PAMANTASAN NG LUNGSOD NG VALENZUELA Tongco St. Brgy. Maysan, Valenzuala City STRATEGIC COST MANAGEMENT JA Labay VARIABLE AND ABSORPTION COSTING Absorption costing is a costing system which treats all costs of production as product costs, regardless weather they are variable or fixed. The cost of a unit of product under absorption costing method consists of direct materials, direct labor and both variable and fixed overhead. Absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing cost. Because absorption costing includes all Costs of production as product costs, itis frequently referred to as full costing method. Variable costing is a costing, system under which those costs of production that vary with output are treated as product costs. This would usually include direct materials. direct labor and variable portion of manufacturing overhead. Fixed manufacturing cost is not treated as a Product costs under variable costing. Rather, fixed manufacturing cost is treated as a period cost and, like selling and administrative expenses, it is charged off in its entirety against revenue each period. Consequently, the cost of a unit of product in inventory or cost of goods sold under this method does not contain any fixed overhead cost. Variable costing is some time referred to as wlireet costing or marginal costing, To complete this summary comparison of absorption and variable costing, we need to consider briefly the handling of sclling and administrative expenses. ‘These expenses ate Never treated as product costs, regardless of the costing method in use. Thus, under either absorption or variable costing, both variable and fixed selling and administrative expenses are always treated as period costs and deducted from revenues red. Absorption Costing Variable Costing, Direct Materi } Direct Labor Variable Overhead (Fixed Overkead Product Costs Product Costs { Administrative Expenses Period Costs { Period Costs \ \ | Absorption costing is the e it reflects a more comprehensive net i and tax purposes be and a more complete cost of inventories on balance sheet by shifling costs between different periods in accordance with the matching concept. ome stater Income Statement under Absorption Costing (Traditivi Sales xx Cost of Goods Sok (xx) Gross Profit xx Operating Expenses (xx) Net Operating Income 3x Strategic Cast Mamagement - Variable/ Absa pti Page 1 of 5tion Format): Variable Cost ser & Contribution Margin we Fixed Cost (0) Net Operating Income xx Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes: Variable Costing Net Operating, Income x Fixed Manufacturing Overhead Costs Deferred / (Released) ftom Inventory under Absorption Costing Absorption Costing Net Operating Income Note: Ifthe production equals sales, AC NOV is equal to VC NOL Ifthe production is greater than safes, AC NOI is greater than VC NOL. If the production is ess than sales. AC NOH is less than VC NOL PROBLEMS 1. The Company, which has only one product, has provided the following data concerning its ‘most recent month of operations: Selling Price P99 Units in beginning inventory 500 Units produced 6,800 Units sold 6.900 Units in ending inventory 400 Variable costs per unit Direct materials Pal Direct labor P28 Variable manufacturing overhead P3 Variable sclling and administrative PS Fixed costs: Fixed manufacturing overhead P 47,600 Fixed selling and administrative P 82.800 company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and lotal fixed costs have ‘om month to month. been consta Required: a. What is the unit product cost b. What is the unit product cost ©. Prepare a contribution format in d, Prepare an income statement for the month using absorption costing. e. Reconcile the variable costing and absorption costing net operating incomes for the month der variable costing? +r absorption costin F the month u the month v atement for the mon! mk using variable costing,2. The C OmPany, whi OSL recent month of operations: Selling Price 104 Units in beginning inventory 0 Units produced 3.300 Units sold 3,000 Units in ending inventory 300, Variable costs per unit: Direct materials P26 Direct labor P37 Variable manufacturing overhead PS Variable selling and administrative Pio Fixed costs: Fixed manufacturing overhead P 16,500 Fixed selfing and administrative 45,000 Required: aa, What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? ‘h has only one product, has provided the following data concerning its ©. Prepare a contribution format income statcment for the month using variable costing. d. Prepare an income statement for the month using absorption costing. €. Reconeile the variable costing and absorption costing nei operating incomes for the month 3. The Company. which produces a single product, has provided the following data for its most recent menth of operation: Number of units produced 5,000 Variable costs per unit Direct materials P85 Direct labor P67 Variable manufacturing overhead P2 Variable selling and administrative Pl Fixed costs: Fixed manufacturing overhead P 70,000 Fixed selling and administrative P 185,000 he company had no heginning or ending inventories Required: a, Compute the uni b, Compute the unit product cost under variable costing 4. The Corporation manufactures a variety income, last year P 84,400 Variable costing net operating income. this year P 87,900 Increase in ending inventory, last year 1,300 Increase in ending inventory. this year 0 Fined momafactering overbend cost per unit P2 products. The following data pertain to the Strategic Cost Management ~ Variable/Absorption Costing Page 3 of 5ey Domine the absorption costing net operating income for last year. + Determine the absorption costing net operating income for this year. 5. The Company, which has only one product, has provided the following data concerning its ‘MOSt recent month of operations: Selling Price P21 Units in beginning inventory 300 Units produced 6.900 Units sold 7,100 Units in ending inventory 100 Variable costs per unit: Direct materials P36 Direct labor P43 Variable manufacturing overhead P3 Variable selling and administrative Pil Fixed costs: Fixed manufacturing overhead 131,100 Fixed selling and administrative P 49,700 The company produces the same number of units every month, although the sales in units vary from month to month. The company’s variable costs per unit and total fixed costs have been constant from month to month Required: a. What is the unit product cost for the month under variable costing? bo. Prepare a contribution format income statement for the month using va ¢. Without preparing an income statement, determine the absorption costing nct operating income for the month. (Hint: Use the reconciliation method.) he costing, 6. The Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling Price pu Units in beginning inv 0 Units produced 3,300 Units sold 200 Units in ending inventor 100 Variable costs per unit Direct materials P31 Direct labor P37 Variable manufacturing overhead P2 Variable selling and administrative P? Fixed costs: Fixed manufacturing overhead P 112,200 Fixed selling and 2 P6400 Strategic Cost Management - Variable/Absorption Costing Page 4 of 5Product cost for the month under variable costing? b. Prepare a contributi ©. Without preparing ot Otmat income statement forthe month using variable costing. ing an income statement, determine the absorption costing net operating income for the month. (Hint: Use the reconciliation method.) 7. The Company, whicl 'y- Which has only or as provi sing i Tost recent nent aes by Oe prot has provided te following data conceming ts Selling Price P 123 Units in beginning inventory 300 Units produced “ 7,600 Units sold 74M Units in ending inventory 500 Variable costs per unit: Direct materials P46 rect labor P26 ‘Variable manufacturing overhead Pl Variable selling and administrative P4 Fixed costs: Fixed manufacturing overhead 235,600 Fixed selling and administrative P 88,800 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a. Prepare a contribution format income statement for the month using variable costing b. Prepare an income statement for the month using absorption costing. 8. The Company. which has only one product, has provided the following data conceming its most recent month of operations: Selling Price pi2d Units in beginning inventory 0 Units produced 6,100 Units sold 5,600 Units in ending inventory 500 Variable costs per unit: Direct materials P23 Direct labor P43 Variable manufacturing overhead P2 Variable selling and administrative Pil Fixed costs Fixed manufacturing overhead P 183,000 Fixed selling and administrative P 61,600 Required: a. Prepare a contribution format income statement for the month using variable costing. b. Prepare an income statement for the month using absorption costing — ‘Strategic Cost Management - Variable/Absorption Costing Page 5 of 5