Absorption and Variable Costing

Review

ABSORPTION COSTING:
Sales
Cost of Goods Sold - DM, DL, VFOH, FFOH; Product Costs
Gross Profit
Operating Expense – Selling and Administrative Expenses; Period Costs
PROFIT / LOSS

Ending Inventory AC = (DM + DL + VFOH +FFOH) x unsold units

VARIABLE COSTING:
Sales
Variable Cost of Goods Sold – DM, DL, VFOH; Product Costs
Manufacturing Margin
Var. Selling and Admin. Expense – Period Costs
Contribution Margin – Period Costs
Fixed Costs – Fixed S & Admin, FFOH; Period Costs
PROFIT / LOSS

Ending Inventory VC = (DM + DL + VFOH) x unsold units

Ending Inventory AC > Ending Inventory VC: This is because of the FFOH

NOTE: The importance of knowing whether the account is a product or period cost kicks in when
Production ≠ Sales

Overview of the Topic Ahead

Absorption Costing | Full Costing

Absorption costing (also called the full costing) treats all costs of production as product costs (DM,
DL, VFOH, FFOH), regardless of whether they are variable or fixed. Since no distinction is made between
variable and fixed costs, absorption costing is not well suited for CVP computations. Under absorption
costing, the cost of a unit of product consists of direct materials, direct labor, and both variable and fixed
overhead. Variable and fixed selling and administrative expenses are treated as period costs and are
deducted from revenue as incurred.

Supporters of absorption costing believe that all manufacturing costs – variable and fixed – are
necessary ingredients for production to take place and should not be ignored in determining product costs.

This is based on the Generally Accepted Principles: “Standard Costing”

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Variable Costing | Direct Costing

Variable costing (also called direct costing) treats only those costs of production which vary with
output as product costs. This method is called variable costing because it only includes “variable”
manufacturing costs in determining the total cost of a product. This approach is compatible with the
contribution approach income statement and supports CVP analysis because of its emphasis on separating
variable and fixed costs. The cost of a unit of product consists of direct materials, direct labor, and variable
overhead. Fixed manufacturing overhead, and both variable and fixed selling and administrative expenses
are treated as period costs and deducted from revenue as incurred.

Supporters of variable costing argue that FFOH costs are incurred in order to have the capacity to
produce units in a given period. These costs are incurred whether or not the capacity is actually used to
make output. Thus, FFOH, having no future substantial service potential, should be charged against the
period and not included in the product cost.

Advantages of Using Variable Costing:

1. 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. More compatible with the standard cost accounting system.
5. Reports provide useful information for pricing decisions and other decision-making problems
encountered by management.

Disadvantages of Using Variable Costing:

1. 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.
4. 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.

Reconciliation of Income under Absorption and Variable Costing

 The difference between the absorption costing income and variable costing income is primarily a
timing difference – when to recognize the FFOH as an expense.

 In variable costing, it is expensed when FFOH is incurred, while in absorption costing, it is expensed
in the period when the related units are sold.
• In Absorption Costing – Expensed when sold; FFOH is part of COGS
• In Variable Costing – Expensed immediately when incurred; FFOH is part of FIXED
COSTS

 The relationship between production and sales generally indicate the following income patterns:
 When PRODUCTION = SALES, there is no change in inventory. FFOH expensed under
absorption costing equals FFOH expensed under variable costing.
 When PRODUCTION > SALES, there is an increase in inventory. FFOH expensed under
absorption costing is less than FFOH expensed under variable costing. Therefore, absorption
income is greater than variable income.
• FFOH VC > FFOH AC
• Thus, INCOME VC < INCOME AC
 When PRODUCTION < SALES, there is a decrease in inventory. FFOH expensed under
absorption costing is greater than FFOH expensed under variable costing. Therefore,
absorption income is less than variable income.
• FFOH VC < FFOH AC
• Thus, INCOME VC > INCOME AC

 POINT OF RECONCILIATION:

Profit/Loss using Absorption Costing P xxx

Add: Fixed FOH in Beginning Inventory xxx

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 Total P xxx
Less: Fixed FOH in Ending Inventory xxx
Profit/Loss using Variable Costing P xxx

Illustration: Absorption vs. Variable Costing

Wolverine Corporation produces a single product. The following is a cost structure applied to its first year of
operations.

Selling price P 15 per unit

Variable selling and administrative costs P2 per unit
Direct materials P2 per unit
Direct labor P1.50 per unit
Variable FOH P0.50 per unit
Fixed selling and administrative costs P14,000
Fixed FOH P20,000

During the first year, Wolverine Corporation manufactured 5,000 units and sold 3,800. There was no
beginning or ending work-in-process inventory.

Required:
1. Compute for the product cost per unit under absorption costing. P8.00
2. Compute for the product cost per unit under variable costing. P4.00

• Remember that their only difference is the treatment of the Fixed Factory Overhead i.e.,
Inventoriable under AC and is not included in the VC (because it is period cost, it is expensed)

3. Prepare an income statement using absorption costing. P5,000

4. Prepare an income statement using variable costing. P200

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 5. Show why the two costing methods give different profit/loss amounts.

• Remember that for the income statement for VC, the fixed costs (including the FFOH was not
divided by units, this is because it is a period cost)
o For AC, FFOH was multiplied to the units sold because FFOH is a product cost and is
included in the COGS
• Since Production > Sales ⁂ Expense VC > Expense AC ⁂ INCOME VC < INCOME AC

6. Reconcile the two profit/loss figures.

* 5,000 units produced – 3,800 units sold = 1,200 ending inventory x P4 FFOH per unit =P4,800

Throughput Costing | Super – Variable Costing

• Can be considered as a Super-Variable Costing

o Stricter criteria than variable costing
• Is a technique that assigns only the unit-level spending amounts for direct costs as the cost of
products or services. In this case, direct material is the only item that qualifies as a throughput
cost.
• Only direct materials as true variable cost and other reaming costs as period costs to be charged
in the period in which they are incurred.
o Thus, in throughput costing, only direct materials costs are inventoriable costs.
• Illustration on why Direct Materials are the only true variable cost:

DIRECT MATERIALS:
Standard Quantity per Unit 3 pounds per unit
Production 1,000 units
No. of Units of DM Used 3,000 units
o Here, it can be said that it is certain that for every unit, there are 3 pounds of materials
used. It cannot be more than that or it cannot be less than that. The “recipe” for
manufacturing a certain unit will always require 3 pounds of that material.

DIRECT LABOR:
Standard Hours per Unit 4 hours per unit
Production 1,000 units
No. of Hours Used 4,000 hours
o Here, it can be said that even if 1,000 units can be produced in under 4,000 hours, it is
not always perfectly certain that one unit will be produced in 4 hours. This is because
direct labor is dependent on the performance of the laborer. It’s hard to measure exactly
the range for every unit.

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Illustration:

Krell Corporation, which uses throughput costing, began operations at the start of the current year 2021.
Planned and actual production equaled 40,000 units, and sales totaled 35,000 units at P80 per unit. Cost
data for 2021 were as follows:

Direct materials (per unit) P 20

Conversion cost:
Direct labor 215,000
Variable manufacturing overhead 340,000
Fixed manufacturing overhead 528,000
Selling and administrative costs:
Variable (per unit) 8
Fixed 220,000

The company classifies direct materials as a throughput cost.

Required:
1. Compute the cost of the company's year-end inventory.
• Since this is for throughput costing, the only composition of the Ending Inventory would be the
Direct Materials only.

Ending Inventory = 40,000 units produced – 35,000 units sold = 5,000 units x P20
= P100,000

2. Prepare Krell's income statement for the year.

* Like in Variable Costing, the Variable Selling and Administrative Costs are multiplied to the
number of units sold

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 EXERCISES

TRUE OR FALSE

1. Absorption costing is commonly used for external reporting.

2. Absorption costing conforms with generally accepted accounting principles.
3. The Bureau of Internal Revenue allows the use of both variable and absorption costing.
o Costing is not needed here
4. Sales minus cost of goods sold is referred to as variable contribution margin.
o “Gross Margin” and not Contribution Margin
5. If production exceeds sales, absorption costing net income exceeds variable costing net income.
6. If sales exceed production, absorption costing net income is less than variable costing net income.
7. Under variable costing, all product costs are variable.
8. Under variable costing, all variable expenses are treated as product costs.
o Variable Selling and Administrative Expenses are period costs
9. Variable costing income fluctuates with production and does not react to changes in sales.
o Fluctuations react to changes in sales
10. Variable costing violates matching principle.
11. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
12. Absorption costing must be used for external financial reporting.
13. A number of companies use both absorption costing and variable costing.
o Absorption – For External Reporting
o Variable – For Internal Reporting
14. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
15. A number of companies use both absorption costing and variable costing.
16. Under a just-in-time (JIT) production environment, income under absorption costing tends to be
equal with income under variable costing.
o Under JIT production environment, no inventory is expected i.e., Production = Sales
17. There is no capacity or volume variance under the standard variable costing system.
o Volume Variance = Budget Allowed Based on SH – Standard FOH

Budget Allowed Based on Standard Hours

F: Budgeted FFOH
V: (Standard VOH Rate x Standard Hours)
Standard FOH
F: Standard FFOH (SFR x Standard Hours)
V: Standard VFOH (SVR x SH)
o The statement is true because standard costing is only for the product cost. Because the
statement says “variable costing system,” we will remove the Fixed Portion in the
formula i.e., those with strikethrough
18. Variable costing is not permitted for income tax purposes, but it is widely accepted for external
financial reports.
o Second statement is false
19. A basic concept of the contribution approach and variable costing is that fixed costs are not
important in an organization.
20. Variable costing is better suited to cost-volume-profit calculations than absorption costing.

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 PROBLEM-SOLVING

Problem 1

Chucky Company operated at a normal capacity of 1,000 units in the year 2021. The company sold 80% of
these units at a price of P12 per unit. Manufacturing costs incurred during the year are as follows:

Manufacturing:
Materials P 1,500
Labor 1,000
Variable Factory Overhead 500
Fixed Factory Overhead 2,000
Selling and Administrative Expenses
Variable P 1,200
Fixed 800

Required: Compute for the following:

1. Inventory cost per unit under absorption and variable costing.
2. Cost of ending inventory under absorption and variable costing.

Problem 2

Beast Company makes state-of-the-art pajamas. Each pajama sells for P1,000 each. Data for 2021’s
operation are as follows:
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. Compute for the net income under both absorption and variable costing.
2. Provide computation explaining the difference in income between the two costing methods.

Problem 3

The following information is available for Ford Company for its first year of operations:

Sales in units 5,000

Production in units 8,000
Manufacturing costs:
Direct labor P3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead P100,000
Net income (absorption method) P30,000
Sales price per unit P40

Required:
1. If Ford Company had used variable costing, what amount of income before income taxes would it
have reported?
2. What was the total amount of Selling and administrative expense incurred by Ford Company?
3. If Ford Company were using variable costing, what would it show as the value of ending inventory?
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Problem 4

The following information has been extracted from the financial records of Clinton Corporation for its first
year of operations:

Units produced 10,000

Units sold 7,000
Variable costs per unit:
Direct material P8
Direct labor 9
Manufacturing overhead 3
SG&A 4
Fixed costs:
Manufacturing overhead P70,000
SG&A 30,000

Required:
1. How much is the difference in net income if Clinton Corporation used absorption costing instead of
variable costing?
2. Based on absorption costing, the Cost of Goods Manufactured for Clinton Corporation's first year
would be
3. Based on absorption costing, what amount of period costs will Clinton Corporation deduct?

Problem 5

The following information was extracted from the first year absorption-based accounting records of Enigma
Corporation

Total fixed costs incurred P100,000

Total variable costs incurred 50,000
Total period costs incurred 70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales price P12

Required:
1. What is Cost of Goods Sold for Enigma Corporation's first year?
2. If Enigma Corporation had used variable costing in its first year of operations, how much income
(loss) before income taxes would it have reported?
3. Based on variable costing, if Enigma had sold 12,001 units instead of 12,000, its income before
income taxes would have been

Problem 6

Tempest Company, which has only one product, has provided the following data concerning its most recent
month of operations:

Selling price .............................. P81

Units in beginning inventory .... 0

Units produced ......................... 7,300
Units sold .................................. 7,000
Units in ending inventory ......... 300

Variable costs per unit:

Direct materials ..................... P20

Direct labor ............................ P30

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 Variable manufacturing
overhead ............................ P7
Variable selling and
administrative .................... P11

Fixed costs:
Fixed manufacturing
overhead ............................ P65,700
Fixed selling and
administrative .................... P21,000

Required: Determine the following:

1. Unit product cost for the month under variable costing?
2. Unit product cost for the month under absorption costing?
3. Total contribution margin for the month under the variable costing approach is:
4. Total gross margin for the month under the absorption costing approach is:
5. Total period cost for the month under the variable costing approach?
6. Total period cost for the month under the absorption costing approach?
7. Net operating income for the month under variable costing?
8. Net operating income for the month under absorption costing?

Problem 7

Luffy Corporation manufactures a computer monitor. Shown below is Luffy's cost structure:

Variable cost Total fixed cost

per monitor for the year
Manufacturing cost ...................... P75.20 P912,000
Selling and administrative ........... P14.60 P456,000

In its first year of operations, Luffy produced 100,000 monitors but only sold 95,000. Luffy's gross margin
in this first year was P2,629,600. Luffy's contribution margin in this first year was P2,109,000.

Required:
1. Under the variable costing method, what is Luffy's net operating income for its first year?
Under the absorption costing method, what is Luffy's net operating income for its first year?

Problem 8

The following information is taken from the books of Gon Company, which assumes first-in, first-out (FIFO)
for inventory cost flow:
2020 2021
Beginning inventory None 3,500 units
Production 10,000 units 9,000 units
Ending inventory 3,500 units 1,000 units

Sales (P2 per unit) ? ?

Variable manufacturing costs (P0.75/unit) P 7,500 P 6,750
Fixed manufacturing costs 5,000 (P0.5) 5,400 (P0.6)
Selling and administrative costs (50% variable) 4,500 7,500

Required:
1. Determine the 2020 profit under absorption and variable costing.
2. Reconcile the two income figures in No. 1.
3. Determine the 2021 profit under absorption and variable costing.
4. Reconcile the two income figures in No. 3.

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Problem 9

Saitama Corporation, which uses throughput costing, began operations at the start of the current year.
Planned and actual production equaled 20,000 units, and sales totaled 17,500 units at P95 per unit. Cost
data for the year were as follows:

Direct materials (per unit) P 18

Conversion cost:
Direct labor 160,000
Variable manufacturing overhead 280,000
Fixed manufacturing overhead 340,000
Selling and administrative costs 430,000
(total)

The company classifies direct materials as a throughput cost.

Required:
1. Compute the company's total cost for the year.
2. How much of this cost would be held in year-end inventory under throughput costing?
3. How much of the company's total cost for the year would appear on the period's income statement
under throughput costing?
4. Compute the year's throughput-costing net income.

MULTIPLE-CHOICE

1. Under variable costing, fixed manufacturing overhead is:

A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process Inventory.
E. treated in the same manner as variable manufacturing overhead.

2. All of the following are inventoried under variable costing except:

A. direct materials D. fixed manufacturing overhead
B. direct labor E. items "C" and "D" above
C. variable manufacturing overhead

3. All of the following are expensed under variable costing except:

A. variable manufacturing overhead D. fixed selling and administrative
costs
B. fixed manufacturing overhead E. items "C" and "D" above
C. variable selling and administrative costs

4. All of the following costs are inventoried under absorption costing except:
A. direct materials D. fixed manufacturing overhead
B. direct labor E. fixed administrative salaries
C. variable manufacturing overhead

5. All of the following are inventoried under absorption costing except:

A. direct labor D. sales commissions
B. raw materials used in production E. machine lubricant used in
production
C. utilities cost consumed in manufacturing

6. The underlying difference between absorption costing and variable costing lies in the
treatment of:
A. direct labor D. variable selling and
administrative expenses
B. variable manufacturing overhead E. fixed selling and administrative
expenses
C. fixed manufacturing overhead
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7. Which of the following costs would be treated differently under absorption costing
and variable costing?
Variable Fixed
Direct Manufacturing Administrative
Labor Overhead Expenses
A. Yes No Yes
B. Yes Yes Yes
C. No Yes No
D. No No Yes
E. No No No

8. Lone Star has computed the following unit costs for the year just ended:
Direct material used P
12
Direct labor 18
Variable manufacturing overhead 25
Fixed manufacturing overhead 29
Variable selling and 10
administrative cost
Fixed selling and administrative 17
cost

Under variable costing, each unit of the company's inventory would be carried at:
A. P35 B. P55 C. P65 D. P84

9. Prescott Corporation has computed the following unit costs for the year just ended:
Direct material used P
18
Direct labor 27
Variable manufacturing overhead 30
Fixed manufacturing overhead 32
Variable selling and 9
administrative cost
Fixed selling and administrative 17
cost

Under absorption costing, each unit of the company's inventory would be carried at:
A. P75 B. P107 C. P116 D. P133

10. Santa Fe Corporation has computed the following unit costs for the year just
ended:
Direct material used P
25
Direct labor 19
Variable manufacturing overhead 35
Fixed manufacturing overhead 40
Variable selling and 17
administrative cost
Fixed selling and administrative 32
cost

Which of the following choices correctly depicts the per-unit cost of inventory under
variable costing and absorption costing?
Variab Absorption
le Costing
Costin
g
A P79 P119
.
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 B P79 P151
.
C P96 P119
.
D P96 P151
.

11. Delaware has computed the following unit costs for the year just ended:
Variable manufacturing cost P
85
Fixed manufacturing cost 20
Variable selling and 18
administrative cost
Fixed selling and administrative 11
cost

Which of the following choices correctly depicts the per-unit cost of inventory under
variable costing and absorption costing?
A. Variable, p85; absorption, p105 C. Variable, p103; absorption, p105
B. Variable, p85; absorption, p116 D. Variable, p103; absorption, p116

Use the following to answer questions 12 and 13:

Indiana Company incurred the following costs during the past year when planned
production and actual production each totaled 20,000 units:

Direct materials used P

280,000
Direct labor 120,000
Variable manufacturing overhead 160,000
Fixed manufacturing overhead 100,000
Variable selling and administrative 60,000
costs
Fixed selling and administrative 90,000
costs

12. If Indiana uses variable costing, the total inventoriable costs for the year would
be:
A. P400,000 B. P460,000 C. P560,000 D. P620,000

13. The per-unit inventoriable cost under absorption costing is:

A. P9.50 B. P25.00 C. P28.00 D. P33.00

14. Consider the following comments about absorption- and variable-costing

income statements:
I. A variable-costing income statement discloses a firm's contribution margin.
II. Cost of goods sold on an absorption-costing income statement includes fixed
costs.
III. The amount of variable selling and administrative cost is the same on
absorption- and variable-costing income statements.

Which of the above statements is (are) true?

A. I only B. II only C. I and II D. I, II, and III

Use the following data for questions 15 through 17:

15. Roberts, which began business at the start of the current year, had the
following data:
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 Planned and actual production 40,000 units
Sales 37,000 units at
P15/unit
Production costs:
Variable P4/unit
Fixed P260,000
Selling and administrative costs:
Variable P1/unit
Fixed P32,000

The gross margin that the company would disclose on an absorption-costing income
statement is:
A. P97,500 B. P147,000 C. P166,500 D. P370,000

16. The contribution margin that the company would disclose on an absorption-
costing income statement is:
A. P -0- B. P147,000 C. P166,500 D.
P370,000

17. The contribution margin that the company would disclose on a variable-costing
income statement is:
A. P97,500 B. P147,000 C. P166,500 D. P370,000

18. Chicago began business at the start of the current year. The company planned
to produce 25,000 units, and actual production conformed to expectations. Sales
totaled 22,000 units at P30 each. Costs incurred were:

Fixed manufacturing overhead P

150,00
0
Fixed selling and administrative cost
100,00
0
Variable manufacturing cost per unit 8
Variable selling and administrative 2
cost per unit

If there were no variances, the company's absorption-costing net income would be:
A. P190,000 B. P202,000 C. P208,000 D. P220,000

19. Madison began business at the start of the current year. The company
planned to produce 30,000 units, and actual production conformed to expectations.
Sales totaled 28,000 units at P32 each. Costs incurred were:
Fixed manufacturing overhead P
150,000
Fixed selling and administrative cost 90,000
Variable manufacturing cost per unit 11
Variable selling and administrative 2
cost per unit

If there were no variances, the company's variable-costing net income would be:
A. P270,000 B. P292,000 C. P308,000 D.
P532,000

20. The following data relate to Lobo Corporation for the year just ended:
Sales revenue P
750,000
Cost of goods sold:
Variable portion 370,000
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 Fixed portion 110,000
Variable selling and administrative 50,000
cost
Fixed selling and administrative 75,000
cost

Which of the following statements is correct?

A. Lobo’s variable-costing income statement would reveal a gross margin of
P270,000.
B. Lobo’s variable costing income statement would reveal a contribution margin of
P330,000.
C. Lobo’s absorption-costing income statement would reveal a contribution margin of
P330,000.
D. Lobo’s absorption costing income statement would reveal a gross margin of
P330,000.

Use the following to answer questions 21 and 22:

Franz began business at the start of this year and had the following costs: variable
manufacturing cost per unit, P9; fixed manufacturing costs, P60,000; variable selling
and administrative costs per unit, P2; and fixed selling and administrative costs,
P220,000. The company sells its units for P45 each. Additional data follow.

Planned production in 10,000

units
Actual production in 10,000
units
Number of units sold 8,500

There were no variances.

21. The net income (loss) under absorption costing is:

A. P(7,500) B. P9,000 C. P15,000 D. P18,000

22. The net income (loss) under variable costing is:

A. P(7,500) B. P9,000 C. P15,000 D. P18,000

23. Income reported under absorption costing and variable costing is:
A. always the same
B. typically different
C. always higher under absorption costing
D. always higher under variable costing

24. Gomez's inventory increased during the year. On the basis of this information,
income reported under absorption costing:
A. will be the same as that reported under variable costing.
B. will be higher than that reported under variable costing.
C. will be lower than that reported under variable costing.
D. will differ from that reported under variable costing, the direction of which cannot
be determined from the information given.

25. Which of the following conditions would cause absorption-costing net income
to be lower than variable-costing net income?
A. Units sold exceeded units produced C. Units sold were less than units
produced
B. Units sold equaled units produced D. Selling expenses increased

26. Which of the following situations would cause variable-costing net income to be
lower than absorption-costing net income?
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 A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by p7 per unit during the accounting period.

27. Consider the following statements about absorption- and variable-costing net
income:
I. Yearly income reported under absorption costing will differ from income reported
under variable costing if production and sales volumes differ. T
II. Long-run, total income reported under absorption costing will often be close to
that reported under variable costing. T
III. Differences in income under absorption and variable costing can often be
reconciled by multiplying the change in inventory (in units) by the variable
manufacturing overhead cost per unit. F

Which of the above statements is (are) true?

A. I only B. II only C. III only D. I and II

28. Which of the following formulas can often reconcile the difference between
absorption- and variable-costing net income?
A. Change in inventory units x predetermined variable-overhead rate per unit.
B. Change in inventory units ÷ predetermined variable-overhead rate per unit.
C. Change in inventory units x predetermined fixed-overhead rate per unit.
D. Change in inventory units ÷ predetermined fixed-overhead rate per unit.

29. Monex reported P65,000 of net income for the year by using absorption costing.
The company had no beginning inventory, planned and actual production of 20,000
units, and sales of 18,000 units. Standard variable manufacturing costs were P20
per unit, and total budgeted fixed manufacturing overhead was P100,000. If there
were no variances, net income under variable costing would be:
A. P15,000 B. P55,000 C. P65,000 D. P75,000

30. Canyon reported P106,000 of net income for the year by using variable costing.
The company had no beginning inventory, planned and actual production of 50,000
units, and sales of 47,000 units. Standard variable manufacturing costs were P15
per unit, and total budgeted fixed manufacturing overhead was P150,000. If there
were no variances, net income under absorption costing would be:
A. P52,000 B. P97,000 C. P106,000 D. P115,000

31. Consider the following statements about absorption costing and variable
costing:
I. Variable costing is consistent with contribution reporting and cost-volume-profit
analysis.
II. Absorption costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.

Which of the above statements is (are) true?

A. I only B. II only C. I and II D. I, II, and III

32. Consider the following statements about absorption costing and variable
costing:
I. Variable costing is consistent with contribution reporting and cost-volume-profit
analysis.
II. Variable costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.

Which of the above statements is (are) true?

A. I only B. III only C. I and II D. I and III

33. For external-reporting purposes, generally accepted accounting principles

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 require that net income be based on:
A. absorption costing B. variable costing C. direct costing D. semi-variable
costing

34. The fixed-overhead volume variance under variable costing:

A. coincides with the fixed manufacturing overhead that was applied to production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget variance.

35. Which of the following differs between absorption costing and variable costing?
A. The number of units produced. C. Sales revenues.
B. The fixed-overhead volume variance. D. The treatment of variable
manufacturing overhead.

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