Part 4: Absorption and Variable

Costing/Product Costing

Melziel A. Emba
University of the East - Manila
 Three approaches to Product Costing

• Product costing involves the assignment of

costs to the output produced by the company.
This usually serves as the basis for
determining selling prices as well as inventory
cost allocation.
 Three approaches to Product Costing
• Absorption costing – treat all manufacturing
costs as product costs regardless whether fixed
or variable.

• Variable Costing (direct costing) – only variable

manufacturing costs are treated as product
costs; the rest (fixed manufacturing and all
commercial costs regardless whether fixed or
variable) are regarded as period costs. 
 Three approaches to Product Costing

• Throughput Costing (super-variable costing) –

only direct materials are treated as product
cost; the rest (direct labor, factory overhead
and all commercial costs regardless whether
fixed or variable) are regarded as period costs.

• Throughput Contribution = Revenue – Direct

Materials
Absorption Costing Variable Costing Throughput Costing
(Full Costing) (Direct Costing) (Super-Variable Costing
 Absorption Costing Variable Costing Throughput Costing
(Full Costing) (Direct Costing) (Super-Variable Costing
Inventoriable Cost    
 Absorption Costing Variable Costing Throughput Costing
(Full Costing) (Direct Costing) (Super-Variable Costing
Inventoriable Cost    
Direct Materials Direct Materials Direct Materials
Direct Labor Direct Labor  
Var. Overhead Var. Overhead  
Fixed Overhead    
Unit Product Cost Unit Product Cost Unit Product Cost
 Absorption Costing Variable Costing Throughput Costing
(Full Costing) (Direct Costing) (Super-Variable Costing
Inventoriable Cost    
Direct Materials Direct Materials Direct Materials
Direct Labor Direct Labor  
Var. Overhead Var. Overhead  
Fixed Overhead    
Unit Product Cost Unit Product Cost Unit Product Cost
Expenses    
 Absorption Costing Variable Costing Throughput Costing
(Full Costing) (Direct Costing) (Super-Variable Costing
Inventoriable Cost    
Direct Materials Direct Materials Direct Materials
Direct Labor Direct Labor  
Var. Overhead Var. Overhead  
Fixed Overhead    
Unit Product Cost Unit Product Cost Unit Product Cost
Expenses    
Var. Selling Var. Selling Var. Selling
Var. Admin Var. Admin Var. Admin
Fixed Selling Fixed Selling Fixed Selling
Fixed Admin Fixed Admin Fixed Admin
  Fixed Overhead Direct Labor
    Var. Overhead
    Fixed Overhead
Total Expenses Total Expenses Total Expenses
• Illustration 01
• Dakki Pillow Company’s planned production for the
year just ended was 10,000 units. This production
level was achieve but only 9,000 units were sold.
Other data follows:
Direct Materials used P80,000
Direct Labor incurred P40,000
Fixed manufacturing overhead P50,000
Variable manufacturing overhead P24,000
Fixed selling and administrative expenses P60,000
Variable selling and administrative expense P9,000
Finished goods inventory, January 1 None
•   Required: What would be Dakki Pillow Company’s
finished goods inventory cost on December 31
under: (a) Absorption; (b) Variable; and (c)
Throughput Costing.
• Illustration 01
• a. Absorption Costing
• Product Costs
• P80,000+40,000+50,000+24,000=P194,000
• Unit Costs
• P194,000/10,000=P19.4
• Inventory Ending
• 1,000x19.4=P19,400  
• Illustration 01
• Dakki Pillow Company’s planned production for the
year just ended was 10,000 units. This production
level was achieve but only 9,000 units were sold.
Other data follows:
Direct Materials used P80,000
Direct Labor incurred P40,000
Fixed manufacturing overhead P50,000
Variable manufacturing overhead P24,000
Fixed selling and administrative expenses P60,000
Variable selling and administrative expense P9,000
Finished goods inventory, January 1 None
•   Required: What would be Dakki Pillow Company’s
finished goods inventory cost on December 31
under: (a) Absorption; (b) Variable; and (c)
Throughput Costing.
• Illustration 01
• b. Variable Costing
• Product Costs
• P80,000+40,000+24,000=P144,000
• Unit Costs
• 144,000/10,000=P14.4
• Inventory Ending
• 1,000x14.4=P14,400
• Illustration 01
• Dakki Pillow Company’s planned production for the
year just ended was 10,000 units. This production
level was achieve but only 9,000 units were sold.
Other data follows:
Direct Materials used P80,000
Direct Labor incurred P40,000
Fixed manufacturing overhead P50,000
Variable manufacturing overhead P24,000
Fixed selling and administrative expenses P60,000
Variable selling and administrative expense P9,000
Finished goods inventory, January 1 None
•   Required: What would be Dakki Pillow Company’s
finished goods inventory cost on December 31
under: (a) Absorption; (b) Variable; and (c)
Throughput Costing.
• Illustration 01
• c. Throughput Costing
• Product Costs
• P80,000
• Unit Costs
• 80,000/10,000=P8
• Inventory Ending
• 1,000xP8=P8,000
• Illustration 01
• Dakki Pillow Company’s planned production for the
year just ended was 10,000 units. This production
level was achieve but only 9,000 units were sold.
Other data follows:
Direct Materials used P80,000
Direct Labor incurred P40,000
Fixed manufacturing overhead P50,000
Variable manufacturing overhead P24,000
Fixed selling and administrative expenses P60,000
Variable selling and administrative expense P9,000
Finished goods inventory, January 1 None
•   Required: What would be Dakki Pillow Company’s
finished goods inventory cost on December 31
under: (a) Absorption; (b) Variable; and (c)
Throughput Costing.
 Income Statement Preparation
• A. Absorption Costing: (GAAP and for external
reporting)
• Sales Pxxx
• Less Cost of Sales
• Finished Goods Inventory, beg. Pxx
• Cost of Good Manufactured* Pxx
• Total Goods Available for Sale Pxx
• Less Finished Goods, Inventory, end** Pxx Pxxx
• Gross Margin Pxxx
• Less Variable Selling and Administrative Expenses Pxx
• Fixed Selling and Administrative ExpensesPxx
• Net Income Pxxx
•  
• *Full or Absorption Cost X Units Produced
• **Full or Absorption Cost X Units in Ending Inventory
 Income Statement Preparation
• B. Based on Variable Costing:
• Sales Pxxx
• Less Variable Manufacturing Costs* Pxxx
• Manufacturing Contribution Margin Pxxx
• Less Variable Selling & Administrative Exp. Pxxx
• Contribution Margin Pxxx
• Less:Fixed Manufacturing Exp (Fixed Overhead) Pxxx
• Fixed Selling and Administrative Expenses Pxxx
• Net Income Pxxx
•  
• *Variable Manufacturing Costs X Units Sold
 Income Statement Preparation
• C. Based on Throughput Costing
• Sales Pxxx
• Less CoGS (Units sold*Std Direct Material Cost) Pxxx
• Throughput Margin Pxxx
• Less: Operating Costs
• Direct Labor Pxx
• Variable Manufacturing Overhead Pxx
• Fixed Manufacturing Overhead Pxx
• Variable Selling and Administrative Exp. Pxx
• Fixed Selling and Administrative Exp. Pxx Pxx
• Net Income Pxxx
 Income Statement Preparation
• Take note that the Income Statement approach
under Absorption costing follows the traditional
approach with emphasis on GAAP principle of
matching. Costs are properly matched with the
corresponding revenues generated.
• Income statement under Variable costing segregates
costs based on cost behavior (i.e. variable costs and
fixed costs). Though it is not considered GAAP, it has
proven its worth in management accounting
particularly regarding CVP Analysis and performance
measurement.
• Points to consider:
• 1. In the variable costing, the whole
amount of fixed overhead is treated as a
period cost – meaning expensed entirely
in the current period regardless of
production. In absorption costing, it is
allocated between cost of sales and
ending inventory.
• Points to consider:
• 2. The difference in net income between
variable costing and absorption costing
therefore lies in the fixed overhead costs
assigned to the beginning and ending
inventory.
• Points to consider:
• 3. In both variable and absorption
costing, variable and fixed selling and
administrative expenses are regarded as
period costs.
• Points to consider:
• 1. In the variable costing, the whole amount of fixed
overhead is treated as a period cost – meaning expensed
entirely in the current period regardless of production.
In absorption costing, it is allocated between cost of
sales and ending inventory.
• 2. The difference in net income between variable costing
and absorption costing therefore lies in the fixed
overhead costs assigned to the beginning and ending
inventory.
• 3. In both variable and absorption costing, variable and
fixed selling and administrative expenses are regarded as
period costs.
• Illustration 02:
• Heaven Company had the following information
provided for analysis:
• Units in beginning inventory 0
• Units produced 6,000
• Units sold 5,000
• Units in ending inventory 1,000
• Selling price per unit P20
• Direct Materials per unit P2
• Direct Labor P4
• Variable Manufacturing Overhead P1
• Fixed Manufacturing Overhead P5
• Variable Selling and administrative expenses P3
• Fixed Selling P10,000
• Illustration 02:
• Unit Cost Computation Absorption Variable
• Direct Materials P2 P2
• Direct Labor P4 P4
• Var. Mftg Overhead P1 P1
• Fixed Mftg Overhead P5 ____
• Total Unit cost P12 P7
• Illustration 02:
• Absorption Costing
• Sales (P20*5,000units) P100,000
• Less: Product Costs (P12*5,000) P60,000
• Gross Profit (P8*5,000) P40,000
• Less:
• Variable Selling& Admin Exp.
• (P3*5,000units) P15,000
• Fixed Selling & Admin Exp. P10,000
• Net Income P15,000
• Illustration 02:
• Variable Costing
• Sales (P20*5,000units) P100,000
• Less: Product Costs (P7*5,000) P35,000
• Gross Profit (P8*5,000) P65,000
• Less:
• Fixed OH (P5*6,000units) P30,000
• Variable Selling& Admin Exp.
• (P3*5,000units) P15,000
• Fixed Selling & Admin Exp. P10,000
• Net Income P10,000
Relation between P Effect on Relationship between AC Remarks
and S for the Period Inventories and VC Net Income

P=S No change in AC Net Income = VC Net Fixed Mfg Cost

inventories Income expensed for both
approaches is the
same
P>S Ending Absorption Costing Net More fixed cost is
Inventories Income > Variable Costing assigned to ending
Increase Net Income inventory

Production < Sales Ending AC Net Income < VC Net Lesser fixed cost is
Inventories Income assigned to ending
Decrease inventory; Fixed cost
assigned to Beginning
Inventory is Released
• Exercise 1
• Fill in the blanks for each of the following
independent situations. In all situations,
selling price is P10 standard and actual
variable manufacturing cost is P6. Fixed
production costs – budgeted and actual – are
P100,000 and the volume used to set the
standard fixed cost per unit is 50,000 units.
There are no selling and administrative
expenses.
  Alpha Bravo Charlie
Units Sold 80,000 ?  50,000
Units Produced  ?  ? 55,000
NI (Direct costing)  ? 80,000 ? 
NI (Absorption costing) 210,000 120,000  ?

• .
• Alpha
• Changes in inventory
• 80,000-50,000units=30,000units
• Fixed Costs per units
• P100,000/50,000units=P2.00
• Changes in Net Income
• P2.00*30,000units=P60,000
• P<S therefore, ACNI<VCNI
• VCNI
• P210,000+60,000=P270,000
• Beta
• ACNI > VCNI therefore, P > S
• Changes in Net income
• P120,000 – P80,000=P40,000
• Changes in Inventory (Inventory Ending)
• P40,000/P2.00=20,000units
• Delta
• P>S therefore, ACNI > VCNI
• VCNI (50,000units*P4.00)-100,000=P100,000
• Changes in Net Income
• 5,000units*P2.00=P10,000
• ACNI (P100,000+P10,000)=P110,000
• Exercise 1
• Fill in the blanks for each of the following
independent situations. In all situations, selling
price is P10 standard and actual variable
manufacturing cost is P6. Fixed production costs –
budgeted and actual – are P100,000 and the
volume used to set the standard fixed cost per unit
is 50,000 units. There are no selling and
administrative expenses.
  Alpha Bravo Charlie
Units Sold 80,000 30,000 50,000
Units Produced  50,000  50,000 55,000
NI (Direct costing)  270,000 80,000 100,000
NI (Absorption costing) 210,000 120,000 110,000

• .
• Exercise2:
• Toshiba Company produces and sells a single product,
wooden cars decorative items. Selected cost and operating
data relating to the product for two years are given below:
• Selling price per unit P50
• Manufacturing costs
• Direct Materials P11
• Direct Labor P6
• Variable Overhead P3
• Fixed Overhead per year P120,000 
• Selling and administrative expenses
• Variable per unit sold P5
• Fixed 
cost per year P70,000
Year 1 Year 2
Units in beginning inventory 0 2,000
Units produced during the year 10,000 6,000
Units sold during the year 8,000 8,000
Units in ending inventory 2,000 0
ABSORPTION COSTING
ABSORPTION COSTING
YEAR 1 YEAR 2
Direct Materials
Direct Labor
FOH – Variable
FOH – Fixed

Product Costs/Total Costs

ABSORPTION COSTING
YEAR 1 YEAR 2
Direct Materials P11.00 P11.00
Direct Labor P6.00 P6.00
FOH – Variable P3.00 P3.00
FOH – Fixed

Product Costs/Total Costs

ABSORPTION COSTING
YEAR 1 YEAR 2
Direct Materials P11.00 P11.00
Direct Labor P6.00 P6.00
FOH – Variable P3.00 P3.00
FOH – Fixed
(P120,000/10,000units) P12.00

Product Costs/Total Costs

ABSORPTION COSTING
YEAR 1 YEAR 2
Direct Materials P11.00 P11.00
Direct Labor P6.00 P6.00
FOH – Variable P3.00 P3.00
FOH – Fixed
(P120,000/10,000units) P12.00
(P120,000/6,000inits) P20.00
Product Costs/Total Costs
ABSORPTION COSTING
YEAR 1 YEAR 2
Direct Materials P11.00 P11.00
Direct Labor P6.00 P6.00
FOH – Variable P3.00 P3.00
FOH – Fixed
(P120,000/10,000units) P12.00
(P120,000/6,000inits) P20.00
Product Costs/Total Costs P32.00 P40.00
ABSORPTION COSTING Year 1 Year 2
Sales
Less:COS
Beg. Invtry.
Manufactured
TGAS
Less: Ending Invtry.
Gross Profit
Less:Operating Expense
Variable
Fixed
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured
TGAS
Less:Ending Invtry
Gross Profit
Less:Operating Expense
Variable
Fixed
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured (10,000x32)
TGAS
Less:Ending Invtry
Gross Profit
Less:Operating Expense
Variable
Fixed
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured (10,000x32) 320,000
TGAS 320,000
Less:Ending Invtry
Gross Profit
Less:Operating Expense
Variable
Fixed
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured (10,000x32) 320,000
TGAS 320,000
Less:Ending Invtry (2,000x32)
Gross Profit
Less:Operating Expense
Variable
Fixed
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured (10,000x32) 320,000
TGAS 320,000
Less:Ending Invtry (2,000x32) 64,000
Gross Profit
Less:Operating Expense
Variable
Fixed
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured (10,000x32) 320,000
TGAS 320,000
Less:Ending Invtry (2,000x32) 64,000
Gross Profit 144,000
Less:Operating Expense  
Variable 40,000
Fixed 70,000
NET INCOME
ABSORPTION COSTING Year 1 Year 2
Sales 400,000
Less:COS  
Beg. Invtry 0
Manufactured (10,000x32) 320,000
TGAS 320,000
Less:Ending Invtry (2,000x32) 64,000
Gross Profit 144,000
Less:Operating Expense  
Variable 40,000
Fixed 70,000
NET INCOME 34,000
ABSORPTION COSTING Year 1 Year 2
Sales 400,000 400,000
Less:COS    
Beg. Invtry 0
Manufactured 320,000
TGAS 320,000
Less:Ending Invtry 64,000
Gross Profit 144,000
Less:Operating Expense  
Variable 40,000
Fixed 70,000
NET INCOME 34,000
ABSORPTION COSTING Year 1 Year 2
Sales 400,000 400,000
Less:COS    
Beg. Invtry 0 64,000
Manufactured (6,000*P40.00) 320,000
TGAS 320,000
Less:Ending Invtry 64,000
Gross Profit 144,000
Less:Operating Expense  
Variable 40,000
Fixed 70,000
NET INCOME 34,000
ABSORPTION COSTING Year 1 Year 2
Sales 400,000 400,000
Less:COS    
Beg. Invtry 0 64,000
Manufactured (6,000*P40.00) 320,000 240,000
TGAS 320,000
Less:Ending Invtry 64,000
Gross Profit 144,000
Less:Operating Expense  
Variable 40,000
Fixed 70,000
NET INCOME 34,000
ABSORPTION COSTING Year 1 Year 2
Sales 400,000 400,000
Less:COS    
Beg. Invtry 0 64,000
Manufactured (6,000*P40.00) 320,000 240,000
TGAS 320,000 304,000
Less:Ending Invtry 64,000
Gross Profit 144,000
Less:Operating Expense  
Variable 40,000
Fixed 70,000
NET INCOME 34,000
ABSORPTION COSTING Year 1 Year 2
Sales 400,000 400,000
Less:COS    
Beg. Invtry 0 64,000
Manufactured (6,000*P40.00) 320,000 240,000
TGAS 320,000 304,000
Less:Ending Invtry 64,000 0
Gross Profit 144,000 96,000
Less:Operating Expense    
Variable 40,000 40,000
Fixed 70,000 70,000
NET INCOME 34,000
ABSORPTION COSTING Year 1 Year 2
Sales 400,000 400,000
Less:COS    
Beg. Invtry 0 64,000
Manufactured (10,000x32) 320,000 240,000
TGAS 320,000 304,000
Less:Ending Invtry (2,000x32) 64,000 0
Gross Profit 144,000 96,000
Less:Operating Expense    
Variable 40,000 40,000
Fixed 70,000 70,000
NET INCOME 34,000 (14,000)
Variable Costing    
  Year 1 Year 2
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales
Variable Product cost
Variable cost Selling
Contribution Margin
Fixed Cost
NET INCOME
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost
Variable cost Selling
Contribution Margin
Fixed Cost
NET INCOME
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20)
Variable cost Selling
Contribution Margin
Fixed Cost
NET INCOME
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling
Contribution Margin
Fixed Cost
NET INCOME
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5)
Contribution Margin
Fixed Cost
NET INCOME
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin
Fixed Cost
NET INCOME
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0
Less: End
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0
Less: End (2,000xP12.00)
VC Net Income
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0
Less: End (2,000x12) 24,000
VC Net Income
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0
Less: End (2,000x12) 24,000
VC Net Income 10,000
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0 24,000
Less: End (2,000x12) 24,000
VC Net Income 10,000
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0 24,000
Less: End (2,000x12) 24,000 0
VC Net Income 10,000
Variable Costing    
  Year 1 Year 2
DM 11 11
Dl 6 6
FOH – Variable 3 3
Total Variable product cost 20 20
   
Sales 400,000 400,000
Variable Product cost (8,000x20) 160,000 160,000
Variable cost Selling (8,000x5) 40,000 40,000
Contribution Margin 200,00 200,000
Fixed Cost 190,000 190,000
NET INCOME 10,000 10,000

Reconciliation: Year 1 Year 2

AC Net Income 34,000 (14,000)
Add: Beg 0 24,000
Less: End (2,000x12) 24,000 0
VC Net Income 10,000 10,000
• THEORY
• 1. To apply direct costing method it is
necessary that you know
• A.Standard production rate and times of
production elements
• B.Contribution margin and break even point in
production
• C.Variable and fixed cost related to production
• D.Controllable and uncontrollable cost of
production
• THEORY
• 1. To apply direct costing method it is
necessary that you know
• A.Standard production rate and times of
production elements
• B.Contribution margin and break even point in
production
• C.Variable and fixed cost related to
production
• D.Controllable and uncontrollable cost of
production
• 2.The following statements about the
adoption of variable costing are true, except:
• A. All fixed manufacturing costs are recognized
as period costs.
• B. A direct cost may not become a product
cost.
• C. It is an acceptable method for general
reporting purposes.
• D. An indirect cost may be assigned as part of
product cost.
• 2.The following statements about the
adoption of variable costing are true, except:
• A. All fixed manufacturing costs are recognized
as period costs.
• B. A direct cost may not become a product
cost.
• C. It is an acceptable method for general
reporting purposes.
• D. An indirect cost may be assigned as part of
product cost.
• 3. The change in period-to-period operating
income when using variable costing can be
explained by the change in the
• A. Unit sales level multiplied by the unit sales
price.
• B. Finished goods inventory level multiplied by
the unit sales price.
• C. Unit sales level multiplied by a constant unit
contribution margin.
• D. Finished goods inventory level multiplied by
a constant unit contribution margin.
• 3. The change in period-to-period operating
income when using variable costing can be
explained by the change in the
• A. Unit sales level multiplied by the unit sales
price.
• B. Finished goods inventory level multiplied by
the unit sales price.
• C. Unit sales level multiplied by a constant
unit contribution margin.
• D. Finished goods inventory level multiplied by
a constant unit contribution margin.
• 4. Which of the following is NOT an advantage
of using variable costing for internal reporting
purposes?
• A. Fixed costs are reported at incurred values,
not absorbed values, thus improving control
over those costs.
• B. Profits are directly influenced by changes in
sales volume.
• C. The impact of fixed costs on profits is
emphasized.
• D. Total costs may be overlooked when
evaluating profits.
• 4. Which of the following is NOT an advantage
of using variable costing for internal reporting
purposes?
• A. Fixed costs are reported at incurred values,
not absorbed values, thus improving control
over those costs.
• B. Profits are directly influenced by changes in
sales volume.
• C. The impact of fixed costs on profits is
emphasized.
• D. Total costs may be overlooked when
evaluating profits.
• 6. A cost that is included as part of product
costs under both absorption costing and direct
costing is:
• A. managerial staff costs D.taxes on factory
building
• B. insurance
• C. variable marketing expenses.
• D. variable materials handling labor
• 6. A cost that is included as part of product
costs under both absorption costing and direct
costing is:
• A. managerial staff costs D.taxes on factory
building
• B. insurance
• C. variable marketing expenses.
• E. variable materials handling labor
• 7. Under variable costing,
• A .all product costs are variable.
• B. all period costs are variable.
• C. all product costs are fixed
• D. product costs are both fixed and variable.
• 7. Under variable costing,
• A .all product costs are variable.
• B. all period costs are variable.
• C. all product costs are fixed
• D. product costs are both fixed and variable.
• 8. Which of the following is not associated
with absorption costing?
• A. functional format
• B. gross margin
• C. Period costs
• D. contribution margin
• 8. Which of the following is not associated
with absorption costing?
• A. functional format
• B. gross margin
• C. Period costs
• D. contribution margin
• 9. Calculating income under variable costing
does NOT require knowing
• A. unit sales.
• B. selling price.
• C. unit variable manufacturing costs.
• D. unit production.
• 9. Calculating income under variable costing
does NOT require knowing
• A. unit sales.
• B. selling price.
• C. unit variable manufacturing costs.
• D. unit production.
• 10. A criticism of variable costing for managerial
accounting purposes is that it
• A. is not acceptable for product line segmented
reporting.
• B. does not reflect cost-volume-profit
relationships.
• C. overstates inventories.
• D. might encourage managers to emphasize the
short term at the expense of the long term.
• 10. A criticism of variable costing for managerial
accounting purposes is that it
• A. is not acceptable for product line segmented
reporting.
• B. does not reflect cost-volume-profit
relationships.
• C. overstates inventories.
• D. might encourage managers to emphasize the
short term at the expense of the long term.
• 11. All of the following are names for the
product costing method in which both fixed
and variable costs are included in overhead
rates, except:
• A. absorption costing C. direct costing
• B. conventional costing D. full costing
• 11. All of the following are names for the
product costing method in which both fixed
and variable costs are included in overhead
rates, except:
• A. absorption costing C. direct costing
• B. conventional costing D. full costing
• 12. Under the variable-costing concept, unit product
cost would most likely be increased by
• A. A decrease in the remaining useful life of factory
machinery depreciated on the units-of-production
method.
• B. A decrease in the number of units produced.
• C. An increase in the remaining useful life of factory
machinery depreciated on the sum-of-the-year’s digits
method.
• D. An increase in the commission paid to salesman for
each unit sold.
• 12. Under the variable-costing concept, unit product
cost would most likely be increased by
• A. A decrease in the remaining useful life of factory
machinery depreciated on the units-of-production
method.
• B. A decrease in the number of units produced.
• C. An increase in the remaining useful life of factory
machinery depreciated on the sum-of-the-year’s digits
method.
• D. An increase in the commission paid to salesman for
each unit sold.
• 13. Under absorption costing, fixed
manufacturing overhead could be found in all
of the following except the
• A. work-in-process account.
• B. finished goods inventory account.
• C. Cost of Goods Sold.
• D. period costs.
• 13. Under absorption costing, fixed
manufacturing overhead could be found in all
of the following except the
• A. work-in-process account.
• B. finished goods inventory account.
• C. Cost of Goods Sold.
• D. period costs.
• 14. 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 absorption costing method.
• B. Increase under the variable costing method.
• C. Decrease under the absorption costing
method.
• D. Decrease under the variable costing method.
• 14. 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 absorption costing method.
• B. Increase under the variable costing method.
• C. Decrease under the absorption costing method.
• D. Decrease under the variable costing method.
• 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.
• B. When sales volume is more than production
volume, variable costing will result in higher operating
profit.
• C. 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 favorable review.
• D. Under absorption costing, operating profit is a
function of both sales volume and production volume.
• 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.
• B. When sales volume is more than production
volume, variable costing will result in higher operating
profit.
• C. 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 favorable review.
• D. Under absorption costing, operating profit is a
function of both sales volume and production volume.
• 16. Jansen, Inc. pays bonuses to its managers based
on operating income. The company uses absorption
costing, and overhead is applied on the basis of
direct labor hours. To increase bonuses, Jansen’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.
• C. Increase production schedules independent of
customer demands.
• D. Decrease production of those items requiring the
most direct labor.
• 16. Jansen, Inc. pays bonuses to its managers based
on operating income. The company uses absorption
costing, and overhead is applied on the basis of
direct labor hours. To increase bonuses, Jansen’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.
• C. Increase production schedules independent of
customer demands.
• D. Decrease production of those items requiring
the most direct labor.
• 17. A firm presently has total sales of
$100,000. If its sales rise, its
• A. net income based on variable costing will
go up more than its net income based on
absorption costing.
• B. net income based on absorption costing will
go up more than its net income based on
variable costing.
• C. fixed costs will also rise.
• D. per unit variable costs will rise.
• 17. A firm presently has total sales of
$100,000. If its sales rise, its
• A. net income based on variable costing will
go up more than its net income based on
absorption costing.
• B. net income based on absorption costing will
go up more than its net income based on
variable costing.
• C. fixed costs will also rise.
• D. per unit variable costs will rise.
• 18. Both Company Y and Company Z produce similar
products that need negligible distribution costs. Their
assets operation and accounting are very similar in all
respects except that Company Y uses direct costing and
Company Z uses absorption costing.
• A. Co. Y would report a higher inventory value than Co. Z
for the years in which production exceeds sales
• B. Co. Y would report a higher inventory value than Co. Z
for the years in which production exceeds the normal or
practical capacity
• C. Co. Z would report a higher inventory value than Co. Y
for the years in which production exceeds sales
• D. Co. Z would report a higher net income than Co. Y for
the years in which production equals sales
• 18. Both Company Y and Company Z produce similar
products that need negligible distribution costs. Their
assets operation and accounting are very similar in all
respects except that Company Y uses direct costing and
Company Z uses absorption costing.
• A. Co. Y would report a higher inventory value than Co. Z
for the years in which production exceeds sales
• B. Co. Y would report a higher inventory value than Co. Z
for the years in which production exceeds the normal or
practical capacity
• C. Co. Z would report a higher inventory value than Co.
Y for the years in which production exceeds sales
• D. Co. Z would report a higher net income than Co. Y for
the years in which production equals sales
• 19. Which of the following statements is true
for a firm that uses variable costing?
• A. The cost of a unit of product changes
because of changes in number of units
manufactured.
• B. Profits fluctuate with sales.
• C. An idle facility variation is calculated.
• D. Product costs include variable
administrative costs.
• 19. Which of the following statements is true
for a firm that uses variable costing?
• A. The cost of a unit of product changes
because of changes in number of units
manufactured.
• B. Profits fluctuate with sales.
• C. An idle facility variation is calculated.
• D. Product costs include variable
administrative costs.
• 21. A company’s net income recently
increased by 30% while its inventory increased
to equal a full year’s sales requirements.
Which of the following accounting methods
would be most likely to produce the favorable
income results?
• A. Absorption costing.C. Variable costing.
• B. Direct costing. D. Standard direct
costing.
• 21. A company’s net income recently
increased by 30% while its inventory increased
to equal a full year’s sales requirements.
Which of the following accounting methods
would be most likely to produce the favorable
income results?
• A. Absorption costing. C. Variable costing.
• B. Direct costing. D. Standard direct
costing.
• 22. Unabsorbed fixed overhead costs in an
absorption costing system are
• A. fixed manufacturing costs not allocated to
units produced.
• B. variable overhead costs not allocated to
units produced.
• C. excess variable overhead costs.
• D. costs that cannot be controlled.
• 22. Unabsorbed fixed overhead costs in an
absorption costing system are
• A. fixed manufacturing costs not allocated to
units produced.
• B. variable overhead costs not allocated to
units produced.
• C. excess variable overhead costs.
• D. costs that cannot be controlled.
• 23. When a firm prepares financial reports by
using absorption costing
• A. Profits will always increase with increases in
sales.
• B. Profits may decrease with increased sales
even if there is no change in selling prices
and costs.
• C. Decreased output and constant sales result
in increased profits.
• D. Profits will always decrease with decreases
in sales.
• 23. When a firm prepares financial reports by
using absorption costing
• A. Profits will always increase with increases in
sales.
• B. Profits may decrease with increased sales
even if there is no change in selling prices and
costs.
• C. Decreased output and constant sales result
in increased profits.
• D. Profits will always decrease with decreases
in sales.
• 24. Variable costing and absorption costing will
show the same incomes when there are no
• A. beginning inventories.
• B. ending inventories.
• C. variable costs.
• D. beg and ending inventories.
• 24. Variable costing and absorption costing will
show the same incomes when there are no
• A. beginning inventories.
• B. ending inventories.
• C. variable costs.
• D. beg and ending inventories.
• 25. 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.
• 25. 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.
• 1. MNO Products, Inc. planned and actually
manufactured 200,000 units of its single product
in 2000, its first year of operations. Variable
manufacturing costs were P30 per unit of product.
Planned and actual fixed manufacturing costs
were P600,000, and marketing and administrative
costs totaled P400,000 in 2000. MNO sold
120,000 units of product in 2000 at a selling price
of P40 per unit. What is the cost of the ending
inventory assuming variable costing is used?
• Inventory End (200,000-120,000)=80,000
• Cost of Ending Inventory 80,000xP30=P2,400,000
• 2. West Co.’s 1988 manufacturing costs were
as follows:
• Direct materials and direct labor $700,000
• Other variable manufacturing costs 100,000
• Dep of factory bldg and mfg equip 80,000
• Other fixed manufacturing overhead 18,000
• What amount should be considered product
cost for external reporting purposes?
(Absorption Costing)
• (700,000+100,000+80,000+18,000)=P898,000
• 3. At the end of Killo Co.’s first year of
operations, 1,000 units of inventory
remained on hand. Variable and fixed
manufacturing cost per unit were $90 and
$20, respectively. If Killo uses absorption
costing rather than direct (variable)
costing, the result would be a higher
pretax income of
• 1,000xP20=P20,000
• 4. Coomber Industries manufactures a single
product using standard costing. Variable
production costs are $13 and fixed production
costs are $125,000. Coomber uses a normal
activity of 12,500 units to set its standard
costs. Coomber began the year with 1,000
units in inventory, produced 11,000 units, and
sold 11,500 units. The standard cost of goods
sold under absorption costing would be?
• FC per unit P125,000/12,500=P10
• TGAS (11,000+1000xP23)=P276,000;
• CoGS P276,000-(500xP23)=P264,500
• 5. Fleet, Inc. manufactured 700 units of Product
A, a new product, during the year. Product A’s
variable and fixed manufacturing costs per unit
were $6.00 and $2.00 respectively. The
inventory of Product A on December 31,
consisted of 100 units. There was no inventory
of Product A on January 1. What would be the
change in the dollar amount of inventory on
December 31 if variable costing were used
instead of absorption costing?
• Decreases 100x$2=$200
• 6. GHI Company had P100,000 income
using absorption costing. GHI has no
variable manufacturing costs. Beginning
inventory was P5,000 and ending
inventory was P12,000. What is the
income under variable costing?
• ACNI P100,000
• Add: BI P5,000
• Less: EI P12,000
• VCNI P93,000
• 7. A company has the following cost data:
• Fixed manufacturing costs $2,000
• Fixed selling, general, and admin costs $1,000
• Variable selling costs per unit sold 1
• Variable manufacturing costs per unit 2
• Beginning inventory 0 units
• Production100 units
• Sales 90 units at $40 per unit
• Variable and absorption-cost net incomes are:
• VCNI 90(40-3)=3,330-3,000=P330
• ACNI P330+(10units*FC/unit P20) = P530
• 8. A company manufactures 50,000 units
of a product and sells 40,000 units. Total
manufacturing cost per unit is $50
(variable manufacturing cost, $10; fixed
manufacturing cost, $40). Assuming no
beginning inventory, the effect on net
income if absorption costing is used
instead of variable costing is that:
• Higher 10,000x$40=$400,000
• 9. A company had an income of P50,000 using
direct costing for a given month. Beginning
and ending inventories for the month are
13,000 units and 18,000 units, respectively.
Ignoring income tax, if the fixed overhead
application rate was P2 per unit, what was the
income using absorption costing?
• ACNI P60,000
• Add: (13,000units*2) P26,000
• Less: (18,000units*2) P36,000
• VCNI P50,000
• 10. In the ABC Company, sales are P800,000,
cost of goods under absorption costing is
P600,000, and total operating expenses are
P120,000. If cost of goods sold is 70% variable
and total operating expenses are 60% fixed,
what is the contribution margin under variable
costing?
• Variable Costs (600,000x70%+120,000x40%)
• = P468,000
• CM (P800,000-P468,000)=P332,000