CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
MAS 9204
MANAGEMENT ADVISORY SERVICES

PRODUCT COSTING AND ACTIVITY-BASED COSTING

PART 1: PRODUCT COSTING (VARIABLE & ABSORPTION COSTING)
PRODUCT & PERIOD COSTS, A RECAP
Before introducing variable and absorption costing, we must have a recap first on product and
period costs since these concepts are heavily used in this topic.
Product Costs Period Costs
(1) Inventoriable? Yes No
(2) Charged amount in income statement Proportionate only Full amount
(based on units sold)
(3) Denominator used in computing
per unit cost Generally, production Sales
DEFINITION OF TERMS
ABSORPTION COSTING
A.K.A. Full Costing, Conventional Costing, GAAP/PFRS Costing and Traditional Costing
A product costing method that includes ALL MANUFACTURING COSTS as part of the cost of
a unit of product.
VARIABLE COSTING
A.K.A. Marginal Costing, Non-GAAP Costing and Direct Costing
A product costing method that includes ONLY VARIABLE MANUFACTURING COSTS as part
of the cost of a unit of product.
PRODUCT COST UNDER
VARIABLE COSTING ABSORPTION COSTING
MANUFACTURING COSTS:
(1) Direct Materials  
(2) Direct Labor  
(3) Variable Overhead  
(4) Fixed Overhead X 
NON-MANUFACTURING COSTS:
(1) Selling Expenses X X
(2) Administrative Expenses X X
THROUGHPUT COSTING
A.K.A. Super-variable Costing
A product costing method that treats all costs, except direct materials, as period costs. In other
words, under this costing ONLY DIRECT MATERIALS are treated as PRODUCT COSTS. This
costing method results in a lower amount of manufacturing costs being inventoried than
variable or absorption costing.
NORMAL CAPACITY
Normal capacity is the average level of activity over a long period of time or over a budgeting
period. This is used in computing STANDARD FIXED COSTS PER UNIT.
VARIABLE COSTING vs. ABSORPTION COSTING
Variable Costing Absorption Costing
(1) Treatment on FFOH Period cost Product Cost
(2) Focus of reporting Internal reporting External reporting
(3) Income statement format CVP format Traditional/PFRS format
Sales xx Sales xx
Variable Costs xx COGS xx
Contribution Margin xx Gross Profit xx
Fixed Costs xx Operating Expense xx
Operating Income xx Operating Income xx
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(4) Treatment on volume variance Ignored Considered

(5) Required by PFRS or GAAP No Yes
(6) Income fluctuates with Sales Production
RULES ON NET INCOME
(1) If PRODUCTION > SALES
 Absorption Costing Income > Variable Costing Income
 Ending Inventory > Beginning Inventory
(2) If PRODUCTION < SALES
 Absorption Costing Income < Variable Costing Income
 Ending Inventory < Beginning Inventory
(3) If PRODUCTION = SALES
 Absorption Costing Income = Variable Costing Income
 Ending Inventory = Beginning Inventory
STANDARD COSTING APPLICATION
 COGS and inventories are initially measured at standard.
 Thereafter, variances should be disposed. (Please see discussion on standard costing
regarding disposition of variances). If the variance is immaterial it is disposed to COGS
 Unfavorable variances – added to COGS Favorable variances – deducted from COGS
 The most common variance encountered on this topic is VOLUME VARIANCE and
computed as follows:
Budgeted FC (Normal Capacity x Standard FC per unit) xx
Applied FC (Actual Capacity x Standard FC per unit) xx
VOLUME VARIANCE [UNFAVORABLE (FAVORABLE)] xx / (xx)
RECONCILIATION OF NET INCOME
In reconciling or converting the net income from absorption costing to variable costing and vice
versa, please use the below template (ABEV TEMPLATE)
Absorption Costing Net Income xx
+ Beginning Inventory FFOH (Beg. Inv. X FFOH/unit) xx
- Ending Inventory FFOH (End. Inc. x FFOH/UNIT) xx
Variable Costing Net Income xx

PART 2: ACTIVITY-BASED COSTING (ABC)

BASIC CONCEPTS
Definition
Activity-based costing is an accounting costing method that collects financial and other data on
the basis of the underlying nature and extent of cost drivers.
Nature of ABC
 The MAIN ISSUE of this topic is ALLOCATION of fixed factory overhead costs and other
indirect costs.
 This costing system is a TWO-STAGE procedure that uses MULTIPLE DRIVERS to predict
and allocate costs to products. Thus, ABC is based on the concept that ACTIVITIES DRIVE
OVERHEAD COSTS.
 Most organizations that use ABC have two-costing systems. The official costing system
that is used for preparing external financial reports and the ABC system that is used for
internal decision making and for management activities.
UNDER ABC
OVERHEAD COSTS ACTIVITIES PRODUCTS
1ST Stage Allocation 2nd Stage Allocation
The steps or activities required in designing an ABC system are:
(1) Process Value Analysis (PVA) (4) Selecting appropriate cost drivers
(2) Identifying activity centers (5) Assigning costs to products
(3) Assigning costs to activity centers
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Activity center can be defined as a part of the production process for which management wants
a separate reporting of the cost of the activity involved.
Advantages & Limitations of ABC
ADVANTAGES:
(1) More accurate product costing (3) Better management decisions
(2) Better control to costs (4) Elimination of Non-value adding activities
LIMITATIONS / DISADVANTAGES:
(1) Costly to implement (3) Some arbitrary allocations continue
(2) Does not conform with PFRS
When to use ABC?
(1) When there are signs of poor cost data. Examples are:
(a) Competitors prices for low volume products are high.
(b) Customers don’t balk at price increases for low volume products
(c) The company seems to have a highly profitable niche all to itself.
(2) Overhead costs constitute a MAJOR portion of total costs.
(3) Complexity of operations.
(4) Products and services vary significantly in terms of volume.
(5) Costs are subject to management distortion.

TRADITIONAL COSTING vs. ACTIVITY-BASED COSTING

ABC TRADITIONAL
Assume that products consume activities Assume that products consume costs
Uses drivers at various levels Uses volume-based cost drivers
(e.g. direct labor hours and machine hours)
Process-oriented Structure-oriented
Accurate cost information Inaccurate or misleading cost information
NOTE: In traditional costing, high volume products are being assigned with high costs also
because the driver used is volume based (peanut-butter costing). But, if the company
implements ABC, these high volume products will be assigned with low costs only. This
phenomenon is known as CROSS SUBSIDIES.
COST LEVELS
COST LEVELS DEFINITION ACTIVITY DRIVERS
performed each time a Direct labor hours, direct labor
Unit Level
unit is produced peso, machine hours, units output
set-up time, number of batches,
performed each time a material moves, orders processed,
Batch Level batch of goods is handled number of receipts, number of
or processed inspections, number of production
orders
performed as needed to desing time, testing time, number
support the production of of engineering change orders,
Product Level
each different type of number of categories of parts,
product design changes
sustain a facility's general
Facility Level square footage occupied
manufacturing process
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EXERCISES:
Actual Costing – Classification of Costs under Variable and Absorption Costing
1. Indicate with a check mark whether each of the following would be a product cost or a
period cost under an absorption or a variable system for BENGUET CORP.
Absorption Variable
Product Period Product Period
a. Direct materials
b. Direct labor
c. Factory utilities
d. Factory rent
e. Indirect labor
f. Factory supervisor salaries
g. Factory maintenance (variable)
h. Factory depreciation
i. Sales salaries
j. Sales commissions

Actual Costing – Production Cost, Unit Cost, Net Income and Inventories
2. CABADBARAN CORP., produces non-fat yogurt which it sells to restaurants and ice cream
shops. The product is sold in 10-gallon containers, which have the following price and
variable costs.
Sales price P30
Direct materials 10
Direct labor 4
Variable overhead 6
Budgeted fixed overhead in 2019, the company’s first year of operations, was P600,000.
Actual production was 150,000 10-gallon containers, of which 125,000 were sold.
CABADBARAN incurred the following selling and administrative expenses.
Fixed P100,000 for the year
Variable P2 per container sold
REQUIREMENTS:
(a) Compute the unit product cost per container of frozen yogurt under variable costing
and absorption costing, respectively.
(b) Prepare the operating income statements for 2019 using absorption costing and
variable costing.
(c) Reconcile the operating income reported under the two methods.
(d) Compute the throughput margin and income under throughput costing.

Variable Costing Income Statement (Conversion from Absorption Net Income)

3. KALIBO CORP. prepared the following absorption-costing income statement for the year
ended May 31, 2019
Sales (16,000 units) P 320,000
Cost of goods sold 216,000
Gross margin P104,000
Selling and administrative expenses 46,000
Operating income P 58,000
Additional information follows:
Selling and administrative expenses include P1.50 of variable cost per unit sold. There
was no beginning inventory, and 17,500 units were produced. Variable manufacturing
costs were P11 per unit. Actual fixed costs were equal to budgeted fixed costs.
REQUIREMENT: Prepare a variable-costing income statement for the same period.
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Absorption Costing Income Statement (Conversion from Variable Net Income)

4. LEGAZPI COMPANY manufactures and sells premium tomato juice by the gallon. LEGAZPI
just finished its first year of operations. The following data relates to this first year:
Number of gallons produced 75,000
Number of gallons sold 70,000
Sales price P3.00 per gallon
Unit product cost under variable costing P1.45 per gallon
Total contribution margin P84,000
Total fixed manufacturing overhead cost P63,000
Total fixed selling and administrative expense P10,500
REQUIREMENT: Using the absorption costing method, prepare Succulent Juice Company's
income statement for the year.
Standard Costing – Production Cost, Unit Cost, Net Income and Inventories
5. For each of the following independent situations, fill in the missing data. In all cases, the
standard fixed cost per unit is based on normal capacity of 20,000 units.
A. B. C. D.
Standard Fixed Total Budgeted
Actual Production Volume Variance
Cost per Unit Fixed Costs
1. P______ P__ ____ 21,000 P10,000 F
2. P 3 P__ ____ _______ P 9,000 U
3. P______ P 40,000 18,000 P_______
4. P______ P140,000 _______ P14,000 F
6. The following information is available for SAN JOSE CORP.’s new product line:
Sale price per unit P 30
Variable manufacturing cost per unit of production 8
Total annual fixed manufacturing cost 25,000
Variable administrative cost per unit 3
Total annual fixed administrative expenses 15,000
There was no inventory at the beginning of the year. Normal capacity is 12,500 units.
During the year, 12,000 units were produced and 10,000 units were sold.
REQUIREMENTS:
(1) What is the cost of ending inventory under direct costing and absorption costing,
respectively?
(2) What is the net income under direct costing and absorption costing, respectively?
Activity-based Costing
7. DORAEMON CORP. produces flat-screen computer monitors. Consider the following
selected costs that arose during the current year:
(1) Direct materials used: P3,640,000
(2) Plant rent, utilities, and taxes: P1,229,000
(3) New technology design engineering: P2,040,000
(4) Materials receiving: P318,000
(5) Manufacturing-run/set-up charges: P115,000
(6) Equipment depreciation: P92,000
(7) General management salaries: P1,564,000
REQUIREMENT: Determine the cost of the firm's unit-level, batch-level, product-
sustaining, and facility-level activities.
8. GHOSTFIGHTERS CORP. produces two products, Product KK and GG, and uses a costing
system in which all overhead is accumulated in a single cost pool and allocated based on
machine hours. The company's management has decided to implement ABC because a
cost study has revealed significant amounts of overhead cost related to setup activity and
design activity. The number of setups and the number of design hours will be the activity
drivers for the two new cost pools, and machine hours will continue as the base for
allocating the remaining overhead. Selected information follows the San Juan Company's
most recent year of operations:
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ACTIVITY-BASED COSTING

Product KK Product GG Total

Units produced 500 15,500 16,000
Direct material cost:
Per unit P200 P20
Total P100,000 P310,000 P410,000
Machine hours 3,000 47,000 50,000
Direct labor cost P50,000 P350,000 P400,000
Setups 120 80 200
Design hours 6,000 4,000 10,000
Overhead:
Setup-related P250,000
Design-related 350,000
Other 900,000
Total overhead P1,500,000
REQUIREMENTS:
1. Compute the total and per-unit costs reported for the two products by the existing
costing system.
2. Compute the total and per-unit costs reported for the two products by the ABC
system.

SELF-TESTS
VARIABLE & ABSORPTION COSTING and ACTIVITY-BASED COSTING(ABC)
1. Inventoriable costs under absorption costing include
A. both fixed and variable production costs.
B. only variable production costs.
C. all production costs plus variable selling and administrative costs.
D. all production costs plus all selling and administrative costs.
2. Absorption costing differs from variable costing in that
A. standards can be used with absorption costing, but not with variable costing.
B. absorption costing inventories are more correctly valued.
C. production influences income under absorption costing, but not under variable
costing.
D. companies using absorption costing have lower fixed costs.
3. Consider the following statements about absorption costing and variable costing:
I. Variable costing is consistent with contribution reporting and cost-volume-profit
analysis.
II. Absorption costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
A. I only. D. I and II.
B. II only. E. I, II, and III.
C. III only.
4. If a firm produces more units than it sells, absorption costing, relative to variable costing,
will result in
A. higher income and assets. C. lower income but higher assets.
B. higher income but lower assets. D. lower income and assets.
5. Which of the following situations would cause variable-costing net income to be lower
than absorption-costing net income?
A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by P7 per unit during the accounting period.
E. Selling expenses increased by 10% during the accounting period.
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6. The fixed-overhead volume variance under variable costing:

A. coincides with the fixed manufacturing overhead that was applied to production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget variance.
E. must be unfavorable.
7. Profit under absorption costing may differ from profit determined under variable costing.
How is this difference calculated?
A. Change in the quantity of all units in inventory times the relevant fixed costs per
unit.
B. Change in the quantity of all units produced times the relevant fixed costs per unit.
C. Change in the quantity of all units in inventory times the relevant variable cost per
unit.
D. Change in the quantity of all units produced times the relevant variable cost per
unit.
8. Which of the following must be known about a production process in order to institute a
variable costing system?
A. the variable and fixed components of all costs related to production
B. the controllable and non-controllable components of all costs related to production
C. standard production rates and times for all elements of production
D. contribution margin and break-even point for all goods in production
9. How will a favorable volume variance affect net income under each of the following
methods?
A. B. C. D.
Absorption Costing Reduce Reduce Increase Increase
Variable Costing No Effect Increase No Effect Reduce
10. When sales are constant, but the production level fluctuates, net operating income
determined by the absorption costing method will:
A. tend to fluctuate in the same direction as fluctuations in the level of production.
B. tend to remain constant.
C. tend to fluctuate inversely with fluctuations in the level of production.
D. none of these
11. Which cost is charged to the product under variable costing?
A. Variable manufacturing overhead C. Variable administrative expenses
B. Fixed manufacturing overhead D. Fixed administrative expenses
12. The manufacturing cost per unit for absorption costing is
A. usually, but not always, higher than manufacturing cost per unit for variable costing.
B. usually, but not always, lower than manufacturing cost per unit for variable costing.
C. always higher than manufacturing cost per unit for variable costing.
D. always lower than manufacturing cost per unit for variable costing.
13. Under absorption costing and variable costing, how are direct labor costs treated?
Absorption Variable
A. Product Cost Product Cost
B. Product Cost Period Cost
C. Period Cost Product Cost
D. Period Cost Period Cost
14. Income reported under absorption costing and variable costing is:
A. always the same.
B. typically different.
C. always higher under absorption costing.
D. always higher under variable costing.
E. always the same or higher under absorption costing.
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15. When production exceeds sales,

A. some fixed manufacturing overhead costs are deferred until a future period under
absorption costing.
B. some fixed manufacturing overhead costs are deferred until a future period under
variable costing.
C. variable and fixed manufacturing overhead costs are deferred until a future period
under absorption costing.
D. variable and fixed manufacturing overhead costs are deferred until a future period
under variable costing.
16. Calculating income under variable costing does NOT require knowing
A. selling price. C. unit sales.
B. unit production. D. unit variable manufacturing costs.
17. Orion's management recently committed to incurring direct labor and all manufacturing
overhead charges regardless of the number of units produced. Under throughput costing,
the company's cost of goods sold would include charges for:
A. selling and administrative costs.
B. direct materials.
C. direct labor and manufacturing overhead.
D. direct materials, direct labor, and manufacturing overhead.
E. direct materials, direct labor, manufacturing overhead, and selling and administrative
costs.
18. If inventory quantities increase during a period,
A. Variable costing profits will equal absorption costing profits.
B. Absorption costing profits will exceed variable costing profits.
C. Variable costing profits will exceed absorption costing profits.
D. Variable costing will show a higher inventory value than absorption costing.
19. A manufacturing company prepares income statements using both absorption- and
variable-costing methods. At the end of the period, actual sales revenues, total gross
margin, and total contribution margin approximated budgeted figures, whereas net
income was substantially below the budgeted amount. There were no beginning or
ending inventories. The most likely explanation of the net income shortfall is that,
compared to budget, actual
A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had increased.
C. Sales price and variable costs had declined proportionately.
D. Sales prices had declined proportionately more than variable costs.
20. As compared with total absorption costing profit over the entire life of a company, total
variable costing profit will
A. Be less.
B. Be equal.
C. Be greater.
D. Be substantially greater or less depending upon external factors
21. A cost that is included as part of product costs under both absorption costing and direct
costing is:
A. insurance D. variable marketing expenses.
B. managerial staff costs E. variable materials handling labor
C. taxes on factory building
22. If unit costs remain unchanged and sales volume and sales price per unit both increase
from the preceding period when operating profits were earned, operating profits must
A. Increase under the variable costing method.
B. Decrease under the variable costing method.
C. Increase under the absorption costing method.
D. Decrease under the absorption costing method.
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23. The fixed-overhead volume variance under variable costing:

A. coincides with the fixed manufacturing overhead that was applied to production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget variance.
E. must be unfavorable.
24. Which of the following formulas can often reconcile the difference between absorption-
and variable-costing net income?
A. Change in inventory units x predetermined variable-overhead rate per unit.
B. Change in inventory units ÷ predetermined variable-overhead rate per unit.
C. Change in inventory units x predetermined fixed-overhead rate per unit.
D Change in inventory units ÷ predetermined fixed-overhead rate per unit.
E. (Absorption-costing net income - variable-costing net income) x fixed-overhead rate
per unit.
25. ABC had the same activity in 20X4 as in 20X3 except that production was lower in 20X4
than in 20X3. ABC will show
A. lower income in 20X4 than in 20X3.
B. the same income in both years.
C. the same income in both years under variable costing.
D. the same income in both years under absorption costing
26. What factor, related to manufacturing costs, causes the difference in net earnings
computed using absorption costing and net earnings computed using variable costing?
A. Absorption costing "inventories" all direct costs, but variable costing considers direct
costs to be period costs.
B. Absorption costing considers all costs in the determination of net earnings, whereas
variable costing considers fixed costs to be period costs.
C. Absorption costing "inventories" all fixed costs for the period in ending finished
goods inventory, but variable costing expenses all fixed costs.
D. Absorption costing allocates fixed overhead costs between cost of goods sold and
inventories, and variable costing considers all fixed costs to be period costs.
27. Absorption costing and variable costing are two different methods of assigning costs to
units produced. Of the following five cost items listed, identify the one that is not correctly
accounted for as a product cost.
Part of Product Cost under
Part of Product Absorption Cost Variable Cost
A. Direct labor cost Yes Yes
B. Insurance on factory Yes No
C. Manufacturing supplies Yes Yes
D. Packaging and shipping costs Yes Yes
28. Advocates of variable costing argue that fixed production costs should be
A. charged to the period in which they are incurred.
B. capitalized as an asset and amortized over future periods when benefits from such
costs are expected to be received.
C. added to inventory because such costs have future service potential and therefore
are inventoriable as an asset.
D. charged to the period in which they are incurred unless sales do not equal
production in which case any difference should be capitalized as an asset and
amortized over future periods.
29. Which of the following is not true of variable costing?
A. Profits fluctuate with sales.
B. Profits may increase though sales decrease.
C. The cost of the product consists of all variable production costs.
D. The income statement under variable costing does not include overhead volume
variance.
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30. Which of the following is true of a company that uses absorption costing?
A. Variable selling expenses are included in product costs.
B. Net operating income fluctuates directly with changes in sales volume.
C. Fixed production and fixed selling costs are considered to be product costs.
D. Unit product costs can change as a result of changes in the number of units
manufactured.
31. PROSPERIDAD CORP. produces a single product and has the following cost structure:
Number of units produced each year 7,000
Variable costs per unit:
Direct materials P51
Direct labor P12
Variable manufacturing overhead P2
Variable selling and administrative expense P5
Fixed costs per year:
Fixed manufacturing overhead P441,000
Fixed selling and administrative expense P112,000
The unit product cost under absorption costing is:
A. P149 C. P63
B. P65 D. P128
Use the following information in answering the next item(s):
KABUGAO INC. produces a single product. Data concerning June's operations follow:
Units in beginning inventory 0
Units produced 6,000
Units sold 5,000

Variable costs per unit:

Manufacturing P7
Selling and administrative P3

Fixed costs in total:

Manufacturing P12,000
Selling and administrative P3,000
32. Under variable costing, ending inventory on the balance sheet would be valued at:
A. P10,000 C. P9,000
B. P7,000 D. P12,000
33. Under absorption costing, ending inventory on the balance sheet would be valued at:
A. P10,000 C. P9,000
B. P7,000 D. P12,000
34. For the year in question, net operating income under variable costing will be:
A. higher than net operating income under absorption costing.
B. lower than net operating income under absorption costing.
C. the same as net operating income under absorption costing.
D. none of these
Use the following information in answering the next item(s):
BALER CORP. manufactures a variety of products. The following data pertain to the
company's operations over the last two years:
Variable costing net operating income, last year P52,000
Variable costing net operating income, this year P68,000
Fixed manufacturing overhead costs released from
inventory under absorption costing, last year P4,000
Fixed manufacturing overhead costs deferred in
inventory under absorption costing, this year P6,000
35. What was the absorption costing net operating income last year?
A. P50,000 C. P52,000
B. P48,000 D. P56,000
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36. What was the absorption costing net operating income this year?
A. P62,000 C. P70,000
B. P74,000 D. P66,000
37. LAMITAN COMPANY’s gross margin exceeded its contribution margin by P25,000. If sales
totaled P175,000 when net operating income equaled P20,000 and total selling and
administrative expenses equaled P55,000, then the contribution margin equaled:
A. P75,000 C. P30,000
B. P80,000 D. P50,000

Use the following information in answering the next item(s):

BALANGA CORP. manufactures a single product. Variable production costs are P20 and
fixed production costs are P150,000. BALANGA uses a normal activity of 10,000 units to
set its standard costs. BALANGA began the year with no inventory, produced 11,000
units, and sold 10,500 units.
38. Ending inventory under variable costing would be
A. P10,000 C. P17,500
B. P15,000 D. P20,000
39. Ending inventory under absorption costing would be
A. P10,000 C. P17,500
D. P20,000 B. P15,000
40. The volume variance under variable costing would be
A. P0 C. P15,000
B. P10,000 D. Some other number.
41. The volume variance under absorption costing would be
A. P0 C. P15,000
B. P10,000 D. Some other number.
42. The standard cost of goods sold under variable costing would be
A. P200,000 C. P367,500
B. P210,000 D. Some other number.
43. The standard cost of goods sold under absorption costing would be
A. P200,000 C. P367,500
B. P210,000 D. Some other number.
44. LA TRINIDAD CORP. manufactures a variety of products. Variable costing net operating
income was P96,300 last year and ending inventory decreased by 2,600 units. Fixed
manufacturing overhead cost was P1 per unit. What was the absorption costing net
operating income last year?
A. P2,600 C. P96,300
B. P93,700 D. P98,900
45. NAVAL INC. had P100,000 income using absorption costing. NAVAL has no variable
manufacturing costs. Beginning inventory was P5,000 and ending inventory was P12,000.
What is the income under variable costing?
A. P88,000 C. P100,000.
B. P93,000 D. P107,000
Use the following information in answering the next item(s):
MALAYBALAY CORP. produces a single product that sells for P7.00 per unit. Last year,
100,000 units were produced and 80,000 units were sold. There were no beginning
inventories. The company has the following cost structure:
Fixed Costs Variable Costs
Raw materials -- P1.50 per unit produced
Direct labor -- P1.00 per unit produced
Factory overhead P150,000 P0.50 per unit produced
Selling and administrative P80,000 P0.50 per unit sold
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46. The unit product cost under absorption costing is:

A. P2.50 C. P3.50
B. P3.00 D. P4.50
47. The net operating income under variable costing is:
A. P50,000 C. P90,000
B. P80,000 D. P120,000
48. A company manufactures a single product for its customers by contracting in advance of
production. Thus, the company produces only units that will be sold by the end of each
period. For the last period, the following data were available:
Sales P40,000
Direct materials 9,050
Direct labor 6,050
Rent (9/10 factory, 1/10 office) 3,000
Depreciation on factory equipment 2,000
Supervision (2/3 factory, 1/3 office) 1,500
Salespeople’s salaries 1,300
Insurance (2/3 factory, 1/3 office) 1,200
Office supplies 750
Advertising 700
Depreciation on office equipment 500
Interest on loan 300
The gross profit margin percentage (rounded) was
A. 34% C. 44%
B. 41% D. 46%
49. MALOLOS CORP.’s 1988 manufacturing costs were as follows:
Direct materials and direct labor P700,000
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed manufacturing overhead 18,000
What amount should be considered product cost for external reporting purposes?
A. P700,000 C. P880,000
B. P800,000 D. P898,000
50. DAET CORP. manufactures and sells boxed coconut cookies. The biggest market for these
cookies are as gifts that college students buy for their business teachers. There are 100
cookies per box. The following income statement shows the result of the first year of
operations. This statement was the one included in the company’s annual report to the
stockholders.
Sales (400 boxes at P12.50 a box) P5,000.00
Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income 1,000.00
Variable selling and administrative expenses are P0.90 per box sold. The company
produced 500 boxes during the year. Variable manufacturing costs are P5.25 per box and
fixed manufacturing overhead costs total P1,375 for the year.
What is the company’s direct costing net income?
A. P 725 C. P2,265
B. P1,000 D. P2,540
Use the following information in answering the next item(s):
The following information is available for PILI CORP. for its first year of operations:
Sales in units 5,000
Production in units 8,000
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ACTIVITY-BASED COSTING

Manufacturing costs:
Direct labor P3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead P100,000
Net income (absorption method) P30,000
Sales price per unit P40
51. What would PILI CORP. have reported as its income before income taxes if it had used
variable costing?
A. (P30,000) C. P30,000
B. (P7,500) D. P67,500
52. What was the total amount of SG&A expense incurred by PILI CORP.?
A. P6,000 C. P36,000
B. P30,000 D. P62,500
53. Based on variable costing, what would PILI CORP. show as the value of its ending
inventory?
A. P24,000 C. P64,500
B. P27,000 D. P120,000
Use the following information in answering the next item(s):
ROXAS CORP. employs an absorption costing system for internal reporting purposes;
however, the company is considering using variable costing. Data regarding ROXAS’
planned and actual operations for the 1995 calendar year are presented below.
Planned Activity Actual Activity
Beginning finished goods inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000
The planned per unit cost figures shown in the next schedule were based on the
estimated production and sale of 140,000 units in 1995. ROXAS uses a predetermined
manufacturing overhead rate for applying manufacturing overhead to its product. Thus, a
combined manufacturing overhead rate of P9.00 per unit was employed for absorption
costing purposes in 1995. Any over- or under-applied manufacturing overhead is closed
to the cost of goods sold account at the end of the reporting year.
Planned Cost Incurred
Per Unit Total Costs
Direct materials P12.00 P1,680,000 P1,560,000
Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing overhead 4.00 560,000 520,000
Fixed manufacturing overhead 5.00 700,000 715,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Variable administrative expenses 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000
Total P50.00 P7,000,000 P6,620,000
The 1995 beginning finished goods inventory for absorption costing purposes was valued
at the 1994 planned unit manufacturing cost, which was the same as the 1995 planned
unit manufacturing cost. There are no work-in-process inventories at either the beginning
or the end of the year. The planned and actual unit selling price for 1995 was P70.00 per
unit.
54. The value of ROXAS’ 1995 actual ending finished goods inventory on the absorption
costing bases was
A. P900,000 C. P1,220,000
B. P1,200,000 D. P1,350,000
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55. The value of ROXAS’ 1995 actual ending finished goods inventory on the variable costing
basis was
A. P750,000 C. P1,125,000.
B. P1,000,000. D. P1,400,000.
56. ROXAS’ total fixed costs expensed in 1995 on the absorption costing bases were
A. P2,030,000 C. P2,095,000
B. P2,055,000 D. P2,120,000
57. ROXAS’ actual manufacturing contribution margin for 1995 calculated on the variable
costing basis was
A. P4,375,000 C. P4,910,000
B. P4,935,000 D. P5,625,000.
58. The total variable costs expensed in 1995 by ROXAS on the variable costing basis was
A. P4,325,000 C. P4,500,000
B. P4,375,000 D. P4,550,000
59. The difference between ROXAS’ 1995 operating income calculated on the absorption
costing basis and calculated on the variable costing basis was
A. P25,000 C. P65,000
B. P40,000 D. P90,000
60. IMUS CORP. Manufactures a single product for which the costs and selling prices are:
Variable production costs P 50 per unit
Selling price P125 per unit
Fixed production overhead P200,000 per quarter
Fixed selling and administrative overhead P80,000 per quarter
Normal capacity 20,000 units per quarter
Production in first quarter was 19,000 units and sales volume was 16,000 units. No
opening inventory for the quarter.
The absorption costing profit for the quarter was
A. P920,000 C. P960,000
B. P950,000 D. P970,000
61. Traditional overhead allocations result in which of the following situations?
A. The resulting allocations cannot be used for financial reports.
B. Overhead costs are assigned as period costs to manufacturing operations.
C. Low-volume products are assigned too much, and high-volume products are
assigned too little overhead.
D. High-volume products are assigned too much overhead, and low-volume products
are assigned too little overhead.
62. Which of the following is NOT a trait of a traditional cost management system?
A. allocation intensive C. narrow and rigid product costing
B. focus on managing activities D. unit-based drivers
63. Symptoms of an outdated cost system include all of the following EXCEPT
A. competitors’ prices appear unrealistically low.
B. products that are difficult to produce show little profit.
C. the company has a highly profitable niche all to itself.
D. product costs change because of changes in financial reporting.
64. Activity-based costing and generally accepted accounting principles differ in that ABC
A. does not define product costs in the same manner as GAAP.
B. cannot be used to compute an income statement, but GAAP can.
C. information is useful only to managers, while GAAP information is useful to all
organizational stakeholders.
D. is concerned only with costs generated from automated processes, but GAAP is
concerned with costs generated from both manual and automated processes.
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ACTIVITY-BASED COSTING

65. Design of an ABC system requires

A. an adjustment to product mix.
B. that the job bid process be redesigned.
C. that a cause-and-effect relationship exists between resource costs and individual
activities.
D. both (A) and (C).
66. Book Co. uses the activity-based costing approach for cost allocation and product costing
purposes. Printing, cutting, and binding functions make up the manufacturing process.
Machinery and equipment are arranged in operating cells that produce a complete product
starting with raw materials. Which of the following are characteristic of Boo’s activity-
based costing approach?
I. Cost drivers are used as a basis for cost allocation.
II. Costs are accumulated by department or function for purposes of product costing.
III. Activities that do not add value to the product are identified and reduced to the
extent possible.
A. I only. C. I and III.
B. I and II. D. II and III.
67. The UNIQUE feature of an ABC system is the emphasis on
A. costing individual jobs. C. individual activities.
B. department indirect-cost rates. D. multiple-cost pools.
68. ABC systems create
A. one large cost pool.
B. activity-cost pools with a broad focus.
C. homogenous activity-related cost pools.
D. activity-cost pools containing many direct costs.
69. The use of activity-based costing normally results in
A. Equalizing setup costs for all product lines.
B. Decreased setup costs being charged to low-volume products.
C. Substantially greater unit costs for low-volume products than is reported by
traditional product costing.
D. Substantially lower unit costs for low-volume products than is reported by traditional
product costing.
70. In Activity-based Costing, which of the following would be considered a value-added
activity?
A. Bookkeeping. C. Repair of machines.
B. Engineering designs. D. Storage of inventory.
71. In the pharmaceutical or food industries, quality control inspections would most likely be
viewed as
A. business-value-added activities. C. process-efficiency activities.
B. non-value-added activities. D. value-added-activities.
72. All of the following are examples of non-value-added activities except:
A. assembling C. handling
B. expediting D. reworking
73. The ideal standard quantity for nonvalue-added activities is
A. zero
B. practical capacity
C. the currently attainable quantity standard
D. the cost of resources acquired in advance of usage
74. The following items are used in tracing costs in an ABC system. In which order are they
used?
(1) cost object (3) activity driver
(2) cost driver (4) cost pool
A. 1, 2, 3, 4 C. 2, 4, 3, 1
B. 2, 3, 4, 1 D. 4, 3, 1, 2
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ACTIVITY-BASED COSTING

75. An item or event that has a cause-effect relationship with the incurrence of a variable cost
is called a
A. cost driver. C. mixed cost.
B. direct cost. D. predictor.
76. Which of the following is typically regarded as a cost driver in traditional accounting
practices?
A. number of customers served
B. number of direct labor hours worked
C. number of purchase orders processed
D. number of transactions processed
77. A cost pool is
A. All costs that have the same driver.
B. All of the costs of a particular department.
C. All costs related to a product or product line.
D. All costs in a group such as variable costs or discretionary fixed costs.
78. The activities that drive resource requirements are called the
A. Activity drivers. C. Resource drivers.
B. Cost objects. D. Sustaining activities.
79. Products make diverse demands on resources because of differences in all of the following
EXCEPT
A. batch size. C. selling price.
B. complexity. D. volume.
80. __________________ are causal factors that explain the consumption of overhead.
A. Activity drivers C. Cost objectives
B. Cost catchers D. Cost pools
81. A time-and-motion study revealed that it should take 1 hour to produce a product that
currently takes 3 hours to produce. Labor is P8 per hour. Nonvalue-added costs are
A. P0 C. P16
B. P8 D. P24
82. Setup time for a product is six hours. A firm that uses JIT and produces the same product
has reduced setup time to 30 minutes. Setup labor is P24 per hour. Value-added costs are
A. P12 C. P132
B. P24 D. P144
83. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each
unit has been averaging 9 gallons of raw material. The raw material costs P4 per gallon.
Value-added costs are
A. P2 C. P32
B. P4 D. P36
84. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to
raw materials shortages. Carrying costs average P2,000 per day. A competitor keeps 10
days of inventory on hand the competitor’s carrying costs average P1,000 per day. Value-
added costs are
A. P0 C. P20,000
B. P10,000 D. P40,000
85. DRAGON BALL CORP. has used a traditional cost accounting system to apply quality
control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly
direct labor cost for Satin Sheen makeup is P27,500. In an attempt to distribute quality
control costs more equitably, New Rage is considering activity-based costing. The
monthly data shown in the chart below have been gathered for Satin Sheen.
Quantity for
Activity Cost Driver Cost Rates Satin Sheen
Incoming material inspection Type of material P11.50 per type 12 types
In-process inspection Number of units P0.14 per unit 17,500 units
Product certification Per order P77per order 25 orders
MAS 9204 PRODUCT COSTING & Page 17 of 19
ACTIVITY-BASED COSTING

The monthly quality control cost assigned to Satin Sheen makeup using activity-based
costing is
A. P8,500.50
B. P88.64 per order.
C. P525.50 lower than the cost using the traditional system.
D. P525.50 higher than the cost using the traditional system.
Use the following information in answering the next item(s):
MOJAKO INC. uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity based
costing system:
Costs:
Manufacturing overhead P600,000
Selling and admin. expenses 220,000
Total P820,000
Distribution of resource consumption:
Activity Cost Pools
Order Size Customer Support Other Total
Manufacturing overhead 15% 75% 10% 100%
Selling and admin. Expenses 60% 20% 20% 100%
The "Other" activity cost pool consists of the costs of idle capacity and organization-
sustaining costs. You have been asked to complete the first-stage allocation of costs to
the activity cost pools.
86. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
activity cost pool?
A. P123,000 C. P307,500
B. P222,000 D. P492,000
87. How much cost, in total, should NOT be allocated to orders and products in the second
stage of the allocation process if the activity-based costing system is used for internal
decision-making?
A. P0. C. P104,000.
B. P82,000. D. P164,000.
88. How much cost, in total, would be allocated in the first-stage allocation to the Customer
Support activity cost pool?
A. P164,000 C. P494,000
B. P389,500 D. P615,000
Use the following information in answering the next item(s):
A company has identified the following overhead costs and cost drivers for the coming
year.
Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level
Machine setup No. of setups P 20,000 200
Inspection No. of inspections P130,000 6,500
Material handling No. of material moves P 80,000 8,000
Engineering Engineering hours P 50,000 1,000
The following information was collected on three jobs that were completed during the
year:
Job 101 Job 102 Job 103
Direct materials P5,000 P12,000 P8,000
Direct labor P2,000 P 2,000 P4,000
Units completed 100 50 200
Number of setups 1 2 4
Number of inspections 20 10 30
Number of material moves 30 10 50
Engineering hours 10 50 10
Budgeted direct labor cost was P100,000, and budgeted direct material cost was
P280,000.
MAS 9204 PRODUCT COSTING & Page 18 of 19
ACTIVITY-BASED COSTING

89. If the company uses activity-based costing, how much overhead cost should be allocable
to Job 101?
A. P1,300 C. P5,000
B. P2,000 D. P5,600
90. If the company uses activity-based costing, compute the cost of each unit of Job 102.
A. P340 C. P440
B. P392 D. P520
91. The company prices its products at 140% of cost. If the company uses activity-based
costing, the price of each unit of Job 103 would be
A. P98 C. P116
B. P100 D. P140
Use the following information in answering the next item(s):
GOKU CORP. recently installed an activity-based relational data base. Using the
information contained in the activity relational table, the following pool rates were
computed:
P200 per purchase order
P12 per machine hour, process A
P15 per machine hour, process B
P40 per engineering hour
Two products are produced by GOKU CORP.: A and B. Each product has an area in the
plant that is dedicated to its production. The plant has two manufacturing processes,
process A and process B. Other processes include engineering, product handling and
procurement. The product relational table for Special is as follows:
Activity Usage
Activity Driver # Name Product A Product B
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500
92. How much overhead cost will be assigned to product A using the number of purchase
orders?
A. P25,000 C. P66,750
B. P50,000 D. P40,000,000
93. How much overhead cost will be assigned to product B using engineering hours?
A. P50,000 C. P400,500
B. P60,000 D. P1,000,000
94. How much overhead cost will be assigned to product A using process A?
A. P120,000 C. P1,200,000
B. P960,000 D. P2,400,000
95. How much overhead cost will be assigned to product B using process B?
A. P120,000 C. P960,000
B. P150,000 D. P1,200,000
96. What is the unit cost of Product A?
A. P3.76 C. P5.30
B. P4.71 D. P252.00
97. What is the unit cost of Product B?
A. P6.00 C. P9.40
B. P6.41 D. P252.00
Use the following information in answering the next item(s):
GOHAN INC. has two products: A and B. The annual production and sales of Product A is
800 units and of Product B is 500 units. The company has traditionally used direct labor-
hours as the basis for applying all manufacturing overhead to products. Product A requires
0.3 direct labor hours per unit and Product B requires 0.2 direct labor hours per unit. The
total estimated overhead for next period is P92,023.
MAS 9204 PRODUCT COSTING & Page 19 of 19
ACTIVITY-BASED COSTING

The company is considering switching to an activity-based costing system for the purpose
of computing unit product costs for external reports. The new activity-based costing
system would have three overhead activity cost pools--Activity 1, Activity 2, and General
Factory--with estimated overhead costs and expected activity as follows:
Estimated Expected Activity
Activity Cost Pool Overhead Costs Product A Product B Total
Activity 1 P14,487 500 600 1,100
Activity 2 P64,800 2,500 500 3,000
General Factory P12,736 240 100 340
Total P92,023
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)
98. The overhead cost per unit of Product B under the traditional costing system is closest to:
A. P2.63. C. P7.49.
B. P4.32. D. P54.13.
99. The overhead cost per unit of Product A under the activity-based costing system is closest
to:
A. P11.24. C. P81.20.
B. P70.79. D. P86.97.
100. GOTEN INC. makes a variety of backpacks. The activity centers and budgeted information
for factory overhead for the year are
Activity Center Overhead Costs Cost Driver Activity Center Rate
Materials Handling P 3,000,000 Weight of materials P 3 00 per pound
Cutting 13,000,000 Number of shapes P30 00 per shape
Assembly 46,000,000 Direct labor hours P120 00per labor hour
Sewing 12,000,000 Machine hours P 80 00 per machine hour
Two styles of backpacks were produced in December, the EasyRider and the Ovenighter
The quantities and other operating data for the month are
Easy Rider Overnighter
Direct materials costs P150,000 P200,000
Direct labor cost P300,000 P 50,000
Direct materials weight in pounds 50,000 15,000
Number of shapes 35,000 15,000
Assembly direct labor hours 7,500 1,200
Sewing machine hours 12,500 1,800
Units produced 5,000 1,000
Calculate the cost per unit for each backpack.
A. EasyRider. P620; Overnighter. P783
B. EasyRider, P1,232; Overnighter, P1,240
C. EasyRider, P783; Overnighter, P620
D. EasyRider, P710; Overnighter, P1,033
KEY ANSWER TO SELF-TEST
1. A 16. B 31. D 46. D 61. D 76. B 91. A
2. C 17. B 32. B 47. A 62. B 77. A 92. B
3. E 18. A 33. C 48. D 63. B 78. C 93. B
4. A 19. A 34. B 49. D 64. A 79. C 94. B
5. A 20. C 35. B 50. A 65. C 80. A 95. B
6. C 21. E 36. B 51. B 66. C 81. C 96. C
7. A 22. A 37. D 52. D 67. C 82. A 97. C
8. A 23. C 38. A 53. B 68. C 83. C 98. D
9. C 24. C 39. C 54. B 69. C 84. A 99. D
10. A 25. C 40. A 55. B 70. B 85. D 100. D
11. A 26. D 41. C 56. C 71. D 86. B
12. C 27. D 42. B 57. D 72. A 87. C
13. A 28. A 43. C 58. B 73. A 88. C
14. B 29. B 44. B 59. A 74. C 89. A
15. A 30. D 45. B 60. B 75. A 90. A
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