MAS-06: Absorption and Variable Costing

ABSORPTION COSTING
Also known as
Users
Presentation/ Format

Classification of cost
Inventoriable cost/ product cost/
unit cost

Period cost

Full Costing
External

VARIABLE COSTING
Direct Costing
Internal

Sales

xxx

Sales

xxx

Cost of sales

(xx)

Variable Cost

(xx)

Gross profit

xx

Expense

(xx)

Net profit

xx

Not required
All product cost

xx

Fixed Cost

(xx)

Net profit

xx

Required
All variable manufacturing cost

Direct material
Direct labor
Variable factory overhead
Fixed factory overhead

Selling and Administrative Expense

Contribution Margin

Selling and Administrative Expense

Variable
Fixed

Direct material
Direct labor
Variable factory overhead

Variable
Fixed

Fixed factory overhead

Fixed factory overhead (FFOH)
Net profit is influenced by:
In accordance with accounting
principles

expensed when the product is sold

Production
Yes

Expensed in the period incurred

Sales volume
No

Matching principle

Note:

1.
2.
3.
4.
5.

The amount of inventories under absorption costing is always higher than the inventories
under variable costing.
If production is equal to sale, then absorption costing income is expected to be equal to the
variable costing income.
If production is greater than sales, then income under absorption costing is higher than the
variable costing.
If sales is greater than production, then income under variable costing is higher than the
absorption costing
Reconciliation of income:

income = inventory x
FFOH per unit
Income - absorption costing

xxx

Add: FFOH in beginning inventory

xxx

Total

xxx

Less: FFOH in ending inventory

Income - variable costing

xxx
P

xxx

Exercise 1:

The company operated at a normal capacity of 10,000 units in the year 2014. The company sold
80% of these units at a price of P12 per unit. Manufacturing costs incurred during the year are as
follows:
Manufacturing:
Materials
Labor
Variable Factory
Overhead
Page 1 of 4

P
10,000
15,000
5,000

Fixed Factory Overhead

Selling and administrative
Variable
Fixed

REQUIREMENTS: Determine the following:

1.
2.

Inventory cost per unit under absorption and variable costing.

Cost of ending inventory under absorption and variable costing.

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20,000
P15,000
8,00
0

Exercise 2:
ABC Company sells its product for P2,000 each. Data for the current years operations are as follows.
Units:
Beginning Inventory
10
Production
80
Ending Inventory
20
Variable Costs:
Direct Materials
Direct Labor
Factory Overhead
Selling and
Administrative
Fixed Costs:
Factory Overhead
Selling and
Administrative

P24,00
0
16,00
0
8,00
0
4,00
0
P20,00
0
2,0
00

REQUIRED:
1.
Prepare income statements under both absorption and variable costing.
2.
Provide computations explaining the differences in income between the two costing methods.
Multiple Choices:
1.
Using absorption costing, fixed manufacturing costs are best describe as:
a. Direct period costs
c. Direct product costs
b. Indirect period costs
d. Indirect product costs
2.

If production is higher than sales then absorption costing income is expected to

a. Higher than variable costing income
c. Lower than the variable costing income
b. Equal to the variable costing income
d. Erratic under variable costing

a.
b.
c.
d.

P
P
P
P

3. Black Company produced 10,000 units and sold 9,000 units. Fixed manufacturing overhead costs
were P 20,000, and variable manufacturing overhead costs were P 3 per unit. For the period, one
would expect net income under the absorption costing method to be
2,000 more than net income under variable costing method
5,000 more than net income under variable costing method
2,000 less than net income under variable costing method
5,000 less than net income under variable costing method

4. Green Company has operating income of P 50,000 using direct costing for a given period. Beginning
and ending inventories for that period were 13,000 units and 18,000 units, respectively. If the fixed
factory overhead application is P 2 per unit, the operating income using the absorption costing is:
a. P 40,000
b. P 50,000
c. P 60,000
d. P 70,00
5. Violet Company had 16,000 units in the beginning inventory. During the year, the companys
variable production costs were P6 per unit and its fixed manufacturing overhead costs were P 4 per
unit. The companys net income for the year was P 24,000 lower under absorption costing than it
was under variable costing. Given these facts, the number of units in the ending inventory must
have been
a. 22,000 units
b. 10,000 units
c. 6,000 units
d. 4,000 units

a.
b.
7.

8.

6. Pink Co. had a net income of P 85,500 using variable costing and net income of P 90,000 using
absorption costing. Total fixed manufacturing overhead cost was P 150,000, and production was
100,000 units. Between the beginning at the end of the year, the inventory model
Increased by 4,500 units
c. Increased by 3,000 units
Decreased by 4,500 units
d. Decreased by 3,000 units

Variable costing is unacceptable for

a. Cost-volume-profit analysis
b. Financial Reporting

c. Transfer pricing
d. Short-term decision making

How many statement(s) is/are true?

a. Variable costing income fluctuates with production and does not react to changes in sales
b. Variable costing violates matching principle
c. Under variable costing, all variable expenses are treated as product costs.
d. Under a just-in-time (JIT) production environment, income under absorption costing tends to be
equal with income under variable costing.

Page 3 of 4

a. one

b. two

c. three

d. four

9. White Co. manufacturers a single product. Unit variable production costs are P 20 and fixed
production costs are P 150,000. White uses normal activity of 10,000 units. White began the
year with no inventory, produced 12,000 units, and sold 7,500 units.
A.) Determine the product cost under variable costing
a. P 20.00
b. P 32.50
c. P 35.00
B.) Determine the product cost under absorption costing

d. P 40.00

a. P 20.00
b. P 32.50
c. P 35.00
C.) Determine the capacity or volume variance under absorption costing

d. P 40.00

a. P 24,000 unfavorable

d. P 30,000 favorable

P 24,000 favorable

c. P 30,000 unfavorable

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