Absorption and Variable Costing

Exercises

1. Production is more than Sales; Ending Inventory is higher than Beginning Inventory

Keicy Company makes a single product that sells for P 2,000 each. Data for 2022’s operations follow:

Units Variable Costs

Beginning Inventory 5 Direct Materials P 30,000
Production 50 Direct Labor 15,000
Ending Inventory 15 Factory Overhead 5,000
Selling and Administrative 6,000

Fixed Costs
Factory Overhead P 20,000
Selling and Administrative 3,000

Required:
1. Determine the inventory cost per unit under:
a. Absorption costing
b. Variable costing
2. Determine the total cost of ending inventory under:
a. Absorption costing
b. Variable costing
3. Prepare the income statement under:
a. Absorption costing
b. Variable costing
4. Without knowing the exact amounts of profit under absorption costing and variable costing:
a. How much is the difference in profit?
b. Which costing method has the higher profit.

2. Production is less than Sales; Ending Inventory is lower than Beginning Inventory

Sabina Company makes a single product that sells for P 2,000 each. Data for 2022’s operations
follow:

Units Variable Costs

Beginning Inventory 15 Direct Materials P 30,000
Production 50 Direct Labor 15,000
Ending Inventory 5 Factory Overhead 5,000
Selling and Administrative 6,000

Fixed Costs
Factory Overhead P 20,000
Selling and Administrative 3,000

Required:
 1. Determine the inventory cost per unit under:
a. Absorption costing
b. Variable costing
2. Determine the total cost of ending inventory under:
a. Absorption costing
b. Variable costing
3. Prepare the income statement under:
c. Absorption costing
a. Variable costing
4. Without knowing the exact amounts of profit under absorption costing and variable costing:
a. How much is the difference in profit?
b. Which costing method has the higher profit.

Wrap-Up Exercises

1. Which of the following is a product cost under absorption costing but not under variable costing?

a. Variable factory costs

b. Fixed factory costs
c. Variable marketing costs
d. Fixed marketing costs

2. Under absorption costing, fixed factory overhead costs are best described as

a. Direct product costs.

b. Indirect product costs.
c. Direct period costs.
d. Indirect period costs.

3. As compared to variable costing inventory cost, inventory cost under absorption costing is typically

a. The same.
b. Higher.
c. Lower.
d. The same or lower in certain cases.

Items 4 to 6 are based on the following information:

Prince Company manufactures a single product. Unit variable production costs are P 20 and fixed
production costs are P 150,000. Prince uses a normal activity of 10,000 units. Prince began the year with
no inventory, produced 12,000 units, and sold 7,500 units.

4. How much is the unit product cost under variable costing?

a. P 20.00
b. P 32.50
c. P 35.00
 d. P 40.00

5. How much is the unit product cost under absorption costing?

a. P 20.00
b. P 32.50
c. P 35.00
d. P 40.00

6. What is the volume variance under absorption costing? (Note: Volume variance is the difference
between actual production and normal production, multiplied by the fixed factory overhead per unit.)

a. P 24,000 favorable
b. P 24,000 unfavorable
c. P 30,000 favorable
d. P 30,000 unfavorable

7. Jeffrey Company has an operating income of P 50,000 under direct costing. Beginning and ending
inventories were 13,000 and 18,000 units, respectively. If the fixed factory overhead application rate
is P 2 per unit, then what is the operating income under the absorption costing?

a. P 40,000
b. P 50,000
c. P 60,000
d. P 70,000

END