ABSORPTION VS.

VARIABLE COSTING
ACTIVITY 2

NAME:
SECTION:

A) Peter Corporation produces and sells a single product. In 2018, its first year of operation, planned
and actual production was 80,000 units. It sold 75,000 of these units for P30 per unit.

Planned and actual costs in 2018 were as follows:

Manufacturing Non-manufacturing

Variable P480,000 P400,000

Fixed 320,000 240,000

1. Using Absorption costing, the company’s operating income in 2018 would be?
2. Using Variable costing, the company’s operating income in 2018 would be?

B) Zechariah’s Corp. produces and sells boxed choco cookies. There are 100 pieces of cookies per box.
The following income statement shows the results of the first year operations. This income
statement was the one included in the company’s annual report to the shareholders:

Sales (600 boxes at P25 per box) P15,000

Less: Cost of goods sold (600 boxes at P16 per box) 9,600
Gross margin 5,400
Less: Selling and administrative expenses 2,400
Income 3,000

During the year, the Company produced 750 boxes. Variable production costs is P10.50 per box and
fixed manufacturing overhead costs totaled P4,125.

1. What is the Company’s variable costing net income?

2. How much is the ending inventory for both Absorption costing and Variable costing?

C) Jeremiah Company produces a single product. Production is done only when orders are received
from customers. Thus, no inventory is kept at the end of the period. For the last period, the
following data were available:

Sales P32,000 Sales commission 1,040

Materials 7,240 Fixed Insurance (60% factory) 960
Labor 4,840 Office supplies 600
Fixed Rent (90% factory, 10% office) 2,400 Advertising (Variable) 560
Fixed Depreciation (80% factory, 20% office) 2,000
Fixed Supervision (2/3 factory, 1/3 office) 1,200

How much is the company’s Net income under Absorption costing and Variable costing
 ABSORPTION VS. VARIABLE COSTING
ACTIVITY 2

D) During its second year of operations, a company produced 82,500 units but sold only 80,000 units for
P26 per unit. It had an inventory balance of 5,000 units at the start of the year. The following costs were
incurred during the year:

Variable costs per unit

Direct materials P4.50
Direct labor 3.00
Manufacturing overhead 3.75
Selling and administrative expenses 0.75
Fixed costs
Manufacturing overhead P660,000
Selling and administrative expenses P412,500

1. Determine the net income under Absorption costing and Variable costing.
2. Assume that the number of units produced were 80,000 units and the number of units sold
were 82,500 units. Determine the net income under Absorption and Variable costing.

E) Haggai Company produces a single product. At the end of the year, the company had 30,000 units in
its ending inventory. Variable production costs are P10 per unit and its fixed manufacturing
overhead costs are P5 per unit every year. The Company’s net income for the year was 12,000
higher under variable costing than under absorption costing. Given these facts, the number of units
of product in inventory at the beginning inventory of the year must have been?

F) Zecharaiah Company had 200,000 income using absorption costing. The company had no variable
manufacturing costs. Beginning inventory was P15,000 and ending inventory was P22,000. Income
under variable costing would have been?