Exercise 1 Absorption vs Variable Costing

During the most recent year, Fair Company had the following data associated with the product it
makes:

Units in beginning inventory

Units produced 10,000
Units sold (P300 per unit) 8,000
Variable costs per unit:
Direct Materials P 50
Direct Labor 100
Variable Overhead 50
Fixed costs:
Fixed overhead per unit produced P 25
Fixed selling and administrative 100,000

1. How manu units are in ending inventory?

Ending Inventory = Beginning inventory + units produced – units sold
Answer: 2,000 units

2. Under absorpition costing, calculate the per unit product cost.

Direct materials P 50
Direct labor 100
Variable overhead 50
Fixed overhead 25
Unit product cost P225

3. Under variable costing, calculate the per unit product cost.

Direct materials P 50
Direct labor 100
Variable overhead 50
Unit product cost P200

4. Under absorption costing, what is the value of ending inventory?

Value of ending inventory = ending inventory units x absorption unit product cost
Answer: 2,000 units x P225 = P450,000

5. Under variable costing, what is the value of ending inventory?

Value of ending inventory = ending inventory units x variable unit product cost
Answer: 2,000 units x P200 = P400,000