15,000.00
35,000.00

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Chapter 6 Variable Costing as a Tool to Management Planning

PROBLEMS
6.1 1 Using absorption costing
Direct material 30.00
Direct labor 12.00
Variable overhead 3.00
Fixed overhead (P108,000 / 12,000) 9.00
Total Production 54.00

Absorption Costing Income statement

Sales (10,000 x P110 ) 1,100,000.00
Less, Cost of Sales (10,000 x P54 ) 540,000.00
Gross Profit 560,000.00
Less, Operating Expenses:
Selling & Administrative - Fixed 200,000.00
Selling & Administrative - Variable 40,000.00 240,000.00
Net income 320,000.00

2 Using variable costing

Direct material 30.00
Direct labor 12.00
Variable overhead 3.00
Total Production 45.00

Variable Costing Income statement

Sales (10,000 x P110 ) 1,100,000.00
Less, Variable costs:
Manufacturing costs 10,000 x P45 450,000.00
Selling & Administrative 10,000 x P4 40,000.00 490,000.00
Contribution margin 610,000.00
Less, Fixed costs:
Manufacturing costs 108,000.00
Selling & Administrative 200,000.00 308,000.00
Net income 302,000.00

3 Difference in net income

Per absorption costing 320,000.00
Per variable costing 302,000.00
Difference (2,000 EI x P9 Fixed FFOH) 18,000.00
a When production exceeds sales ( P > S ), net income per AC is greater than
net income per VC as there are Fixed FOH that are inventoried.

6.2 1 Cost per unit under Absorption costing (P90 + [ P450,000 / 20,000 units] ) = P112.50
Sales 17,000 x P200 3,400,000.00
Less, Cost of slaes 17,000 x P112.50 1,912,500.00
Gross Profit 1,487,500.00
Less, Expenses:
Variable selling & adm 17,000 x P22 374,000.00
Fixed selling & adm 500,000.00 874,000.00
Net income 613,500.00

2 Inventory at end 3,000 x P112.50 337,500.00

6.3 Variable costing method Production at

30,000 cans 50,000 cans
Sales ( 30,000 at P15. per unit) 450,000.00 450,000.00
Less Variable costs - Production 30,000 x P7 210,000.00 210,000.00
Contribution margin 240,000.00 240,000.00

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Less Fixed costs

Production 150,000.00 150,000.00
Selling & Administrative 25,000.00 25,000.00
175,000.00 175,000.00
Net income 65,000.00 65,000.00

6.4 Net income per Absorption costing 62,000.00

- FOH in EI [(P45,000 - P41,000) x (P225,000 / 45,000)] 20,000.00
Net income per Variable costing 42,000.00

6.5
Sales 2,000,000.00
Less, Variable costs:
Cost of sales [P1,500,000 - (250,000 x P3.00)] 750,000.00
Operating expenses 125,000.00 875,000.00
Contribution margin 1,125,000.00
Less, Fixed costs:
Manufacturing costs (P1,500,000 - P750,000) 750,000.00
Operating expenses 100,000.00 850,000.00
Net income 275,000.00

6.6 1 ABSORPTION COSTING METHOD

Sales 174,000.00
Less, Cost of sales
Direct materials 44,000.00
Direct labor 36,000.00
Factory overhead 56,000.00
Total manufacturing costs 136,000.00
Less, cost of inventory for 2,000 units
(P136,000 / 16,500) x 2,000 units 16,484.85 119,515.15
Gross Profit 54,484.85
Less, Operating
Variable operating
expensesexpenses:
Selling and marketing expenses 20,000.00
General & Administrative expenses 12,000.00 32,000.00
Net income 22,484.85

2 VARIABLE COSTING METHOD

Sales 174,000.00
Less, Variable costs of sales
Direct materials 44,000.00
Direct labor 36,000.00
Factory overhead 16,000.00
Total manufacturing costs 96,000.00
Less, cost of inventory for 2,000 units
(P96,000 / 16,500) x 2,000 units 11,636.36 84,363.64
Manufacturing contribution margin 89,636.36
Less, Variable operating expenses:
Selling and marketing expenses 10,000.00
General & Administrative expenses 2,000.00 12,000.00
Final Contribution margin 77,636.36
Less, Fixed costs:
Factory overhead 40,000.00
Selling and marketing expenses 10,000.00
General & Administrative expenses 10,000.00 60,000.00
Net income 17,636.36
3 Net income per Variable costing 17,636.36
+ Fixed FOH in ending inventory 2,000 x (P40,000 /16,500) 4,848.48
= Net income per absorption costing 22,484.84

The difference is due to the treatment in the Fixed FOH. The full amount of P40,000 was charged to the
revenues under variable costing while only P35,151.52 (P40,000 /16,500 x 14,500) was charged to the
revenues under the absorption costing. (P40,000 - P35,151.52)

6.7 Variable Absorption

Costing Costing
Direct materials 3.00 3.00
Direct labor 2.00 2.00
Variable overhead 1.00 1.00

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Fixed overhead (P30,000 /100,000) - 3.00

Total cost per unit 6.00 9.00
Ending inventory in units 25,000 25,000
1 Cost of ending inventory 150,000.00 225,000.00
Sales in units 75,000 75,000
2 Cost of sales 450,000.00 675,000.00
Sales 2,100,000.00 2,100,000.00
Less, Cost of sales 450,000.00 675,000.00
Fixed factory overhead 300,000.00 -
Selling & Administrative -variable 75,000.00 75,000.00
Selling & Administrative -fixed 160,000.00 160,000.00
Total 985,000.00 910,000.00
3 Net income 1,115,000.00 1,190,000.00

6.8 Variable Absorption

Costing Costing
Direct materials 80,000.00 80,000.00
Direct labor 100,000.00 100,000.00
Factory overhead - variable 72,000.00 72,000.00
Factory overhead - fixed - 60,000.00
Total cost 252,000.00 312,000.00
Units produced 12,000 12,000
1 cost per unit 21.00 26.00
Units sold 10,000 10,000
2 Cost of goods sold 210,000.00 260,000.00
Net income per variable costing 40,000.00
- Fixed factory overhead in beginning inventory (P60,000/12,000) x 2,000 (10,000.00)
+ Fixed factory overhead in ending inventory (2,000 + 12,000 - 10,000) x P5.00 20,000.00
Net income per absorption costing 50,000.00

6.9
1 Absorption costing method Year 1 Year 2
Sales 260,000.00 460,000.00
Less Cost of Sales
Beginning inventory - 70,000.00
Add, Current costs:
Variable Manufacturing costs at P7.50 150,000.00 135,000.00
Fixed costs 50,000.00 54,000.00
Add, Current costs 200,000.00 189,000.00
Total Available for sale 200,000.00 259,000.00
Less, Ending inventory * 70,000.00 21,000.00 **
Cost of sales 130,000.00 238,000.00
Gross profit 130,000.00 222,000.00
Selling and administrative expense 45,000.00 75,000.00
Net income 85,000.00 147,000.00
* 7,000 x (P200,000/20,000) = P70,000
** 2,000 x (P189,000/18,000) = P21,000

2 Variable costing method

Sales 260,000.00 460,000.00
Less, Variable costs
Cost of sales
Beginning inventory - 52,500.00
Current costs 150,000.00 135,000.00
Available for sale 150,000.00 187,500.00
Ending inventory * 52,500.00 15,000.00 **
Cost of sales 97,500.00 172,500.00
Variable expenses (P45,000 x 40%) 18,000.00 30,000.00 (P75,000 x 40%)
Total variable costs 115,500.00 202,500.00
Contribution margin 144,500.00 257,500.00
Less, Fixed costs
Factory overhead 50,000.00 54,000.00
Selling and Administrative (P45,000 x 60%) 27,000.00 45,000.00 (P75,000 x 60%)

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Total fixed costs 77,000.00 99,000.00

Net income 67,500.00 158,500.00
* 7,000 x (P150,000/20,000) = P52,500
** 2,000 x (P135,000/18,000) = P15,000

3 Difference in Net income

Net income per absorption costing 85,000.00 147,000.00
Net income per variable costing 67,500.00 158,500.00
Difference 17,500.00 (11,500.00)

Fixed factory overhead in Ending inventory

Per absorption costing 70,000.00 21,000.00
Per variable costing 52,500.00 15,000.00
17,500.00 6,000.00
Fixed factory overhead in Beginning inventory
Per absorption costing - 70,000.00
Per variable costing - 52,500.00
- 17,500.00
Total Difference 17,500.00 (11,500.00)

OR
Net income per Absorption costing 85,000.00 147,000.00
+ Fixed factory overhead in beg. Inventory
Y1 -
Y2 7000 x P2.50 17,500.00
- Fixed factory overhead in end. Inventory
Y1 7000 x P2.50 (17,500.00)
Y2 2000 x P3.00 (6,000.00)
Net income per Variable costing 67,500.00 158,500.00

6.10 1 Variable costing method Year 1 Year 2

Sales (14,000 @ P45) (16,000 @ P45) 630,000.00 720,000.00
Less Variable costs
Cost of goods sold
Beginning inventory, at std., P25 - 75,000.00
Current costs at std., at P25 425,000.00 350,000.00
Total 425,000.00 425,000.00
Ending inventory, at std. P25 75,000.00 25,000.00
Variable cost of goods sold 350,000.00 400,000.00
Variable selling and Adm., Expenses - -
Total Variable costs 350,000.00 400,000.00
Contribution Margin 280,000.00 320,000.00

Less, Fixed Costs:

Factory overhead 120,000.00 120,000.00
Selling & Administrative Expenses - -
Total Fixed costs 120,000.00 120,000.00
Operating income 160,000.00 200,000.00

2 Absorption cosing method

Sales (14,000 @ P45) (16,000 @ P45) 630,000.00 720,000.00
Less Cost of goods sold
Beginning inventory, at std., P33* - 99,000.00
Current costs at std., at P33 561,000.00 462,000.00
Total 561,000.00 561,000.00
Ending inventory, at std. P33 99,000.00 33,000.00
Variable cost of goods sold 462,000.00 528,000.00
Gross Profit at standard 168,000.00 192,000.00
Production volume variance - Fav (Unfav)** 16,000.00 (8,000.00)
Gross Profit at Actual 184,000.00 184,000.00
Less Operating Expenses:
Selling & Administrative Expenses - -
Operating income 184,000.00 184,000.00

* Standard costs : Variable costs 25.00

Fixed costs (P120,000 / 15,000) 8.00
33.00

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** Production volume variance:

Year 1 17,000 - 15,000 x P8 16,000.00 Favorable
Year 2 14,000 - 15,000 x P8 8,000.00 Unfavorable

3 Reconciliation of net income Year 1 Year 2 total

Net income per variable costing 160,000.00 200,000.00 360,000.00
Fixed factory overhead costs in:
Beginning inventory
Y 1 0 -
Y2 3000 x P8 (24,000.00)
Ending inventory
Y1 3000 x P8 24,000.00
Y2 1000 x P8 8,000.00 8,000.00
Net income per absorption costing 184,000.00 184,000.00 368,000.00

6.11
1 Standard costs Variable Absorption
Costing Costing
Direct materials 3.00 3.00
Direct labor 6.00 6.00
Variable overhead 1.00 1.00
Fixed overhead - 1.10
10.00 11.10
2 Units sold* Sales (20,000 + 110,000 - 12,000 ) 118,000.00 118,000.00
Cost of goods sold 1,180,000.00 1,309,800.00
Less, Prod. volume variance (100,000 - 110,000 ) x P1.10 - (11,000.00) Fav.
Cost of goods sold at actual 1,180,000.00 1,298,800.00

6.12
Direct materials and direct labor 500,000.00
Factory overhead 100,000.00
Total Manufacturing costs 600,000.00
Units produced 1,000.00
Cost per unit 600.00
Ending finished goods in units 200.00
Cost of ending finished goods 120,000.00

6.13
No. 1 No. 2
Fixed manufacturing costs 44,000.00 -
Variable manufacturing costs 12,000.00 12,000.00
Direct materials 30,000.00 30,000.00
Direct labor 24,000.00 24,000.00
Total costs a 110,000.00 66,000.00
Units produced b 2,200 2,200
cost per unit ( a / b) c 50.00 30.00
Units of ending inventory d 300.00 300.00
cost of ending inventory (c x d) e 15,000.00 9,000.00

6.14
a Absorption costing
Sales 256,000.00
Less, cost of goods sold
Beginning inventory -
Current Production 160,000.00
Available for sale 160,000.00
Ending inventory 2,000 x P16 (32,000.00) 128,000.00
Gross Profit 128,000.00
Less Expenses 80,000.00
Net income 48,000.00

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b Variable costing
Sales 256,000.00
Less, Cost of goods sold
Variable manufacturing costs 96,000.00
Less, Ending inventory 2,000 x P9.60 (19,200.00) 76,800.00
Contribution Margin 179,200.00
Less, Fixed costs:
Manufacturing costs 64,000.00
Selling & Administrative Expenses 80,000.00 144,000.00
Net income 35,200.00
OR
Net income per absorption costing 48,000.00
Fixed factory overhead in Ending inventory (P6.40 x 2,000) (12,800.00)
Net income per variable costing 35,200.00

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