JOSE RIZAL MEMORIAL STATE UNIVERSITY

Main Campus, Dapitan City 5965

College of Business and Accountancy Registration No. 87Q12612

INSTITUTIONAL LEVEL

Finals Module: 2nd Assignment

Variable and Absorption Costing

Refer to Chapter 10 of your book

1. Jacob Company produces a ladies’ wallet and a men’s wallet. Selected data for the past year
follow:
Ladies’ Wallet Men’s Wallet
Production (units) 100,000 200,000
Sales (units) 90,000 210,000
Selling price P5.50 P4.50
Direct labor hours 50,000 80,000
Manufacturing costs:
Direct materials P75,000 P100,000
Direct labor 250,000 400,000
Variable overhead 20,000 24,000
Fixed overhead:
Direct 50,000 40,000
Commona 20,000 20,000
Nonmanufacturing costs:
Variable selling 30,000 60,000
Direct fixed selling 35,000 40,000
Common fixed sellingb 25,000 25,000
a
Common overhead totals P40,000 and is divided equally between the two products.
b
Common fixed selling costs total P50,000 and are divided equally between the two products.

Budgeted fixed overhead for the year, P130, 000, equalled the actual fixed overhead. Fixed
overhead is assigned to the products using a plant wide rate based on expected direct labor hours,
which were 130,000. The company had 10,000 men’s wallets in inventory at the beginning of the
year. These wallets had the same unit cost as the men’s wallets produced during the year.

Required:
a. Compute the unit cost for the ladies’ and men’s wallets using the variable-costing method.
Compute the unit cost using absorption costing
b. Prepare an income statement using variable costing.
c. Prepare and income statement using variable costing.
d. Prepare a segmented income statement using the products as segments.
ANSWER:

1. The unit cost for the ladies’ wallet is as follows:

Direct materials = (P75, 000/100,000) =P0.75

Direct labor = (P250, 000/100,000) = P2.50
Variable overhead = (P20, 000/100,000) = P0.20
Variable cost per unit = P3.45
Fixed overhead = [(50,000 3 $1.00)/100,000] = P0.50
Absorption cost per unit = P3.95
-The two unit cost only differs in the assignment of the fixed overhead, and fixed
overhead cost is assigned using the predetermined fixed overhead rate (P130,000/130,000 hours =
P1 per hour). An example is that the ladies’ wallets used 50,000 direct labor hours and so receive
P1x 50,000, or P50, 000, of fixed overhead. This total, when divided by the units produced, gives
the P0.50 per-unit fixed overhead cost. Hence the variable nonmanufacturing costs are not part of
the unit cost under variable costing. For both approaches, only manufacturing costs are used to
compute the unit costs.

2. The income statement under absorption costing is as follows:

Jacob Company
Absorption-Costing Income Statement
For the Year Ended December 31, 20XX

Sales [(P5.50 x 90,000) + (P4.50 x 210,000)] P1, 440,000

Less: Cost of goods sold [(P3.95 x 90,000) + (P3.02 x 210,000)] 989,700
Gross margin P 450,300
Less: Selling expenses 215,000
Operating income P 235,300
-The sum of selling expenses for both products.

3. The income statement under variable costing is as follows:

Jacob Company
Variable-Costing Income Statement
For the Year Ended December 31, 20XX

Sales [(P5.50 x 90,000) + (P4.50 x 210,000)] P1, 440,000

Less variable expenses:
Variable cost of goods sold [(P3.45 x 90,000) + (P2.62 x 210,000)] (860,700)
Variable selling expenses (90,000)
Contribution margin P 489,300
Less fixed expenses:
Fixed overhead (130,000)
Fixed selling (125,000)
Operating income P 234,300
4. Segmented income statement:

Jacob Company
Segmented Income Statement
For the Year Ended December 31, 20XX

Ladies’ Wallet Men’s Wallet Total

Sales P 495,000 P 945,000 P1, 440,000
Less variable expenses:
Variable cost of goods sold (310,500) (550,200) (860,700)
Variable selling expenses (30,000) (60,000) (90,000)
Contribution margin P 154,500 P 334,800 P 489,300
Less direct fixed expenses:
Direct fixed overhead (50,000) (40,000) (90,000)
Direct selling expenses (35,000) (40,000) (75,000)
Segment margin P 69,500 P 254,800 P 324,300
Less common fixed expenses:
Common fixed overhead (40,000)
Common selling expenses (50,000)
Operating income P 234,300
2. During ABC Company’s first two years of operations, the company reported net operating
income as follows (absorption costing basis):

Year 1 Year 2
Sales (at P50 per unit) P1,000,000 P1,500,000
Less Cost of goods sold:
Beginning inventory 0 170,000
Add cost of goods manufactured (at P34 per unit) 850,000 850,000
Goods available for sale 850,000 1,020,000
Less ending inventory (at P34 per unit) 170,000 0
Cost of goods sold 680,000 1,020,000
Gross margin 320,000 480,000
Less selling and administrative expenses* 310,000 340,000
Net operating income P10,000 P140,000

*P3 per unit variable; P250, 000 fixed each year.

The company’s P34 unit product cost is computed as follows:

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 cost data for the two years are given below:

Year 1 Year 2
Units produced 25,000 25,000
Units sold 20,000 30,000

Required:

a. Prepare an income statement for each year in the contribution format using variable costing.
b. Reconcile the absorption costing and variable costing net operating income figures for each
year.
a. Income statement for each year in variable costing

ABC Company
Variable Costing Income Statement
For the Year 1 and 2

Year 1 Year 2
Sales P 1,000,000 P 1500,000
Less: variable cost of sales
DM- Y1 (8x20, 000) (160,000)
Y2 (8x30, 000) (240,000)

DL - Y1- (10x20, 000) (200,000)

Y2- (10x30, 000) (300,000)
FHO-Y1- (2x20, 000) (40,000)
Y2- (2x30, 000) (60,000)
Less: variable S&A Expense (@3 per unit)
Y1- (3x20, 000) (60,000)
Y2- (3x30, 000) (90,000)
Contribution Margin P540, 000 P810, 000
Less: Fixed cost
Manufacturing (350,000) (350,000)
Selling and Administrative (250,000) (250,000)
Net income/loss (P60, 000) P 210,000

b. Reconciliation of absorption and variable costing

Year 1 Year 2
Units in Beginning Inventory 0 P 5,000
Add: Units Produced 25,000 25,000
Less: Units Sold 20,000 30,000
Units in Ending Inventory 5,000 0

Year 1 Year 2

Fixed Manufacturing overhead, Ending (5,000x10) 50,000 -

Less: Fixed manufacturing overhead, Beg. (5,000x10) (50,000)
Manufacturing deferred in (increase from) inventory 50,000 50, 000

Variable Costing unit product cost= 20/2= 10

Reconciliation of Net Income

Year 1 Year 2

Net Income, absorption costing P 10,000 P 140, 000

Add: Fixed overhead, Beg. Inventory 0 70, 000
Total 10,000 210,000
Less: Fixed overhead, Ending. Inventory (70,000) 0
Net Income, variable costing (P60, 000) P 210,000