CEBU CPAR CENTER INC.

Mr. Elerie Arañas

VARIABLE COSTING

The following are major points to remember about variable costing:

 The basic difference between absorption and variable costing relates to the handling of fixed manufacturing overhead. Under
absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under
variable costing, fixed manufacturing overhead is treated as a period cost and is deducted in full from the current period’s revenues.

 Selling and administrative expenses are treated as period costs under variable costing, the same as under absorption costing.

 Under absorption costing, as a company manufactures units of product, the fixed manufacturing overhead costs of the period are added
to the units, along with direct materials, direct labor, and variable manufacturing overhead. If some of these units are not sold by the
end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units
in ending inventory follow the units into the next period as part of their inventory cost. When the units carried over as inventory are
finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of
goods sold.

 Many accountants and managers believe absorption costing does a better job of matching costs with revenues than variable costing.
They argue that all manufacturing costs must be assigned to products in order to properly match the costs of producing units of
product with the revenues from the units when they are sold. They believe that the fixed costs of depreciation, taxes, insurance,
supervisory salaries, and so on, are just as essential to manufacturing products as are the variable costs.
 Advocates of variable costing argue that fixed manufacturing costs are not really the costs of any particular unit of product. If a unit is
made or not, the total fixed manufacturing costs will be exactly the same. Therefore, how can one say that these costs are part of the
costs of the products? These costs are incurred in order to have the capacity to make products during a particular period and should
be charged against that period as period costs according to the matching principle.

 If production and sales are equal, both absorption and variable costing should show the same net income. The reason is that under
these conditions inventory will remain unchanged, and therefore there can be no deferral of fixed manufacturing overhead cost to
inventory, or release of fixed manufacturing overhead cost from inventory, under absorption costing.

 If production exceeds sales, absorption costing will show higher net income. The reason is that the inventory account will increase, and
therefore part of the fixed manufacturing overhead cost of the current period will be deferred in inventory to the next period under the
absorption costing method. By contrast, all of the fixed manufacturing overhead cost of the current period will be charged immediately
against revenues as a period cost under the variable costing method.

 Inventory decreased. The decrease caused fixed manufacturing overhead cost to be released from inventory and charged against
income as part of cost of goods sold. This added fixed manufacturing overhead cost caused the company to incur a loss even though it
sold the break-even volume of sales.

 It is possible to increase net income without increasing sales under the absorption costing method by increasing the level of production.
If production exceeds sales, units of product are added to inventory. These units carry a portion of the current period’s fixed
manufacturing overhead costs into the inventory account, thereby reducing the current period’s reported expenses and causing net
income to rise.

 Variable costing cannot be used externally for financial reporting purposes nor can it be used for tax purposes.

 Differences in reported net income between absorption and variable costing arise because of changing levels of inventory. Under JIT,
goods are produced strictly to customers’ orders. With production geared to sales, inventories are largely (or entirely) eliminated,
thereby eliminating any shifting of fixed manufacturing overhead costs between periods under absorption costing. Thus, if inventories
are completely eliminated, absorption costing and variable costing will report the same net income figures.

PROBLEMS
PROBLEM 1
Chuck Wagon Grills, Inc., makes a single product – a handmade specialty barbecue grill that it sells for P210. Data for last year’s operations
follow:
Units in beginning inventory 0
Units produced 20,000
Units sold 19,000
Units in ending inventory 1,000
Variable costs per unit
Direct materials P50
Direct labor 80
Variable manufacturing overhead 20
Variable selling and administrative 10
Total variable cost per unit P160
 Fixed costs:
Fixed manufacturing overhead P700,000
Fixed selling and administrative 285,000
Total fixed costs P985,000
Required:
1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.
2. Assume that the company uses variable costing. Prepare an income statement for the year using the contribution format.
3. What is the company’s break-even point in terms of the number of barbecue grills sold?
4. Assume that the company uses the absorption costing. Compute the unit product cost for one barbecue grill.
5. Assume that the company uses the absorption costing. Prepare an income statement for the year.

PROBLEM 2
Ida Sidha Karya Company is a family-owned company located in the village of Gianyar on the island of Bali in Indonesia. The company
produces a handcrafted Balinese musical instrument called a gamelan that is similar to a xylophone. The sounding bars are cast from brass and
hand-filed to attain just the right sound. The bars are then mounted on an intricately hand-carved wooden base. The gamelans are sold for
850,000. Selected data for the company’s operations last year follow.
Units in beginning inventory 0
Units produced 250
Units sold 225
Units in ending inventory 25
Variable costs per unit
Direct materials P100
Direct labor 320
Variable manufacturing overhead 40
Variable selling and administrative 20
Fixed costs:
Fixed manufacturing overhead P60,000
Fixed selling and administrative 20,000
An absorption costing income statement prepared by the company’s accountant appears below.
Sales (225 units x P850,000) P191,250,000
Less cost of goods sold:
Beginning inventory P0
Add cost of goods manufactured
(250 units x ? per unit) 175,000,000
Goods available for sale 175,000,000
Less ending inventory ( 25 units x ? per unit) 17,500,000 157,500,000
Gross margin 33,750,000
Less selling and administrative 4,500,000
Fixed selling and administrative 20,000,000 24,500,000
Net operating income 9,250,000
Required:
1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan.
2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.
3. Determine how much of the ending inventory of P17,500,000 consists of fixed manufacturing overhead cost deferred in inventory to the next
period.
4. Prepare an income statement for the year using the variable costing method. Explain the difference in net operating income between the two
costing methods

PROBLEM 3

UHF Antennas, Inc., produces and sells a unique television antenna. The company has just opened a new plant to manufacture the antenna,
and the following cost and revenue data have been reported for the first month of the new plant's operation:
Beginning inventory .................... -0-
Units produced ......................... 35,000
Units sold ............................. 30,000
Selling price per unit ................. P50
Selling and administrative expenses:
Variable per unit ................... P2
Fixed (total) ....................... P360,000
Manufacturing costs:
Direct material cost per unit ....... P9
Direct labor cost per unit .......... P8
Variable overhead cost per unit ..... P3
Fixed overhead cost (total) ......... P350,000
Management is anxious to see how profitable the new antenna will be and has asked that an income statement be prepared for the month.
Assume that direct labor is a variable cost.
Required:
a. Assuming that the company uses absorption costing, compute the unit product cost and prepare an income statement.
b. Assuming that the company uses variable costing, compute the unit product cost and prepare an income statement.
c. Explain the reason for any difference in the ending inventories under the two costing methods and the impact of this difference on reported net
income.

MULTIPLE CHOICE QUESTIONS

 During the past year, Carr Company manufactured 25,000 units and sold 20,000 units. Production costs for the year were as follows:
Fixed manufacturing overhead ...... P250,000
Variable manufacturing overhead ... P210,000
Direct labor ...................... P120,000
Direct materials .................. P180,000
Sales totaled P850,000, variable selling expenses totaled P110,000, and fixed selling and administrative expenses totaled P170,000. There
were no units in beginning inventory. Assume that direct labor is a variable cost.
1. The contribution margin per unit would be:
a. P12.10. b. P22.10. c. P17.70. d. P16.60.

2. Under absorption costing, the ending inventory for the year would be valued at:
a. P179,500. b. P213,500. c. P222,000. d. P152,000.

3. The net income for the year under variable costing would be:
a. P28,000 lower than under absorption costing.
b. P28,000 higher than under absorption costing.
c. P50,000 lower than under absorption costing.
d. P50,000 higher than under absorption costing.

Gordon Company produces a single product that sells for P10 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................ -- P2.00 per unit produced
Direct labor................. -- 1.25 per unit produced
Factory overhead............. P120,000 0.75 per unit produced
Selling and administrative... 70,000 1.00 per unit sold
4. Net income under variable costing would be:
a. P114,000. b. P210,000. c. P234,000. d. P330,000.

5. The carrying value on the balance sheet of the ending finished goods inventory under absorption costing would be:
a. P 80,000. b. P104,000. c. P110,000. d. P124,000.

6. In a recent period, Marvel Co. incurred P20,000 of fixed manufacturing overhead and deducted P30,000 of fixed manufacturing overhead.
Marvel Co. must be using
a. absorption costing. c. direct costing
b. variable costing. d. standard costing

7. Another name for absorption costing is

a. full costing. c. job order costing
b. direct costing. d. fixed costing

8. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in
a. higher income and assets.
b. higher income but lower assets.
c. lower income but higher assets.
d. lower income and assets.

9. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the
a. work-in-process account. c. Cost of Goods Sold.
b. finished goods inventory account. d. period costs.

10. If a firm uses absorption costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.

11. Under absorption costing, if sales remain constant from period 1 to period 2, the company will report a larger income in period 2 when
a. period 2 production exceeds period 1 production.
b. period 1 production exceeds period 2 production.
c. variable production costs are larger in period 2 than period 1.
d. fixed production costs are larger in period 2 than period 1.

12. An ending inventory valuation on an absorption costing balance sheet would

a. sometimes be less than the ending inventory valuation under variable costing.
b. always be less than the ending inventory valuation under variable costing.
c. always be the same as the ending inventory valuation under variable costing.
d. always be greater than or equal to the ending inventory valuation under variable costing.

13. Absorption costing differs from variable costing in all of the following except
a. treatment of fixed manufacturing overhead.
b. treatment of variable production costs.
c. acceptability for external reporting.
d. arrangement of the income statement.

14. Which of the following is not associated with absorption costing?

a. functional format
b. gross margin
c. period costs
d. contribution margin

15. 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.

16. Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated?
a. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
b. Change in the quantity of all units produced times the relevant fixed costs per unit.
c. Change in the quantity of all units in inventory times the relevant variable cost per unit.
d. Change in the quantity of all units produced times the relevant variable cost per unit.

17. What factor, related to manufacturing costs, causes the difference in net earnings computed using absorption costing and net earnings
computed using variable costing?
a. Absorption costing considers all costs in the determination of net earnings, whereas variable costing considers fixed costs to be period costs.
b. Absorption costing allocates fixed overhead costs between cost of goods sold and inventories, and variable costing considers all fixed costs to
be period costs.
c. Absorption costing “inventories” all direct costs, but variable costing considers direct costs to be period costs.
d. Absorption costing “inventories” all fixed costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs.

18. The costing system that classifies costs by functional group only is
a. standard costing. c. variable costing.
b. job order costing. d. absorption costing

19. Under variable costing, which of the following are costs that can be inventoried?
a. variable selling and administrative expense
b. variable manufacturing overhead
c. fixed manufacturing overhead
d. fixed selling and administrative expense

20. Consider the following three product costing alternatives: process costing, job order costing, and standard costing. Which of these can be
used in conjunction with variable costing?
a. job order costing
b. standard costing
c. process costing
d. all of them

21. If a firm uses variable costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.

22. 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.

23. How will a favorable volume variance affect net income under each of the following methods?
Absorption Variable
a. reduce no effect
b. reduce increase
c. increase no effect
d. increase reduce

24. The variable costing format is often more useful to managers than the absorption costing format because
a. costs are classified by their behavior.
b. costs are always lower.
c. it is required for external reporting.
d. it justifies higher product prices.

25. The difference between the reported income under absorption and variable costing is attributable to the difference in the
a. income statement formats.
b. treatment of fixed manufacturing overhead.
c. treatment of variable manufacturing overhead.
d. treatment of variable selling, general, and administrative expenses.

26. A basic tenet of variable costing is that period costs 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 amounts to specific products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by management.
d. Because period costs will occur whether production occurs, it is improper to allocate these costs to production and defer a current cost of
doing business.

27. What costs are treated as product costs under variable (direct) costing?
a. only direct costs c. all variable costs
b. only variable production costs d. all variable and fixed manufacturing costs

28. Which of the following must be known about a production process in order to institute a variable costing system?
a. the variable and fixed components of all costs related to production
b. the controllable and non-controllable components of all costs related to production
c. standard production rates and times for all elements of production
d. contribution margin and break-even point for all goods in production

29. Which of the following is an argument against the use of direct (variable) costing?
a. Absorption costing overstates the balance sheet value of inventories.
b. Variable factory overhead is a period cost.
c. Fixed manufacturing overhead is difficult to allocate properly.
d. Fixed manufacturing overhead is necessary for the production of a product.

30. 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.

31. With respect to fixed costs, CVP analysis assumes total fixed costs
a. per unit remain constant as volume changes.
b. remain constant from one period to the next.
c. vary directly with volume.
d. remain constant across changes in volume.

Use the following information for questions 29–32. Young Corporation has the following standard costs associated with the manufacture and sale
of one of its products:
Direct material P3.00 per unit
Direct labor 2.50 per unit
Variable manufacturing overhead 1.80 per unit
Fixed manufacturing overhead 4.00 per unit (based on an estimate
of 50,000 units per year)
Variable selling expenses .25 per unit
Fixed SG&A expense P75,000 per year
During 2001, its first year of operations, Young manufactured 51,000 units and sold 48,000. The selling price per unit was P25. All costs were
equal to standard.
32. Under absorption costing, the standard production cost per unit for 2001 was
33. Under variable costing, the standard production cost per unit for 2001 was
34. Based on variable costing, the income before income taxes for the year was
35. The volume variance under absorption costing is

Three new companies (X, Y, and Z) began operations on January 1, 2001. Consider the following operating costs that were incurred by these
companies during the complete calendar year 2001:
Company X Company Y Company Z
Production in units 10,000 10,000 10,000
Sales price per unit P10 P10 P10
Fixed production costs P10,000 P20,000 P30,000
Variable production costs P30,000 P20,000 P10,000
Variable SG&A P10,000 P20,000 P30,000
Fixed SG&A P30,000 P20,000 P10,000
36. Based on sales of 7,000 units, which company will report the greater income before income taxes for 2001 under absorption costing?
37. Based on sales of 7,000 units, which company will report the greater income before income taxes for 2001 under variable costing?
38. Based on sales of 10,000 units, which company will report the greater income before income taxes for 2001 under variable costing?

39. 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
40. 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.

41. 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.

42. 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.

43. Cay Co.’s 1995 fixed manufacturing overhead costs totaled P100,000, and variable selling costs totaled P80,000. Under variable
costing, how should those costs be classified?
a. b. c. d.

Period Costs P0 P 80,000 P100,000 P180,000

Product Costs P180,000 P100,000 P 80,000 P0

43. A cost that is included as part of product costs under both absorption costing and direct costing is
a. Managerial staff costs c. Taxes on factory building
b. Insurance d. Variable materials handling labor

44. Under variable costing,

a. All product costs are variable c. All product costs are fixed
b. All period costs are variable d. Product costs are both fixed and variable.

45. Which of the following is not associated with absorption costing?

a. Functional format c. period costs
b. Gross margin d. Contribution margin

46. Calculating income under variable costing does not require knowing
a. Unit sales c. Selling price
b. Unit manufacturing variable costs. d. Unit production

47. 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
48. 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

49. 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

50. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the
a. Work-in-process account c. Cost of goods sold
b. Finished goods inventory account d. Period costs

51. If unit6 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

52. 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.
53. 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

54. A firm presently has total sales of P100,000. 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.

55. 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 equal sales

56. 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.

57. 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

58. 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

59. 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 decreased in sales

59. Variable costing and absorption costing will show the same incomes when there are no
a. Beginning inventories c. Variable costs
b. Ending inventories d. Beginning and ending inventories

60. 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.

61. In a recent period, Marvel Co. incurred P20,000 of fixed manufacturing overhead and deducted P30,000 of fixed manufacturing
overhead, Marvel Co. must be using
a. Absorption costing c. direct costing
b. Variable costing d. standard costing

62. Under absorption costing, if sales remain constant form period 1 to period 2, the company will report larger income in period 2 when
a. Period 2 production exceeds period 1 production
b. Period 1 production exceeds period 2 production
c. Variable production costs are larger in period 2 than period 1
d. Fixed production costs are larger in period 2 than 1

63. Other things being equal, net income computed by direct costing method would exceed net income computed by absorption costing
method if
a. Units sold were to exceed units produced
b. Fixed manufacturing costs were to increase
c. Units produced were to exceed unit sold
d. Variable manufacturing costs were to increase
 64. Net income is lower under variable costing than under absorption costing when
a. Production increases from the previous period
b. Production exceeds sales
c. Production equals sales
d. Production is less than sales

65. President X of WXY Corporation requested you to explain the difference of net income between the variable costing income
statements presentation and the absorption costing method. You would say that the difference
a. Is none if there is no change in the fixed cists in the beginning and ending inventories
b. Is equal to the fixed costs per unit times the number of units sold
c. Is attributable to the variable costs in the inventory
d. Is attributable to the fixed costs in ending inventory

66. If inventory quantities increase during a period

a. Variable costing profits will exceed absorption costing profits
b. Absorption costing profits will exceed variable costing profits
c. Variable costing profits will equal absorption costing profits
d. Variable costing will show a higher inventory value than absorption costing.

67. A manufacturing company prepares income statements using both absorption and variable-costing methods. At the end of the period,
actual sales revenues, total gross margin, and total contribution margin approximated budgeted figures, whereas net income was
substantially below the budgeted amount. There were no beginning or ending inventories. The most likely explanation of net income
shortfall is that, compared to budget, actual
a. Sales price and variable costs had declined proportionately.
b. Sales prices had declined proportionately more than variable costs.
c. Manufacturing fixed costs had increased.
d. Selling and administrative fixed expenses had increased

68. As compared with total absorption costing profit over the entire life of a company, total variable costing profit will
a. Be less
b. Be greater
c. Be equal
d. Be substantially greater or less depending upon external factors

69. A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing
overhead cost applied per unit produced in 2001 was the same as in 2000. The 2001 variable costing statement reported a profit.
Whereas the 2001 absorption costing statement reported a loss. The difference in reported income could be explained by units
produced in 2001 being.
a. Less than units sold in 2001
b. Less than the activity level used for allocating overhead to the product
c. In excess of the activity level used for allocating overhead to the product
d. In excess of units sold in 2001.

PROBLEMS
70. West co.’s 1988 manufacturing costs were as follows:
Direct materials and direct labor P700,000
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed manufacturing overhead 18,000
What amount should be considered product cost for external reporting purposes?

71. 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 P90 and P20 respectively. If Killo uses absorption costing rather than direct [variable) costing, the result would be a higher
pretax income of

72. Z Corp. incurred the following costs in 2001. [its first year of operations) based on production of 10,000 units:
Direct material P5 per unit
Direct labor P3 per unit
Variable product costs P2 per unit
Fixed product costs [in total) P100,000
When Z Corp. prepared its 2001 financial statements, its Cost of Goods sold was listed at P100,000. Based on this information, which
of the following statement must be true:
a. Z Corp. sold all 10,000 units that it produced
b. Z Corp. sold 5,000 units
c. Z Corp. had a very profitable year.
d. From the information given, one cannot tell whether Z Corp.’s financial statements were prepared based on variable or
absorption costing.

73. The Blue Company has failed to reach its planned activity level during its first 2 years of operation. The following table shows the
relationship among units produced, sales, and normal activity for these years and the projected relationship for year 3. All prices and
costs have remained the same for the last 2 years and are expected to do so in year 3. Income has been positive in both year 1 and
year 2.
 Units produced Sales Planned Activity
Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000
Because Blue Company uses an absorption costing system, gross margin for year 3 should be
a. Greater than year 1 c. Equal to year 1
b. Greater than year 2 d. Equal to year 2

74. 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 P6.00 and P2.00 respectively. The inventory of product A on December 31, consisted of 100 units. There was no
inventory of Product A on January1, what would be the change in the dollar amount of inventory on December 31, if variable costing
were used instead of absorption costing?

75. 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?

76. Youthful Biscuits manufacturers and sells boxed coconut cookies. The biggest market for these cookies are as gifts that college
students buy for their business teachers. There are 100 cookies per box. The following income statement shows the result of the first
year of operations. This statement was the one included in the company’s annual report to the stockholders.
Sales [400 boxes at P12.50 a box) P5,000.00
Less: Cost of goods sold [400 boxes at P8 per box) 3,200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income 1,000.00
Variable selling and administrative expenses are P0.50 per box sold. The company produced 500 boxes during the year. Variable
manufacturing costs are P5.25 per box and fixed manufacturing overhead costs total P1,375 for the year.
What is the company’s direct costing net income?

77. During its first year of operations, a company produced 275,000 units and sold 250,000 units. The following costs were incurred
during the year:
Variable Cost per unit Fixed costs
Direct materials P15.00
Direct labor 10.00
Manufacturing overhead 12.50 P2,200,000
Selling and administrative 2.50 1,375,000
The difference between operating income calculated on the absorption-costing basis and on the variable costing basis is that
absorption-costing operating income is
a. P200,000 greater b. P220,000 greater c. P325,000 greater d. P62,500 lesser

78. A company has the following cost data:

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Fixed manufacturing costs P2,000
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Fixed selling, general, and administrative cost 1,000
Variable selling costs per unit sold 1
Variable manufacturing costs per unit 2
Beginning inventory 0 units
Production 100 units
Sales 90 units at P40 per unit
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Variable and absorption-cost net incomes are:
a. P320 variable, P520 absorption c. P520 variable, P320 absorption
b. P330 variable, P530 absorption d. P530 variable, P330absorption

79. 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?

Louder Industries manufactures a single product. Variable production costs are P20 and fixed production cost are P150,000. Louder uses a
normal activity of 10,000 units to set and its standard costs. Louder began the year with no inventory, produced 11,000 units, and sold
10,500 units.
80. Ending inventory under variable costing would be
81. Ending inventory under absorption costing would be
82. The volume variance under variable costing would be
83. The volume variance under absorption costing would be
84. The standard cost of goods sold under variable costing would be
85. The standard cost of goods sold under absorption costing would be

Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using
variable costing. Data regarding Valyn’s planned and actual operations for the 1995 calendar year are presented below.
Planned Activity Actual Activity
 Per unit Total Costs
Direct materials P12.00 P1,680,000 P1,560,000
Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing overhead 4.00 560,000 520,000
Fixed manufacturing overhead 5.00 700,000 715,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Variable administrative expenses 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000
Total P50.00 P7,000,000 P6,620,000
The 1995 beginning finished goods inventory absorption costing was valued at the 1994 planned unit manufacturing cost, which was the
same as the 1995 planned unit manufacturing cost, There are no work-in-process inventories at either the beginning or the end of the year.
The planned and actual unit selling price for 1995 was P70.00 per unit.
86. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the absorption costing basis was
87. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the variable costing basis was
88. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption costing basis were
89. Valyn Corporation’s actual manufacturing contribution margin for 1995 calculated on the variable costing basis was
90. The total variable costs expensed in 1995 by Valyv Corporation on the variable costing basis was
91. The difference between Valyn Corporation’s 1995 operating income calculated on the absorption costing basis and calculated on the
variable costing basis was

92. In the ABC Company, sales are P800,000, cost of goods under absorption costing is P600,000, and the 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?

END