RIZARDE, JONALYN MAY B.

BSB-FM 2ND YEAR MANAGERIAL

ACCOUNTING

PROBLEM 2
The Honey Company is comparing its present absorption costing practices with direct
costing methods. An examination of its records produced the following information:
Maximum capacity 40,000 units
Normal capacity 36,000
Fixed factory overhead P54,000
Fixed marketing and administrative expense P20,000
Sales price per unit P10
Standard variable manufacturing cost per unit P4
Variable marketing expense per unit sold P1
For the year, the following data are variable:
Budgeted production 36,000 units
Actual production 30,000 units
Sales 28,000
Finished goods inventory, Jan 1 1,000
Unfavorable variances from standard variable
Manufacturing costs P5,000
All variances are written off directly at year end as an adjustment to Cost of goods sold.
Required: 1. Prepare the income statement under the direct costing method.
2. Prepare the income statement under the absorption costing method.

Requirement 1
Honey Company
Income Statement – Direct Costing
For the Year Ended December 31, 20X3
Sales ( 28,000 x P10 ) P280,000
Less Variable Cost of Sales:
Finished Goods Inventory, 1/1(1,000 x 4) P4,000
Current Production 120,000_
Total Available for Sale P124,000
Finished Goods Inventory, 12/31(3,000 x 4) 12,000
Variable Cost of Sale – Standard P112,000
Unfavorable Variance ___5,000 117,000

Contribution Margin Manufacturing P163,000

Less Variable Marketing Expenses (28,000 x P1) __28,000
Contribution Margin – Final P135,000
Less Fixed Costs and Expenses:
Fixed Factory Overhead P54,000
Fixed Marketing and
Administrative Expenses _20,000 __74,000
Net Income _P61,000

Requirement 2
Honey Company
Income Statement – Absorption Costing
For the Year Ended December 31, 20X3
Sales P280,000
Less: Cost of Sales
Finished Goods Inventory. Jan 1 (1,000 x P5.50) P
5,500
Current Production Costs
Variable (30,000 x P4.00) P 120,000
Fixed (30,000 x P1.50) 45,000 165,000
P170,500
Less: Finished goods inventory. Dec. 31
(3,000 x P5.50) 16,500
Cost of Sales – at Standard P154,000
Add (Deduct) Variance
Unfavorable variable manufacturing
Cost variances 5,000
Under applied fixed factory overhead
(6,000 x P1.50) 9,000
Cost of Sales – Actual P168,000
Gross Profit P112,000
Less: Selling and administrative expenses
Variable 28,000
Fixed 20,000
P48,000
Net Income P64,000
Problem 3 (variable Costing Income Statement; Reconciliation)

During ABC Company's first two years of operations, The company reported net operating
income as follows (absorption costing basis):

Year I Year 2
Sales (at P50 per unit) P1,000,000 P
I ,500,000
Less cost of goods sold:
Beginning inventory 0 170,000
Add cost of goods manufactured (at P34 per unit) 850,000
850,000
Goods available for sale 850,000 1,020,000
Less ending inventory (at P34 per unit) 170,000
0
Cost of goods sold 680,000 1,020,000
Gross margin 320,000 480,000
Less selling and administrative expenses* 310,000 340,000
Net operating income P10,000 P140,000

*P3 per unit variable; P250,000 fixed each year.

The company's P34 unit product cost is computed as follows:

Direct materials P8
Direct labor 10
Variable manufacturing overhead 2
Fixed manufacturing overhead
(P350,000/25,000 units) 14
Unit product cost P34

Production and cost data for the two years are given below:

Year I Year 2
Units produced 25,000
25,000
Units sold 20,000 30,000
Required:
a. Prepare an income statement for each year in the contribution format using variable costing

ABC Company
Variable Costing Income Statement
For the Year I and 2
Year 1 Year 2
Sales P 1000,000 P 1500,000
Less: variable cost of sales
Direct Materials - year 1 (8 x 20,000) (160,000)
year 2 (8 x 30,000) (240,000)
Direct Labor - year 1- (10 x 20,000) (200,000)
year 2- (10 x 30,000) (300,000)
Variable overhead - year 1 (2 x 20,000) (40,000)
year 2- (2 x 30,000) (60,000)
Less variable S&A Expense (P3 per unit)
Year 1- (3 x 20.000) (60,000)
Year 2- (3 x 30.000) (90,000)
Contribution Margin P540,000 P810,000
Less: Fixed cost
Manufacturing (350,000)
(350,000)
Selling and Administrative (250,000) (250,000)
Net income (loss) P (P60, 000) P210,000

b. Reconcile the absorption costing and variable costing net operating income figures for each
year.

Reconciliation of absorption and variable costing

Year 1 Year 2
Units in Beginning Inventory 0 5,000
Add: Units Produced 25,000 25,000
Less Units Sold 20,000 30,000
Units in Ending Inventory 5,000 __0

Year 1 Year 2
Fixed Manufacturing overhead, Ending (5,000 x 10) 50,000
Less: Fixed manufacturing overhead, Beg (5,000 x 10)
(50,000)
Manufacturing deferred in (increase from) inventory 50,000 50,000