Gabuya, Christine E

Case A: Assuming that the units sold totals 900 units.

1. Compute the unit costs under absorption and variable costing methods

ABSORPTION COSTING VARIABLE COSTING

DIRECT MATERIALS P 1,000 P1,000
DIRECT LABOR 1,400 1,400
VARIABLE MANUFACTURING
500 500
OVERHEAD
FIXED MANUFACTURING
3,000 ----
OVERHEAD
UNIT COST P 5,900 P 2,900

Solution:

Fixed manufacturing overhead: 3,000,000/1,000 = 3,000

2. Prepare the income statement under absorption and variable costing methods

Absorption Costing

Sales (900 x 12,000) P 10,800,000

COGS (900 x 5,900) (5,310,000)

Gross Profit 5,490,000

OPEX (Var. (200 x 900) = 180,000 + Fixed – 2,000,000) (2,180,000)

Net Income P 3,310,000

Variable Costing

Sales (900 x 12,000) P 10,800,000

Variable Cost (Mftg. (900 x 2,900) = 2,610,000 + S&A (200 x 900) = 180,000) (2,790,000)

Contribution Margin 8,010,000

Fixed Cost (Mftg. – 3,000,000 + S&A – 2,000,000) (5,000,000)

Net Income P 3,010,000

3. Compute the value of ending inventory under absorption and variable costing methods

Beginning Inventory 300 ABSORPTION VARIABLE COSTING

COSTING
Production 1,000
ENDING 400 x 5,900 = 2,360,000 400 x 2,900 = 1,160,000
1,300 INVENTORY

Sales (900)

Ending Inventory 400

*increase of 100 in ending inventory

3. Reconcile the difference in operating income under the absorption and variable costing methods

Variable Costing Net Income 3,010,000

Add: 100 x 3,000 300,000

Absorption Net Income 3,310,000

Case B: Assuming that the units sold totals 1,050 units.

4. Prepare the income statement under absorption and variable costing methods

Absorption Costing

Sales (1,050x 12,000) P 12,600,000

COGS (1,050 x 5,900) (6,195,000)

Gross Profit 6,405,000

OPEX (Var. (200 x 1,050) = 210,000 + Fixed – 2,000,000) (2,210,000)

Net Income P 4,195,000

Variable Costing

Sales (1,050 x 12,000) P 12,600,000

Variable Cost (Mftg. (1,050 x 2,900) = 3,045,000 + S&A (200 x 1,050) = 210,000) (3,255,000)

Contribution Margin 9,345,000

Fixed Cost (Mftg. – 3,000,000 + S&A – 2,000,000) (5,000,000)

Net Income P 4,345,000

 Variable
Absorption Costing
Costing

Ending 250 x5,900 250 x 2,900

5. Compute the value of ending inventory under Inventory = 1,475,000 = 725,000
absorption and variable costing methods

Beginning Inventory 300

Production 1,000

1,300

Sales (1,050)

Ending Inventory 250

*decrease of 50 in ending inventory

6. Reconcile the difference in operating income under the absorption and variable costing methods

 Variable Costing Net Income 4,345,000

less: 50 x 3,000 150,000

Absorption Net Income 4,195,000

Case C: Assuming that the units sold totals 1,000 units

7. Prepare the income statement under absorption and variable costing methods

Absorption Costing

Sales (1,000 x 12,000) P 12,000,000

COGS (1,000 x 5,900) (5,900,000)

Gross Profit 6,100,000

OPEX (Var. (200 x 1,000) = 200,000 + Fixed – 2,000,000) (2,200,000)

Net Income P 3,900,000

Variable Costing

Sales (1,000 x 12,000) P 12,000,000

Variable Cost (Mftg. (1,000 x 2,900) = 2,900,000 + S&A (200 x 1,000) = 200,000) (3,100,000)

Contribution Margin 8,900,000

Fixed Cost (Mftg. – 3,000,000 + S&A – 2,000,000) (5,000,000)

Net Income P 3,900,000

Variable
Absorption Costing
Costing
8. Compute the value of ending inventory under
absorption and variable costing methods Ending 300 x 5,900 300 x 2,900
Inventory = 1,770,000 = 870,000

Beginning Inventory 300

Production 1,000

1,300

Sales (1,000)

Ending Inventory 300