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MS-Handout-04-Variable-and-Absorption-Costing (1)

The document provides a series of illustrative examples related to variable and absorption costing, including calculations for inventory costs, income statements, and profit reconciliation for different companies. It outlines specific requirements for determining costs and profits under both costing methods for various scenarios. The document is intended for educational purposes in a management advisory context at National University.

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32 views

MS-Handout-04-Variable-and-Absorption-Costing (1)

The document provides a series of illustrative examples related to variable and absorption costing, including calculations for inventory costs, income statements, and profit reconciliation for different companies. It outlines specific requirements for determining costs and profits under both costing methods for various scenarios. The document is intended for educational purposes in a management advisory context at National University.

Uploaded by

jaxj36833
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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National University Management Advisory Services

National University
College of Business and Accountancy
Management Advisory Services
Reviewer: Mr. Rainiel C. Soriano, CPA, MBA
Handout 04: Variable and Absorption Costing

Illustrative 1: Patricia Co. makes toy car. Each toy car sells for 1,000 each. Data for
2016’s operations are as follows:

Units: Variable Costs:


Beginning Inventory 5 Direct Materials P 24,000
Production 80 Direct Labor 16,000
Ending Inventory 15 Factory Overhead 8,000
Selling and Administrative 4,000

Fixed Costs
Factory Overhead P 20,000
Selling and Administrative 2,000

Required:
1. Determine the inventory cost per unit under:
a. Absorption Costing
b. Variable Costing

2. Determine the cost of ending inventory under:


a. Absorption Costing
b. Variable Costing

3. Prepare Income Statement under:


a. Absorption Costing
b. Variable Costing

4. How much is the difference in income between the costing methods?

Lecturer: Rainiel C. Soriano, CPA, MBA


National University Management Advisory Services

Illustrative 2: The following information are taken from the books of Aziel Co., which
assumes FIFO for inventory cost flow:

Inventory (in units) 2015 2016


Beginning inventory None ???
Production 10,000 units 9,000 units
Ending inventory 3,500 units 1,000 units

Sales (P 2 per unit) ??? ???


Variable manufacturing costs (P 0.75 per unit) P 7,500 P 6,750
Fixed manufacturing costs 5,000 5,400
Selling and Administrative costs (50% variable) 4,500 7,500

Required:
1. Determine the 2015 profit under variable and absorption costing.
2. Reconcile the 2 income figures in no. 1
3. Determine 2016 profit under variable and absorption costing.
4. Reconcile the two income figures in No. 3

Illustrative 3: Joshua Inc., produces nonfat frozen yogurt which it sells to restaurants
and ice cream shops. The product is sold in 10-gallon containers, which have the following
price and variable costs.

Sales Price P 30
Direct Materials 10
Direct Labor 4
Variable overhead 6

Fixed overhead in 2016, the co.’s first year of operations, was P 600,000. Actual
production was 150,000 10-gallon containers, of which 125,000 were sold. Joshua Inc.
incurred the following selling and administrative expenses:

Fixed P 100,000 for the year


Variable P 2 per container sold

Required:
1. Compute the variable product cost per container of frozen yogurt under:
a. Variable costing
b. Absorption costing
2. Prepare income statements for 2016 using both methods.
3. Reconcile the operating income reported under the two methods.

Lecturer: Rainiel C. Soriano, CPA, MBA


National University Management Advisory Services
Illustrative 4: CMROs Company began operations on January 1 to produce a single
product. It used an absorption costing system with a production volume of 100,000 units.
Inventory on December 31 was 20,000 units, and net income for the year was P 240,000.

If CMROs had used variable costing, its net income would have been P 220,000.

Required: Compute the breakeven point in units.

Lecturer: Rainiel C. Soriano, CPA, MBA

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