MASTERS TECHNOLOGICAL INSTITUTE OF MINDANAO M. Badelles Sr. St.

,
Cor. Actub St., Poblacion, Iligan City 9200
Tel No: (062) 228-2602 / (062) 221 - 6472
Email: [email protected]

Name: Achmadjan N. Lucman Year & Block: 3rd year- A

MODULE 3 PRACTICE PROBLEMS – Variable Costing

Problem 1:
Ybanez Industries manufactures a unique device that is used by internet users to boost Wi-Fi signals.
The following data relates to the first month of operation:

Beginning inventory: 0 units

Units produced: 40,000 units
Units sold: 35,000 units
Selling price: P120 per unit

Marketing and administrative expenses:

Variable marketing and administrative expenses per unit: P4
Fixed marketing and administrative expenses per month: P1,120,000

Manufacturing costs:
Direct materials cost per unit: P30
Direct labor cost per unit: P14
Variable manufacturing overhead cost per unit: P4
Fixed manufacturing overhead cost per month: P1,280,000

Management is anxious to see the success as well as profitability of newly designed unique booster.

Required:
1. Calculate unit product cost and prepare income statement under variable costing system and
absorption costing system.

The production cost per unit are as follows:

Item Description Absorption Costing Variable Costing

Direct Materials P 30.00 P 30.00
Direct Labor P 14.00 P 14.00
Variable Manufacturing Overhead P 4.00 P 4.00
Fixed Manufacturing Overhead P 32.00 -
(P P1,280,000/40,000units)
Total Production Cost P 80.00 P 48.00
2. Prepare income statement under two costing system.

b. Variable Costing

Ybanez Industries
Income Statement – Variable Costing
Septemeber 19, 2020
Sales (P 120 x 35,000units) P 4,200,000
Less: Cost of Sales
Inventory, Beginning P 0
Inventory Produced (40,000units x P 48) P 1,920,000
Goods Available for Sale P 1,920,000 ,
Inventory, End (5,000unitsx P 48) P 240,000
Variable Manufacturing Cost P 1,680,000
Variable Marketing & Administrative Expenses
(35,000units x P 4) P 140,000 P 1,820,000
Contribution Margin P 2,380,000
Fixed Manufacturing Overhead P 1,280,000
Fixed Marketing & Administrative Expenses
P 1,120,000 P 2,400,000
Operating Loss P (20,000)

b. Absorption Costing

Ybanez Industries
Income Statement – Absorption Costing
Septemeber 19, 2020
Sales (P 120 x 35,000units) P 4,200,000
Less: Cost of Sales
Inventory, Beginning P 0
Inventory Produced (40,000units x P 80) P 3,200,000
Goods Available for Sale P 3,200,000 ,
Inventory, End (5,000units x P80) P 400,000 P 2,800,000
Gross Profit P 2,400,000
Less: Expenses
Variable Marketing & Administrative Expenses
(35,000 x 4) P 140,000
Fixed Marketing & Administrative Expenses
P 1,120,000 P 1,260,000
Operating Income P 140,000

Problem 2:
Golden Crown Manufacturing Company presents the following data for year 2016:

Opening inventory: 0 Units

Sales: 8,000 Units
Production: 10,000 Units
Closing inventory: 2,000 Units
Direct materials: P240
Direct labor: P280
Variable manufacturing overhead expenses: P100
Variable selling and administrative expenses: P40
Fixed manufacturing overhead expenses: P1200,000
Fixed selling and administrative expenses: P800,000

Required:

Using the data given above, compute the unit product cost of one bike under:

1. Absorption costing system.

2. Variable costing system.

The production cost per unit are as follows:

Item Description Absorption Costing Variable Costing

Direct Materials P240.00 P240.00
Direct Labor P280.00 P280.00
Variable Manufacturing Overhead P100.00 P100.00
Fixed Manufacturing Overhead P120.00
(P 1,200,000/ 10,000units)
Total Manufacturing Cost P740.00 P620.00

Problem 3:
Margaret Heavy Industries Company manufactures and sells premium tomato juice by the gallon. The
company just finished its first year of operations. The following data relate to this first year:

The number of gallons produced - 75,000

The number of gallons sold - 70,000
Sales price - P3.00 per gallon
Unit product cost under variable costing - P1.45 per gallon
Total contribution margin - P84,000
Total fixed manufacturing overhead cost - P63,000
Total fixed selling and administrative expense - P10,500

Required:

1. Using the absorption costing method, prepare the company's income statement for the year.

Margaret Heavy Industries Company

Income Statement – Absorption Costing
September 19, 2020
Sales (P 3 x 70,000units) P 210,000
Less: Cost of Sales
Inventory, Beginning P 0
Inventory Produced (75,000units x P 2.29) P 171,750
Goods Available for Sale P 171,750 ,
Inventory, End (5,000units x P 2.29) P 11,450 P 160,300
 Gross Profit P 49,700
Less: Expenses
Variable Selling & Administrative Expenses
(70,000units x P .35) P 24,500
Fixed Selling & Administrative Expenses
P 10,500 P 35,000
Operating Income P 14,700

*Fixed Manufacturing Overhead/units:

Fixed Manufacturing Overhead/units produced: P 63,000/ 75,000units
= P 0.84

*Total Production Cost/Unit: Variable Production Cost/unit + Fixed Manufacturing Overhead/units

= P 1.45 + P 0.84
= 2.29

2. Using the variable costing method, prepare the company's income statement for the year.

Margaret Heavy Industries Company

Income Statement – Variable Costing
Sales (P 3/70,000units) P 210,000
Less: Cost of Sales
Inventory, Beginning P 0
Inventory Produced (75,000units x P 1.45) P 108,750
Goods Available for Sale P 108,750 ,
Inventory, End (5,000units x P 1.45) P 7,250
Variable Production Cost P 101,500
Variable Selling & Administrative Expenses
(70,000units x P 0.35) P 24,500 P 126,000
Contribution Margin P 84,000
Less: Fixed Cost & Expense
Fixed Selling & Administrative Expenses
P 10,500
Fixed Manufacturing Overhead
P 63,000 P 73,500
Operating Income P 10,500

3. For decision making purposes, which is the better method? Why?

For decision making purpose, the method is Variable Costing System. The fixed manufacturing
overhead is going to be incurred no matter how much is produced. In the long run, a business must
recover those cost to survive. But, on a case-by-case, including fixed manufacturing overhead in a
product cast analysis can result in some very wrong decisions.
Assume that a company produces 10,000 units of a product, and per unit costs are P2 for
direct material, P3 for direct labor, and P4 for variable factory overhead. In addition, fixed factory
overhead amounts to P10,000. The product cost under absorption costing is P10 per unit, consisting
of the variable cost components (P2+P3+P4 = P9). Variable costing suggests a profit of P0.50, and
the information appears to support a decision to make the sale. Management may well decide to sell
the addition unit at P9.50 and produce an addition P0.50 for the bottom line. Remember, no other
cost will be generated by accepting this proposed transaction.

Problem 4:
The following data are available for 2001 from the accounting records of Baxter Company:

Units in beginning inventory 0

Units produced 20,000
Units in ending inventory 4,000
Selling price per unit P20
Manufacturing costs
Direct materials (per unit) P4
Direct labor (per unit) P2
Variable overhead (per unit) P1
Fixed overhead (total) P60,000
Selling and Administrative expenses
Variable (per unit) P3
Fixed (per unit) P40,000

Required:

1. Compute the following using absorption costing and variable costing (a) unit cost, (b) cost of goods
sold, and (c) ending inventory.

a. The production cost per unit are as follows:

Item Description Absorption Costing Variable Costing

Direct Materials P 4.00 P 4.00
Direct Labor P 2.00 P 2.00
Variable Production Overhead P 1.00 P 1.00
Fixed Production Overhead P 3.00 -
(60,000/20,000)
Total Production Cost P 10.00 P 7.00

b. The Cost of Goods Sold are as follows:

Baxter Company
Income Statement – Variable Costing
Sales (P 20 x 16,000units) P 320,000
Less: Cost of Sales
Direct Materials (16,000units x P 4) P 64,000
Direct Labor (16,000units x P 2) P 32,000
Overhead (16,000units x P 1) P 16,000 P 112,000
Cost of Goods Sold P 208,000

Baxter Company
 Income Statement – Absorption Costing
Sales (P 20 x 16,000units) P 320,000
Less: Variable Cost & Expenses
Direct Materials (16,000units x P 4) P 64,000
Direct Labor (16,000units x P 2) P 32,000
Variable Overhead (16,000units x P 1) P 16,000
Variable Selling & Administrative
Expense (16,000units x P 3) P 48,000 P 160,000
Cost of Goods Sold P 160,000

c. The Ending Inventory are as follows:

Item Description Absorption Costing Variable Costing

Direct Materials P 4.00 P 4.00
Direct Labor P 2.00 P 2.00
Variable Overhead P 1.00 P 1.00
Fixed Overhead (P 60,000/20,000units) P 3.00
Total Production Cost P 10.00 P 7.00
Units in Ending Inventory 4,000units 4000units
Value of Inventory End (P 10 x 4,000units) P 40,000
(P 7 x 4,000units) P 28,000

2. Prepare an income statement using (a) absorption costing and (b) variable costing.

Baxter Company
Income Statement – Absorption Costing
For the Year Ended 2001
Sales (P 20 x 16,000units) P 320,000
Less: Cost of Sales
Direct Materials (16,000units x P 4) P 64,000
Direct Labor (16,000units x P 2) P 32,000
Fixed & Variable Overhead (16,000units x P 4) P 64,000 P 160,000
Gross Profit P 160,000
Less: Expenses
Variable Selling & Administrative Expenses
(16,000units x P 3) P 48,000
Fixed Selling & Administrative Expenses
P 40,000 P 88,000
Operating Income P 72,000

Baxter Company
Income Statement – Variable Costing
For the Year Ended 2001
Sales (P 20/16,000units) P 320,000
Less: Variable Cost & Expenses
Direct Materials (16,000units x P 4) P 64,000
 Direct Labor (16,000units x P 2) P 32,000
Variable Overhead (16,000units x P 1) P 16,000
Variable Selling & Administrative Expense
(16,000units x P 3) P 48,000 P 160,000
Contribution Margin P 160,000
Less: Fixed Costs & Expenses
Fixed Overhead P 60,000
Fixed Selling & Administrative Expenses
P 40,000 P 100,000
Operating Income P 60,000

Problem 5:
Maxwell Department has three segments: clothing, shoes, and appliances. The following information
is available for 2001. (Amounts are in thousands of pesos)

Clothing Shoes Appliances

Sales revenue 90,000 36,000 50,000

Variable costs 54,000 19,000 32,000
Direct fixed costs 7,500 3,200 6,000
Indirect fixed costs 9,000 3,600 5,000

Common fixed costs are allocated to the segments in the proportion of sales revenues.

Required:
Prepare a segmented income statement using the variable costing approach.

CLOTHING

Maxwell Department
Income Statement – Variable Costing
For the Year Ended 2001
Sales P 90,000
Less: Variable Cost & Expenses
Variable Costs P 54,000
Contribution Margin P 36,000
Less: Fixed Costs & Expenses
Direct Fixed Costs P 7,500
Indirect Fixed Costs
P 9,000 P 16,500
Operating Income P 19,500

SHOES

Maxwell Department
Income Statement – Variable Costing
For the Year Ended 2001
Sales P 36,000
 Less: Variable Cost & Expenses
Variable Costs P 19,000
Contribution Margin P 17,000
Less: Fixed Costs & Expenses
Direct Fixed Costs P 3,200
Indirect Fixed Costs
P 3,600 P 6,800
Operating Income P 10,200

APPLIANCES

Maxwell Department
Income Statement – Variable Costing
For the Year Ended 2001
Sales P 50,000
Less: Variable Cost & Expenses
Variable Costs P 32,000
Contribution Margin P 18,000
Less: Fixed Costs & Expenses
Direct Fixed Costs P 6,000
Indirect Fixed Costs
P 5,000 P 11,000
Operating Income P 7,000