CHAPTER 4

VARIABLE COSTING
[Problem 1]
1. Direct materials
Direct labor
Var OH
FxOH (P4,000,000/1,000)
Unit product costs
2.
Sales (800 x P12,000)
Var CGS (800 x P3,100)
Fixed OH (800 x P4,000)
Variable exp (800 x P200)
Fixed exp
Operating income
3.

AC
P1,200
1,400
500
4,000
P7,100

VC
P1,200
1,400
500
P3,100

AC
P9,600,000
(2,480,000)
(3,200,000)
( 160,000)
(2,000,000)
P1,760,000

VC
P9,600,000
(2,480,000)
(4,000,000)
( 160,000)
(2,000,000)
P 960,000

AC

VC

Ending inventory
(200 x P7,100)
(200 x P3,100)

P1,420,000
P620,000

4. Productions
1,000 units
Less: Sales
800 units
Change in inventory
200 units
x UFxOH
P4,000
Change in income
P800,000
[Problem 2]
1a.
Direct materials
Direct labor
Var OH
Fx OH (P640,000/40,000)
Unit product costs

AC
P15
7
2
16
P40

VC
P15
7
2
P24

1b.

AC
Sales (35,000 x P60)
P2,100,000
Var CGS (35,000 x P24)
( 840,000)
Fx OH (35,000 x P16)
( 560,000)
Var exp (35,000 x .05 x P60 ) ( 105,000)
Fx exp
( 560,000)
Operating income
P 35,000

1c.

VC
P2,100,000
( 840,000)
( 640,000)
( 105,000)
( 560,000)
P( 45,000)

AC

VC

Ending inventory
(5,000 x P40)
(5,000 x P24)

P200,000
P120,000

2. Difference in net income [P35,000 - (P45,000)]

Change in inventory (40,000 - 35,000)
x Unit Fx OH
Change in income
[Problem 3]
1. Unit var cost (P80,000/40,000)
Unit Fx OH (P75,000 / 50,000)
Unit cost - absorption costing

P80,000
5,000 units
__ P16
P80,000

P2.00 [or P1 + P0.80 + P0.20]

1.50
P3.50

2. Sales
Less: CGS (40,000 x P3.50)
Gross profit
Less: Operating expenses (P30,000 + P20,000)
Net income

P200,000
140,000
60,000
50,000
P 10,000

3. Change in net income [P10,000 - (5,000)]

Change in inventory ( 50,000 - 40,000)
X Unit Fx OH Rate
Change in net income

P15,000
10,000 units
1.50
P15,000

[Problem 4]
1. Variable Costing Income Statements
Sales
Less Variable CGS:
Beginning inventory
Add: Var CGM (30,000 x P22)
TGAS
Less: Ending inventory
Variable CGS
Manufacturing Margin
Less: Variable express (26,000 x P3)
(34,000 x P3)

Contribution Margin
Less Fixed costs and expenses:
Fixed overhead
Fixed expenses
Total
Net Income (loss)

May
P1,040,000

June
P1,360,000

0
660,000
660,000
88,000
572,000
468,000
78,000
____ ___
_390,000

88,000
660,000
748,000
0
748,000
612,000
__ 102,000
510,000

240,000
__ 180,000
420,000
P( 30,000)

240,000
__ 180,000
420,000
P 90,000

2. Change in net income accounted for as follows:

May
Change in net income
[(P2,000) - (-P30,000)]
P32,000

June
P32,000

(P58,000 - P90,000)

Change in inventory
(30,000 - 26,000)
(30,000 - 34,000)

Unit Fx OH
Change in net income
x

[Problem 5]
1.
Direct materials
Direct labor
Var Overhead
Fx Overhead (P240,000/6,000 units)
Unit inventoriable costs

4,000 units
P8 _
P32,000
AC
P50
36
4
__ 40
P130

4,000 units
P8 __
P32,000
VC
P50
36
4
____
P 90

2. Normal capacity
Less: Actual capacity
Capacity (volume) variance in units
X Unit Fx OH
Capacity variance
3.
Var CGS (5,200 x P130 )
Fx overhead
Net Mat. Var unfavorable
Net DL variance - favorable
Net Var OH Var - favorable
Capacity variance - unfavorable
Cost of good sold - at actual
4.
Sales (5,200 x P 300)
Costs of good sold - at actual
Var S and A expenses
(P1,560,000 x 12%)

Fixed S and A expenses

Operating income

6,000 units
5,500
500 UF
P 40
P20,000 UF
AC
VC
P676,000
P468,000 (5,200 x P90)
240,000
12,000 UF 12,000 UF
( 5,000) F ( 5,000) F
( 2,500) F ( 2,500) F
20,000 UF ______-_
P700,500
P712,500
AC
P1,560,000
( 700,000)

VC
P1,560,000
( 712,500)

( 187,200)
(160,000)
P 512,300

( 187,200)
( 160,000)
P 500,300

5. Change in income (P512,300 - P520,3020)

P12,000
Change in inventory (5,500 - 5,200)
300 units
X Unit Fx OH
P 40
Change in net income
P12,000
[Problem 6]
Bark Manufacturing Company
Direct Costing Income Statement
For the Year Ended, December 21,2006
Sales (90,000 x P12)
P1,080,000
Less: Cost of Goods Sold
Beginning Inventory
P
0
Add: Var CGM (100,00 x P4.00)
400,000
Total goods available for sale
400,000
Less: Ending Inventory (10,000 x P4.00) 40,000
380,000
Manufacturing margin
700,000
Less: Variable Expenses (90,000 x P0.20)
18,000
Manufacturing margin
682,000
Less: Fixed costs and expenses:

Fixed factory overhead

Fixed marketing and
administrative expenses
Net Income

200,000
100,000

300,000
P382,000

[Problem 7]
1.

Unit variable cost [(P7,000,0\000 x 60%) / 140,000 units] P30.00

Unit fixed costs [(P11,.200,000 x 50%) / 160,00 units]
35.00
Total unit cost absorption costing
P65.00
CGS absorption costing (100,000 units x P65)

P6,500,000

2.

Ending inventory-direct costing [(140,000 100,000) P30]

P1,200,000

3.

Normal capacity
- Actual capacity
Volume variance in units
X Unit Fixed overhead
Volume variance in pesos

4.

Sales (100,000 units x P180)

Variable CGS (100,000 units x P30)
Variable expenses (P27,000,000 x 40%)
Fixed costs and expenses
Operating income direct costing

160,000 units
140,000
20,000 UF
P
35
P700,000 UF
P18,000,000
( 3,000,000)
( 2,800,000)
( 11,200,000)
P 1,000,000

[Problem 8]
1.a. Unit Fx OH Rate = [P6,000/(20,000 16,000)]
=
P1.50
b. Bud. Fx OH
= (20,000 units x P1.50)
=
P30,000
c.
Jan. 1
Nov.30
Total CGS
P212,000
P233,300
- Fx OH
30,000
33,000 (30,000 x 110%)
Var CGS
P182,000
P200,300
d. Operating Income:
Sales
Var CGS
Fx CGS

Absorption
P294,000
(200,300)
( 33,000)

Variable
P294,800
(200,300)
( 30,000)

Change
P
3,000

Underapplied Fx OH
Marketing expenses
Admin expenses
Operating income

( 6,000) UF
( 14,740)
( 14,740)
( 26,800)
( 26,800)
P 13,960
P 22,960

6,000
P 9,000

e. Accounting for the difference in net income:

Overcharging of fixed OH (P30,000 x 10%)
Underapplied Fx OH
Decrease in net income under absorption costing

P3,000
6,000
P9,000

2. The alternative accounting procedure would be the use of the variable

costing method where fixed overhead is treated as period cost and is
deducted in total from sales regardless of the change in the level of
production and sales. This method will result to a net income of P22,960
as of Nov. 30.
[Problem 9]
1.

MASS COMPANY
Comparative Income Statement
For the Years Ended, December 31, 2005 and 2006
2005
Absorption
Costing
P1,000,000

.
Variable
Costing
P1,000,000

Sales (25,000 x P40)

Less: Variable CGS
(25,000 x P23.50) 587,500
587,500
Fx CGS (25,000 x P4) 100,000
Volume variance
20,000 UF
_______
Total
707,500
587,500
Gross profit/Mfg. Margin
292,500
412,500
Less: Variable Expenses
(25,000 x P1.20)
30,000
Gross profit/
Contribution margin
292,500
382,500
Less: Variable expenses
30,000
Fx overhead
120,000
Fx expenses
190,000
190,000
Total
220,000
310,000
Net Income
P 72,500
P 72,500

2006
Absorption
Costing
P1,000,000

.
Variable
Costing
P1,000,000

587,500
587,500
100,000
__12,000 UF
- .
699,500
587,500
300,500
412,500
300,500
30,000
190,000
220,000
P 80,500

30,000
382,500
120,000
190,000
310,000
P 72,500

Supporting Analysis:
a. Unit fixed manufacturing costs = P120,000 / 30,000 units =
P4.00

b.
Normal capacity
Less: Actual capacity
(25,000 + 3,000 1000)
Under(Over) absorbed capacity
x Unit Fx OH rate
Volume Variance - UF(F)

2002
30,000 units
25,000
______
5,000 UF
P4
P20,000 UF

2003
30,000 units
27,000
3,000 UF
P4
P12,000 UF

2. Accounting for the change in net income:

Change in net income
Production
Less: Sales
Change in inventory
X Unit Fx OH
Change in net income

2002
P
0
25,000 units
25,000
0
P
4
P
0

2003
P8,000
27,000 units
25,000
2,000
P
4
P8,000

3.a. Advantages of variable costing:

1) It classifies costs and expenses into either fixed or variable which
leads to the use of contribution margin model for profit prediction,
analysis and control.
2) It more significantly relates to the managerial concept of performance
measurement and evaluation where the concept of cost and profit
controllability is at utmost importance.
b. Disadvantages of variable costing:
1) It is not in accordance with the generally accepted accounting
principles. GAAP uses the traditional principle that fixed overhead is a
necessary cost of production and should be classified as product
costs.
2) It treats fixed overhead as a period cost (i.e. expenses) which may
lead to lower inventoriable cost and, consequently, lower sales price
thereby negating the potentials of maximizing income.

[Problem 10]
1.a. The decrease in net income under absorption costing is P405,000,
computed as follows:
2005 Income as reported

P900,000

2006 Income as corrected

495,000

Decrease in net income

P405,000

b. Decrease in net income accounted for as follows:

Increase in Sales (P11,200,000 P9,000,000)

P2,200,000

Increase in Variable CGS:

2001 balance (900,000 x P5)

P4,500,000

2002 balance (P1,000,000 x P5.40)

5,400,000

(900,000)

Increase in operating expenses

(100,000)

(P1,600,000 P1,500,000)

Increase in fixed overhead per statement:

2001 (P6,600,000 P4,500,000)

P2,100,000

2002 (P8,995,000 P5,400,000)

3,595,000

(1,495,000)

Increase in fixed overhead as corrected:

(110,000)

[P3,210,000 (P8,500,000 P5,400,000)]

Decrease in net income

(P405,000)

c. The true operating income under absorption costing in 2006 should be:
Sales

P11,200,000

Var CGS (1,000,000 x P5.40)

Fixed CGS (300,000 x P3.00)
(700,000 x P3.30)

(5,400,000)
P 900,000
2,310,000 (3,210,000)

Volume variance

(495,000) UF

Operating expenses

(1,600,000)

Net income
2.a.

495,000

RGB Corporation
Income Statement
VARIABLE COSTING
For the Years Ended, December 31, 2005 and 2006

2005

2006

Sales

P9,000,000

Variable CGS (900,000 x P5)

(4,500,000)

P11,200,000
(5,400,000)

(1,000,000 x P5.40)

Fixed overhead

(3,000,000)

(3,300,000)

Operating expenses

(1,500,000)

(1,600,000)

Net Income

P 900,000

b. Accounting for the difference in net income:

2005
Change in net income

2006

P900,000

(P900,000 P495,000)

P405,000

Change in inventory
300,000 units

(1,200,000 900,000)

150,000 units

(850,000 1,000,000)
x

Unit Fx OH

P 3.00

P 3.30

900,000

495,000

Change in net income before

changes in unit fixed OH rate

Increase in unit fixed OH in relation

to the beginning inventory
(300,000 x P0.30)

Change in net income

_______

(90,000)

P900,000

P405,000

3.a. Advantages of direct costing:

1) It segregates costs and expenses into their fixed or variable elements
thereby facilitating the use of contribution margin analysis.
2) It controls costs as to rate (i.e., variable) or volume (i.e., fixed), hence,
giving managers directions as to the model to be used in controlling
costs and expenses.
3) It could be used for more relevant segmentized reporting where
managers are evaluated based on items that they control.

b. Disadvantages of direct costing:

1) It is not in accordance with GAAP.
2) It treats fixed overhead as period costs which may not reflective of the
process of manufacturing a product.
[Problem 11]
a.

1.

Units
7,000
3,000
4,000

High
Low
Difference
2.
Total costs
P
Less: Variable costs
(7,000 x P3)
Fixed costs
P

P
P

High
29,000
21,000
8,000

3. Variable costs (8,000 x P3)

Fixed costs
Total costs - 8,000 units

b.
Cost (thousands)

Costs
29,000
17,000
12,000

Low
17,000

9,000
8,000

P
P

24,000
8,000
32,000

SCATTERGRAPH

Y = a +bx

P32
30
28
26
24
22

Y1

20
18
16

Y2

14
12
10
a=8
6
4
2
0
1

10
X2

X1
Units (thousands)

X1 = 4,750
X2 = 2,750

Y1 = P22,000
Y2 = P16,000

b. =
5.

(Y1 - Y2)
(X1 - X2)

(P22,000 - P16,000)
(4,750 - 2,750)

P6,000

2,000

Variable cost (8,100 x P3.00)

Fixed costs
Total costs

P3.00

P24,300
8,000
P32,300

[Problem 11]
a.
SCATTERGRAPH
Cost (thousands)
P16
15
14
13
12
11
10
9
8
7
6
a=5
4
3
2
1
Units (thousands)

0
1

3
X2

X1 = 6,000
X2 = 3,000

10

X1

Y1 = P12,000
Y2 =
8,500

b.

Fixed cost = P5,000

a.

Variable cost per unit

b =

(Y1 - Y2)
(X1- X2)

(P12,000 P8,500)
(6,000 - 3,000)

P3,500
3,000

P1.17

[Problem 12]
a.
High-Low Method

High
Low
Difference
VC Rate =

Units
9,000
2,000
7,000
P28,000
7,000

P
P

Costs
40,000
12,000
28,000

= P4 / unit

Total cost = P4,000 + P4 / unit

b.

SCATTERGRAPH

Costs (thousands)

Variable
Cost @ P4
P
36,000
8,000

Fixed
Costs
4,000
4,000

P44

Y^

40
36

Y1

32
28
24

Y2

20
16
12
a=8
4

Units (thousands)

0
1

7 8
X1

X2

10

a = P8,000
X1 = 7,000
X2 = 3,500

If:

b =

(Y1 - Y2)
(X1 - X2)

Y1 = P32,000
Y2 = 20,000

(P32,000 P20,000)
(7,000 - 3,500)

P12,000
3,500

P3.43

= P8,000 + 3.43x
c.

Least-squares method
X
4,000

Y
22,000

XY
88,000,000

X2
16,000,000

7,000
5,000
2,000
3,000
6,000
8,000
9,000
44,000

31,000
26,000
12,000
22,000
30,000
35,000
40,000
218,000

Y = na + bX

XY = aX + bX

217,000,000
130,000,000
24,000,000
66,000,000
180,000,000
280,000,000
360,000,000
1,345,000,000

[218,000 = 8a + b44,000] - 5,500

1,345,000,000 = 44,000a + b284,000,000
- 1,199,000,000 = -44,000a b242,000,000
146,000,000 =
b =
b =

To solve for a:
218,000
218,000
8a
a

=
=
=
=

8a + (3.48) 44,000
8a + 153,120
64.880
8.110

Therefore:

Y = 8.110 + 3.48x

[Problem 13]

49,000,000
25,000,000
4,000,000
9,000,000
36,000,000
64,000,000
81,000,000
284,000,000

0 + b 42,000,000
146,000,000
42,000,000
3.48

a.

X
800
500
1,000
400
600
900
4,200

Y
P
270,000
200,000
310,000
190,000
240,000
290,000
1,500,000

= na + bX

X2
640,000
250,000
1,000,000
160,000
360,000
810,000
3,220,000

XY
216,000,000
100,000,000
310,000,000
76,000,000
144,000,000
261,000,000
1,107,000,000

= [1,500,000 = 6a + b4,200] - 700

XY = aX + bX = 1,107,000,000 = 4,200a + b3,220,000

- 1,050,000,000 = - 4,200a b2,940,000
57,000,000 =
b =

203.57

To solve for a:
1,500,000 = 6a + (203.57) 4,200
1,500,000 = 6a + 854,994
6a = 645.006
a = 107,501
Therefore:

Y = 107.501 + 203.57x

b.
c.

Y = P107,501 + 203.57 (12) = P109,944

[Problem 14]

+ b 280,000

1.

a.

D =
=
=
=

[2.455 (.188)(1,500,000/100,000)] x 10,000 units

(2.455 +2.82) x 10,000 units
5.275 x 10,000 units
52,750 units

b.

D = [2.491 + (.44)(12,000,000/1,000,000)] x 10,000 units

= (2.491 + 5.28) x 10,000 units
= 77,710 units

2.

The 50% confidence level interval for demand is calculated as follows:

D = 104,160 units (.69) (.922 x 10,000 units)
= 104,160 units 6,361.8 units
or between 97,798 and 110,522 units

3.

Equation 4 is the best. The coefficient of correlation and the coefficient

of determination are the highest of the four equations. The coefficient
of determination indicates that 70.3% of the sample variance of the
automobile sales is explained by the regression. For predictive
purposes, the standard error of the estimate at .992 is also the lowest
of the four models, giving the tightest (smallest) confidence interval of
any of the equations.

4.

Equation 3 assumes that factory rebates are dependent on

advertising funds (A). The results of the analysis show that factory
rebates and advertising funds are almost totally independent, and,
therefore cannot be used to predict each other. The results of the
equation 3 lend credibility to the use of A and R in equation 4. The
independence of A and R reduces the possible negative aspects of colinearity.

[Problem 15]
1.

An advantage of alternative A is that using time as an independent

variable is a convenient way to take into consideration all possible
factors that may be influencing the dependent variable during each
period of time. A disadvantage of alternative A is that there is no logical
relationship between years and rental expense.
An advantage of alternative B is that this method is logical because as
revenues increase, the stores increase, and, thus, rental expense

increases. A disadvantage of alternative B is that an estimate of

revenues is required.
An advantage of alternative C is that the mathematical calculations are
relatively easy and the method is easy to understand. A disadvantage
of alternative C is that the arithmetic average is an oversimplification
that does not recognize any relationship between variables.
2.

Cebu Company should select alternative B because the relationship

between revenue and the rental expense is logical, the coefficient of
correlation is high, and the standard error of the estimate is low.

3.

A statistical technique is an appropriate method for estimating rental

expense before Cebu Company actually contact Mactan Auto Parts. A
statistical technique attempts to measure the covariation between the
variables that are presumed to have a cause and effect relationship,
and such relationship appears to exist in this situation. Of course,
Cebu is assuming that any relationship that exist in the historical data
will continue in the future without a change. Management may want to
adjust the variables for changes that it expects will occur, and Cebu
may wish to introduce other quantitative variables.