Our Lady of The Pillar College - Cauayan

OUR LADY OF THE PILLAR COLLEGE - CAUAYAN
Cauayan City, Isabela

Exercises in Accounting 6B Gerry L. Carabbacan
Financial Management Instructor
True-False
1. Absorption costing incomes are always higher than variable costing incomes.
2. Income under standard variable costing is not influenced by the total amount of
fixed manufacturing costs.
3. A multiproduct company using standard absorption costing calculates standard

fixed costs for each product using a standard fixed overhead rate based on
an input factor such as direct labor hours.
4. A major difference between standard costing and normal costing is that one uses
actual hours to apply overhead and the other uses standard hours.
5. Proponents of variable costing for external reporting argue that while fixed
production costs benefit production as a whole, they do not benefit any
particular unit of product.
6. A company using absorption costing can increase its income by increasing

production without increasing sales.
7. A company using variable costing can increase its income by increasing

production without increasing sales.
8. Variable costing must be used for internal reporting.
9. According to GAAP, absorption costing must be used for internal reporting.
10. According to GAAP, absorption costing must be used for external financial
reporting.
I. PROBLEM SOLVING ( Absorption and Variable Costing ).
A. Aero Co. operated at normal capacity of 50,000 units in the year 2006. The company sold 80% of
these units at a price of P 130.00 per unit. Manufacturing cost incurred during the year is as follows:
Manufacturing cost per unit:

Materials P 20
Labor 30
Variable factory overhead 10
Fixed factory overhead 40
Selling and administrative (Total):

Variable P 40,000
Fixed 30,000
Required:
(1) Product cost per unit (or inventoriable cost per unit) under absorption and variable
costing
(2) Cost of ending inventory under absorption and variable costing
B. Baron Co. makes study tables. The table sells for P 1,200 each. Data for last year’s operations follow:
Units:
Beginning inventory 20
Production 500
Ending inventory 50
Variable cost per unit:

Direct materials P 300
Direct labor 150
Factory overhead 120
Selling and administrative 75
Fixed cost:
Factory overhead P 85,000
Selling and administrative 50,000
Required:
(1) Prepare comparative income statements under both the absorption and variable
costing methods using the following format:
Baron Company
Comparative Income Statements
Absorption vs. Variable Costing
For the Period______________
Absorption Variable
Sales P _________ P _________
Cost of goods sold / variable cost:
Cost of goods sold P _________ P _________
Variable selling and administrative _________ _________
Total P _________ P _________
Gross profit / contribution margin P _________ P _________
Operating expenses / fixed cost:
Fixed factory overhead P _________ P _________
Variable selling and administrative _________ _________
Fixed selling and administrative _________ _________
Total P _________ P _________
Profit P _________ P _________
(2) Provide computations explaining the differences in operating income

between the two methods.
(3) Reconcile the income figures under the two methods.
C. Chatz Co. was organized just a year ago. The results of the company’s first year of operations are
shown below (absorption costing basis):
Chatz Company
Income Statement
Sales (2,000 units) P 135,000

Less: Cost of goods sold:
Beginning inventory P 0
Cost of goods manufactured 105,000
Goods available for sale P 105,000
Ending inventory 21,000 84,000
Gross margin P 51,000
Less Selling and administrative expenses 42,000
Net income P 9,000
=====
The company’s selling and administrative expenses consist of P 30,000 per year in fixed expenses
and P 6.00 per unit sold in variable expenses. The company’s unit product cost is computed
as follows:
Direct materials P 20
Direct labor 8
Variable manufacturing overhead 4
Fixed manufacturing overhead
(P 25,000 divide by normal capacity of 2,500 units) 10
Unit product cost P 42
==
Required:
(1) Redo the company’s income statement in the contribution format using variable
costing.
(2) Reconcile any difference between the net income figure on your variable costing
income statement and the net income figure on the absorption costing income
statement above.
D. PusongBato Company sells a single product for P25. It had no beginning inventories. Operating data follow.
Sales, 27,000 units P675,000

Normal capacity 30,000 units
Production costs:
Variable per unit P13
Fixed production P150,000
Selling and administrative expenses:
Variable per unit sold P2
Fixed selling P20,000
Number of units produced 32,500 units
Assume the actual costs were as budgeted.
a. Find contribution margin per unit.
b. Compute the ending inventory under standard variable costing.
c. Compute the income under standard variable costing.

Assume standard absorption costing using normal capacity as the basis for computing the standard fixed cost
per unit. Compute
d. Standard gross profit per unit.
e. Ending inventory.
f. Volume variance.
g. Income.
E. DingAngBato Company sells a single product for P25. It had no beginning inventories. Operating data follow.
Sales, 55,000 units P1,375,000

Production costs:
a. Compute income under standard variable costing.
b. Compute income under standard absorption costing.
3. Rock-Rock Company sells a single product for P25. It had no beginning inventories. Operating data follow.
Sales, 20,000 units P500,000

Production costs:
a. Find Rock-Rock Company’s income under standard variable costing.
b. Find Rock-Rock Company’s income under standard absorption costing.

F. Uncanny Encounter Inc. makes a single product that sells for P50. The standard variable manufacturing cost is
P32.50 and the standard fixed manufacturing cost is P7.50, based on producing 20,000 units. During the year
Uncanny Encounter Inc. produced 22,000 units and sold 21,000 units. Actual fixed manufacturing costs were
P157,000; actual variable manufacturing costs were P735,000. Selling and administrative expenses, all fixed,
were P75,000. There were no beginning inventories.
a. Prepare a standard absorption costing income statement.
b. Prepare a standard variable costing income statement.
G. Pamparampampam Corp. has the following data:
Normal capacity 25,000

Practical capacity 30,000
Budgeted production 20,000
Actual production 22,000
Actual sales ($25 per unit) 21,000
Standard variable production cost per unit P15
Budgeted fixed production costs P120,000
There were no variable cost variances for the year. Fixed costs incurred were equal to the budgeted amount.
There were no beginning inventories and no selling or administrative expenses.
a. Compute the absorption costing income if fixed costs per unit are determined using normal capacity.
b. Compute the absorption costing income if fixed costs per unit are determined using practical capacity.
c. Compute the absorption costing income if fixed costs per unit are determined using budgeted production.
d. Compute the variable costing income.
---- end of exercises----

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OUR LADY OF THE PILLAR COLLEGE - CAUAYAN

Cauayan City, Isabela

3. A multiproduct company using standard absorption costing calculates standard

6. A company using absorption costing can increase its income by increasing

7. A company using variable costing can increase its income by increasing

8. Variable costing must be used for internal reporting.

9. According to GAAP, absorption costing must be used for internal reporting.

I. PROBLEM SOLVING ( Absorption and Variable Costing ).

Manufacturing cost per unit:

Selling and administrative (Total):

Variable cost per unit:

(2) Provide computations explaining the differences in operating income

Sales (2,000 units) P 135,000

Sales, 27,000 units P675,000

Assume the actual costs were as budgeted.

a. Find contribution margin per unit.

b. Compute the ending inventory under standard variable costing.

c. Compute the income under standard variable costing.

d. Standard gross profit per unit.

Sales, 55,000 units P1,375,000

Assume the actual costs were as budgeted.

a. Compute income under standard variable costing.

b. Compute income under standard absorption costing.

Sales, 20,000 units P500,000

Assume the actual costs were as budgeted.

a. Find Rock-Rock Company’s income under standard variable costing.

b. Find Rock-Rock Company’s income under standard absorption costing.

a. Prepare a standard absorption costing income statement.

b. Prepare a standard variable costing income statement.

G. Pamparampampam Corp. has the following data:

Normal capacity 25,000

d. Compute the variable costing income.

---- end of exercises----

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