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    “CHAPTER 4 VARIABLE COSTING 136 Profit Modelling ‘There are two (2) profit determination models that are popularly used - the variable costing and the absorption costing, The variable costing is used for management reporting while the absorption costing is used for external reporting. ‘The variable costing Variable costing s premised on the philosophy that costs are either fixed or variable. Variable. ————— costs relate to units sold. The difference between sales and variable costs is called the Coss contribution margin. It is used to absorb fixed costs and generate profit. fixed or variable. ‘A condensed variable costing statement of profit or loss is shown below: b Table 4.1. Pro-Forma Condensed Statement of Profit or Loss - Variable Costing Variable costing follows the The variable costing (also called marginal costing or direct costing) income statement is f Production (20,000 units) 1. Formulas Femember me Rios SFAOR = BExOH NC 2. The case environment Notice that the cases have the same level of production at 20,000 units which is equal to the normal capacity. This is an important observation! it means we do no have volume variance in this sample problem. Next, in case letter “A”, sales are greater than production; in case letter “B", sales are less than production; and in case letter “C’, sales equal production. 3. Profit (loss) determination : Now, let us compute the profit or loss by getting the differences in sales, costs, and ‘expenses under each costing systems. Costs and expenses include all of the variable _ cost of goods sold, fixed overhead, variable expenses, and fixed expenses. The profit | under each method is computed as follows; : Computation + Absorption’ Variable” Sales 22,000 x P200 4,400,000 4,400,000 oy Re Variable CGS 22,000 x P120 (2,640,000) (2,640,000) ‘Absorption Costing Fixed overhead | -22,000xP 20 (440,000) FXOH = Sx SFXOR z 20,000 xP. 20 ( 400000) | —=——— Variable expenses ~ 22,000xP-10 . (220,000) (220,000) pane Coat Fixed expenses 20,000xP 5 (100,000) Profit (loss) Y B1.900,000 . (For computation guidelines, refer to discussions number “1” above.) ‘The fixed overhead under the absorption costing method is based on the number of units sold (ie,, 22,000 units) because it is a product cost and therefore is expensed based Scanned with CamScanner 141 VARIABLE COSTING CHAPTER 4 on the number of units sold. Gone The fixed ovethead under the variable costing method is a period cost. .As such all the bosedononnal budgeted fixed overhead is deducted from sales without regard to the number of units capacity gold. The budgeted fixed overhead and budgeted fixed expenses are computed as follows: ‘Normal capacity x Standard Fixed Overhead Rate 20,000 units x P 20 Budgeted fixed overhead Budgeted fixed expenses = Normal capacity x Standard Fixed Expenses Rate 20,000 units x PS To emphasize, budgeted fixed overhead and fixed expenses are based onnormal capacity. » Incase actual fixed overhead is given, the same shall beincluded in the variable costing income statement, instead that of the budgeted fixed overhead. However, under the ' absorprtion costing system, the fixed overhead is reported based on standard costs and the difference between the actual and standard fixed overhead is reported as fixed “overhead variance to be reflected in the profit or loss statement. The fixed expenses ate allocated over normal capacity for more strategic reason and is used purposely for this particuler problem. For short-term analysis, the standard fixed expense rate is related to units sold.) 4. The difference in profit Incase A, the difference in profitis P40,000 (.e.,P1,040,000 -P1,000,000). The difference in profit between absorption and variable costing methods may be accounted for using four (4) methods, as follows: Method 1. Diréct reconciliation. Get the difference in the amount of fixed overhead charged under the two methods, as shown below: Absorption ‘Variable Change Sales P.4400000 p4400000 Po - Variable CGS (2,640,000) (2,640,000) 3 Fixed overhead (440,000) (400,000) 40,000 Variable expenses ( 220,000) . (220,000) - Fixed expenses ' 190000) (190,900) : Profit (oss) Boon == BLoanong =p an.00 Note that sales, variable cost of goods sold, variable expenses, and fixed expenses are the same under each method, Only the fixed overhead differs in amount between the absorption and variable costing methods. The difference in the fixed overhead amount Scanned with CamScanner CHAPTER 4 VARIABLE COSTING A explains the difference in profit between the two profit modelling systems. Method 2. Production and sales perspective. Get the change in production and sales . and multiply it by the standard unit fixed overhead rate. f Production 20,000 units ‘BinP=P-3) Sales (22,000) : xSFXOR Change in inventory (2.000) units x Standard fixed overhead rate Pp -20 yi Change in profit 40,000 This emphasizes that the change in profit between the two costing systemsiis on the fixed ‘overhead accounting: This mehtod is the normal technique we will use in accounting for the change in profit between the absorption costing and variable costing systems. Method 3. Beginning and inventory units perspective. Another way to get the change in inventory is by getting the differencein the beginning and ending inventory units. Check it Beginning inventory 4,000. units: Less: Ending inventory i 2,000 units Change in inventory 2,000 units x Standard fixed overhead rate. * P20 Change in profit P 40,000 + Ending invty= Beg. Invty. + Production - Sales = 4,000 units + 20,00 units - 22,000 units = 2000 units Method 4. Beginning and inventory amounts perspective. Get the changes in the values ‘of beginning and ending inventories under each of the methods. * : Bre Blunts xuC Absorption __ Variable Change" 2 ey Uris RUC, Beginning inventory P 560,000 5 (4,000 units x P140) 480,000 .P 80,000 (4,000 units x P'120) ee ars Ges x Ending inventory * OPA 2s (2,000 units x P 140) 280,000 (2,000 units x P 120) 240,000 _ (40,000) Change in profit ! P.40,000 Scanned with CamScanner CGM= Prodx uC 6. The cost of goods sold (the long way 143 VARIABLE COSTING CHAPTER 4 The beginning inventory is already released to expenses while the ending inventory cost is deferred to the inventory account: 5. The unit product costs The unit product costs (or unit inventoriable costs) for the two profit modelling systems are determined below: Absorption Variable Unit variable costs P 120 P 120 Unit fixed overhead 20: Pa: Unit product costs [ ) Unit variable costs include the costs of direct materials, direct labor, and variable overhead. The fixed overhead is a period cost, and not a product cost, under the variable costing method. Cost of goods sold is units sold times the unit product cost. It could also be determined using the financial accounting method as follows: Absorption . Variable Beginning inventory P 560,000 P 480,000 + Cost of goods manufactured (20,000 x P 140) 2,800,000 "2,400,000 (20,000 xP 120) Total goods available for sale 3,360,000 2,880,000 Ending inventory 280,000 240,000 Cost of goods sold P3,080,000_P2,640,000 Refer to the solutions/discussions of profit in Sample Problem "3.2", item no. 3. We will find out that the sum of variable cost and fixed overhead is P3,080,000 (ie., 2,640,000 + P440,000) and is thé cost of goods sold under the absorption costing system. ‘The variable cost of goods sold under the Variable costing method, as determined in solutions/discussions of Sample Problem "3.2 item no. 3, is also P2,640,00. ‘Throughout this text, we will use the direct and shorter method of computing the cost ‘of goods sold (i.e., units sold x unit cost). Scanned with CamScanner CHAPTER 4 VARIABLE COSTING Ws Discussion : Case B - Sales (19,000 units) < Production (20,000 units) The profit is computed as follows: Absorption. Variable sales (19,000 x P-200) 3,800,000 » P3,800,000 variable cost of goods sold (19,000xP 210) (2,280,000) (2,280,000) Fixed overhead (19,000 x P 120) ( 380,000) (406,000) {budgeted amount} Variable expenses (19,000 x P 10) (190,000) (190,000) Fixed expenses (100,000), (100,000) {unchanged} Profit (loss) 850,000 _P_830,000 The difference in profit (loss) of P20,000 is accounted for as follows: Production 20,000 units Sales (2,000) Change in inventory. _ 7,000. units x Standard fixed overhead rate P20 Change in profit P30,000 Discussion : Case C - Sales (20,000 units) = Production (20,000 units) The profit is computed as follows: Absorption» Variable ‘ sales (20,000 x P 200) P 4,000,000 P 4,000,000 Variable cost of goods sold (20,000xP210) (2,400,000) (2,400,000) Lay Fixed overhead (20,000 x P 120) (400,000) (400,000) (budgeted amount) Variable expenses (20,000 x P 10) (200,000) - (200,000) Fixed expenses (100,000) _( 100,000) {unchanged} Profit (loss) P 909000 _P 900,000 ‘There is no difference in profit (loss) because there is no change in inventory. This means production equals sales, and cost of goods manufactured equals the cost of goods sold. Let us pause for a little summary... Atthis point let us summarize our profit orloss data under each of the discussed independent cases in pages 137-142, to wit: : Scanned with CamScanner CHAPTER 4 145 k VARIABLE COSTING CaseA CaseB CaseC 20,000 Sales (units) 22,000 19,000 , Fe aay mil che fit P1,000,¢ ,( , OE 1,040,000 830,000 900,000 Variable costing, profit From this, we can observe the following learning points: Profit Drivers "Profit (Loss) Vo protteates s to sales, AC ‘Sales > Production | Variable profit > Absorption profit oft relat ; be lei Sales < Production: | Variable profit < Absorption profit Sales = Production | Variable profit = Absorption profit Variable costing profit follows the trend in sales. When Sales are greater than production, variable costing profit is greater than absorption costing profit; and when sales are lower than production, variable costing profit is less than absorption costing profit. When sales equal production, the profit (loss) between variable costing and absorption costing is equal. When sales exceed production, the cost of fixed overhead recorded in the absorption costing is greater than that of the variable costing. This is because the amount of fixed overhead charged against income is determined based on the number of actual units sold. Therefore, inasmuch as sales in units are greater than production, the fixed overhead recorded under the absorption costings also greater, resulting to higher cost of goods sold and lower profit than that of the variable costing system. - When sales are lower than production, the fixed overhead charged in the absorption costing is lower and its profit is higher than variable costing.: Note that the fixed overhead charged in the variable costing is constant regardless of the level of sales while the fixed overhead charged in the absorption costing changes in relation to units sold. £ In variable costing, as sales increase, profit also increases; as sales decline, profit also declines. This observation follows a manager's normal train of thought with regard to the relationship of sales and profit, This differs from the reports using absorption costing where there are instances that sales are increasing but profit is declining, and vice-versa. Now, we should also say thatif variable costing follows sales, then/absorption costing follows production. That is, if production is greater than the sales, absorption costing income is greater than that of variable costing. And if productions less than sales, absorption costing profit is less than that of variable costing. Sample problem 4.3. Profit (Loss) Calculation, Normal Capacity Differs From The ‘Actual Production. * ‘ Hunter X Hunter Corporation has the following standard costs and production data in 200Y: Scanned with CamScanner CHAPTER 4 VARIABLE COSTING ge Unit sales price P 200 Unit fixed > le expenses PS Unit variable cost of production 120” Beginning ero 4,000 units Unit fixed overhead 20 _ Normal capacity 20,000 units Unit variable expenses 10 ‘The fixed expenses are also based on normal capacity, Required: Determine the operating income under absorption costing and variable costing under each of the following independent cases: solutions/Discussions: Case A-Sales (22,000 units) > Production (21,000 units), With Volume Variance 1. First, compute the volume variance because the actual production is not equal to the WW=NCU-ACU_ normal capacity. zi Normal capacity in units 20,000 = Actual capacity in units 21,000 Volume variance in units (1,000) F x Standatd fixed overhead rate P20 r ———— NCU< ACU == F Volumne variance in pesos 20,000 F — Volume variance represents the ability of the business to meet its normal capacity. ‘Volume variance is related to fixed overhead, itis constant per total amount but changes -per unit, In short, fixed overhead is not controlled on its total amount but is controlled in relation to volume (Le, production). Over the years, a business would have already j developed its average capacity (ie., normal capacity) that settles at the middle of the ups and downs of its production levels (please refer to page XXXX154). If normal capacity is greater than actual capacity, there is an under-absorbed capacity anditisan =! unfavorable variance. If normal capacity is less than actual capacity, there is an over- absorbed capacity, a favorable variance, ‘Acost variance is the difference between the actual costs and standard costs. If actual costs are greater than standard costs, the cost variance is unfavorable. If actual costs are less than standard costs, the cost variance is favorable. i Under the standard costing system, the costs are recorded at standard, Financial reports, however, are prepared at actual data. As ‘such, unfavorable variances are added to standard cost of goods sold, while favorable variances are deducted from standard cost Scanned with CamScanner UF variance iS added to Std (CGS or deducted from profit. Fav variance is deducted from the Std. CGS 147 VARIABLE COSTING CHAPTER 4 of goods sold to get the actual cost of goods sold. That is why unfavorable cost variance is also called debit variance, while favorable cost variance is called credit variance. Volume variance is included only in the absorption costing income statement. Since volume variance relates to fixed overhead which is a product cost under the absorption method, hence, the volume variance is considered. Under the variable costing, however, the fixed overhead is a period cost, an expense and is not subject to cost variance analysis, 3, The computation of profit (loss), with volume variance, is shown below: Absorption Variable Sales (22,000 x P 200) 4,400,000 P.4400,000 Variable cost of goods sold (22,000xP 120) (2,640,000) (2,640,000) Fixed overhead (22,000 x P20) (- 440,000) (400,000) (budgeted amounty ‘Volume variance - favorable 20,000 F na Variable expenses (22,000 x P 10) (220000) (220,000) Fixed expenses (_ 100,000) (100,000) (unchanged) Profit (loss) Pe 000 _P 7,040,000 U= Unfavorable variance F = Favorable variance The favorable volume variance is added because the profit is computed directly. The normal treatment, though, fora favorable cost variance is to deduct it from the standard cost of goods sold. Alsonote the volume variance is treated only under the absorption costing method. The difference in profit of P20,000 is accounted for as follows: Production 21,000 units Sales (22,000) Change in inventory > (1,000). units x Standard filed overhead rate P20 Change in profit P 20,000 Case B - Sales (15,000 units) < Production (18,000 units), With Capacity Variance 1. First, compute the capacity variance because the actual production is not equal to the normal capacity, Scanned with CamScanner CHAPTER 4 VARIABLE COSTING sd Normal capacity 20,000 units Actual capacity 18,000 Volume variance in units 2,000 U x Standard fixed overhead rate P20 Volumne variance in pesos “P4000 U 2... The profit (oss) is computed as follows: Absorption Variable sales (15,000 x P 200) 3,000,000 3,000,000 Variable cost of goods sold (15,000 xP 120) . (7,800,000) (1,800,000), Fixed overhead (15,000 x P 20) (300,000) (400,000) {budgeted amount) ‘Volume variance favorable (40,000) u na. ‘Variable expenses (15,000 x P 10) (150,000) - (150,000) Fixed expenses (100,000) _(_100,000)_ (unchanged) Profit (loss) , P_ 610,000 _ P-§50,000 The unfavorable volume variance is deducted from profit. ‘The normal treatment of an unfavorable variance is as addition to the standard cost of goods sold. Using a direct _ Method of computating profit, an increase in cost of goods soldis a deduction from profit. The difference in operating profit of P60,000 is accounted for as follows: Production , 18,000 units Sales (15,000) Change in inventory (3,000). units x Standard fixed overhead rate P20 Change in profit : P 60,000 The Normal Capacity Normal capacity refers to the average production level of the business over a long range of ‘time or over the period covered in the budget. It is influenced, one way or another, by plant ‘capacity, market size, budgetary capability legal restrictions, cultural orientations, and other variables. ’ Budgeted capacity is the targeted production level of operations in a given period. Sample Problem 4.4. Normal Capacity v. Budgeted Capacity Let us assume the following levels of production of a business operations in the last seven Normal capacity isthe expected capacity over the long-term. Scanned with CamScanner ia VARIABLE COSTING CHAPTER 4 years: Year1 45,000 units Year 5 60,000 Year 2 35,000 » Year 6 35,000 Year 3 50,000 Year? _ 50,000 Year 4 “25,000 Year 8 (estimated) 75,000 Required: Sow graphically the budgeted and normal capacities. Solutions / Discussions: ‘ | The business’ production performance is presented in Fig. 3.1 below.. . | Fig. 4.1. Normal capacity and Budgeted Capacity ; Une The normal capacity of the business is 42,000 units.’ Its the average production level of the business in the last seven years. The company's normal capacity is Set based on its past production records. Normal capacity rests in the middle of the ups and downs of the company's production levels. It serves as the benchmark in assessing the production absorption capacity of the business on its plant capacity. Itis preferred to be used as. denominator in computing the fixed overhead and fixed expenses rates, . : ‘Budgeted capac. The 70,000 units is the budgeted capacity (or expected actual capacity), Budgeted capacity ityfectustes’ Is the expected production in the next accounting cycle or bia ee vttich may be in fromone period months, quarter, year, or other meaningful expressions. : to another, . . lfthenormal capacity is not given, the budgeted capacityis used as a denominator in determining the standard fixed overhead rate. If the normal capacity and the budgeted capacity are not alate then use the practical capacity, the maximum capacity, and, lastly, the actual scapacity. Scanned with CamScanner CHAPTER 4 VARIABLE COSTING cas The P/L Statements : Absorption Costing and Variable Costing ‘The profit and loss statement under the absorption costing follows the international financial reporting standards and the variable costing follows the economic model of determining profit. fi Sample Problem 4. Costing. Profit (Loss) Under the V: ble Costing and Absorption . Gotong Company disclosed the following data relative to its July 20CY operations: ‘Actual production 13,000 units Budgeted fixed factory overhead 96,000 ‘Actual units sold 12,000 units Total fixed expenses 30,000 Normal capacity 16,000 units Net materials costs variance 5000 U Budgeted capacity 15,000 ‘units. Net direct labor cost variance 3,000 F Beginning inventory 4,000 units _ Net variable overhead cost variance 1,000 F sales price per unit P so Total variable expenses 40,900 Variabl ecost per unit 20 ‘Actual fixed FOH 99,000 Required: 1. Prepare the statement of profit or loss under absorption casting and variable costing systems 2. Show supporting computations for the volume variance. Solutions/Discussions: The Profit (Loss) Statement + The absorption statement of profit or loss is presented below. Inthe right box are computational guidelines and are not part of the presented statement profit or loss. Scanned with CamScanner 151° VARIABLE COSTING CHAPTER 4 Table 4.6 Absorption Costing Statement of Profit or Loss < ABSORPTION COSTING * Gotong Company ‘Statement of Profit or Loss For The Month Ended, July 31, 20CY Sales : P 600,000 Less: Cost of goods sold Inventory, beginning P 104,000 Add: Cost of goods manufactured 338,000, Total goods available forsale * 442,000 Less: Inventory, ending 130,000 Cost of goods sold, at standard 312,000 ‘Add (deduct) cost variances: Net materials variance 5,000 U Net direct labor variance (3.000) F Net variable OH variance + (1,000) F Fixed OH spending variarice * 000) u Fixed OH volume variance 18,000 U Cost of goods sold, at actual 334,000 Gross profit 266,000 Less: Variable expenses 40,000 Fixed expenses 30,000 70,000 Profit P196,000 | + The variable costing profit or loss statement in the following page: In the right box '¢ for computational guidelines. Scanned with CamScanner CHAPTER 4 VARIABLE COSTING 182 Table 4.7. Variable Costing Statement of Profit or Loss VARIABLE COSTING Gotong Company Statement of Profit or Loss For The Month Ended, July 31, 2067 Sales Less: Cost of goods sold Inventory, beginnit P 80,000 ‘Add: Cost of goods manufactured 260,000 Total goods available for sale 340,000 Less: Inventory, ending 100,000 Cost of goods sold, at standard 240,000 ‘Add (deduct) cost variances: : Net materials variance 5,000U Fixed OH variances are not Net direct labor variance (3.000) F Considered inthe Net variable OH variance (1,000) F VC system. Cost of goods sold, at actual 241,000 : Manufacturing margin Less: Variable expenses Contribution margin Less: Fixed factory overhead 99,000 Fixed expenses 30000 Profit The volume variance is not considered in the computation of variable costing profit or loss statement. In variable costing, fixed overhead is a period cost, an expense, and is not Subject to cost variance analysis. i + The unit product costs are: Absorption Costing Variable Costing Variable cost per unit P20 P 20 Fixed overhead per unit i (P96,000/16,000 units) ages IQ fy ‘ Par Total unit costs p26 The ending inventory Is ,000 unite (Le., 4000 beg. inventory. + 13,000 sales - 12,000 production) * Production cost variances are considered in computing the actual cost of goods sold. Scanned with CamScanner 153 VARIABLE COSTING — CHAPTER 4 Unfavorable cost variance (U) means that actual production cost is greater than standard production cost. Favorable cost variance (F) indicates that actual production cost is lesser than standard production cost. The cost of goods sold to be deducted from sales should be the actual cost of goods sold. Ergo, to compute the actual cost of goods sold, the unfavorable cost variance is added to, and the favorable cost variance is deducted from, the standard cost of goods sold. The volume variance is computed as follows: Normal capacity 16,000 units- Actual capacity 13,000 Capacity variance in units 3,000 U x Standard fixed overhead rate Bre Capacity variance in pesos P 18000 U The difference in operating profit between absorption costing and variable costing is P 6,000 (ie., P196,000 of absorption costing - P190,000 of variable costing). This difference in operating profit is accounted for as shown below: Change in inventory (13,000 units - 12,000 units) 1,060. units x Fixed overhead rate per unit Pi 6 Difference in profit (loss) P 6,000 U The Academic Issue on Fixed Expenses Total fixed expenses, that is, marketing, distribution and administrative are period expenses, and are therefore, unit sales related. Because of this argument, the computation of unit fixed expenses takes two (2) options: (1) based on the units sold; and ,(2) based on normal. capacity. Take note that the other basis is on normal capacity which reflects a strategic and long-term basis. To summarize, we will have: : ‘Std. Fixed Expenses = Budgeted Fixed Expenses/ Theuse of the normal production capacity assumes Normal Sales Capacity the sales and production would be the same in the long-run. This basis In computing the standard fixed | ‘expenses is strategic in its applications. * ‘Std. Fixed Expenses = Budgeted Fixed Expenses / Budgeted Sales Capacity The use of the budgeted sales Capacity glves em- phasis to profit and short-term activities of the bust. ness, This'method endorses short-term approach In profit planning and profit management. Scanned with CamScanner CHAPTER 4 VARIABLE COSTING 14 If a. company is determining its short-term ‘ mpa Profit, the total gs_2 function of sales rather than of production “And since manapeemntacooening 1s traditionally related to operating activitie iti if tate taimber of unt acted: s, the fixed expenses are traditionally determined Absorption Costing vs. Variable Costing: The Strategic Issue learned in this chapter, vari i a production. pter, variable costing follows sales and absorption costing follows This means that to inicrease profit in the variable cost trigger point Anenterprise should keep on generating and itis eee eed finite Pati emphasizes the value of customers thats criticized by other strategists as short ran je Unde this costing system, sales would be realistically higher than production thereby creating an almost zero level of inventory. This would make the supply situation lower than the demand and would further trigger an increase, and continuing increase, in prices to the disadvantage ~ af the buying public. This does not promote stability of production. n this costing system the stratedic pricing is critically influenced by the seller. F Using the absorption costing system, the trigger points production. Management would be encouraged to always make production greater than sales to make profit. This results to a continuing increase in inventory leading to an ‘oversupply situation and, eventually, industry sloudown, It emphasizes long-term availablity of resources. In this costing system, the strategic pricing in the market is actively influenced by both the buyer and the seller. Scanned with CamScanner 185 VARIABLE 1 Unit product costs, profit and cost of COSTING CHAPTER 4 STRAIGHT PROBLEMS (CY = current yea PY = past year; NY = next year) ending inventory. Northern Bicycle produces an inexpensive motorbike that sells for P12,000. Selected data for the company's operations last year follow: Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Manufacturing overhead Selling and administrative Fixed costs per year: Manufacturing overhead Selling arid administrative Required: 300 1,000 ‘800 500 P 1,300 “B00 500 200 P 4,000,000 2,000,000 1. Compute the unit costs under absorption and variable costing methods. 2. Compute the operating income under absorption and variable costing methods. 3. Compute the value of ending inventory under absorption and variable costing methods. 4. Reconcile the difference in operating income under the absorption and variable costing methods. 2. Complete the table below by filling out 3. the missing values. A Absorption Costing Variable Costing Quantity UnitPrice Amount Quantity Unit Price Amount Sales 7? P3000. ? 2 2 ? Variable CGS go00 «1200? 2 2 2 Fixed overhead 2 300 2 10,000 2 2 Variable expenses ? 2.50!) (2 2 2 2 Fixed expenses 2 4007 2 2 2 Profit ? 2 2 2 Inventoriable cost, profit and ending inventory values. Anton Company produces and sells a unique type of TV antenna. It has just opened a new plant to manufacture the antenna, and the following costs and revenue data are reported for the first month of the company’s operations. The management is anxious to see how profitable the new antenna will be and has asked that an income statement be prepared for the month. Scanned with CamScanner HAPTER 4 Beginning inventory Units produced Units sold Sales price per unit Selling and administrative expenses: Variable per unit Fixed Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable overhead cost per unit Fixed overhead cost (total) Required: \ VARIABLE COSTING 156° 0 42,000 35,000 P80 5% of sales P 560,000 15 ao 2 640,000 1, Under variable costing and absorpotion costing, respectively, compute the: a. unit product costs. b. _ profit.. cc, ending inventory value. 2. Reconcile the difference in profit between the absorption and direct costing methods. the following data: Unit product cost, fixed cost and profit. Haiyan Corporation produces a product with ‘A. Standard production costs per unit (Normal capacity = 20,000 units): Direct materials Direc labor. Variable overhead Fixed overhead 2 Ibs. @ P 6.00 1.25 hrs. @ P20.00 1.25 hrs. @ P4.00 1.25 hrs. @ P8.00 12.00 25.00 5.00 10.00 B. Standard distribution and administration expenses: Variable expenses Fixed expenses ©. Regular unit sales price D. ‘Actual data: Beginning inventory Production Sales Required: P 3.00perunit 200,000 per month P.200.00 2,200 units 19,000 units 18,400 units a. The standard unit product cost under absorption costing and variable costing systems. ; b. The budgeted fixed production costs. ©. Profit using absorption costing and variable costing under each of the following independent cases: Production Sales 1. 20,000 22,000 2. 20,000 19,300 3. 20,000 20,000 4, 23,000 23,500 5. 17,500 17,200 Scanned with CamScanner 157 VARIABLE COSTING 6. Fill out the missing values in the following table: Absorption Unit sales price 300.00 Unit sold 20,000 Units produced 23,200 Normal capacity 23200 Sales inpesos - Poe Unit var prod costs 140.00 Variable CGS Po Fixed overhead Ps Std. unit fixed OH rate 20.00 Unit variable expense P. Variable expenses, 200,000 Unit fixed expenses P12.00 Fixed expenses P. Volume variance none Profit (loss) P. Difference in profit Pee Profit (loss) other method —_P. b Variable pase 32,000 30,000 30,000 P. Pcs! P1,600,000 330,000 P. Pp 480,000 P. 320,000 ¥ none 4,000,000 P. P. CHAPTER 4 c d Variable _ Absorption Pate: AP. d 8,000 12,000 8,200 pases P__ Pp _—-P6.00 P144000 P___ P118000 © P___ Pi P70 pit.’ p200 P72,000 P__— Pec ey e120 250,000 P. none none P(400,000) P. 500,000 P= P{_._ P29,000 7.” Profit, inventoriable costs and costs of ending inventory. Golden Company produces an inexpensive product branded as “Ginto". Selected data for the company's last year’s operations follow: Units f Beginning inventory: Normal capacity Unit sales price Variable costs per unit: Direct materials Direct labor Manufacturing overhead Selling and administrative Fixed costs: Manufacturing overhead per unit \ Selling and administrative, total _ 4,000 50,000 Pp 250 P30. 20 25 12 P14 300,000 Required: For each of the following independent cases, determine the profit and account for the difference in profits under the absorption and variable costing methods: Scanned with CamScanner CHAPTER 4 VARIABLE COSTING uy Production Sales 50,000 52,000 50,000 49,500 50,000 50,000 52,000. 51,000 47,500 52,500 gaens 8. Profit computation and reconciliation. Maggie has just obtained a patent on a small electronic device and organized Maggie Products, Inc, in order to produce and sell the device. During the first month of operations, the device was very well received on the market and a statement of profit or loss shown below was prepared. The President was discouraged over the loss shown on the profit or loss statement. Maggie Products, Inc. Statement of Profit or Loss First Month Sales (40,000 units) 200,000 Less variable expenses: 3 Cost of goods sold (*) P 80,000 Selling and administrative . Contribution margin 90,000 Less fixed expenses: Manufacturing overhead 75,000 Selling and administrative, 70900 95000 Loss («consists of direct materials, direc labor and variable overhead.) Other data: Units produced 50,000 Units sold 40,000 Variable costs per unit: Direct,materials P 1,00 Direct labor 0.80 “Manufacturing overhead 0.20 Selling and administrative expenses 0.90 Required: 1. Calculate the unit product cost under absorption costing. 2., Calculate the profit (loss) under absorption costing. 3. Reconcile the difference in profit under absorption costing and variable costing. 9. Profit reconciliation. Alfred Company manufactures and sells a single product, Cost data for the product follow: : Scanned with CamScanner VARIABLE COSTING CHAPTER 4 159 Variable costs per ‘unit: Materials pate. Labor 2 Factory overhead 4 Selling and administrative 3 Fixed costs per month: ns actory overhead 240,000 Selling and administrative . "190,000 ‘The product sells fr P40 per unit. Production and sales data for May and June, the fist two months of operations are as follows: Units produced Units sold May 30,000 26,000 June 30,000 34,000 Income statements prepared by the accounting department, using absorption costing, are presented below: May June Sales P_1,040,000 Less cost of goods sold: : Beginning inventory 0 120,000 ‘Add: Cost of goods manufactured __ 900.000 — __ 900,000 Goods available for sale ‘900,000 7,020,000 Less: Ending inventory 420000 Cost of goods sold 780000. + 1.020.000 Gross margin ; 260,000 340,000 Less: Selling and administrative expenses __258.000__ 282.000 Profit P2000 P5800 Required: i 1. "Prepare the statement of profit or loss for May and June using the contribution approach. 2. Account for the difference in profit between variable costing and absorption costing. 10. Reconciliation of profit and volume variance. Aldrin Products has organized a new division to manufacture and sell specially designed tables for mount ing and usirig personal computers. its new plant is highly automated and requires high monthly | fixed costs as shown below. Manufacturing costs: Variable costs per unit: Direct materials P60 Direct labor 26 Overhead 24 | Fixed overhead 240,000 Seling and administrative costs: . Variable 12% of sales Fixed 160,000 Scanned with CamScanner 159 VARIABLE COSTING CHAPTER 4 Variable costs per unit: Materials P 6 Labor 12 Factory overhead 4 Selling and administrative 3 Fixed costs per month: Factory overhead 240,000 Selling and administrative + "180,000, ‘The product sells for P40 per unit. Production and sales data for May and June, the first | ‘two months of operations are as follows: | Units produced Units sold May 30,000 26,000 June 30,000 + 34,000 Income statements prepared by the accounting department, using absorption costing, are presented below: May June Sales P.1,040,000 ~— P._1,360,000 Less cost of goods sold: Beginning inventory. 0 120,000 ‘Add: Cost of goods manufactured 900.000 __900,000 Goods available for sale 900,000 7,020,000 Less: Ending inventory 120.000 0 Cost of goods sold ‘ 780000. 7.020.000 Gross margin 260,000 "340,000 Less: Selling and administrative expenses +___258,000 282.000 Profit B20 psgooo Required: * ‘ '1, ” Prepare the statement of profit or loss for May and June using the contribution approach. 2, Account for the differencein profit between variable costing and absorption costing. 10. Reconciliation of profit and volume variance, Aldrin Products has organized a new division to manufacture and sell specially designed tables for mount ing and usirig personal computers. Its new plant is highly automated and requires high monthly fixed costs as shown below. Manufacturing costs: Variable costs per unit: Direct materials P 60 Direct labor 26 ! | Overhead: 24 Fixed overhead 240,000 Selling and administrative costs: j Variable 12% of sales | Fixed , 160,000 | 4 Scanned with CamScanner CHAPTER 4 “VARIABLE COSTING ie 12. During the month.of operations, the following activity was recorded: Units produced : Units sold 3200 Selling price per unit ‘ P 410 Net materials variance-unfavorable 12,000 Net direct labor variance-favorable F 5,000 Net variable overhead variance-favorable 2,500 The company has a normal capacity of 6,000 units. Required: Unit inventoriable costs under absorption costing and variable costing. Calculate the volume variance. Cost of goods sold at actual under absorption costing and variable costing. Operating income under absorption costing and variable costing. * Reconciliation of income under absorption costing and variable costing. gees 41. Volume variance in units and in hours. Consider the following standard cost per unit based on a normal capacity of 40,000 units: Direct materials 1.4kgs.@P20 P28.00 Direct labor 0.2 hr. @ P80 _ 16.00 Variable overhead 0.2 hr. @P100 20.00 Fixed overhead 0.2 hr. @ PSO. 10.00 Compute the volume variance under each of the following independent actual production conditions (identify the variances as unfavorable or favorable): a. 40,000 units, b. 43,200 units. c. 37,800 units. d 40,000 units and 8,000 hours. e f. 41,400 units and 7,650 hours. 38,800 units and 9,800 hours. ' Statement of profit or loss. Bark Manufacturing Company began its operations on January 1, 20CY, and produces a single product that sells for P12 per unit. During 20CY, 100,000 units of the product were produced, 90,000 of which were sold. There was no work in process inventory at the end of the year. Manufacturing costs and marketing and administrative expenses for 20CY were as follows: Fixed Variable P 2.00 per unit produced Materials : Direct labor : 1.50 per unit produced Factory overhead 200,000 .50 per unit produced Marketing and administrative. 100,000 -20 per unit produced Required: Prepare the statement of profit or loss for 20CY using direct costing. (aicpa) Scanned with CamScanner HAPTER 4 “VARIABLE COSTING ile? 1. 12. During the month-of operations, the following activity was recorded: Units produced , Unis sl 5200 Selling price per unit S P 410 Net materials variance-unfavorable 12000 Net direct labor variance-favorable : 5,000 Net variable overhead variance-favorable 2,500 The company has a normal capacity of 6,000 units. Required: 1. Unit inventoriable costs under absorption costing and variable costing. 2. Calculate the volume variance. 3. Cost of goods sold at actual under absorption costing and variable costing. 4. Operating income under absorption costing and variable costing. 5, - Reconciliation of income under absorption costing and variable costing. Volume variance in units and in hours. Consider the following standard cost per unit based on a normal capacity of 40,000 units: Direct materials 1.4kgs. @ P20 28.00 Direct labor 0.2 hr. @ P80 . 16.00 Variable overhead 0.2 hr. @P100 20.00 Fixed overhead 0.2 hr. @ PSO. 10.00 Compute the volume variance under each of the following independent actual production conditions (identify the variances as unfavorable or favorable): 40,000 units. 43,200 units. 37,800 units. 40,000 units and 8,000 hours. 41,400 units and 7,650 hours. ; 38,800 units and 9,800 hours, 1 mpance Statement of profit or loss. Bark Manufacturing Company began its operations on January 1, 20CY, and produces a single product that sells for P12 per unit. During 20CY, 100,000 units of the product were produced, 90,000 of which were sold. There was no work in process inventory at the end of the year. Manufacturing costs and marketing and administrative expenses for 20CY were as follows: Fixed Variable Materials P 2.00 per unit produced Direct labor : 1.50 per unit produced Factory overhead 200,000 50 per unit produced Marketing and administrative. 100,000 “20 per unit produced Required: Prepare the statement of profit or loss for 20CY using direct costing. (aicpa) Scanned with CamScanner 161 VARIABLE COSTING CHAPTER 4 13. Profit and volume variance. Holland Products began operations on January 3 of the current year. Standards were established in early January assuming a normal production volume of 160,000 units. However, the company produced only 140,000 Units of product and sold 100,000 units at a selling price of P180 per unit during the current year, Variable costs totaled P7,000,000, of which 60% were manufacturing and 40% were selling. Total fixed costs amount to P11,200,000 of which 50% comes from the manufacturing. There were no raw materials or work in process inventories at the end of the year. Actual input prices per unt of product and actual input quantitative per unit of product were equal to standard. Required: % 1. Determine the cost of goods sold at standard coat, using full absorption costing (excluding standard cost variances). 2, How much cost would be assigned to ending inventory using direct costing? 3. Compute the factory overhead volume variance for the year. 4, How much would operating income be, using direct costing? (iema) 14, Explaining the profit decline. Star Company, a wholly owned subsidiary of Orbit inc., produces and sells three main product lines. The company employs a standard cost accounting system for sound-keeping purposes. At the beginning ofthe year, the president of Star Company presented the budget to the parent company and accepted a commitment to contribute P15,800 to Orbit’s consolidated profit in 2020, The president has been confident that the year’s profit would exceed the budget target, because the monthly sales reports have shown that sales for the year will exceed the budget by 10%. The president is both disturbed and confused when the controller presents an adjusted forecast as of November 30, indicating that profit will be 11% under budget. The two forecasts follow: : Forecasts as of January 1 November 30 Sales P 268,000 P 294,800 Cost of goods sold at standards: =212,000(*) __233,300 Gross profit at standard 58,000 61,500 Less: Underapplied factory overhead : 6,000 Gross profit at actual 58,00 55,600 Marketing expense 13,400 14,740 Administrative expense 26,800 26.800 Total commercial expense = 40,200 41,540 Income from operations B_15.200 P_13,960 There have been no sales price changes or product mix shifts since the January 1 forecast. The only cost variance on the income statement is underapplied factory overhead. This arose because the company used only 16,000 standard machine hours (budgeted machine hours were 20,000) during the year as a result of a shortage of raw materials. Fortunately, Star Companys finished goods inventory was large enough to fil all sales orders received. Scanned with CamScanner CHAPTERS VARIABLE COSTING 162 15. 16. Required: 1, Analyze and explain the forecast profit decline, in spite of increased sales and good cost control 2. Explain and illustrate as alternative internal cost reporting procedure that would avoid the confusing effect of the procedure used presently. (iema) Statement of profit or loss and reconciliation of profit. The Mass Company manufactures and sells a single product. The following data cover the two latest years of operations: 20PY, 20cy Selling price P40 p40 Sales.in units 25,000 25,000 Beginning inventory in units 1,000 1,000 Ending inventory in units 1,000 5,000 Fixed manufacturing costs 120,000 ~ P120,000 Fixed marketing and administrative costs 190,000 190,000 ‘Standard variable costs per unit: Direct materials P 10.00 Direct labor 9.50 | Variable manufacturing overhead 4.00 Variable marketing and administrative 1.20 The denominator level is 30,000 output units per year. Mass Company's accounting fecords produce variable costing information, and year-end adjustments are made to produce external reports showing absorption costing information. Any variances are charged to cost of goods sold. Required: 1. Prepare two. staements of profit or loss for 20PY and 20CY, one under variable and one under absorption costing. 2.” Explaii briefly why the profit figures computed in requirement "a" agree or do not agree. 3. Give two advantages and two disadvantages of using variable costing. (cma) Statement of profit orloss and reconciliation of profit. RGB Corporation isa manufacturer of a synthetic element: A. 8. Cruz, president of the company, has been eager to obtain the operating results for the fiscal year ust completed. Cruz was surprised when the income statement revealed that operating income dropped to P645,000 from P900, 000, although sales volume had increased by 100,000 units. This drop in operating income occurred even though Cruz had implemented the following changes during the past 12 months to improve the profitability of the company. (1) Inresponse to a 10% Increase In production costs, the sales price of the ‘company's product was incteased by 12%. This action took place on December 3, 20PY. (2) The management of the selling and administrative departments were given strict instructions to spend no more in fiscal 20CY than they did in fiscal 20PY. Scanned with CamScanner 163 VARIABLE COSTING CHAPTER 4 RGB's accountants prepared the following schedule of selected data to assist management. The company's comparative income statement also appears below. RGB uses the FIFO method for finished goods. RGB Corporation Selected Operating and Financial Data For 20PY and 20CY —20PY____20Cy Sales price per unit P1000 P 11.20 Materials cost per unit 1.50 1.55 Direct labor cost pér unit 2.50 2.75 Variable factory overhead per unit 1.00 1.10 Fixed factory overhead per unit 3.00 3.30 Total fixed factory overhead 3,000,000, P3,300,000 Total selling and administrative expenses 1,500,000 1,500,000 Quantity of units budgeted (normal capacity) 1,000,000. 1,000,000 Quantity of the units actually produced 1,200,000, 850,000 Quantity of units sold ‘900,000 1,000,000 Quantity of units in beginning inventory 0 300,000 Quantity of units in ending inventory 300,000 150,000 RGB Corporation ‘Statement of Operating Income. For The Years Ended November 30, 20PY, and 20CY 20PY: * 20cy Sales revenue P 9,000 P 11,200 Cost of goods sold 7,200 P 8,500 Volume variance, (favorable) unfavorable (600) 6600 _ 495 __8.995 Gross profit 2,400 2.205 Selling and administrative expenses 1.500 L600 Operating income i 900 B_605 Required: 1 Explain to A. B. Cruz why RGB Corporation's profit decreased in the current fiscal year, despite the sales price and sales volume increase, 2. A member of RGB’s Accounting Department has suggested that the company adopt direct costing for intemal reporting purposes. a. Prepare an operating income statement for the fiscal years ended November 30, 20PY and 20CY, for RGB Corporation using the direct costing method. b. Present a numerical reconciliation of the difference in operating income between the absorption costing method currently in the use and the direct «_ costing method proposed, 3.__ Identify and discuss some of the advantages and disadvantages of using direct. costing method for internal reporting purposes. (ima) Scanned with CamScanner CHAPTER 4 VARIABLE COSTING 164 MULTIPLE CHOICE (CY = current year; PY = past year; NI yext year) Basic concepts In absorption costing, as contrasted with direct costing, the following are absorbed into inventory. a. Allthe elements of fixed and variable manufacturing overhead. b. Only the fixed manufacturing overhead. ¢.. Only the variable manufacturing overhead. d. Neither fixed nor variable manufacturing overhead. (rpepa) 1 2. Under the direct costing, which is classified as product costs? a. Only variable production costs. b. Only direct.costs. ¢. Allvariable costs. d._ Allvariable and fixed production cots. (rpepa) 3, Which one of the following considers the impact of fixed overhead costs? a. Full absorption costing. js b. Marginal costing. c.. Direct costing. d. Variable costing. (cma) 4. When all manufacturing cost used in production are attached to the products, whether direct, or indirect, variable of fixed, this is Called: a. Process costing. c.' Variable costing. b. Absorption costing, d. Job Order costing. (cpa) 5. An operation costing system is a. Identical to a process costing system except'that actual cost is used for manifacturing overhead. b. The same as a process costing system except that materials are allocated on the basis of batches of production. c. The sameas ajob order costing system except that materials are accounted for in the same way as they are in a process costing system. d. The same as job order costing system except that no overhead allocations ate made since actual costs are used throughout. (cma) 6. If production is greater than sales (units), then absorption costing net income will generally be oN 8. greater than direct costing net income. 1 b. less than direct costing net income. ©. equal to direct costing net income. d. additional data is needed to be able to answer, (rpcpa) Scanned with CamScanner 10. A 12; 165 VARIABLE COSTING CHAPTER 4 Which of the following statements is correct? se ye a. When production is higher than sales, absorption costing net income is lower than variable costing net income. ‘ ache b. [fall the products manufactured during the period are sold in that period, variable costing net income is equal to absorption costing net income. , When production is lower than sales, variable costing net income is lower than absorption costing net income. j d, When production and sales level are equal, variable costing net income is lower than absorption costing net income. (rpepa) Which of the following is an argument against the use of direct (variable) costing? @. Absorption costing overstates the balance sheet value of inventories. b. Variable factory overhead is a period cost. c. Fixed factory overhead is difficult to allocate properly. d. Fixed factory overhead is necessary for the production of a product. (cia) The difference between variable costs and fixed costs is 2. Variable costs per unit fluctuate and fixed costs per unit remain constant. b. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable. : : ¢. Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs never change. 4d. Variable costs per unit change in varying increments, while fixed costs per unit change in equal increments. (ema) Determine the following statements as true or false. ‘ Statement 1. Direct costing and variable costing are different terms that mean the same thing. Statement 2. na variable costing income statement, sales revenue is typically lower than in absorption costing income statement. : Statement 1. Statement 2 a False True b. False False ce. Tne True a Tue False H (fpepa) Jansen, Inc. pays bonuses to its managers based on dperating income. The company uses absorption costing, and overhead is applied on the basis of direct labor hours. To increase bonuses, Janser’s managers may do all of the following except a. Produce those products requiring the most direct labor. b. Defer expenses such as maintenance to a future period, ¢. Increase production schedules Independent of customer demands. 4d. Decrease production of those items requiring the most direct labor. (cma) The management of a company computes et income using both the absorption and variable costing approaches to product costing. This year, the net income under the variable costing approach was greater than the net income under the absorption costing approach. This difference is most likely the result of Scanned with CamScanner CHAPTER 4 VARIABLE COSTING 166 A decrease in the variable marketing expenses. ‘An increase in the finished goods inventory. Sales volume exceeding production volume. Inflationary effects on overhead costs. (cia) aose 43. When comparing absorption costing with variable costing, which of the following statements is not true? a. Absorption costing enables managers to increase operating profits in the short run by increasing inventories. b. When sales volume is more than production volume, variable costing will result in higher operating profit. i cc. A manager who is evaluated based on variablé costing operating profit would be tempted to increase production at the end of a period in order to get a more favorable review. d. Under absorption costing, operating profit is a function of both sales volume and production volume. (cia) 14. Which one of the following statement is correct regarding absorption costing variable costing? Overhead costs are treated in thie same manner under both costing methods. If finished goods inventory increases, absorption costing results in higher income. Variable manufacturing costs are lower under variable costing. Gross margins are the same under both costing methods. (cma) poop 15. When comparing absorption costing with variable costing, which of the following statements is not true? _a. Absorption costing enables managers to increase operating profits in the short run by increasing inventories. as b. When sales volume is more than production volume, variable costing will resutt in higher operating profit. cc. A manager who is evaluated based on variable costing operating profit would be tempted to increase production at the end _of.a period.in order to get a more favourable review. z d. Under absorption costing, operating profit is a function of both sales volume and production volume. 16. Which of the following is an argument against the use of direct (variable) costing? a. Absorption costing overstates the balance sheet value of inventories. b. Variable factory overhead is a period cost. c. Fixed factory overhead is difficult to allocate properly. d. Fixed factory overhead is necessary for the production of a product. (cia) Inventoriable costs + The next 2 questions are based on the following data: i Lina Company produced 100,000 units of Product Zee during the month of June. Costs incurred'during Jute were as follows: . , Scanned with CamScanner 167 he 18 19, 20. 2. CHAPTER 4 VARIABLE COSTING «Direct materials P 100,000 Direct labor : 80,000 Variable manufacturing overhead 40,000 Fixed manufacturing overhead 50,000 Variable selling and general expenses 12,000 Fixed selling and general expenses 46,000 2.327.000 What was product Zee's unit cost under absorption costing? a, P3.27 ce P232 b. P2.70 i d. P1.80 (aicpa) What was product Zee's unit cost under variable (direct) costing? a P2.82 ce. °P232 b. P270 d. P2.20 (aicpa) Excellent Writer produces and sell boxes of signing pens for P1,000 pér box. Direct materials are P400 per box and direct manufacturing labor averages P75 per box. Variable overhead is P25 per box and fixed overhead is P12,500,000 per year. Administrative expenses, all fixed, run P4,500,000 per year, with sales commissions of P100 per box. Production is expected to be 100,000 boxes, which is met every year. For the year just ended, 75,000 boxes were sold. What is the inventoriable cost per box using variable costing? a. P770 PATS b. . P500 . ds P65 (rpepa) For P1,000 per box, the Majestic Producers, Inc., produces and sell delicacies. Direct materials are P400 per box and direct manufacturing labor averages P75 per box. Variable ovethead'is P25 per box and fixed overhead is P12,500,000 per year. Administrative expenses, all fixed, run P4,500,000 per year, with sales commissions of P100 per box. Production is expected to be 100,000 boxes, which is met every year. For the year just ended, 75,000 boxes were sold. What is the inventoriable costs per box using absorption costing? a P625 c. ° P770 b. P50 d. P670 (rpcpa) Compute for the inventory value under the direct costing method using the data given: Units unsold a the end of the period, 45,000; raw materials used, P6.00 per unit; raW ‘materials inventory, beginning, P5.90'per unit; direct labor, P3.00 per unit; vatiable overhead per unit, P2.00 per unit; indirect labor for the month, P33,750. Total fixed costs, P67,500. a P1690 ce P1745 b. P11.00 d P19.15 (rpopa) Scanned with CamScanner 1 CHAPTER 4 VARIABLE COSTING 168 22. The absorption costing method includes in invent Fixed factory Variable factory pa overhead overhead a. No No b. No Yes c Yes Yes & Yes No (aicpa) 23.’ Inan income staternent prepared as an intemal report using the direot (variable) costing method, fixed selling and administrative expenses would a. Notbeused. b. Be used in the computation of the contribution margin. c. Be used in the computation of operating income but not in the computation of the contribution margin. d. Be treated the same as variable selling and administrative expense. _(aicpa) 24, Inanincome statement prepared as an internal report using the variable costing method, variable selling and administrative expense would a. Not be used. b. Beused in the computation of the contribution margin. . ¢._,Beused in the computation of operating income but not in the computation of the contribution margin. d. Be treated the same as fixed selling and administrative expenses. (aicpa) 25. Care Company's 20CY fixed manufacturing overhead cost totaled P100,000 and variable selling costs totaled P80,000. Under direct costing, how should these costs be classified? Period Cost Product Cost a. P 0 P 180,000 bP 80,000 P 100,000 cc. P-100,000 P 80,000 d. — P.180,000 Pp 0 (rpepa) 26. With a production of 200,000 units of product A during the month of June, Bucayao Cotporation has incurred costs as follows: Direct materials P 200,000 Direct labor used 135,000 Manufacturing overhead: Variable 75,000 Fixed 90,000 Selling and administrative expenses: Variable 30,000 Fixed 85,000 Total P 615,000 Under absoiption costing, the unit cost of product A was: z a P220 ce , P3825 2) b. P250 d. | P2.05 (rpc Scanned with CamScanner 169 ‘ VARIABLE COSTING CHAPTER 4 Profit determination 27. The Blue Company has failed to reach its planned activity level during its first 2 years of operation. The following table shows the relationship among units produced, sales, and ‘normal activity for these years and the projected relationship for Year 3. All prices and costs have reméined the same for the last 2 years and are expected to do soin Year 3. Income has been positive in both Year 1 and Year 2. Units Produced Sales Planned Activity Year 1 90,000 90,000 100,000 Year2 95,000 95,000 100,000 Year 3 90,000 90,000 100,000 Because Blue Company uses an.absorption-costing system, one would predict gross margin for Year 3 to be : ‘a... Greater than Year 1. c. Equal to Year 1. b. Greater than Year 2. d. Equal to Year 2 (cia) 28. HY & Compaiy completed its first year of operations during which time the following information were generated: Total units produced ' 100,000 Total units sold + 80,000 at 100 per unit Work in process ending inventory Costs: Fixed cost L Factory overhead P12 million : Selling and administrative P0.7 million Perunit variable cost Raw materials P 20.00 Direct labor 12.50 Factory overhead 7.50 Selling and administrative 10.00 If the company used the variable (direct) costing method, the operating income would be a.’ P2,100,000 c. ” P2,480,000 b. 4,000,000 4. P3,040,000 (rpcpa) 29. Gordon Company began its operations on Januiary 1, 20CY, and produces a single product that sell for P10 per unit, Gordon uses an actual (historical) cost system. In 20CY, 100,000 units were produced and 80,000 units were sold. There was no work-in-process inventory at December 31, 20CY. Manufacturing costs and selling and administrative expenses for 20CY were as follows: Fixed costs Variable costs Raw materials * P.2.00 per unit produced Direct labor ts 1.25 per unit produced Factory overhead P 120,000 0.75 per unit produced Selling and administrative 70,000 1.00 per unit produced Scanned with CamScanner CHAPTER 4 VARIABLE COSTING 70 us youd be Gordon's operating income for 20CY under the variable (direct) costing metho a. P114,000 c. . P234,000 b. P210,000 4.” P330,000 (cicpa) : 30. If net earings were higher using standard direct costing than using standard absorption costing, what can be said about sales during the period if inventory is priced using the FIFO method? : a. Salesincreased, - c. Sales decreased. b. Sales exceed production d_. Sales were less than production (rpep@) 431. If sales equals production, one would expect net income under the variable costing method to be ‘a. “The same as net incorie under the absorption costing method.” b. Greater than net income under the absorption costing method. c. Differing in'as much as the difference between sales and production. d.. Less than net income under the absorption costing method. (rpepa) 32. When a firm prepares financial reports by using absorption costing a. Profits will always increase with increases in sales. b. Profits will always decrease with decreases in sales. c. Profits may decrease with increased sales even if there is no change in selling ~~ prices and costs. d. Decreased output and constant sales result in increased profits. (ema) The next two questions are based on the following information: Expected to operate at normal capacity, Golden Corporation plans to manufacture 275,000 units of products in 20CY, and the following estimates with respect to sales: Sales in units 250,000 Unit selling price P 35.00 Finished goods inventory on December 31, 20PY is estimiated at 25,000 units costing 500,000. Included in this amount is the fixed manufacturing overhead amounting to 300,000. No changes in both the fixed manufacturing cost and the variable cost per unit of produce are expected in 20CY. 33, Whatis the estimated income from manufacturing using the absorption costing method? a. P3,750,000 cc. P.3,550,000 b. P3,450,000 d. \ P3,550,000 (pepa) 4. What is the estimated income from manufacturing using the variable costing method?“ a. P3,150,000 cc. P3,450,000 b. P.3,550,000 d. — P-3,750,000 (rpepa) 35. Oldies Biscuits manufactures and sells boxed coconut cookies. The biggest market for these cookiés are as gift that college students buy for their business teachers. There are 100 cookies per box. The following income statement shows the results of the first Scanned with CamScanner wy VARIABLE COSTING CHAPTER4 year of operations. This statement was the one included in the company’s annual report to the shareholders. Sales (400 boxes at P12.50) P 5,000.00 Less: Cost of goods sold (400 boxes at P8.00) Gross margin 1,800.00 Less: Selling and administrative expenses —800.00 Profit 21,000.00 Variable selling and administrative expenses are P0.90 per box unit. The company produced 500 boxes during the year. Variable manufacturing costs are PS.25 per box and fixed manufacturing overhead costs total P1,375 for the year. What is the company's direct costing net income? a. P2540 c. — P1,000 b. P2265 d. P725 (tepa) 36. Don Papot Ltd., manufactures a single product for which the costs and selling prices are: Variable production costs P50 per unit Selling price - 150 per unit | Fixed production overhead P 200,000 per quarter Fixed selling and administrative overhead P 480,000 per quarter Normal capacity is 20,000 units per quarter. Production in 1 quarter was 19,000 units and sales volume was 16,000 units. No opening inventory forthe quarter. The absorption costing profit for the quarter was: a. 920,000 cc. P960,000 | b. P950,000 d. — P970,000 (rpepa) “The next two questions are based on the following information: The following operating data are available from the records of Jonathan Company for the month of January 20CY: ‘ Sales (P 70 per unit” P210,000 Direct materials 59,200 Direct labor 48,000 i Manufacturing overhead: € Fixed 36,080 Variable” 24,000 Marketing and general expenses: Fixed 11,000 Variable 5% of sales Production in units - 3,280 units Beginning inventory- none 37. The ending finished goods inventory under absorption Costing method would be: j a. P14,280 c. P12,096 b. P16968 * d. P16,072 (pepa) 38. The profit for the month under the variable costing method would be: a. P32,420 ©. 23,320 b. P25,500 d. 622,420 (pcpa) i Scanned with CamScanner CHAPTER 4 VARIABLE COSTING 172 The next four questions are based on the following information: Sales per unit Variable production cost P "hoo Annual fixed production cost 35,000.00 Variable office expense (unit) 3.00 ‘Annual fixed selling expense 5,000.00 Produced 12,500 units during the period No inventory at January 1 (beg.) Sold 10,000 units 2 49. The ending inventory under direct costing is : a. 25,000 cc. P20,000 b. P27,500 “

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