Q2 – Chapter 10: Variable Costing and Absorption Costing

Part 1: Multiple Choice Theories - One (1) point each.

1. In comparing absorption costing and variable costing, what causes the difference between net
income under absorption costing and net income under variable costing?
a. Absorption costing includes all variable manufacturing costs in product costs, but variable
costing considers variable manufacturing costs to be period costs.
b. Absorption costing considers all manufacturing costs in the determination of net income,
whereas variable costing considers only variable costs.
c. Absorption costing allocates fixed manufacturing costs between cost of goods sold and
inventories, and variable costing considers all fixed manufacturing costs as period costs.
d. Absorption costing includes all fixed manufacturing costs in product costs, but variable
costing expenses all fixed manufacturing costs.

2. "Gross margin” is also known as the excess of sales over:

a. Cost of sales, excluding fixed selling and administrative expenses.
b. Cost of sales, including fixed manufacturing overhead.
c. Variable costs, excluding variable selling and administrative expenses.
d. All variable costs, including variable selling and administrative expenses.

3. If in case there are final ending inventories, the net operating income reported under absorption
costing will be:
a. The same as reported under variable costing.
b. Greater than reported under variable costing.
c. Less than reported under variable costing.
d. None of the above.

4. Under absorption costing, the following are considered to be product costs:

I. Variable manufacturing overhead
II. Fixed manufacturing overhead
III. Variable selling and administrative expenses

a. I
b. I and II
c. I and III
d. All of the above

5. During 2020, MM Company had a net operating income of P80,000 using absorption costing and
P70,000 using variable costing. The fixed manufacturing overhead cost was P5 per unit. Beginning
inventories were zero. If 20,000 units were produced last year, then sales last year were:
a. 18,000
b. 16,000
c. 20,000
d. 19,000

6. Under variable costing, costs which are treated as period costs include:
a. Both variable and fixed manufacturing costs
b. Only fixed and selling administrative costs
c. Only fixed manufacturing costs
d. All fixed costs
7. Modified true or false:
I. Under absorption costing, fixed manufacturing overhead are treated as a period cost, rather
than as a product cost.
II. Under absorption costing, all manufacturing costs are treated as product costs.

a. Only I is true.
b. Only II is true.
c. Both are true.
d. Both are false.

8. This cost would be treated as a product cost under both absorption costing and variable costing:
a. Variable manufacturing costs
b. Variable selling expenses
c. Administrative salaries
d. Depreciation of equipment

9. MM Company's fixed manufacturing overhead costs amounted to P50,000, and the variable selling
costs totaled P40,000. Under variable costing, how should these costs be classified?
a. Period Cost: P0 Product Cost: P90,000
b. Period Cost: P40,000 Product Cost: P50,000
c. Period Cost: P50,000 Product Cost: P40,000
d. Period Cost: P90,000 Product Cost: P0

10. For a company that uses variable costing, which of the following statements is true?
a. Net income is greatest in periods when production is highest.
b. Both variable selling costs and variable production costs are included in the unit product cost.
c. Gross profit moves in the same direction as sales.
d. Net income is greatest in periods when production is highest.

Part 2: Problem Solving - Two (2) points each.

Problem 1
Ray Company produces a single product that sells for P35 per unit. Last year there were no beginning
inventories, 100,000 units were produced, and 80,000 units were sold. The company has the
following cost structure:

Fixed Costs Variable Costs

Raw materials - P12 per unit produced
Direct labor - P8.50 per unit produced
Factory overhead P150,000 P4.25 per unit produced
Selling and administrative P97,500 P5 per unit sold

Questions
1. Net income under variable costing would be:
2. The ending inventory under absorption costing would differ from variable costing by what amount?
3. Under super variable costing, how much is the net income(loss)?
Problem 2

MM Company, which has only one product, has provided the following data concerning its most
recent month of operations:

Selling price PHP 200

Units in beginning inventory -

Units produced 2,200
Units sold 1,800
Units in ending inventory 400

Variable costs per unit:

Direct materials PHP 50
Direct labor PHP 42
Variable manufacturing overhead PHP 8
Variable selling and administrative PHP 15

Fixed costs:
Fixed manufacturing overhead PHP 11,000
Fixed selling and administrative PHP 30,000

Questions
1. What is the total period cost for the month under the variable costing approach?
2. What is the total period cost for the month under the absorption costing approach?
3. The total contribution margin for the month under the variable costing approach is:
4. What is the difference in net income between absorption costing and variable costing?
Problem 3

In 2020, Lu Company manufactures a single product which it sells for P25 per unit. The company
has the following cost structure:

Variable costs per unit: (In Peso)

Manufacturing 9
Selling and Administrative 3

Fixed costs in total: (In Peso)

Manufacturing 60,000
Selling and Administrative 60,000

There were no units in beginning inventory. During the year, 20,000 units were produced and
17,000 units were sold.

Questions
1. Under absorption costing, the unit product cost would be:
2. The company's net income for the year under variable costing would be:
3. Under absorption costing. In 2021, fixed costs remained the same and the ending inventory was
zero, how much was total fixed costs in 2021?