Cost Accounting - 01

VARIABLE COSTING
Ricalyn E. Sumpay, CPA
Instructor
 Absorption Costing

-is a costing method that includes all

manufacturing costs – direct materials,
direct labor, variable and fixed factory
overhead – in the cost of a unit of product.
It treats fixed factory overhead (FFOH) as
a product cost.
-also known as full costing
 PRODUCT
vs.
PERIOD COST
A product cost is an
inventoriable cost that is
subject to allocation between
sold and unsold units.
EXAMPLE

UNSOLD UNITS
Asset ( as Inventory)

SOLD UNITS
Expense
(as Cost of Goods Sold)
A period cost is a cost that is
charged as expense against
income, regardless whether
the expense generated revenue
or not. No allocation is
necessary; current income is
reduced by the full amount of
the period cost.
EXAMPLE

FULLY EXPENSED in
the period incurred,
regardless of sales
 ABSORPTION
vs.
VARIABLE COSTING
1. Rationale
Supporters of variable costing argue that FFOH
costs are incurred whether or not production
occurs. Thus, FFOH costs do not have future
service potential, should be truly expensed in the
same period incurred.
Supporters or absorption costing believe that
all manufacturing costs of variable and fixed
costs are necessary for production to take
place and hence should not be ignored in
determining product cost.
2. INVENTORIES
Since FFOH costs are simply expensed (i.e.,
period cost) under the variable costing, the
peso amount generated from variable costing
is always lower than the peso amount of
inventories under absorption costing.
3. ACCEPTABILITY
Since treating FFOH as part of inventory cost
is consistent with accounting standards, only
absorption costing is acceptable for financial
reporting and tax purposes. Variable costing,
which violates the ‘matching principle’’, is
acceptable only for internal use by
management.
 NOTE:
Matching principle is an accounting principle
that calls for the recognition of expense by
matching it with the related revenue in the same
accounting period. It supports the treatment of
cost of sales as expense only when related units
have been sold.
 4. INCOME STATEMENT
An income statement prepared under absorption
costing distinguishes between production and
other costs. Production costs pertaining to sold
units are first deducted from sales to arrive at
gross profit, and then other costs are deducted to
obtain net income.
Under variable costing, the income statement
distinguishes between variable and fixed
costs. All variable costs are first deducted
from revenue to arrive at the contribution
margin, and then fixed costs are deducted to
obtain profit.
5. INCOME COMPUTATION
Variable costing income may differ from
absorption costing income because of the
difference in the amount of FFOH recognized
as expense during a period. This is actually
caused by the difference between production
and sales.
In the long run, however, both methods would
yield the same results since sales cannot
continuously exceed production, nor
production can continuously exceed sales.

NOTE: the term “income” in many

accounting literatures is liberally used to mean
“profit”
 EXERCISES: ABSORPTION and
VARIABLE COSTING
Adriel Company makes state-of-the-art toy
car. Each toy car sells for P 1,000 each. Data
for 2016’s operations are as follow:
Units:
Beginning Inventory 5
Production 80
Ending Inventory 15
Variable Costs:
Direct Materials P 24,000
Direct Labor 16,000
Factory Overhead 8,000
Selling and Administrative 4,000

Fixed Costs:
Factory Overhead P 20,000
Selling and Administrative 2,000
REQUIRED:
1. Determine the inventory cost per unit
under:
A. Absorption costing
B. Variable Costing
2. Determine the cost of ending inventory
under:
A. Absorption costing
B. Variable Costing
3. Prepare income statements under (A)
absorption costing and (B) variable costing.
4. How much is the difference in income
between the costing methods?
5. What causes the difference in income
between the costing methods?
 RECONCILIATION OF
INCOME UNDER
ABSORPTION COSTING &
VARIABLE COSTING
Under variable costing, FFOH costs are fully
expensed as incurred, while under absorption
costing, FFOH costs are expensed in the
period when the units to which such FFOH
relates are sold.
 Patterns based on production and
sales:
 Pattern No 1. When production equals sales, there
is no change in inventory. FFOH expensed under
absorption costing equals FFOH expensed under
variable costing.

PRODUCTION = SALES Income(Absorption)

= Income ( Variable)
 Pattern No. 2 : When production is greater
than sales, there is an increase in inventory.
FFOH expensed under absorption costing
is less than FFOH expensed under variable
costing. Therefore, absorption income
greater than variable income.

PRODUCTION > SALES Income

(Absorption) > Income ( Variable)
 Pattern No. 3: When production is less
than sales, there is a decrease in inventory.
FFOH expensed under absorption costing
is greater than FFOH expensed under
variable costing.

PRODUCTION < SALES Income (

Absorption) < Income (Variable)
 Basic Formula :
Income = Inventory x unit FFOH
Where:
Inventory = Ending Inventory – Beginning
Inventory
Inventory = Units Produced – Units Sold
 Alternative Formula:
Income, Absorption costing P xxx
Add: FFOH in beginning inventory xxx
Total P xxx
Less: FFOH in ending inventory (xxx)
Income Variable costing P xxx
WRAP-UP EXERCISES
1. The inventory costing method that treats
direct manufacturing costs and indirect
manufacturing costs, both variable and
fixed, as inventoriable costs is called
a. Variable costing
b. Absorption costing
c. Conversion costing
d. Perpetual inventory
WRAP-UP EXERCISES
1. The inventory costing method that treats
direct manufacturing costs and indirect
manufacturing costs, both variable and
fixed, as inventoriable costs is called
a. Variable costing
b. Absorption costing
c. Conversion costing
d. Perpetual inventory
WRAP-UP EXERCISES
2. Which of the following statements is correct?
a. In a variable costing income statement, sales revenue is
typically higher that in absorption costing income statement.
b. When production is not equal to sales, income under
absorption costing differs from income under variable costing
due to the difference in the treatment (product cost and period
cost) of the fixed overhead cost under the two costing
methods.
c. In a variable costing system, fixed overhead cost is included as
part of the cost of inventory.
d. In an absorption costing system, fixed overhead cost is treated
as period cost.
WRAP-UP EXERCISES
2. Which of the following statements is correct?
a. In a variable costing income statement, sales revenue is
typically higher that in absorption costing income statement.
b. When production is not equal to sales, income under
absorption costing differs from income under variable
costing due to the difference in the treatment (product cost
and period cost) of the fixed overhead cost under the two
costing methods.
c. In a variable costing system, fixed overhead cost is included as
part of the cost of inventory.
d. In an absorption costing system, fixed overhead cost is treated
as period cost.
WRAP-UP EXERCISES
3. Which of the following statements is true?
a. Depreciation expense is always a product cost.
b. Depreciation expense is always a period cost.
c. Selling and administrative costs, whether
variable or fixed, is always treated as period
costs under both the absorption and variable
costing systems.
d. Income under variable costing is always
greater than income under variable costing.
WRAP-UP EXERCISES
3. Which of the following statements is true?
a. Depreciation expense is always a product cost.
b. Depreciation expense is always a period cost.
c. Selling and administrative costs, whether
variable or fixed, is always treated as
period costs under both the absorption and
variable costing systems.
d. Income under variable costing is always
greater than income under variable costing.
WRAP-UP EXERCISES
4. If production is less than sales (in units), then
absorption costing net income will generally be
a. Greater than variable costing net income
b. Less than variable costing net income
c. Equal to variable costing net income
d. Less than expected
WRAP-UP EXERCISES
4. If production is less than sales (in units), then
absorption costing net income will generally be
a. Greater than variable costing net income
b. Less than variable costing net income
c. Equal to variable costing net income
d. Less than expected
WRAP-UP EXERCISES
5. If a firm uses variable costing,
a. Its product costs include variable
selling and administrative costs.
b. Its profits fluctuate with sales
c. Its product costs per unit changes
because of changes in the number of
units produced.
d. None of the above.
WRAP-UP EXERCISES
5. If a firm uses variable costing,
a. Its product costs include variable
selling and administrative costs.
b. Its profits fluctuate with sales.
c. Its product costs per unit changes
because of changes in the number of
units produced.
d. None of the above.
WRAP-UP EXERCISES
6. Which of the following statements regarding
absorption and variable costing is correct?
a. Absorption costing results in higher income when
finished goods inventory increases.
b. Variable manufacturing costs are lower under
absorption costing.
c. Overhead costs are treated in the same manner
under both variable and absorption costing
methods.
d. Profits are always the same under the two costing
methods.
WRAP-UP EXERCISES
6. Which of the following statements regarding
absorption and variable costing is correct?
a. Absorption costing results in higher income
when finished goods inventory increases.
b. Variable manufacturing costs are lower under
absorption costing.
c. Overhead costs are treated in the same manner
under both variable and absorption costing
methods.
d. Profits are always the same under the two costing
methods.
WRAP-UP EXERCISES
7. Which of the following cost items is not correctly
accounted for as a product cost under absorption and
variable costing?
ABSORPTION VARIABLE
a. Freight –out NO NO

b. Straight-line YES YES

depreciation of
factory equipment
c. Factory supplies YES YES

d. Direct materials YES YES

WRAP-UP EXERCISES
7. Which of the following cost items is not correctly
accounted for as a product cost under absorption and
variable costing?
ABSORPTION VARIABLE
a. Freight –out NO NO

b. Straight-line YES YES

depreciation of
factory equipment
c. Factory supplies YES YES

d. Direct materials YES YES

WRAP-UP EXERCISES
8. Which of the following must be known about a
production process to institute a variable costing
system?
a. The direct and indirect costs related to production,
b. The variable and fixed components of
manufacturing costs.
c. The capacity level
d. None of the above
WRAP-UP EXERCISES
8. Which of the following must be known about a
production process to institute a variable costing
system?
a. The direct and indirect costs related to production.
b. The variable and fixed components of
manufacturing costs.
c. The capacity level
d. None of the above
WRAP-UP EXERCISES
9. What costs are treated as product
cost under variable costing?
a. All variable costs
b. All direct costs only
c. All manufacturing costs
d. Only variable production costs
WRAP-UP EXERCISES
9. What costs are treated as product
cost under variable costing?
a. All variable costs
b. All direct costs only
c. All manufacturing costs
d. Only variable production costs
 WRAP-UP EXERCISES
10. On the variable costing income statement,
the difference between “the contribution
margin” and “income before income tax” is
equal to
a. The total operating expenses
b. The total fixed cost
c. Fixed selling and administrative expenses
d. The total variable costs
 WRAP-UP EXERCISES
10. On the variable costing income statement,
the difference between “the contribution
margin” and “income before income tax” is
equal to
a. The total operating expenses
b. The total fixed cost
c. Fixed selling and administrative expenses
d. The total variable costs
 WRAP-UP EXERCISES
11. Under variable costing, all fixed costs are expensed
during the current period because
a. Fixed costs are usually immaterial in amount
b. Fixed costs are non-controllable costs
c. Fixed costs are incurred whether or not there is
production, so it is not proper to allocate these costs to
production and defer a current cost of doing business.
d. Allocation of fixed costs is usually done arbitrarily and
could lead to erroneous decision by management
 WRAP-UP EXERCISES
11. Under variable costing, all fixed costs are expensed
during the current period because
a. Fixed costs are usually immaterial in amount
b. Fixed costs are non-controllable costs.
c. Fixed costs are incurred whether or not there is
production, so it is not proper to allocate these costs
to production and defer a current cost of doing
business.
d. Allocation of fixed costs is usually done arbitrarily and
could lead to erroneous decision by management.
 WRAP-UP EXERCISES
12 Which of the following statements is incorrect?
a. In a variable costing income statement, variable selling and
administrative expenses are used both in the computation of
contribution margin and operating income.
b. When using a variable costing system, the contribution margin
(CM) discloses the excess of revenues over variable costs.
c. In an income statement prepared as an internal report using the
variable costing method, fixed FOH is used in the computation of
operating income and contribution margin.
d. Using absorption costing method, fixed manufacturing overhead
costs are best described as indirect product cost.
 WRAP-UP EXERCISES
12 Which of the following statements is incorrect?
a. In a variable costing income statement, variable selling and
administrative expenses are used both in the computation of
contribution margin and operating income.
b. When using a variable costing system, the contribution margin
(CM) discloses the excess of revenues over variable costs.
c. In an income statement prepared as an internal report using
the variable costing method, fixed FOH is used in the
computation of operating income and contribution margin.
d. Using absorption costing method, fixed manufacturing overhead
costs are best described as indirect product cost.
 WRAP-UP EXERCISES
13. Income under absorption costing may differ from income
under variable costing. The difference in income between the
two costing methods is equal to the change in the quantity of
all units
a. Produced multiplied by the variable manufacturing cost
per unit
b. Sold multiplied by the fixed factory overhead cost per unit.
c. In inventory multiplied by the fixed factory overhead cost
per unit.
d. Sold multiplied by the selling price per unit
 WRAP-UP EXERCISES
13. Income under absorption costing may differ from income
under variable costing. The difference in income between the
two costing methods is equal to the change in the quantity of
all units
a. Produced multiplied by the variable manufacturing cost
per unit
b. Sold multiplied by the fixed factory overhead cost per unit.
c. In inventory multiplied by the fixed factory overhead
cost per unit.
d. Sold multiplied by the selling price per unit
 WRAP-UP EXERCISES
14. Net income computed using absorption costing can be
reconciled to net income computed using variable costing by
computing the difference between
a. The gross profit under absorption costing and
contribution margin under variable costing
b. The product costs per unit under the two costing
methods
c. Inventoried fixed factory overhead costs in the beginning
and ending finished goods inventories.
d. The selling prices under the two costing methods.
 WRAP-UP EXERCISES
14. Net income computed using absorption costing can be
reconciled to net income computed using variable costing by
computing the difference between
a. The gross profit under absorption costing and
contribution margin under variable costing
b. The product costs per unit under the two costing
methods
c. Inventoried fixed factory overhead costs in the
beginning and ending finished goods inventories.
d. The selling prices under the two costing methods.
 WRAP-UP EXERCISES
15. A company prepares income statements using both
the absorption and variable costing methods. During the
year, the income amounts under the two methods are not
equal. The difference in income figures could have been
due to the following except
a. A change in the finished good inventory.
b. A change in the selling price of the products
c. An excess of production volume over sales volume.
d. An excess of sales volume over production volume.
 WRAP-UP EXERCISES
15. A company prepares income statements using both
the absorption and variable costing methods. During the
year, the income amounts under the two methods are not
equal. The difference in income figures could have been
due to the following except
a. A change in the finished good inventory.
b. A change in the selling price of the products
c. An excess of production volume over sales volume.
d. An excess of sales volume over production volume.
WRAP-UP EXERCISES
16. If production is higher than sales, then
absorption costing income is expected to be
a. Lower than variable costing income
b. Higher than variable costing income
c. Equal to the variable costing income
d. Incomparable with variable costing
income.
WRAP-UP EXERCISES
16. If production is higher than sales, then
absorption costing income is expected to be
a. Lower than variable costing income
b. Higher than variable costing income
c. Equal to the variable costing income
d. Incomparable with variable costing
income.
WRAP-UP EXERCISES
17. Black Company produced 10, 000 units and sold 9, 000
units. Fixed manufacturing overhead is P20, 000, and
variable manufacturing overhead costs were P3 per unit.
Which of the following describes the net income under the
absorption costing method?
a. P2, 000 more than net income under variable costing
method.
b. P5, 000 more than net income under variable costing
method.
c. P2, 000 less than net income under variable costing
method.
d. P5, 000 less that net income under variable costing
method.
WRAP-UP EXERCISES
17. Black Company produced 10, 000 units and sold 9,
000 units. Fixed manufacturing overhead is P20, 000, and
variable manufacturing overhead costs were P3 per unit.
Which of the following describes the net income under the
absorption costing method?
a. P2, 000 more than net income under variable
costing method.
b. P5, 000 more than net income under variable costing
method.
c. P2, 000 less than net income under variable costing
method.
d. P5, 000 less that net income under variable costing
method.
 WRAP-UP EXERCISES
18. Green Company has operating income of P50 ,000 using
direct costing for a given period. The beginning and ending
inventories for that period were 13,000 units and 18, 000 units,
respectively. If the factory overhead application rate is P2 per
unit, then what is the operating income using the absorption
costing?
a. P70, 000
b. P60, 000
c. P50, 000
d. P40, 000
 WRAP-UP EXERCISES
18. Green Company has operating income of P50 ,000 using
direct costing for a given period. The beginning and ending
inventories for that period were 13,000 units and 18, 000 units,
respectively. If the factory overhead application rate is P2 per
unit, then what is the operating income using the absorption
costing?
a. P70, 000
b. P60, 000
c. P50, 000
d. P40, 000
WRAP-UP EXERCISES
19. Violet Company had 16, 000 units in the beginning
inventory During the year, the company’s variable
production costs were P6 per unit and its fixed
manufacturing overhead costs were P4 per unit. The
company’s net income for the year was P24, 000 lower
under absorption costing than it was under variable costing.
How many units does the company have in its ending
inventory?
a. 22, 000 units
b. 10, 000 units
c. 6, 000 units
d. 4, 000 units
 WRAP-UP EXERCISES
19. Violet Company had 16, 000 units in the beginning
inventory During the year, the company’s variable production
costs were P6 per unit and its fixed manufacturing overhead
costs were P4 per unit. The company’s net income for the year
was P24, 000 lower under absorption costing than it was under
variable costing. How many units does the company have in its
ending inventory?
a. 22, 000 units
b. 10, 000 units
c. 6, 000 units
d. 4, 000 units
WRAP-UP EXERCISES
20. Pink Co. had a net income of P85, 500 using variable
costing and net income of P90,000 using absorption
costing. Total fixed manufacturing overhead cost was
P150, 000, and production was 100, 000 units.
How did the inventory level change during the year?
a. 3, 000 units increase
b. 4, 500 units increase
c. 3, 000 units decrease
d. 4, 500 units decrease
WRAP-UP EXERCISES
22. Pink Co. had a net income of P85, 500 using variable
costing and net income of P90,000 using absorption
costing. Total fixed manufacturing overhead cost was
P150, 000, and production was 100, 000 units.
How did the inventory level change during the year?
a. 3, 000 units increase
b. 4, 500 units increase
c. 3, 000 units decrease
d. 4, 500 units decrease
WRAP-UP EXERCISES
21. TRUE or FALSE

Variable costing income

fluctuates with
production and does not
react to changes in sales.
WRAP-UP EXERCISES
21. TRUE or FALSE

Variable costing income

fluctuates with
production and does not
react to changes in sales.
 WRAP-UP EXERCISES
22. A company produces a single product. Production is done only when orders
are received from customers. Thus, no inventory is kept at the end of the period.
For the last period, the following data were available:

Sales P32, 000

Materials 7, 240
Labor 4, 840
Rent ( 90% factory, 10% office) 2,400
Depreciation (80% factory, 20% office) 2, 000
Supervision ( 2/3 factory, 1/3 office) 1, 200
Salesmen’s salaries and commission(1/4 variable, 2/3 fixed) 1, 040
Insurance (60% factory, 40% office) 960
Office supplies 600
Advertising 560
 WRAP-UP EXERCISES
22. If the company uses absorption
costing, the cost of goods sold
during the period was
a. P18, 640
b. P17, 216
c. P20, 840
d. P12, 080
 WRAP-UP EXERCISES
22. If the company uses absorption
costing, the cost of goods sold
during the period was
a. P18, 640
b. P17, 216
c. P20, 840
d. P12, 080
 WRAP-UP EXERCISES
23. When 10, 000 units are produced,
fixed costs are P14 per unit. Therefore,
when 20, 000 units are produced, fixed
costs
a. Will increase to P28 per unit
b. Will remain at P14 per unit
c. Will decrease to P7 per unit
d. Will total P280, 000
 WRAP-UP EXERCISES
23. When 10, 000 units are produced,
fixed costs are P14 per unit. Therefore,
when 20, 000 units are produced, fixed
costs
a. Will increase to P28 per unit
b. Will remain at P14 per unit
c. Will decrease to P7 per unit
d. Will total P280, 000
 WRAP-UP EXERCISES
24. When 10, 000 units are produced,
variable costs are P6 per unit.
Therefore, when 20, 000 units are
produced, variable costs
a. Will total P120, 000
b. Will total P60, 000
c. Per unit will increase to P12 per unit
d. Per unit will decrease to P3 per unit
 WRAP-UP EXERCISES
24. When 10, 000 units are produced,
variable costs are P6 per unit.
Therefore, when 20, 000 units are
produced, variable costs
a. Will total P120, 000
b. Will total P60, 000
c. Per unit will increase to P12 per unit
d. Per unit will decrease to P3 per unit
 WRAP-UP EXERCISES
25. Kirsten Manufacturing provided the
following information for last month.
Sales P10, 000
Variable costs 3, 000
Fixed costs 5, 000
Operating income P2, 000
 WRAP-UP EXERCISES
If sales double next month, what is the
projected operating income?
a. P4, 000
b. P7, 000
c. P9, 000
d. 12, 000
 WRAP-UP EXERCISES
If sales double next month, what is the
projected operating income?
a. P4, 000
b. P7, 000
c. P9, 000
d. 12, 000
 WRAP-UP EXERCISES
26. MD Santos Corporation’s 2019 manufacturing costs
were as follows:
Prime costs P560, 000
Variable manufacturing overhead 80, 000
Straight-line depreciation of factory building 60, 000
Factory supervisor’s salary( P8, 000 per month)96, 000
Other fixed factory overhead 40, 000
 WRAP-UP EXERCISES
What amount should be considered
product cost for external reporting
purposes?
a. P680, 000
b. P196, 000
c. P640, 000
d. P836, 000
 WRAP-UP EXERCISES
What amount should be considered
product cost for external reporting
purposes?
a. P680, 000
b. P196, 000
c. P640, 000
d. P836, 000
 WRAP-UP EXERCISES
27. Redillas Corporations 2019 manufacturing costs were as
follows:
Prime costs P400,000
Straight-line depreciation of factory equipment 60, 000
Straight-line depreciation of factory building 40, 000
Salesmen’s commission based on sales 20, 000
Janitor’s salaries for cleaning factory premises ` 12, 000
Straight-line depreciation for delivery van 15, 000
 WRAP-UP EXERCISES
How much of these costs should be
inventoried for external reporting
purposes?
a. P500, 000
b. P512, 000
c. P547, 000
d. P400, 000
 WRAP-UP EXERCISES
How much of these costs should be
inventoried for external reporting
purposes?
a. P500, 000
b. P512, 000
c. P547, 000
d. P400, 000
 WRAP-UP EXERCISES
28. During the year, Apduhan
Corporation produced 500 units of a
new product. The new product’s
variable and fixed manufacturing costs
per unit were P5 and P3, respectively.
At the end of the period, the new
product’s inventory consisted of 80
units.
 WRAP-UP EXERCISES
What would be the change on the peso
amount of inventory at the end of the
period if absorption costing were used
instead of variable costing?
a.P640 increase
b. P400 increase
c. P240 increase
d. P0
 WRAP-UP EXERCISES
What would be the change on the peso
amount of inventory at the end of the
period if absorption costing were used
instead of variable costing?
a.P640 increase
b. P400 increase
c. P240 increase
d. P0
 WRAP-UP EXERCISES
30. Malou&Wang Co. produces and
sells boxed choco cookies. There are
100 pieces of cookies per box.
The following income statement shows
the results of Deveza’s first year of
operations. This income statement was
the one included in the company’s
annual report to the stockholders:
 WRAP-UP EXERCISES
Sales (600 boxes at P25 per box) P15, 000
Less cost of goods sold(600 boxes at P16
per box) 9, 600
Gross margin P5, 400
Less selling and administrative expense
2, 400
Income P3, 000
 WRAP-UP EXERCISES
Variable selling and administrative expenses
is P1.80 per box.
During the year, the company produced 750
boxes. Variable production costs is P10.50
per box and fixed manufacturing overhead
costs totaled P4,125.
 WRAP-UP EXERCISES
What is the company’s variable costing net
income?
a. P2, 175
b. P3, 000
c. P7, 620
d. P5, 400
 WRAP-UP EXERCISES
What is the company’s variable costing net
income?
a. P2, 175
b. P3, 000
c. P7, 620
d. P5, 400
 WRAP-UP EXERCISES
31. A cost that would be included in product
costs under both absorption costing and
variable costing would be:
a. Supervisory salaries
b. Equipment depreciation
c. Variable manufacturing costs
d. Variable selling expenses
 WRAP-UP EXERCISES
31. A cost that would be included in product
costs under both absorption costing and
variable costing would be:
a. Supervisory salaries
b. Equipment depreciation
c. Variable manufacturing costs
d. Variable selling expenses
 WRAP-UP EXERCISES
32. Last year, fixed manufacturing overhead
was P30, 000, variable production costs
were P48, 000, fixed selling and
administration costs were P20, 000 and
variable selling and administrative were P9,
600. There was no beginning inventory.
During the year, 3, 000 units were produced
and 2, 400 units were sold at a price of P40
per unit.
 WRAP-UP EXERCISES
Under variable costing,
a. Profit would be P6, 000
b. Profit would be P4, 000
c. Loss would be P2, 000
d. Loss would be P4, 400
 WRAP-UP EXERCISES
Under variable costing,
a. Profit would be P6, 000
b. Profit would be P4, 000
c. Loss would be P2, 000
d. Loss would be P4, 400
 WRAP-UP EXERCISES
33. During the last year, Hansen Company
had profit under absorption costing that was
P5, 500 lower than its income under
variable costing. The company sold 9, 000
units during the year, and its variable costs
were P10 per unit, of which P6 was variable
selling expense.
 WRAP-UP EXERCISES
If fixed production costs is P5 per unit under
absorption costing every year, then how
many units did the company produce during
the year?
a. 7,625 units
b. 8, 450 units
c. 10, 100 units
d. 7, 900 units
 WRAP-UP EXERCISES
If fixed production costs is P5 per unit under
absorption costing every year, then how
many units did the company produce during
the year?
a. 7,625 units
b. 8, 450 units
c. 10, 100 units
d. 7, 900 units
 Problem –solving :
During Floppy Company’s
first two years of operations,
the company reported net
operating income as follows
(absorption costing basis):
 Problem –solving :
Year 1 Year 2

Sales (at P50 per unit) P1, 000, 000 P1, 500, 000

Less cost of goods sold:

Beg. Inventory 0 ` 170, 000

Add cost of goods 850, 000 850, 000

manufactured (at P34 per
unit)
Goods available for sale 850, 000 1, 020, 000

Less ending inventory (at 170, 000 0

P34 per unit)
Cost of goods sold P680, 000 1, 020, 000
 Problem –solving :
Year 1 Year 2

Gross margin 320, 000 480, 000

Less selling and 310, 000 340 ,000

administrative expenses

Net operating income P 10, 000 P140, 000

Note: For selling and administrative
expenses

P 3 per unit variable,

P250, 000 fixed each
year.
Computation of the company’s P34
unit product cost:
Direct materials P8
Direct labor 10
Variable manufacturing overhead 2
Fixed manufacturing overhead
(P350, 000/ 25, 000 units) 14
Unit product cost P34
Computation of the company’s P34
unit product cost:
Direct materials P8
Direct labor 10
Variable manufacturing overhead 2
Fixed manufacturing overhead
(P350, 000/ 25, 000 units) 14
Unit product cost P34
Production and sales data for the
two year period were given below:

Year 1 Year 2
Units produced 25, 000 25, 000
Units sold 20, 000 30, 000
Required:

1. Prepare an income statement for each

year in the contribution margin format
using variable costing.
2. Reconcile the absorption costing and
variable costing net operating income
figures for each year.
ADVANTAGES OF USING VARIABLE
COSTING
1. Variable costing reports are simpler and
more understandable.
2. The problems involved in allocating fixed
costs are eliminated.
3. Data needed for break-even and cost-
volume-profit analyses are readily
available.
4. Variable costing is more compatible with
the standard cost accounting system.

5. Variable costing reports provide useful

information for pricing decisions and other
problems encountered by management.
 DISADVANTAGES OF USING
VARIABLE COSTING
1. Variable costing is not in accordance with GAAP ;
hence, it is not acceptable for external reporting.
2. Segregation of costs into fixed and variable might
be difficult.
3. The matching principle is violated by using
variable costing, which excludes FFOH from
product costs and charges the same as period costs
regardless of production and sales.
4. With variable costing, inventory costs and
other related accounts, such as working capital,
current ratio, and acid – test ratio are
understated because of the exclusion of FFOH
in the computation of product cost.