ABSORPTION AND VARIABLE COSTING

Exercise # 1.
a. Inventory cost per unit under absorption and
variable costing:
Abs Var
DM 1,500 1,500
DL 1,000 1,000
VOH 500 500
FxOH 2,000 _____
5,000 3,000
÷ 1,000 1,000
P5 P3
b. Cost of ending inventory under absorption and
variable costing:
[invty. end = 20% since only 80% was sold]
1,000 x 20% = 200; 200 x P 5 = P1,000
x P 3 = P 600
Exercise # 2.

a. Prepare income statement under both absorption

and variable costing.
Abs Var
DM 24,000 24,000
DL 16,000 16,000
VFOH 8,000 8,000
FxFOH 20,000 ______
68,000 48,000
÷ 80 80
P850/u P600/u

No. of units sold [5+80-15] = 70 units

 Abs Var
Sales [70xP2T] P140T Sales P140T
CGS [70xP850] 59.5 VMC [70xP600] 42
Gross profit 80.5 VSA 4 46
Expenses [4+2] 6 CM 94
Income 74.5T FxMC 20
FxSA 2 22
Income 72T
difference = P2,500

b. Provide computations explaining the differences in

income between the two costing methods.
change in inventory x FxFOH/u = change in income
[15-5] 10 x P250 = P2,500
Exercise # 3.

a. Determine 2012 profit under variable and absorption

costing.
Abs Var
Sales [6.5xP2] P13T Sales P13T
CGS [6.5xP1.25] 8.125 VMC [6.5xP.75] 4.875
GP 4.875 VSA [4.5x50%] 2.250 7.125
Exp. [S&A] 4.5 CM 5.875
Income P 375 FxMC 5
FxSA [4.5x50%] 2.250 7.250
Loss (1,375)
b. Reconcile the two income figures in letter a.
Y (Abs) = 375
FxFOH in beg. Invty [ 0xP.50] = 0
FxFOH in invty. end [3.5xP.50] = (1,750)
Y (Var) = (1,375)

or
375 – (1,375) = (3,500 – 0)P.50
1,750 = P1,750
c. Determine the 2013 profit under variable and
absorption costing.
Abs
Sales [11.5xP2] P23,000
CGS [3.5xP1.25] 4,375
[8xP1.35**] 10,800 15,175
GP 7,825
Expenses 7,500
Income P 325
Var
Sales P23,000
VMC [11,500xP.75 8,625
VSA [7,500x50%] 3,750 12,375
CM 10,625
FxMC 5,400
FxSA [7,500x50%] 3,750 9,150
Income 1,475
** (6,750 +5,400)/9,000 = 1.35

d. Reconcile the two income figures in letter c.

Y (Abs) P 325
FxFOH in invty. beg [3,500xP.50] 1,750
FxFOH in invty. end [1,000xP.60] (600)
Y (var) P1,475

or
(325-1,475) = [3,500xP.50] 1,750
[1,000xP.60] (600)
1,150 = 1,150
Exercise # 4.

a. The product cost under variable costing = P20

b. The product cost under absorption costing
VC = P20
FxC [150T/10T] = 15
P35
c. Capacity or volume variance under absorption
costing
(12,000-10,000)P15 = P30,000 (F)
Exercise # 5.

The operating income using absorption costing.

Operating Y (direct costing) = P 50T
FxFOH in invty end [13TxP2] = 36
FxFOH in invty beg [18TxP2] = (26)
Operating Y (absorption) = P 60

Exercise # 6.

The number of units in the ending inventory.

FxFOH in invty beg [16TxP4] = P64T
net income = 24
FxFOH in invty end = P40
÷ FxFOH P4
ending inventory in units = 10,000 u
Exercise # 7.

Determine how much lower the company’s net income

would be if it used variable costing instead of full
absorption costing.
Abs
Mfg. costs [180+160] = 340/100 x 80T = 272
Expenses 130
402
Var
VMC [160/100 x 80] = 128
VSA 40
FxC [180+90] 270
438
Difference [ 402 – 438] = P36T
or [100-80] 20T x [P180/100] P1.80 = P36T
Exercise # 8.

Determine how much higher the pre-tax income would

be of the company uses absorption rather than
variable costing.
Abs Var
VC [1,000xP90] P 90T P90T
FxC [1,000xP20] 20 _____
Cost of invty. P110T P90T

difference = P20T
Seatwork:
1. # of units manufactured = 200,000 units
variable mfg. costs = P30/unit
fixed mfg. costs = P600,000
selling and admin. costs = P400,000
Sales (P40/unit) = 120,000 units
Required: a. operating income using
(1) absorption and (2) variable costing
b. reconciliation of income difference
2. Direct materials used = P300,000
Direct labor = 100,000
variable factory overhead = 50,000
fixed factory overhead = 80,000
selling & admin. costs – variable = 40,000
selling & admin. costs – fixed = 20,000
Required: inventoriable costs using
(1) absorption and (2) variable costing