URDANETA CITY

UNIVERSITY
Owned and operated by the City Government of Urdaneta

Competency Appraisal
Variable and Absorption Costing
February 12, 2024

Pro-forma Income Statement

Variable Costing Absorption Costing

Sales P xx Sales P xx
Less: Variable Production Costs (CGS) Less: Production Costs (CGS)
Direct Materials P xx Direct Materials P xx
Direct Labor xx Direct Labor xx
Variable Manufacturing Overhead xx xx Variable Manufacturing Overhead xx
Contribution Margin - Manufacturing P xx Fixed Manufacturing Overhead xx xx
Less: Variable Selling and Administrative Expense xx Gross Profit P xx
Contribution Margin P xx Less: Selling and Administrative Expense
Less: Fixed Costs and Expenses Fixed Selling and Administrative Expense P xx
Fixed Manufacturing Expense P xx Variable Selling and Administrative Expense xx xx
Fixed Selling and Administrative Expense xx xx Operating Profit P xx
Operating Profit P xx

Notes:
1. CGS – Cost of Goods Sold
2. If Fixed Manufacturing Overhead is given in total, you have to use the NORMAL
CAPACITY as denominator in computing the Fixed Manufacturing Overhead per unit.
3. If there is no Normal Capacity in the problem, then use the PRODUCTION OUTPUT as
denominator in computing the Fixed Manufacturing Overhead per unit.
4. If Normal Capacity = Production Output, no capacity variance.
5. If Normal Capacity > Production Output, there is unfavorable capacity variance.
6. If Normal Capacity < Production Output, there is favorable capacity variance.
7. FAVORABLE CAPACITY VARIANCE is deducted from Cost of Goods Sold, whereas,
UNFAVORABLE CAPACITY VARIANCE is deducted from Cost of Goods Sold.
8. There is NO CAPACITY VARIANCE under Variable Costing because Fixed Manufacturing
Overhead is classified as PERIOD COST and the whole amount is deducted during the
accounting period.
9. There is CAPACITY VARIANCE under Absorption Costing because Fixed Manufacturing
Overhead is classified as PRODUCT COST.

Problem
With a production of 200,000 units of product A during the month of June, ABC Corporation has
incurred costs as follows:
Direct Materials P 200,000
Direct Labor Used 135,000
Manufacturing Overhead:
Variable 75,000
Fixed 90,000
Selling and Administrative Expenses:
Variable 30,000
Fixed 85,000
Total P 615,000
Other data:
Sales P 180,000
Selling Price P 10
Normal Capacity 200,000 units
(075) 600 - 1507
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 URDANETA CITY
UNIVERSITY
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Required:
1. Prepare the Income Statement under Variable Costing and Absorption Costing.
2. Prepare the Income Statement under Absorption Costing assuming there is no changes in
variable costs per unit:
a. Production is 225,000 units.
b. Production is 180,000 units.

Problem A
Expected to operate at normal capacity, Ballesteros Corporation plans to manufacture 275,000
units of products in 2022, and the following are the estimates with respect to sales: Sales in units –
250,000; Unit selling price – P35.00.

Finished goods inventory on December 31, 2021 is estimated at 25,000 units costing P500,000.
Included in this amount is the fixed manufacturing overhead amounting to P300,000. No changes
in both the fixed manufacturing cost and the variable cost per unit is expected in 2022.

1. What is the estimated income from manufacturing using the absorption costing method?
A. P3,750,000
B. P3,450,000
C. P3,550,000
D. P3,150,000

2. What is the estimated income from manufacturing using the variable costing method?
A. P3,150,000
B. P3,550,000
C. P3,450,000
D. P3,750,000

Problem B
Bonagua Company manufactures a single product for which the costs and selling price are:
Variable production costs P50 per unit
Selling price P150 per unit
Fixed production overhead P200,000 per quarter
Fixed selling and administrative expense P480,000 per quarter

Normal capacity is 20,000 units per quarter. Production in the first quarter is 19,000 units and sales
volume is 16,000. No opening inventory for the quarter.

3. How much is the profit under absorption costing for the first quarter?
A. P920,000
B. P950,000
C. P960,000
D. P970,000

How much is the profit under variable costing for the first quarter?
A. P970,000
B. P960,000
C. P950,000
D. P920,000

(075) 600 - 1507

San Vicente West, Urdaneta City, Pangasinan
Bright future starts here 2 ucu.edu.ph | [email protected]
 URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of Urdaneta

Problem C
The following information pertains to Sarmiento Company:
Sales per unit P25.00
Variable production cost per unit 8.00
Annual Fixed production cost 35,000.00
Variable selling expense 3.00
Annual fixed selling expense 5,000.00
Produced 12,500 units during the period
No inventory at January 1 (beginning)
Sold 10,000 units

4. How much is the ending inventory under direct (variable) costing?

A. P25,000
B. P27,500
C. P20,000
D. P32,500

5. How much is the ending inventory under absorption costing?

A. P32,500
B. P20,000
C. P25,000
D. P27,000

6. How much is the total annual variable costs and expenses under direct (variable) costing?
A. P110,000
B. P117,500
C. P80,000
D. P100,000

How much is the total fixed costs charged against current year’s operations under absorption
costing?
A. P43,000
B. P35,000
C. P25,000
D. P15,000
ANSWER: A

Problem D
Acio Company produced 100,000 pcs. of Product Toblerone during the month of June. Costs
incurred during June are as follows:
Direct materials P 100,000
Direct labor 80,000
Variable manufacturing overhead 40,000
Fixed manufacturing overhead 50,000
Variable selling and general expenses 12,000
Fixed selling and general expenses 46,000

What is Product Toblerone’s unit cost under absorption costing?

A. P3.27
B. P2.70

(075) 600 - 1507

San Vicente West, Urdaneta City, Pangasinan
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 URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of Urdaneta

C. P2.32
D. P1.80

What is Product Toblerone’s unit cost under direct (variable) costing?

A. P2.82
B. P2.70
C. P2.32
D. P2.20

Prepared by:

REMEDIOS A. PALAGANAS, CPA, MBA

Assistant Professor IV

(075) 600 - 1507

San Vicente West, Urdaneta City, Pangasinan
Bright future starts here 4 ucu.edu.ph | [email protected]