NET INCOME NET INCOME

ABSORPTION VARIABLE
Sales Sales
(Cost of Goods Direct Materials (Variable Cost) Direct Materials
Sold) Direct Labor Direct Labor
Overhead – Variable & Fixed Overhead – Variable
(Manufacturing cost/Product cost) Selling and Administrative – Variable
Gross Profit Contribution
(Operating Selling and Administrative – Variable & Fixed Margin
Expenses) (Period cost) (Fixed Costs) Overhead – Fixed
Net Income Selling and Administrative – Fixed
Net Income

ABSORPTION VARIABLE
Product cost Direct Materials Product cost Direct Materials
Direct Labor Direct Labor
Overhead – Variable & Fixed Overhead – Variable

Period cost Selling and Administrative – Variable & Period cost Selling and Administrative – Variable & Fixed
Fixed Overhead – Fixed

ENDING INVENTORY
ABSORPTION & VARIABLE
Beginning Inventory (units) xx
Add: Production xx
Less: Sold (xx)
Ending Inventory (units) xx
Multiplied by: Product cost xx
Ending Inventory (peso value) xx
 RECONCILIATION OF NET INCOME
ABSORPTION & VARIABLE
Net Income, Variable Net Income, Variable xx
xx
Add: Fixed cost in ending inventory xx Add: Units in ending inventory xx
(units in end, inventory*fixed overhead per unit) (units in end, inventory*fixed overhead per unit/fixed overhead per unit)
Less: Fixed cost in beginning inventory (xx) Less: Units in beginning inventory (xx)
(units in beg, inventory*fixed overhead per unit) (units in beg, inventory*fixed overhead per unit/fixed cost per unit)
Net Income, Absorption xx Net Income, Absorption xx

RELATIONSHIP BETWEEN PRODUCTION AND SALES NET INCOME INVENTORIES

P=S Absorption = Variable Ending inventory, bal. = Beginning inventory, bal.
P>S Absorption > Variable Ending inventory, bal. > Beginning inventory, bal.
P<S Absorption < Variable Ending inventory, bal. < Beginning inventory, bal.