Responsibility Accounting and Transfer Pricing

(C. Variable Costing & Segmented Reporting)

A.
B.
B.
C.

sales less variable costs

sales less variable
total budgeted costs based on long-term expected use of the service
total budgeted

Direct materials
P10,000
Direct labor
20,000
Variable manufacturing overhead
5,000
Variable selling and general
3,000
Fixed manufacturing overhead
9,000
Fixed selling and general
4,000
Total
P51,000
What are the unit costs under absorption and variable costing methods, respectively?
A. P5.10; P3.80
C. P4.40; P3.50
B. P3.80 P5.10
D. P3.50: P4.40

:
Beginning inventory
Ending inventory
Direct labor per unit
Direct materials per unit
Variable overhead per unit
Fixed overhead per unit
Variable selling costs per unit
Fixed selling costs per unit
What is the value of ending inventory using the variable costing method?
A. P155,000
C. P100,000
B. P125,000
D. P195,000

0 units
5,000 units
P10
8
2
5
6
8

Difference in income
iii
. Consider the following:
Sales price, per unit
P18 per unit
Standard absorption cost rate
P12 per unit
Standard variable cost rate
P8 per unit
Variable selling expense rate
P2 per unit
Fixed selling and administrative expenses
P40,000
Fixed manufacturing overhead
P60,000
Last period, 13,000 units were produced. In the current period, 15,000 units were produced.
In each period, 13,000 units were sold. What is the difference in reported income under
absorption and variable costing for the current period?
A. The variable-costing income exceeded absorption-costing income by P4,000.
B. The absorption-costing income exceeded variable-costing income by P8,000.
C. The variable-costing income exceeded absorption-costing income by P6,000.
D. Net income will not be different between the two methods.

Absorption costing
Gross margin
i
. A company manufactures a single product for its customers by contracting in advance of
production. Therefore, the company only produces units that will be sold by the end of each
period. During the last period, the following sales were made and costs incurred:
1,300
Insurance (2/3 factory, 1/3 office)
1,200
Office supplies
750
Advertising
700
Depreciation on office equipment
500
Interest on loan
300
Based on the above data, the gross margin percentage for the last period (rounded to nearest
percent) was
A. 41%
C. 46%
B. 44%
D. 49%

iv

Variable costing vs. Absorption costing

Unit costs
ii
. During May, Roy Co. produced 10,000 units of Product X. Costs incurred by Roy during May
were as follows
157

The Blue Company has failed to reach its planned activity level during its first two years of
operation. The following table shows the relationship between units produced, sales, and
normal activity for these years and the projected relationship for Year 3. All prices and costs
have remained the same for the last two years and are expected to do so in Year 3. Income
has been positive in both Year 1 and Year 2.
Units Produced
Sales
Planned Activity
Year 1
90,000
90,000
100,000
Year 2
95,000
95,000
100,000
Year 3
90,000
90,000
100,000

Responsibility Accounting and Transfer Pricing

(C. Variable Costing & Segmented Reporting)

Because Blue Company uses an absorption costing system, one would predict gross margin
for Year 3 to be
A. Greater than Year 1.
C. Equal to Year 1.
B. Greater than Year 2.
D. Equal to Year 2.
Reconciliation
Income under absorption costing
v
. A company had income of P50,000 using direct costing for a given period. Beginning and
ending inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring
income taxes, if the fixed overhead application rate were P2.00 per unit, what would the
income have been using absorption costing?
A. P40,000
B. P50,000
C. P60,000
D. Cannot be determined from the information given.
Income under variable costing
vi
. Luna Company had income of P65,000 using absorption costing for a given period.
Beginning and
Use this
B. Equal to the fixed costs incurred.
D. Underapplied by P80,000
vii

. Reported net income (or loss) for the first six months under absorption costing would be
A. P160,000
C. P 80,000
B. P 40,000
D. P (40,000)

viii

ix

. Reported net income (or loss) for the firs six months under direct costing would be
A. P144,000.
C. P 72,000
B. P0
D. P(36,000)

Assuming that 90,000 units of Product X were sold during the first six months and that this is
to be used as a basis, the revised budget estimate for the total number of units to be sold
during this year would be
A. 360,000.
C. 240,000
B. 200,000.
D. 300,000

158

ii

iii

Answer: C
Sales
Cost of goods sold
Direct materials
Direct labor
Rent (0.9 x P3,000)
Depreciation
Supervision (2/3 x P1,500)
Insurance (2/3 x P1,200)
Gross margin
Gross margin percentage (P18,400 P40,000)

P40,000
P9,050
6,050
2,700
2,000
1,000
800

Answer: C
Direct materials
Direct labor
Variable overhead
Total variable product cost
Variable unit cost (P35,000 10,000)
Add Fixed overhead per unit (P9,000 10,000)
Absorption unit cost

(21,600)
P18,400
46%
P10,000
20,000
5,000
P35,00
P3.50
0.90
P4.40

Answer: B
Fixed overhead rate per unit:
P12 P8
P4
Difference in income:
2,000 x P4
P8,000
During the current year, the companys production equaled the budgeted. The inventory increased.
absorption costing income is higher than the variable costing income.

Therefore,

iv

. Answer: C
The production and unit sales during year 3 matched with year 1.

. Answer: C
The income under absorption costing is higher by P10,000 because the amount of fixed overhead that related to unsold
units was deferred and was included as cost of finished goods inventory. The variable costing income statement
immediately wrote the entire fixed overhead that was incurred during the year as period cost.
Fixed overhead deferred as product cost: 5,000 x P2
P10,000
Absorption income
(P50,000 + P10,000)
P60,000

vi

vii

viii

ix

Answer: C
Absorption income
Less Fixed Overhead in decrease in inventory
Income, Variable costing

(18,000 15,000) x 2.50

Answer: B
Sales (60,000 x P8)
Cost of goods sold (60,000 x P4)
Gross profit
Selling and other expenses (60,000 x 2) + P80,000
Absorption profit
Answer: B
Total contribution margin (60,000 x P3)
Less: Fixed manufacturing OH
Fixed selling and other expenses
Variable costing profit
CM per unit (P1.6M P0.6M P0.4M) 200,000)

65,000
12,500
52,500
P480,000
240,000
240,000
200.000
P 40,000
P180,000

P100,000
80,000

180,000
NIL
P3.00