chapter 12 - answer

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 period’s 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

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Chapter 12 Variable Costing

depreciation, taxes, insurance, supervisory salaries, and so on, are just as essential to manufacturing products as are the variable costs.

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 period’s fixed manufacturing overhead costs into the inventory account, thereby reducing the current period’s 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 period’s 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.

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Variable Costing Chapter 12

II. Exercises

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

Requirement 1

a. The unit product cost under absorption costing would be:

Direct materials........................................................................ P18Direct labor.............................................................................. 7Variable manufacturing overhead.............................................. 2 Total variable manufacturing costs........................................... 27Fixed manufacturing overhead (P160,000 ÷ 20,000 units)........ 8 Unit product cost...................................................................... P35

b. The absorption costing income statement:

Sales (16,000 units × P50 per unit)....................... P800,000Less cost of goods sold:

Beginning inventory......................................... P 0Add cost of goods manufactured

(20,000 units × P35 per unit)........................ 700,000 Goods available for sale................................... 700,000Less ending inventory

(4,000 units × P35 per unit).......................... 140,000 560,000 Gross margin....................................................... 240,000Less selling and administrative expenses.............. 190,000 *Net operating income........................................... 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............................................................................ P18Direct labor.................................................................................. 7Variable manufacturing overhead.................................................. 2 Unit product cost.......................................................................... P27

b. The variable costing income statement:

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Sales (16,000 units × P50 per unit)..................... P800,000Less variable expenses:

Variable cost of goods sold:Beginning inventory................................... P 0Add variable manufacturing costs

(20,000 units × P27 per unit)................... 540,000 Goods available for sale.............................. 540,000Less ending inventory

(4,000 units × P27 per unit)..................... 108,000 Variable cost of goods sold............................. 432,000 *Variable selling expense

(16,000 units × P5 per unit)........................ 80,000 512,000 Contribution margin........................................... 288,000Less fixed expenses:

Fixed manufacturing overhead........................ 160,000Fixed selling and administrative..................... 110,000 270,000

Net operating income......................................... 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)................................... P1,350,000Less 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............................................................. 590,000Less fixed expenses:

Fixed manufacturing overhead..........................................250,000Fixed selling and administrative

expenses............................................................................... 300,000 550,000 Net operating income............................................................ P 40,000

*Direct materials...................................................................................................P10Direct labor.........................................................................................................4Variable manufacturing overhead......................................................................... 2

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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....................................... P40,000Add: Fixed manufacturing overhead cost

deferred in inventory under absorption costing: 10,000 units × P5 per unit in fixed manufacturing overhead cost......................................... 50,000

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......................................................................... P 600Direct labor............................................................................... 300Variable manufacturing overhead............................................... 100 Unit product cost....................................................................... 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 period’s revenue.

Requirement 2

The variable costing income statement appears below:

Sales..................................................................... P18,000,000

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Less variable expenses:Variable cost of goods sold:

Beginning inventory.................................... P 0Add variable manufacturing costs

(10,000 units × P1,000 per unit)................ 10,000,000 Goods available for sale............................... 10,000,000Less ending inventory (1,000 units × P1,000

per unit)................................................. 1,000,000 Variable cost of goods sold*.............................. 9,000,000Variable selling and administrative (9,000 units × P200 per unit)............................................... 1,800,000 10,800,000

Contribution margin.............................................. 7,200,000Less fixed expenses:Fixed manufacturing overhead.............................. 3,000,000Fixed selling and administrative............................ 4,500,000 7,500,000 Net operating loss................................................. 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............................................................................................P2,000Variable cost per unit........................................................................................... 1,200 Contribution margin per unit................................................................................P 800

Exercise 4 (Absorption Costing Unit Product Cost and Income Statement)

Requirement 1

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Break-even unit sales =Fixed expenses

Unit contribution margin

=P7,500,000

P800 per unit

= 9,375 units


Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs.

Direct materials.............................................................. P 600Direct labor.................................................................... 300Variable manufacturing overhead.................................... 100Fixed manufacturing overhead

(P3,000,000 ÷ 10,000 units)........................................ 300 Unit product cost............................................................ P1,300

Requirement 2

The absorption costing income statement appears below:

Sales (9,000 units × P2,000 per unit)................................. P18,000,000Cost of goods sold:

Beginning inventory......................................................P 0Add cost of goods manufactured

(10,000 units × P1,300 per unit)................................. 13,000,000 Goods available for sale.................................................13,000,000Less ending inventory

(1,000 units × P1,300 per unit)................................... 1,300,000 11,700,000 Gross margin..................................................................... 6,300,000Selling and administrative expenses:

Variable selling and administrative (9,000 units × P200 per unit)................................................1,800,000

Fixed selling and administrative..................................... 4,500,000 6,300,000 Net operating income........................................................ P 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

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Requirement 2

The variable costing income statement appears below:

Sales........................................................................... P4,000,000Variable expenses:

Variable cost of goods sold:Beginning inventory............................................P 0Add variable manufacturing costs

(10,000 units × P310 per unit)....................... 3,100,000 Goods available for sale.......................................3,100,000Less ending inventory

(2,000 units × P310 per unit)............................ 620,000 Variable cost of goods sold*....................................2,480,000Variable selling and administrative

(8,000 units × P20 per unit)................................. 160,000 2,640,000 Contribution margin.................................................... 1,360,000Fixed expenses:

Fixed manufacturing overhead.................................600,000Fixed 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

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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.

Year 1 Year 2 Year 3Variable costing NOI = Absorption costing

NOI

Variable costing NOI < Absorption costing

NOI

Variable costing NOI > Absorption costing

NOIProduction = Sales Production > Sales Production < Sales

Inventories remain the same 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

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deferred in inventories. The year-by-year effects are shown below.

Year 1 Year 2 Year 3Variable costing NOI =

Absorption costing NOI


NOI


NOIProduction = Sales Production > Sales Production > Sales

Inventories remain the same 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 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.............................. P153,153Contribution margin per unit..................................... P35,000Annual fixed SGA costs............................................ P180,000

Part 1:Year 1 Year 2 Year 3

Beginning inventory.......................................................... 1 1 2Production........................................................................ 10 11 9Sales................................................................................. 10 10 10Ending.............................................................................. 1 2 1

Variable costing net operating income...............................P16,847 P16,847 P16,847

Fixed manufacturing overhead in beginning inventory*..................................................................P15,315 P15,315 P27,846

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Fixed manufacturing overhead in ending inventory...........P15,315 P27,846 P17,017Absorption costing net operating income..........................P16,847 P29,378 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 Year 2 Year 3

Beginning inventory............................................... 1 1 4Production.............................................................. 10 12 20Sales....................................................................... 10 9 8Ending.................................................................... 1 4 16

Variable costing net operating income (loss)...........P16,847 (P18,153) (P53,153)

Fixed manufacturing overhead in beginning inventory*........................................................P15,315 P15,315 P51,051

Fixed manufacturing overhead in ending inventory..........................................................P15,315 P51,051 P122,522

Absorption costing net operating income................P16,847 P17,583 P18,318

* Fixed manufacturing overhead in beginning inventory is assumed in both parts 1 and 2 for Year 1. A FIFO inventory flow assumption is used.

III. Problems

Problem 1

Requirement 1: Variable Costing Method

Romero Parts, Inc.Income Statement - Manufacturing

For the Year Ended December 31, 2005

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Sales P20,700,000Less: Variable Cost of Sales

Inventory, Jan. 1 P1,155,000 Current Production 7,700,000 Total Available for Sale P8,855,000 Inventory, Dec. 31 805,000 8,050,000

Contribution Margin P12,650,000Less Fixed Costs and Expenses 6,000,000Net Income P 6,650,000

Requirement 2: Absorption Costing Method


For the Year Ending December 31, 2006

Sales P26,100,000Less Cost of goods sold:

Inventory, Jan. 1 P 1,380,000 Current Production 16,100,000 Total Available for Sale P17,480,000 Inventory, Dec. 31 747,500 Cost of Sales - Standard P16,732,500 Favorable Capacity Variance 900,000 15,832,500

Income from Manufacturing P10,267,500

Requirement 3: Variable Costing Method


For the Year Ending December 31, 2006

Sales P26,100,000Less Variable Cost of Sales:

Inventory, Jan. 1 P 805,000 Production 9,800,000 Total Available for Sale P10,605,000

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Inventory, Dec. 31 455,000 10,150,000Contribution Margin - Manufacturing P15,950,000Less Fixed Cost 5,400,000 Income from Manufacturing P10,550,000

Reconciliation

Net Income, absorption costing P10,267,500Add Fixed Factory Overhead Inventory, 1/1 575,000 Total P10,842,500Less Fixed Factory Overhead Inventory, 12/31 292,500 Net Income, direct costing P10,550,000

Problem 2

Requirement 1

Honey CompanyIncome Statement - Direct Costing

For the Year Ended December 31, 2005

Sales P280,000Less Variable Cost of Sales:

Finished Goods Inventory, 1/1 P 4,000 Current Production 120,000 Total Available for Sale P124,000 Finished Goods Inventory, 12/31 12,000 Variable Cost of Sale - Standard P112,000 Unfavorable Variance 5,000 117,000

Contribution Margin - Manufacturing P163,000Less Variable Marketing Expenses 28,000Contribution Margin - Final P135,000Less Fixed Costs and Expenses:

Fixed Factory Overhead P 54,000 Fixed Marketing and Administrative Expenses 20,000 74,000

Net Income P 61,000

Requirement 2

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Honey CompanyIncome Statement - Absorption Costing For the Year Ended December 31, 2005

Sales P280,000Less: Cost of Sales

Finished goods inventory, Jan. 1 (1,000 x P5.50) P 5,500 Current production costs

Variable (30,000 x P4.00) P120,000Fixed (30,000 x P1.50) 45,000 165,000

P170,500 Less: Finished goods inventory, Dec. 31

(3,000 x P5.50) 16,500 Cost of Sales - at Standard P154,000 Add (Deduct) Variance

Unfavorable variable manufacturingcosts variances 5,000

Underapplied fixed factory overhead(6,000 x P1.50) 9,000

Cost of Sales - Actual P168,000Gross Profit P112,000Less: Selling and administrative expenses

Variable 28,000Fixed 20,000

P 48,000Net Income P 64,000

Problem 3 (Variable Costing Income Statement; Reconciliation)

Requirement 1

The unit product cost under the variable costing approach would be computed as follows:

Direct materials...................................................................................................P 8Direct labor.........................................................................................................10Variable manufacturing overhead......................................................................... 2 Unit product cost.................................................................................................P20

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With this figure, the variable costing income statements can be prepared:

Year 1 Year 2Sales....................................................................................................................P1,000,000 P1,500,000Less variable expenses:

Variable cost of goods sold @ P20 per unit......................................................400,000 600,000Variable 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.........................................................................350,000 350,000Fixed 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 210,000Add: 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

Year 1 Year 2 Year 3Sales P1,000,000 P 800,000 P1,000,000Less variable expenses:

Variable cost of goods sold @ P4 per unit 200,000 160,000 200,000

Variable selling and administrative @ P2 per unit 100,000 80,000 100,000

Total variable expenses 300,000 240,000 300,000 Contribution margin 700,000 560,000 700,000 Less fixed expenses:

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Fixed manufacturing overhead 600,000 600,000 600,000Fixed selling and administrative 70,000 70,000 70,000

Total fixed expenses 670,000 670,000 670,000 Net operating income (loss) P 30,000 P(110,000) P 30,000

Requirement 2

a.Year 1 Year 2 Year 3

Variable manufacturing cost P 4 P 4 P 4Fixed manufacturing cost:

P600,000 ÷ 50,000 units 12P600,000 ÷ 60,000 units 10P600,000 ÷ 40,000 units 15

Unit product cost P16 P14 P19

b.

Variable costing net operating income (loss) P30,000 P(110,000) P 30,000

Add (Deduct): Fixed manufacturing overhead cost deferred in inventory from Year 2 to Year 3 under absorption costing (20,000 units × P10 per unit) 200,000 (200,000)

Add: Fixed manufacturing overhead cost deferred in inventory from Year 3 to the future under absorption costing (10,000 units × P15 per unit) 150,000

Absorption costing net operating income (loss) P30,000 P 90,000 P(20,000)

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 company’s net operating income rose even though sales were down.

Requirement 4

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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 3’s 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 Year 2 Year 3Sales P1,000,000 P 800,000 P1,000,000Less cost of goods sold:Cost of goods manufactured @ P16 per unit 800,000 640,000 * 800,000Add underapplied overhead 120,000 ** Cost of goods sold 800,000 760,000 800,000

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Gross margin 200,000 40,000 200,000Selling and administrative expenses 170,000 150,000 170,000 Net operating income (loss) P 30,000 P(110,000) P 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 Year 2Direct materials P11 P11Direct labor 6 6Variable manufacturing overhead 3 3Fixed manufacturing overhead

(P120,000 10,000 units) 12(P120,000 6,000 units) 20

Unit product cost P32 P40

Requirement 1 (b)

The absorption costing income statements follow:

Year 1 Year 2Sales (8,000 units x P50 per unit) P400,000 P400,000Cost of goods sold:

Beginning inventory P 0 P 64,000Add cost of goods manufactured

(10,000 units x P32 per unit; 6,000 units x P40 per unit) 320,000 240,000

Goods available for sale 320,000 304,000Less ending inventory

(2,000 units x P32 per unit; 0 units x P40 per unit) 64,000 256,000 0 304,000

Gross margin 144,000 96,000Selling and administrative expenses 102,000 102,000

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(8,000 units x P4 per unit + P70,000)

Net operating income P 42,000 P (6,000)

Requirement 2 (a)

Under variable costing, only the variable manufacturing costs are included in unit product costs:

Year 1 Year 2Direct materials P11 P11Direct labor 6 6Variable manufacturing overhead 3 3Unit product cost P20 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.

Year 1 Year 2Sales (8,000 units x P50 per unit) P400,000 P400,000Variable expenses:

Variable cost of goods sold(8,000 units x P20 per unit) P160,000 P160,000

Variable selling and administrative (8,000 units x P4 per unit) 32,000 192,000 32,000 192,000

Contribution margin 208,000 208,000Fixed expenses:

Fixed manufacturing overhead 120,000 120,000Fixed selling and administrative

expenses 70,000 190,000 70,000 190,000Net operating income P 18,000 P 18,000

Requirement 3

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The reconciliation of the variable and absorption costing net operating incomes follows:

Year 1 Year 2Variable costing net operating income P18,000 P18,000Add 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) (24,000)

Absorption costing net operating income P42,000 P(6,000)

Problem 6 (Variable Costing Income Statement; Reconciliation)

Requirement 1

Sales (40,000 units × P33.75 per unit)........................................ P1,350,000Variable 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................................................250,000Fixed selling and administrative expenses............................... 300,000 550,000

Net operating income.................................................................. P 40,000

* Direct materials...................................................... P10Direct labor............................................................ 4Variable 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:

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Variable costing net operating income...............................................................P40,000Add: Fixed manufacturing overhead cost deferred in

inventory under absorption costing: 10,000 units × P5 per unit in fixed manufacturing overhead cost..................................................... 50,000

Absorption costing net operating income..........................................................P90,000

IV. Multiple Choice Questions

1. D 11. B2. B 12. A3. B 13. C4. B 14. D5. B 15. B6. C 16. A7. A 17. C8. B 18. C9. A 19. B10. A 20. C

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chapter 12 - answer

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