MODULE 2.

VARIABLE COSTING
 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.
17. Black Company produced 10, 000 units and sold 9, 000
WRAP-UP EXERCISES
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.
17. Black Company produced 10, 000 units and sold 9, 000
WRAP-UP EXERCISES
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 administrative expenses 310, 000 340 ,000

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.