MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 12
VARIABLE COSTING
I.

Questions
1. The variable costing technique does not consider fixed costs as
unimportant or irrelevant, but it maintains that the distinction between
behaviors of different costs is crucial for certain decisions.
2. The central issue in variable costing is what is the proper timing for
release of fixed manufacturing overhead as expense: at the time of
incurrence, or at the time the finished units to which the fixed overhead
relates are sold.
3. Direct costing would be more accurately called variable or marginal
costing because in substance it is the inventory costing method which
applies only variable production costs to product; fixed factory overhead
is not assigned to product.
4. Marketing and administrative costs are treated as period costs under both
variable costing and absorption costing methods of product costing.
5. 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 periods cost of goods sold.
6. 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 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.

12-1

Chapter 12 Variable Costing

7. If fixed manufacturing overhead cost is released from inventory, then

inventory levels must have decreased and therefore production must have
been less than sales.
8. Under absorption costing it is possible to increase net operating income
without increasing sales 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 periods fixed manufacturing overhead
costs into the inventory account, thereby reducing the current periods
reported expenses and causing net operating income to rise.
9. Generally speaking, variable costing cannot be used externally for
financial reporting purposes nor can it be used for tax purposes.
10. If production exceeds sales, absorption costing will show higher net
operating income than variable costing. The reason is that inventories 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
absorption costing. By contrast, all of the fixed manufacturing overhead
cost of the current period will be charged immediately against revenues as
a period cost under variable costing.
11. Absorption and variable costing differ in how they handle 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 expensed on the current periods income statement.
12. Advocates of variable costing argue that fixed manufacturing costs are not
really the cost 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 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.

II. Exercises
Exercise 1 (Variable and Absorption Costing Unit Product Costs and
Income Statements)

12-2

Variable Costing Chapter 12

Requirement 1
a. The unit product cost under absorption costing would be:
Direct materials..........................................................................
Direct labor.................................................................................
Variable manufacturing overhead................................................
Total variable manufacturing costs.............................................
Fixed manufacturing overhead (P160,000 20,000 units)..........
Unit product cost........................................................................

P18
7
2
27
8
P35

b. The absorption costing income statement:

Sales (16,000 units P50 per unit)........................
Less cost of goods sold:
Beginning inventory...........................................
Add cost of goods manufactured
(20,000 units P35 per unit).........................
Goods available for sale.....................................
Less ending inventory
(4,000 units P35 per unit)...........................
Gross margin..........................................................
Less selling and administrative expenses................
Net operating income.............................................

P800,000
P

700,000
700,000
140,000

560,000
240,000
190,000*
P 50,000

*(16,000 units P5 per unit) + P110,000 = P190,000.

Requirement 2
a. The unit product cost under variable costing would be:
Direct materials...............................................................................
Direct labor.....................................................................................
Variable manufacturing overhead.....................................................
Unit product cost.............................................................................

P18
7
2
P27

b. The variable costing income statement:

Sales (16,000 units P50 per unit)......................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory......................................
Add variable manufacturing costs
(20,000 units P27 per unit)....................
Goods available for sale................................
12-3

P800,000
P

540,000
540,000

Chapter 12 Variable Costing

Less ending inventory

(4,000 units P27 per unit)......................
Variable cost of goods sold...............................
Variable selling expense
(16,000 units P5 per unit)..........................
Contribution margin.............................................
Less fixed expenses:
Fixed manufacturing overhead..........................
Fixed selling and administrative........................
Net operating income............................................

108,000
432,000 *
80,000
160,000
110,000

512,000
288,000
270,000
P 18,000

* The variable cost of goods sold could be computed more simply as:
16,000 units P27 per unit = P432,000.
Exercise 2 (Variable and Absorption Costing Unit Product Costs)
Requirement 1
Sales (40,000 units P33.75 per unit)....................................
P1,350,000
Less variable expenses:
Variable cost of goods sold
(40,000 units P16 per unit*).........................................
P640,000
Variable selling and administrative expenses
(40,000 units P3 per unit).............................................
120,000
760,000
Contribution margin................................................................
590,000
Less fixed expenses:
Fixed manufacturing overhead.............................................
250,000
Fixed selling and administrative expenses............................
300,000
550,000
Net operating income...............................................................
P 40,000
*Direct materials.......................................................................................................
P10
Direct labor.............................................................................................................
4
Variable manufacturing overhead.............................................................................
2
Total variable manufacturing cost............................................................................
P16
Requirement 2
The difference in net operating income can be explained by the P50,000 in
fixed manufacturing overhead deferred in inventory under the absorption
costing method:
Variable costing net operating income..........................................
Add: Fixed manufacturing overhead cost
12-4

P40,000
50,000

Variable Costing Chapter 12

deferred in inventory under absorption

costing: 10,000 units P5 per unit in
fixed manufacturing overhead cost............................................
Absorption costing net operating income......................................

P90,000

Exercise 3 (Variable Costing Unit Product Cost and Income Statement;

Break-even)
Requirement 1
Under variable costing, only the variable manufacturing costs are included in
product costs.
Direct materials............................................................................
Direct labor..................................................................................
Variable manufacturing overhead.................................................
Unit product cost..........................................................................

P600
300
100
P1,000

Note that selling and administrative expenses are not treated as product costs;
that is, they are not included in the costs that are inventoried. These expenses
are always treated as period costs and are charged against the current periods
revenue.

Requirement 2
The variable costing income statement appears below:
Sales.......................................................................
P18,000,000
Less variable expenses:
Variable cost of goods sold:
Beginning inventory....................................... P
0
Add variable manufacturing costs
(10,000 units P1,000 per unit)................. 10,000,000
Goods available for sale................................. 10,000,000
Less ending inventory (1,000 units P1,000
per unit)................................................... 1,000,000
Variable cost of goods sold*................................ 9,000,000
Variable selling and administrative (9,000 units
P200 per unit)..................................................... 1,800,000 10,800,000
12-5

Chapter 12 Variable Costing

Contribution margin................................................
Less fixed expenses:
Fixed manufacturing overhead................................
Fixed selling and administrative..............................
Net operating loss....................................................

7,200,000
3,000,000
4,500,000

7,500,000
P (300,000)

* The variable cost of goods sold could be computed more simply as: 9,000 units
sold P1,000 per unit = P9,000,000.

Requirement 3
The break-even point in units sold can be computed using the contribution
margin per unit as follows:
Selling price per unit................................................................................................
P2,000
Variable cost per unit...............................................................................................
1,200
P800
Contribution margin per unit....................................................................................
Break-even unit sales

Fixed expenses
Unit contribution margin

P7,500,000
P800 per unit

=
9,375 units
Exercise 4 (Absorption Costing Unit Product Cost and Income Statement)
Requirement 1
Under absorption costing, all manufacturing costs (variable and fixed) are
included in product costs.
Direct materials.................................................................
Direct labor.......................................................................
Variable manufacturing overhead......................................
Fixed manufacturing overhead
(P3,000,000 10,000 units)..........................................
Unit product cost...............................................................

P600
300
100
300
P1,300

Requirement 2
The absorption costing income statement appears below:
Sales (9,000 units P2,000 per unit)...................................
12-6

P18,000,000

Variable Costing Chapter 12

Cost of goods sold:

Beginning inventory.........................................................
P
0
Add cost of goods manufactured
(10,000 units P1,300 per unit)..................................
13,000,000
Goods available for sale...................................................
13,000,000
Less ending inventory
(1,000 units P1,300 per unit)....................................
1,300,000
Gross margin........................................................................
Selling and administrative expenses:
Variable selling and administrative (9,000 units
P200 per unit)...........................................................
1,800,000
Fixed selling and administrative.......................................
4,500,000
Net operating income...........................................................

11,700,000
6,300,000

6,300,000
0

Note: The company apparently has exactly zero net operating income even
though its sales are below the break-even point computed in Exercise 3. This
occurs because P300,000 of fixed manufacturing overhead has been deferred
in inventory and does not appear on the income statement prepared using
absorption costing.
Exercise 5 (Variable Costing Income Statement; Explanation of Difference
in Net Operating Income)
Requirement 1
2,000 units P60 per unit fixed manufacturing overhead = P120,000
Requirement 2
The variable costing income statement appears below:
Sales..............................................................................
P4,000,000
Variable expenses:
Variable cost of goods sold:
Beginning inventory...............................................
P
0
Add variable manufacturing costs
(10,000 units P310 per unit)...........................3,100,000
Goods available for sale.........................................3,100,000
Less ending inventory
(2,000 units P310 per unit)............................. 620,000
Variable cost of goods sold*.......................................2,480,000
Variable selling and administrative
(8,000 units P20 per unit)................................... 160,000 2,640,000
Contribution margin.......................................................
1,360,000
12-7

Chapter 12 Variable Costing

Fixed expenses:
Fixed manufacturing overhead................................... 600,000
Fixed selling and administrative................................. 400,000 1,000,000
Net operating income.....................................................
P 360,000
* The variable cost of goods sold could be computed more simply as: 8,000
units sold P310 per unit = P2,480,000.
The difference in net operating income between variable and absorption
costing can be explained by the deferral of fixed manufacturing overhead cost
in inventory that has taken place under the absorption costing approach. Note
from part (1) that P120,000 of fixed manufacturing overhead cost has been
deferred in inventory to the next period. Thus, net operating income under the
absorption costing approach is P120,000 higher than it is under variable
costing.
Exercise 6 (Evaluating Absorption and Variable Costing as Alternative
Costing Methods)
Requirement 1
a. By assumption, the unit selling price, unit variable costs, and total fixed
costs are constant from year to year. Consequently, variable costing net
operating income will vary with sales. If sales increase, variable costing
net operating income will increase. If sales decrease, variable costing net
operating income will decrease. If sales are constant, variable costing net
operating income will be constant. Because variable costing net operating
income was P16,847 each year, unit sales must have been the same in
each year.
The same is not true of absorption costing net operating income. Sales and
absorption costing net operating income do not necessarily move in the
same direction because changes in inventories also affect absorption
costing net operating income.
b. When variable costing net operating income exceeds absorption costing
net operating income, sales exceeds production. Inventories shrink and
fixed manufacturing overhead costs are released from inventories. In
contrast, when variable costing net operating income is less than
absorption costing net operating income, production exceeds sales.
Inventories grow and fixed manufacturing overhead costs are deferred in
inventories. The year-by-year effects are shown below.

12-8

Variable Costing Chapter 12

Year 1
Variable costing NOI =
Absorption costing
NOI
Production = Sales
Inventories remain the
same

Year 2
Variable costing NOI <
Absorption costing
NOI
Production > Sales

Year 3
Variable costing NOI >
Absorption costing
NOI
Production < Sales

Inventories grow

Inventories shrink

Requirement 2
a. As discussed in part (1 a) above, unit sales and variable costing net
operating income move in the same direction when unit selling prices and
the cost structure are constant. Because variable costing net operating
income declined, unit sales must have also declined. This is true even
though the absorption costing net operating income increased. How can
that be? By manipulating production (and inventories) it may be possible
to maintain or increase the level of absorption costing net operating
income even though unit sales decline. However, eventually inventories
will grow to be so large that they cannot be ignored.
b. As stated in part (1 b) above, when variable costing net operating income
is less than absorption costing net operating income, production exceeds
sales. Inventories grow and fixed manufacturing overhead costs are
deferred in inventories. The year-by-year effects are shown below.
Year 1
Variable costing NOI =
Absorption costing
NOI
Production = Sales
Inventories remain the
same

Year 2
Variable costing NOI <
Absorption costing NOI
Production > Sales

Year 3
Variable costing NOI
< Absorption costing
NOI
Production > Sales

Inventories grow

Inventories grow

Requirement 3
Variable costing appears to provide a much better picture of economic reality
than absorption costing in the examples above. In the first case, absorption
costing net operating income fluctuates wildly even though unit sales are the
same each year and unit selling prices, unit variable costs, and total fixed
costs remain the same. In the second case, absorption costing net operating
income increases from year to year even though unit sales decline. Absorption
costing is much more subject to manipulation than variable costing. Simply by
changing production levels (and thereby deferring or releasing costs from
12-9

Chapter 12 Variable Costing

inventory) absorption costing net operating income can be manipulated

upward or downward.
Note: This exercise is based on the following data:
Common data:
Annual fixed manufacturing costs................................
Contribution margin per unit........................................
Annual fixed SGA costs...............................................

P153,153
P35,000
P180,000

Part 1:
Year 1
Beginning inventory.............................................................
1
Production.............................................................................
10
Sales......................................................................................
10
Ending...................................................................................
1

Year 2
1
11
10
2

Year 3
2
9
10
1

Variable costing net operating income.................................

P16,847

P16,847

P16,847

Fixed manufacturing overhead in beginning

inventory*......................................................................
P15,315
Fixed manufacturing overhead in ending inventory............
P15,315
Absorption costing net operating income.............................
P16,847

P15,315
P27,846
P29,378

P27,846
P17,017
P6,018

* Fixed manufacturing overhead in beginning inventory is assumed in both parts 1 and

2 for Year 1. A FIFO inventory flow assumption is used.

Part 2:
Year 1
Beginning inventory..................................................
1
Production..................................................................
10
Sales...........................................................................
10
Ending........................................................................
1

Year 2
1
12
9
4

4
20
8
16

Variable costing net operating income (loss).............P16,847

(P18,153)

(P53,153)

P15,315

P51,051

P51,051
P17,583

P122,522
P18,318

Fixed manufacturing overhead in beginning

inventory*...........................................................P15,315
Fixed manufacturing overhead in ending
inventory.............................................................P15,315
Absorption costing net operating income..................P16,847

Year 3

* Fixed manufacturing overhead in beginning inventory is assumed in both parts 1 and

2 for Year 1. A FIFO inventory flow assumption is used.

12-10

Variable Costing Chapter 12

III. Problems
Problem 1
Requirement 1: Variable Costing Method
Romero Parts, Inc.
Income Statement - Manufacturing
For the Year Ended December 31, 2005
Sales
Less: Variable Cost of Sales
Inventory, Jan. 1
Current Production
Total Available for Sale
Inventory, Dec. 31
Contribution Margin
Less Fixed Costs and Expenses
Net Income

P20,700,000
P1,155,000
7,700,000
P8,855,000
805,000

8,050,000
P12,650,000
6,000,000
P 6,650,000

Requirement 2: Absorption Costing Method

Romero Parts, Inc.
Income Statement - Manufacturing
For the Year Ending December 31, 2006
Sales
Less Cost of goods sold:
Inventory, Jan. 1
Current Production
Total Available for Sale
Inventory, Dec. 31
Cost of Sales - Standard
Favorable Capacity Variance
Income from Manufacturing
12-11

P26,100,000
P 1,380,000
16,100,000
P17,480,000
747,500
P16,732,500
900,000

15,832,500
P10,267,500

Chapter 12 Variable Costing

Requirement 3: Variable Costing Method

Romero Parts, Inc.
Income Statement - Manufacturing
For the Year Ending December 31, 2006
Sales
Less Variable Cost of Sales:
Inventory, Jan. 1
Production
Total Available for Sale
Inventory, Dec. 31
Contribution Margin - Manufacturing
Less Fixed Cost
Income from Manufacturing

P26,100,000
P

805,000
9,800,000
P10,605,000
455,000

10,150,000
P15,950,000
5,400,000
P10,550,000

Reconciliation
Net Income, absorption costing
Add Fixed Factory Overhead Inventory, 1/1
Total
Less Fixed Factory Overhead Inventory, 12/31
Net Income, direct costing

P10,267,500
575,000
P10,842,500
292,500
P10,550,000

Problem 2
Requirement 1
Honey Company
Income Statement - Direct Costing
For the Year Ended December 31, 2005
Sales
Less Variable Cost of Sales:
Finished Goods Inventory, 1/1
Current Production
Total Available for Sale
Finished Goods Inventory, 12/31
Variable Cost of Sale - Standard
12-12

P280,000
P 4,000
120,000
P124,000
12,000
P112,000

Variable Costing Chapter 12

Unfavorable Variance

5,000

Contribution Margin - Manufacturing

Less Variable Marketing Expenses
Contribution Margin - Final
Less Fixed Costs and Expenses:
Fixed Factory Overhead
Fixed Marketing and
Administrative Expenses
Net Income

117,000
P163,000
28,000
P135,000

P 54,000
20,000

74,000
P 61,000

Requirement 2
Honey Company
Income Statement - Absorption Costing
For the Year Ended December 31, 2005
Sales
P280,000
Less: Cost of Sales
Finished goods inventory, Jan. 1 (1,000 x P5.50)
Current production costs
Variable (30,000 x P4.00)
P120,000
Fixed (30,000 x P1.50)
45,000
Less: Finished goods inventory, Dec. 31
(3,000 x P5.50)
Cost of Sales - at Standard
Add (Deduct) Variance
Unfavorable variable manufacturing
costs variances
Underapplied fixed factory overhead
(6,000 x P1.50)
Cost of Sales - Actual
Gross Profit
Less: Selling and administrative expenses
Variable
Fixed
Net Income

12-13

5,500

165,000
P170,500
16,500
P154,000
5,000
9,000
P168,000
P112,000
28,000
20,000
P 48,000
P 64,000

Chapter 12 Variable Costing

Problem 3 (Variable Costing Income Statement; Reconciliation)

Requirement 1
The unit product cost under the variable costing approach would be computed
as follows:
P8
Direct materials.......................................................................................................
Direct labor.............................................................................................................
10
Variable manufacturing overhead.............................................................................
2
Unit product cost.....................................................................................................
P20
With this figure, the variable costing income statements can be prepared:
Year 1
Year 2
Sales........................................................................................................................
P1,000,000 P1,500,000
Less variable expenses:
Variable cost of goods sold @ P20 per unit..........................................................
400,000
600,000
Variable selling and administrative
@ P3 per unit...................................................................................................
60,000
90,000
Total variable expenses............................................................................................
460,000
690,000
Contribution margin.................................................................................................
540,000
810,000
Less fixed expenses:
Fixed manufacturing overhead.............................................................................
350,000
350,000
Fixed selling and administrative...........................................................................
250,000
250,000
Total fixed expenses................................................................................................
600,000
600,000
Net operating income (loss).....................................................................................
P (60,000) P 210,000
Requirement 2
Variable costing net operating income (loss).................
P (60,000) P 210,000
Add: Fixed manufacturing overhead cost deferred
in inventory under absorption costing (5,000
units P14 per unit)................................................ 70,000
Deduct: Fixed manufacturing overhead cost
released from inventory under absorption
costing (5,000 units P14 per unit)........................
(70,000)
Absorption costing net operating income......................
P 10,000 P 140,000
Problem 4 (Prepare and Interpret Statements; Changes in Both Sales and
Production; JIT)
Requirement 1
12-14

Variable Costing Chapter 12

Year 1
P1,000,000

Sales
Less variable expenses:
Variable cost of goods sold
@ P4 per unit
Variable selling and administrative
@ P2 per unit
Total variable expenses
Contribution margin
Less fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative
Total fixed expenses
Net operating income (loss)

Year 2
Year 3
P 800,000 P1,000,000

200,000

160,000

200,000

100,000
300,000
700,000

80,000
240,000
560,000

100,000
300,000
700,000

600,000
70,000
670,000
P 30,000

600,000
600,000
70,000
70,000
670,000
670,000
P(110,000) P 30,000

Requirement 2
a.
Year 1
P4

Variable manufacturing cost

Fixed manufacturing cost:
P600,000 50,000 units
P600,000 60,000 units
P600,000 40,000 units
Unit product cost

Year 2
P4

Year 3
P4

12
10
P16

P14

15
P19

b.
Variable costing net operating income
(loss)
Add (Deduct): Fixed manufacturing
overhead cost deferred in inventory
from Year 2 to Year 3 under
absorption costing (20,000 units
P10 per unit)
Add: Fixed manufacturing overhead
cost deferred in inventory from Year
3 to the future under absorption
costing (10,000 units P15 per unit)

P30,000 P(110,000)

200,000

P 30,000

(200,000)

150,000
Absorption costing net operating income
(loss)

12-15

P30,000

P 90,000

P(20,000)

Chapter 12 Variable Costing

Requirement 3
Production went up sharply in Year 2 thereby reducing the unit product cost,
as shown in (2a). This reduction in cost, combined with the large amount of
fixed manufacturing overhead cost deferred in inventory for the year, more
than offset the loss of revenue. The net result is that the companys net
operating income rose even though sales were down.
Requirement 4
The fixed manufacturing overhead cost deferred in inventory from Year 2 was
charged against Year 3 operations, as shown in the reconciliation in (2b). This
added charge against Year 3 operations was offset somewhat by the fact that
part of Year 3s fixed manufacturing overhead costs was deferred in inventory
to future years [again see (2b)]. Overall, the added costs charged against Year
3 were greater than the costs deferred to future years, so the company reported
less income for the year even though the same number of units was sold as in
Year 1.
Requirement 5
a. Several things would have been different if the company had been using
JIT inventory methods. First, in each year production would have been
geared to sales so that little or no inventory of finished goods would have
been built up in either Year 2 or Year 3. Second, unit product costs
probably would have been the same in all three years, since these costs
would have been established on the basis of expected sales (50,000 units)
for each year. Third, since only 40,000 units were sold in Year 2, the
company would have produced only that number of units and therefore
would have had some underapplied overhead cost for the year. (See the
discussion on underapplied overhead in the following paragraph.)
b. If JIT had been in use, the net operating income under absorption costing
would have been the same as under variable costing in all three years.
The reason is that with production geared to sales, there would have been
no ending inventory on hand, and therefore there would have been no fixed
manufacturing overhead costs deferred in inventory to other years.
Assuming that the company expected to sell 50,000 units in each year and
that unit product costs were set on the basis of that level of expected
activity, the income statements under absorption costing would have
appeared as follows:
Year 1
P1,000,000

Sales
12-16

Year 2
Year 3
P 800,000 P1,000,000

Variable Costing Chapter 12

Less cost of goods sold:
Cost of goods manufactured @ P16 per unit
Add underapplied overhead
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income (loss)

800,000
800,000
200,000
170,000
P 30,000

640,000 *
120,000 **
760,000
40,000
150,000
P(110,000) P

800,000
800,000
200,000
170,000
30,000

* 40,000 units P16 per unit = P640,000.

** 10,000 units not produced P12 per unit fixed manufacturing overhead cost =
P120,000 fixed manufacturing overhead cost not applied to products.

Problem 5 (Contrasting Variable and Absorption Costing)

Requirement 1 (a)
Under absorption costing, all manufacturing costs, variable and fixed, are
included in unit product costs:
Year 1
P11
6
3

Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
(P120,000 10,000 units)
(P120,000 6,000 units)
Unit product cost

Year 2
P11
6
3

12
20
P40

P32

Requirement 1 (b)
The absorption costing income statements follow:
Sales (8,000 units x P50 per unit)
Cost of goods sold:
Beginning inventory
Add cost of goods manufactured
(10,000 units x P32 per unit;
6,000 units x P40 per unit)
Goods available for sale
Less ending inventory
(2,000 units x P32 per unit; 0 units

Year 1
P400,000
P

Year 2
P400,000

P 64,000

320,000
320,000

240,000
304,000

64,000
12-17

256,000

304,000

Chapter 12 Variable Costing

x P40 per unit)
Gross margin
Selling and administrative expenses
(8,000 units x P4 per unit +
P70,000)
Net operating income

144,000

96,000

102,000
P 42,000

102,000
P (6,000)

Requirement 2 (a)
Under variable costing, only the variable manufacturing costs are included in
unit product costs:
Year 1
P11
6
3
P20

Direct materials
Direct labor
Variable manufacturing overhead
Unit product cost

Year 2
P11
6
3
P20

Requirement 2 (b)
The variable costing income statements follow. Notice that the variable cost
of goods sold is computed in a simpler, more direct manner than in the
examples provided earlier. On a variable costing income statement, this
simple approach or the more complex approach illustrated earlier is
acceptable for computing the cost of goods sold.

Sales (8,000 units x P50 per unit)

Variable expenses:
Variable cost of goods sold
(8,000 units x P20 per unit)
Variable selling and administrative
(8,000 units x P4 per unit)
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative
expenses
Net operating income

Year 1
P400,000
P160,000
32,000

P160,000
192,000
208,000

120,000
70,000

Requirement 3

12-18

Year 2
P400,000

32,000

192,000
208,000

120,000
190,000
P 18,000

70,000

190,000
P 18,000

Variable Costing Chapter 12

The reconciliation of the variable and absorption costing net

incomes follows:
Year 1
Variable costing net operating income
P18,000
Add fixed manufacturing overhead costs
deferred in inventory under absorption
costing (2,000 units x P12 per unit)
24,000
Deduct fixed manufacturing overhead costs
released from inventory under absorption
costing (2,000 units x P12 per unit)
Absorption costing net operating income
P42,000

operating
Year 2
P18,000

(24,000)
P(6,000)

Problem 6 (Variable Costing Income Statement; Reconciliation)

Requirement 1
Sales (40,000 units P33.75 per unit).......................................... P1,350,000
Variable expenses:
Variable cost of goods sold
(40,000 units P16 per unit*)...............................................
P640,000
Variable selling and administrative expenses
(40,000 units P3 per unit)...................................................
120,000
760,000
Contribution margin......................................................................
590,000
Fixed expenses:
Fixed manufacturing overhead...................................................
250,000
Fixed selling and administrative expenses..................................
300,000
550,000
Net operating income..................................................................... P 40,000
* Direct materials........................................................
Direct labor..............................................................
Variable manufacturing overhead..............................
Total variable manufacturing cost.............................

P10
4
2
P16

Requirement 2
The difference in net operating income can be explained by the P50,000 in
fixed manufacturing overhead deferred in inventory under the absorption
costing method:
Variable costing net operating income..................................................................
P40,000
Add: Fixed manufacturing overhead cost deferred in inventory
50,000
12-19

Chapter 12 Variable Costing

under absorption costing: 10,000 units P5 per unit in fixed

manufacturing overhead cost............................................................................
Absorption costing net operating income..............................................................
P90,000
IV. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

D
B
B
B
B
C
A
B
A
A

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

B
A
C
D
B
A
C
C
B
C

12-20