© Basic principles : . > Variable costing is the same as marginal costing, direct costing, or contribution margin costing. rcve ysis = Variable costing is an extension of analysis. A » The basic assumptions in the marginal costing (i.e., CVP analysis) are followed except that production is not equal to sales. : = Technically speaking, variable costing and direct costing are cee Variable costing includes variable production costs as part of the produ cost while direct costing includes all costs directly identified with the segment as product costs. Another, variable costing focuses on the contribution margin while direct costing zeroes-in on segment margin. = The unit costs from the preceding period are the same in the current period; meaning, unit costs are assumed to be constant. © Treatment of fixed overhead, and other costs and expenses : : = Under absorption costing, fixed overhead is a product cost, inventoriable costs, of deferrable costs. This means that the cost assigned to the product is charged against sales when the units are sold, and is stifl deferred in the inventory when the units are still unsold. This follows the principle of matching of costs against revenues. = Under variable costing, fixed overhead is a period cost, meaning, outright an expense. This means the fixed overhead is immediately charged against revenues without regard as to whether the units are already sold or still unsold. This follows the immediate recognition principle. The rationale for this treatment is because the fixed overhead would be incurred regardless of whether the production occurs or not, and therefore, should not be treated as product cost. = Direct materials, direct labor, and variable overhead are product costs, both to absorption and variable costing systems. ~ Variable expenses and fixed expenses are period costs, both to absorption and variable costing systems. © Computation guidelines = Computation of unit costs: : : AC ve Unit variable production costs (.e., direct materials, direct labor, and variable factory overhead) Px Px Unit fixed overhead (Budgeted fixed OH / Normal capacity) x ni Unit costs 5x PE (where : ni = noncluded) os x= Computation of operating income Sales as x USP Variable CGS as x UVC Fixed OH as x UFC Variable expenses QS x UVE Fixed expenses NC x UFE Operating income where: NC = normal capacity QS_ = quantity sold USP = unit sales price UVC = unit variable costs = Cost of ending inventory te PK i & [NC x UFC] ~~) be ue ‘= unit fixed costs a UVE = unit variable expen: UFE = unit fixed expense = Ending inventory in units x Unit cost i arial © Reconciliation of operating income under absorption and variable Costing systems (using three models): = Production model Production - Sales Change in inventory x Unit fixed costs Change in operating income = Inventory model Beginning inventory AC Px vc x Ending inventory AC x ve ax Change in operating income = Costs model Fixed overhead charged under AC Fixed overhead charged under ve Change in operating income ((Qs © Treatment of costs variances and co = Costs variances are treated as fo © UF costs variances are operating income, added to operating inc © Volume variance is in income. ome, (QS x UFx¢) (NC x UFx¢) Mputation of volu lows: Cluded only j (also Beg. invty — Ending invty) 0 x fe x] o> Pl. NC) x UFxC] Ime variances added to CGsg at Standard or deducted fro" in the absorption costing operati"d= Computation of operating income with costs Adare Sales asx usp Px Px 3 asxuve (x) (%) pee QS x UEC () [NC x UFC] Variable production costs variances - UF (x) (x) a x x Volume variance — (UF) F x ni Fixed expenses NC x UFE wd Operating income Px Px (where: ni = not included) = Volume variant ? Normai capacity in units * - Actual capacity in units wh Volume variance in units — under(over) absorbed x UF (F) x Unit fixed costs Px Volume variance in pesos P_x UF (F) © Sales and variable costing, production and absorption costing (Which follows which?) = Variable cosiing income follows sales; that is: Li VC Operating income VC Operating Income is Sales > Production Increases Greater than AC Sales < Production Decreases Lower than AC «= Absorption costing income follows production; that is: if AC Operating Income AC Operating Income is Production > Sales Increases Greater than VC Production < Sales Decreases Lower than VC STRAIGHT PROBLEMS 1 Operating income, inventoriable costs, and costs of ending inventory. Golden Company produces an inexpensive product that sells for P160. Selected data for the company’s operations last year follow: Units in beginning inventory 4,000 Normal capacity 50,000 Variable costs per unit: : Direct materials Overt aber “2 Manufacturing overhead 45 Selling and administrative 410 Fixed costs per unit: Manufacturing overhead 20 Selling and administrative 15 The fixed selling and administrative expenses are also based on normai capacity city.rption and vari abso! d: e under 2 “Determine the operating ine ranaert C2525 Prod i assuming the following in ‘Sales 48,000 Production 53,000 : 50.000 42.500 un b f 0 incom °. 50,000 ee -_ b. Account for the difference in ope! rating able costing Methods Sales 35,000, 51,500 der the absorption Costing fl od. method and variable costing meth 1. SOLUTION GUIDE ee ao Production = 0, Sales___ = 53,000 —AC_ _VC_ Sales (QSx USP) P 8,480 P 8,480 VarCGS (QSxUVC) (5,830) (5,830) FxOH (QSxUFC) (1,060) (NC x UFC) (1,000) Var expenses (QS x UVE) ( 530) ( 530) Fx expenses (NC x UFE) (750) _( 750) Operating income (loss) P 310 P__370 Accounting for the A in operating income: Change in operating income P 60,000 Production 50,000 Sales 53.000 Change in inventory (3,000) X Unit fixed cost x P20 Change in operating income PC 60,000) nds): a. Computation of operating income (in thousa! Ee Basic data: = p25 +P40+ Pas a * Unit variable costs 0.000 units x P20. = * Budgeted fixed costs 0000 units x P41 5 = * Budgeted fixed expenses = 50, se D Production = Soeaa Sales = ae P 7,760 P 7,760 P110 P1,000,000 P750,000 Case c Production = 50,000 Sales = 50,000 P 8,000 P 800 5,335) (5,335) (5,500) (5,500) i 970) 1000) (1,000) (1,000) ( pi ( =) ( a ( a (750) _{ 750) _( 750) _(_750) p20 P 190 P 250 P25 P 30,000 Pp 0 on 50,000 —48,500 50,000 1,500 0 P20 Po Case q Production = ales Al Sales (QSxUsP) p nen Pp HarCGS (Sx UVC)” ( 3a69 5.600 P 8.460 xOH — (QSxUFC) ( 700) (3,850) , (NC x UFC) (5,610) Volume variance ! 80 (1,000) (1,020) a iil ng x UVE) 350) ( - ( “x expenses x UFE 3 40) Operating Income (Loss) ; 50 7 7) (54 Bt ac 350) xl B‘Volume variance: Normal capacity 50,000 units 50,000 units - Actual capacity 54,000 “ 48,000 “ Volume variance in units — UF (F) (4,000) F 2,000 UF x UFC P20 P20 Volume variance in pesos — UF (F) (80,000) F 40,000 UF Accounting for the A in operating income Production 54,000 units 48,000 units - Sales 35,000 “ 51,000 “ Change in inventory 19,000 “ 3,000 “ X Unit fixed cost rs) P__20 Change in operating income 380,000 Income statements with variances. MELANIE Company produces and sells a unique type of TV antenna. It has just opened a new plant to manufacture the antenna, and the following costs and revenue data are reported for the second month of the company’s operations. The management is anxious to see how profitable the new antenna will be and has asked that an income statement be immediately prepared for the month using the following data. Nn Beginning inventory 200 Units produced 4,400 Normal capacity 4,000 Units sold 4,300 Sales price per unit P. 500 Selling and administrative expenses: Variable per unit 5% of sales Fixed P 160,000 Manufacturing costs: Direct materials cost per unit 80 Direct labor cost per unit 470 Variable overhead cost per unit 20 Fixed overhead cost (total) P340,000 Production cost variances: Direct materials variances, net 30,000 UF Direct labor variances, net 7,500 F Variable OH controllable variance 22,000 UF Required: For the second month: a. Compute the volume variance. b. Compute the operating income under absorption and direct costing methods for the second month. c. Determine the cost of ending inventories under the absorption costing and direct costing. d. Reconcile the difference in operating income under absorption and direct costing methods. Determine which costing method results to a higher income.a 2. SOLUTION GUIDE: 4,000 units Normal capacity - Actual capacity 100) F Under(over) absorbed capacity - UF (F) (400) x UfxOH (P340,000 / 4,000 units) F Volume in pesos — UF(F) (34,000) b. Computation of operating income (in thousands) c ve 5 Sales (4,300 x P500) p2,150.00 P 7 : Hee - VarCGS (4,300 x P270) (1,161.00) ¢ Dyes - Fx overhead (4,300 x P85) ( 965.50) a ( i oy Direct materials variances, net (30.00) UF ( .00) UF Direct labor variances, net 7.50 F 7.50 F Variable OH controllable variance (| 22.00) UF ( 22.00) UF Volume variance 34.00 F : - Var expenses (4,300 x 500 x 5%) ( 107.50) ( 107.50) - Fx expenses (160.00) (160.00) 80. Operating income (loss) P__345.50 B__ 337,00 c. Ending inventory in units = 200 + 4,400-4,300 = 300 units Cost of ending inventory: se Absorption costing = 300 units x (P270 + P85) = P106,500 . = P_81,000 Variable costing 300 units x P270 d. Reconciliation of the change in operating income: Change in inventory (4,400 ~ 4,300) X UfxOH ) e 100 units Change in net income E__85 The variable costing method produces a lower income since saies ara lower than production. Hence, the absorption costi a of the variable costing method, sting method has a higher income over that