Andi Glenn C.
Sabellano
MAS
Handout 4
Exercise 1
1. > Absorption Costing
Product Cost per Unit = DM + DL + Variable OH + Fixed OH (units) = P40/u + P20/u + P14/u +
P400,000 / 20,000 = P74/u + P20/u = P94/u
> Variable Costing
Product cost per unit = DM + DL + Variable OH = P40/u + P20/u + P14/u = P74/u
2. > Absorption
FG, end = 20,000 - 18,000 = 2,000 units 2,000 x P94/u = P188,000
> Variable
2,000 x P74/u = P148,000
3. > Absorption
Sales (18k x 100) P 2,880,000
Less: COGS (18k x 94) (1,692,000)
Gross Profit 1,188,000
Less: Selling & Admin.
Costs Fixed Sell. & Admin. Costs (750,000)
Variable Sell. & Admin. Costs (18k x 12) (216,000)
Net Income P 222,000
Variable Costing
Sales:
₱ 2,880,000
Less: Variable Costs
Variable Manufacturing: (1,332,000)
Variable Selling & Admin: (216,000)
Contribution Margin: ₱ 1,332,000
Less: Fixed Cost
Fixed Manufacturing OH: (400,000)
Fixed Selling & Admin: (750,000)
Net Income: ₱ 182,000
The ₱ 40,000 difference in income is the fixed manufacturing overhead which is deferred in
inventory under absorption costing.
Throughput Margin
Throughput Margin = Sales - Direct Materials
= 2,880,000 - (40 × 18,000)
= 2,160,000
Throughput Income
Throughput Income = Throughput Margin - All Other Costs
= 2,160,000 - (360k + 250k + 216k + 400k + 750k)
= 182,000
Exercise 2
Units Produced = Units Sold + Ending Inventory - Beginning Inventory
= 540K + 40K - 30K
= 550K
Fixed MOH/u = ₱ 0.7/u
= (₱ 420K / 600K)
Total Cost per unit = Variable Cost + Fixed MOH/u
₱ 3.7 = ₱ 3 + ₱ 0.7
Absorption Costing
Sales (540K × 5) = 2,700,000
Less: COGS
Beginning Inventory: 311,000
FGOM: 2,035,000
Less: Ending Inventory: (149,000)
COGS: (1,998,000)
Gross Profit: 702,000
Less: Operating Expenses
Variable Selling & Admin: (540,000)
Fixed Selling & Admin: (120,000)
Net Income: 42,000
Variable Costing
Sales: 2,700,000
Less: Variable Costs
Variable Manufacturing (540K × 3) = (1,620,000)
Variable Selling & Admin = (540,000)
Contribution Margin: 540,000
Less: Fixed Costs
Fixed MOH = (420,000)
Fixed Selling & Admin = (120,000)
Net Income= 0
Exercise 4
Fixed MOH/u = 300K ÷ 30 = 10
VC/u = 25
Total Cost/u = 25 + 10 = 35
COGS = 40,000 × 35 = 1,400,000
Change in Inventory = Units Produced - Units Sold
10 K = 30K - 40K
Absorption Costing
Sales (40K × 60) = 2,400,000
Less: COGS
(40K × 35) = (1,400,000)
Gross Profit: 1,000,000
Less: Operating Expenses
Variable (40K × 5) = (200,000)
Fixed = (100,000)
Net Income: 700,000
Net Income in Variable Costing:
= 700K + (Change in Inventory × Fixed MOH/u)
= 700K + (10,000 × 10)
= 800,000 (Production < Sales)
Exercise 5
1. Variable Costing
Sales (750K × 1.000) = ₱ 750,000
Less: Variable Costs
Variable Manufacturing (750 × 200) = (150,000)
Variable Selling & Admin = (180,000)
Contribution Margin: 420,000
Less: Fixed Costs
Fixed Manufacturing OH = (120,000)
Fixed Selling & Admin = (100,000)
Net Income: ₱ 200,000
2. Explanation of Income Difference
The difference in net income is caused by the fixed manufacturing overhead in ending inventory.
Income Difference = Inventory, End × Fixed OH/u
= (800 - 750) × 125 (Production > Sales)
= ₱ 6,250
Net Income in Absorption Costing
= Variable Costing Net Income + Income Difference
₱ 206,250 = ₱ 200,000 + ₱ 6,250
Exercise 7
Since the reported finished goods inventory is ₱ 300,000, the company is using Variable Costing
as shown in the computation below:
Product/Variable Cost = DM + DL + Var. OH
= 10 + 30 + (50 × 0.2)
= 60/u
Inventory, End = Produced units - Sold units
= 50,000 - 45,000
= 5,000 units
FG, End = 5,000 × 60/u = ₱ 300,000
Under GAAP/IFRS, finished goods inventory must be reported under Absorption Costing.
Hence, ₱ 300,000 is not the correct amount for external reporting.
b. FG, End = 5,000 × 68/u = 340K
(Calculation breakdown: 10 + 30 + 20 + 8)
(Comparison: 400K/50K)
Exercise 6
Absorption Costing
Total Absorption Cost/u = Var. Manufacturing Cost + Fixed MOH/u
= 25 + (60,000 ÷ 22,000)
= 27.73/u
Sales - COGS - Operating Expenses = Income
(18,000 × 50) - [(18,000 × 27.73) + [(4 x 18) + 24,000]
= 900,000 - 499,140 - 96,000
= ₱ 304,860
Variable Costing
Sales - Variable Cost - Fixed Costs = Income
(18,000 × 50) - [(18,000 × 29) - (60K + 24K)]
= 900,000 - 522,000 - 84,000
= ₱ 294,000
2. Break-even Point (BEP)
BEP (units) = Total Fixed Costs ÷ CM per unit
= ₱ 84,000 ÷ 21
= 4,000 units
3. Margin of Safety (MOS)
MOS = Actual Sales - BE Sales
= 18,000 - 4,000
= 14,000
MOS Ratio = (MOS ÷ Actual Sales) × 100%
= (4,000 ÷ 18,000) × 100%
= 77.78%
4. Pre-tax Profit Calculation
Pre-tax Profit = (1 - 0.25) × Total Fixed Costs
= 252K
= ₱ 336,000
Req. Sales = Total Fixed Costs + Pre-tax Profit
= 84K + 336K
= ₱ 920K
= 20K units (using CM per unit = 21)
5. Sales Calculation
Sales - (Variable Cost Ratio × Sales) = Fixed Costs
(Assuming 70% Sales variable cost ratio)
Sales - (0.58 × Sales) = 84,000
100% Sales - 58% Sales = 84,000
42% Sales = 84,000
Sales = ₱ 700,000
