MAS 04: ABSORPTION & VARIABLE COSTING

ABSORPTION COSTING VARIABLE COSTING

Also known as Full Costing Direct Costing
Users External Internal
Presentation/ Sales xxx Sales xxx
Format Cost of sales (xx) Variable Cost (xx)
Gross profit xx Contribution Margin xx
Expense (xx) Fixed Cost (xx)
Net profit xx Net profit xx
Classification of Not required Required
cost
Inventoriable cost/ All product cost All variable manufacturing cost
product cost/ unit • Direct material • Direct material
cost • Direct labor • Direct labor
• Variable factory overhead • Variable factory overhead
• Fixed factory overhead
Period cost Selling and Administrative Expense Selling and Administrative Expense
• Variable • Variable
• Fixed • Fixed
Fixed factory overhead
Fixed factory expensed when the product is sold Expensed in the period incurred
overhead (FFOH)
Net profit is Production Sales volume
influenced by:
In accordance with Yes No
accounting • Matching principle
principles

True or False:
1. The amount of inventories under absorption costing is always higher than the inventories under variable
costing.
2. If production is equal to sale, then absorption costing income is expected to be equal to the variable costing
income.
3. If production is greater than sales, then income under absorption costing is higher than the variable costing.
4. 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 P xxx

Add: FFOH in beginning inventory xxx
Total xxx
Less: FFOH in ending inventory xxx
Income - variable costing P xxx
Exercise 1:

JBV Company operated at a normal capacity of 10,000 units in 2012. The Company sold 90% of the units produced
@ P16. Manufacturing costs incurred during the year are as follows:
Direct materials P 20,000
Direct labor 30,000
Variable factory overhead 10,000
Fixed factory overhead 40,000
Variable selling and administrative expenses 30,000
Fixed selling and administrative expenses P 16,000

Under absorption and variable costing, determine the following:

1. Inventory cost per unit
2. Cost of ending inventory
3. Net income

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Exercise 2:

Data for 2012’s operations of JBV Corporation are as follows:

Variable costs:
Direct materials P 12,000
Direct labor P 8,000
Factory overhead P 4,000
Selling and P
administrative 2,000
Fixed costs:
Factory overhead P 10,000
Selling and P
administrative 1,000
Units:
Beginning inventory 5
Units produced 80
Ending inventory 15
Selling price P 1,000

Required: Prepare income statements under both costing method.

Exercise 3:

JBV Incorporated’s actual costs for 2012 are as follows:

Direct materials 150,000.00

Direct labor 100,000.00
Variable factory overhead 49,000.00
Fixed factory overhead 75,000.00
Variable selling and administrative
expenses 16,000.00
Fixed selling and administrative expenses 60,000.00

Beginning inventory -
Units produced 10,000
Units sold 8,000
Selling price P 49

Under absorption and variable costing, determine the following:

1. inventoriable cost
2. cost per unit
3. non-inventoriable cost
4. cost of ending inventory
5. cost of goods sold
6. gross profit
7. manufacturing margin
8. contribution margin
9. manufacturing income
10. total variable cost expensed during the year
11. total fixed cost expensed during the year
12. total expense expensed during the year
13. Net income

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1. Which of the following is the more appropriate term for direct costing ?
a. Absorption costing c. Marginal Costing
b. Out of pocket costing d. Variable Costing
2. Which of the following statement is true?
a. Absorption costing is used for internal reporting purposes.
b. Direct costing is used for external reporting processes.
c. Variable costing is used for internal reporting purposes.
d. Full Costing is used for internal reporting purposes.
3. Which method of costing are the terms contribution margin and gross profit used?
a. The contribution margin is used under the absorption costing while the gross profit is used under
the variable costing.
b. The contribution margin is used under the direct costing while the gross profit is used under the
full costing method.
c. Both terms are used under the absorption costing method.
d. Both terms are used under the variable costing method.
4. Which costing method is in conformity with the Philippine Financial Reporting Standards (PFRS)?
Absorption Costing Variable Costing
a. YES YES
b. YES NO
c. NO NO
d. NO YES
5. Which of the following must be known in order to institute a variable costing method?
a. The variable and fixed components of all costs.
b. The controllable and non-controllable components of all costs.
c. The direct and indirect components of all cost.
d. The relevant and irrelevant components of all costs.
6. Which costing method charges all fixed cost in the period incurred?
a. Absorption Costing c. Variable Costing
b. Out of Pocket costing d. Relevant Costing
7. Which costing method charges fixed overhead in the period the units produced are sold?
a. Full Costing c. Direct costing
b. Out of pocket costing d. Marginal costing
8. The method of costing where the net income is influenced by the production volume rather than the
sales volume?
a. Absorption costing c. Variable Costing
b. Out of pocket costing d. Batch costing
9. The primary difference between absorption costing and variable costing is in the treatment of fixed
overhead. How is fixed overhead treated under each method?
Absorption Costing Variable Costing
a. Inventoriable cost Period cost
b. Inventoriable cost Inventoriable cost
c. Period cost Period cost
d. Period cost Inventoriable cost
10. A costing method where there is no variance?
a. Actual Costing c. Standard costing
b. Normal Costing d. Batch Costing
11. A basic tenet of direct costing is that costing should be currently expensed. What is the rationale
behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the amount of specific
products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management.
d. Because period cost will occur whether or not production occurs, it is improper to allocate these
costs to production and defer a current cost of doing business.
12. Why is direct costing not in accordance with Philippine Financial Reporting Standards?
a. Fixed manufacturing costs are assumed to be period costs.
b. Direct costing procedure is not well known in the industry.
c. Net earnings are always overstated when using direct costing procedure.
d. Direct costing ignores the concept of lower of cost or markets when valuing inventory.
13. Direct costing has an advantage over absorption costing for which of the following purposes?

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 a. Analysis of the profitability of products, territories, and other segments of a business.
b. Determining the CVP relationship among the major factors of sales such as selling price, selling
mix, and sales volume.
c. Minimizing the effect of inventory changes on the net income.
d. All of the above.
14. Unabsorbed fixed overhead costs in an absorption costing system are
a. Fixed factory costs not allocated to units produced.
b. Variable overhead costs not allocated to units produced.
c. Excess variable overhead costs.
d. None of the above
15. Which of the following statements is FALSE?
a. When production is equal to sales, then the beginning and ending inventory (in units) will be the
same.
b. There is no capacity variance under the variable costing method.
c. The under or over applied factory overhead is attributed to the fixed element of factory overhead.
d. When all variances are closed to cost of sales, the net income under absorption costing and direct
costing will be the same.
Questions 16 & 17 are based on the following information provided by Kulimbat Manufacturing
Company for the month of May:
Direct materials P 24,000
Direct labor 40,000
Variable overhead 16,000
Fixed overhead (excluding depreciation) 30,000
Variable selling & adm. expenses 12,000
Fixed selling & adm. expenses
(excluding depreciation) 45,000
Financing cost 2,000
Depreciation- Machinery 20,000
Depreciation-Delivery Van 15,000
Depreciation-Office Equipment 5,000
Units produced 8,000
Units sold 7,200
16. How much are the inventoriable costs under absorption costing and variable costing?
Absorption costing Variable costing
a. P152,000 P80,000
b. P150,000 P92,000
c. P145,000 P92,000
d. P130,000 P80,000
17. How much are the non-inventoriable costs under absorption costing and variable costing?
Absorption costing Variable costing
a. P79,000 P 28,000
b. P49,000 P 87,000
c. P79,000 P129,000
d. P59,000 P129,000
Questions 18 & 19 are based on the following information of Kupit Manufacturing Company for the
month of July:
Prime costs P 70,000
Conversion costs 104,000
Direct labor 48,000
Fixed overhead 30,000
Variable operating costs 9,600
Fixed operating costs 15,000
Financing costs 1,500
Production (units) 5,000
Sales (units) 4,000
18. What are the production costs per unit under the full costing method?
a. P 22.50 b. P 25.20 c. P 27.20 d. P 31.50
19. What are the production costs per unit under the direct costing method?
a. P 19.20 b. P 21.20 c. P 22.10 d. P 26.50
Questions 20 & 21 are based on the following information:

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 Prime costs P 45,000 (5,000 units produced)
Variable factory overhead 15,000
Fixed factory overhead 40,000
Variable expenses 30,000 (4,000 units sold)
Fixed expenses 20,000
20. What is the cost of the ending inventory under absorption costing?
a. P 12,000 b. P 18,000 c. P 20,000 d. P 30,000
21. What is the cost of the ending inventory using direct costing?
a. P 12,000 b. P 18,000 c. P 20,000 d. P 30,000
22. Selected information concerning the operation of Nakaw Manufacturing Company is shown below.
Units produced 10,000
Units sold 9,000
Direct production costs P 60,000
Factory overhead ( P25,000 is fixed) 37,000
Variable expenses 15,000
Fixed expenses 12,000
Which costing method will yield the higher ending inventory valuation and by how much?
a. Absorption costing by P2,500 c. Absorption costing by P3,700
b. Variable costing by P2,500 d. cannot be determined
23. Nikki Corporation’s variable and fixed production costs are P8 and P5, respectively. During the month
12,000 units were produced and 10,000 units were sold. There was no beginning inventory.
What would happen to ending inventory if the variable costing were used instead of absorption
costing?
a. P10,000 increase c. P16,000 decrease
b. P10,000 decrease d. P16,000 increase
24. Selected data concerning the operation of Vikki Corporation is as follows:
Materials P13/unit
Conversion costs P21/unit
Variable expenses P4/unit
Fixed expenses P120,000
Units produced 15,000
Units sold 11,000
Included in the computation of conversion cost per unit are variable costs of P240,000.
How much higher is the cost of sales under absorption costing as compared to direct costing?
a. P50,000 b. P55,000 c. P60,000 d. P75,000
Questions 25 & 26 are based on the following information:
The following were the actual costs incurred by Lee Company on its first year of operations:
Prime costs P55,000
Conversion costs 50,000
Direct labor 25,000
Variable overhead 15,000
Variable expenses 12,000
Fixed expenses 10,000
5,000 units were produced and 4,000 units were sold at P25 per unit.
25. How much was the gross profit?
a. P28,000 b. P30,000 c. P32,000 d. P36,000
26. What was the contribution margin?
a. P32,000 b. P40,000 c. P45,000 d. P50,000
Questions 27-29 are based on the following information:
Actual costs incurred by Lotlot Company on its first month of operation were as follows:
Per unit
Variable Fixed
Materials P 15 -
Labor 10 -
Factory overhead 8 9 (based on output)
Operating expenses 7 12(based on output)
Production (units) 1,500
Sales (units) 1,200

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27. How much variable costs were expensed during the period under both absorption costing and variable
costing?
a. P48,000 b. P50,400 c. P60,000 d. P67,200
28. How much fixed costs were expensed during the period under absorption costing?
a. P21,600 b. P28,800 c. P31,500 d. P35,100
29. How much fixed costs were expensed during the period under variable costing?
a. P21,600 b. P25,200 c. P28,800 d. P31,500
Questions 30 & 31 are based on the following information:
Noynoy Company incurred the following costs:
Sales ₱ 600,000
Variable production costs 450,000 (15,000 units)
Fixed production costs 60,000
Variable expenses 96,000 (12,000 units)
Fixed expenses 45,000
30. How much was the manufacturing margin?
a. P144,000 b. P180,000 c. P192,000 d. P240,000
31. How much was the manufacturing profit?
a. P39,000 b. P144,000 c. P180,000 d. P192,000
Questions 42-43 are based on the following information :
Wawa Company began operation on January 1, 200A. The company sells a single product at P15 per
unit. 80,000 units were produced and 75,000 units were sold. Manufacturing costs and operating
expenses were as follows:
Fixed Costs Variable costs
Materials - P2.50 per unit produced
Labor - 3.00 per unit produced
Factory overhead P280,000 1.50 per unit produced
Operating expenses P160,000 1.00 per unit sold
32. What was the net income under the variable costing method?
a. P85,000 b. P102,500 c. P112,500 d. P160,000
33. What was the net income under the absorption costing method?
a. P85,000 b. P102,500 c. P112,500 d. P160,000
Questions 34-41 are based on the following information :
Sales price per unit P 20.00
Variable manufacturing costs per unit 10.00
Variable selling & administrative costs per unit 2.00
Total fixed manufacturing cost per month:
actual and budgeted P31,250
Total fixed selling and administrative costs per month 18,000
There were no inventories at the beginning of the month. Normal capacity is 12,500 units. During the
month 10,000 units were produced and 9,500 units were sold. Any capacity variance is closed to cost
of sales monthly.
34. How much is the ending inventory under absorption costing?
a. P1,250 b. P6,250 c. P6,520 d. P7,500
35. How much is the ending inventory using direct costing?
a. P1,250 b. P2,500 c. P5,000 d. P7,500
36. How much is the cost of sales at normal under absorption costing?
a. P118,570 b. P118,750 c. P124,678.50 d. P124,687.50
37. How much is the capacity variance to be closed to cost of sales?
a. P1,250 b. P1,562.50 c. P6,250 d. P7,500
38. How much is the cost of sales using variable costing?
a. P95,000 b. P100,000 c. P117,850 d. P7,500
39. How much are the total variable costs charged to expense during the month under both the direct
costing and absorption costing method?
a. P19,000 b. P95,000 c. P114,000 d. P115,000
40. How much are the total fixed costs expensed during the period under absorption costing?
a. P18,000 b. P41,570 c. P41,750 d. P48,000
41. How much are the total fixed costs expense during the period under variable costing?

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 a. P18,000 b. P29,687.50 c. P31,250 d. P49,250
Questions 42&45 are based on the following information:
Variable production costs (12,000units ) P180,000
Fixed production costs ( actual and budgeted ) 60,000
Variable expenses 35,000
Fixed expenses 25,000
Normal capacity ( in units ) 10,000
Sales ( in units ) @ ₱ 30 9,000
Any under or over applied overhead is closed to cost of sales.
42. How much is the gross profit?
a. P80,000 b. P81,000 c. P91,000 d. P93,000
43. How much is the manufacturing margin?
a. a.P75,000 b. P100,000 c. P135,000 d. P189,000
44. How much is the contribution margin?
a. P75,000 b. P100,000 c. P135,000 d. P189,000
45. How much is the manufacturing profit?
a. P75,000 b. P100,000 c. P135,000 d. P189,000
Questions 46-50 are based on the following information:
Selling price P 8
Normal capacity (in units) 20,000
Production (in units) 15,000
Sales (in units) 18,000
Ending inventory 0
Variable production cost/unit P 1.20
Variable selling expenses/unit 0.60
Variable administrative expenses/unit 0.40
Fixed factory overhead (budget and actual) P 30,000
Fixed selling & administrative expenses 10,000
Any under or over applied overhead is closed to cost of sales.
46. How much is the under and over applied factory overhead?
a. P3,000 under applied c. P4,500 over applied
b.P4,000 over applied d. P7,500 under applied
47. How much is the adjusted cost of sales under absorption costing?
a. . P51,600 b. P56,100 c. P61,600 d. P66,100
48. How much are the total selling and administrative expense?
a. P16,800 b. P26,800 c. P28,000 d. P30,000
49. How much is the net income under variable costing?
a. P59,900 b. P60,000 c. P64,400 d. P74,400
50. How much is the net income under absorption costing?
a. P59,900 b. P60,000 c. P64,400 d. P74,400
Questions 51-60 are based on the following information:
The cost accountant of Nakakalito Manufacturing Corporation submitted the following cost
information on December 31, 200G , the end of its second year of operations. The company uses the
standard cost system.
Beginning inventory 0
Production (unit) 8,000
Sales (units) 7,200
Selling price P 50.00
Actual cost incurred:
Direct materials P 72,000
Direct labor 80,000
Variable overhead 48,400
Fixed overhead 41,000
Variable operating expense 15,400
Fixed operating expense 30,000
The standard costs per unit are as follows:
Direct materials P 8.80
Direct labor 10.50

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 The standard variable overhead per unit and standard fixed overhead per unit are based on the budget
of overhead at normal capacity as shown below.
Production (units) 10,000
Variable overhead P 60,000
Fixed overhead 40,000
Total P 100,000
All variances are treated as period cost.
51. What is the production cost per unit if the actual full costing method is used?
a. P25,000 b. P29,000 c. P29,300 d. P30,175
52. What is the production cost per unit if the normal full costing method is used?
a. P25.00 b. b.P29.00 c. P29.30 d. P30.00
53. What is the standard cost per unit of product?
a. P25.00 b. P29.00 c. P29.30 d. P30.00
54. How much is he material cost variance?
a. P1,500 U b. P1,600 U c. P1,700 U d. P1800 U
55. How much is the labor cost variance?
a. P2,000 F b. P4,000 F c. P4,000 U d. P6,000 F
56. How much is the variable overhead cost variance?
a. P400 U b. P1,000 F c. P2,000 U d. P2,000 F
57. How much is the fixed overhead variance?
a. P0 b. P8,000 F c. P8,000 U d. P9,000 U
58. How much is the overhead capacity variance included in the total fixed overhead variance?
a. P4,000 U b. P6,000 U c. P8,000 U d. P0
59. How much is the net income under the standard variable costing?
a. P90,880 b. P93,440 c. P96,640 d. P98,400
60. How much is the net income under the standard absorption costing?
a. P93,080 b. P96,640 c. P98,040 d. P98,400

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