CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila -

MAS 8205
MANAGEMENT ADVISORY SERVICES

PRODUCT COSTING
ABSORPTION COSTING (also called_ .._.......
fullcosting, conventi6nal
......--- costing)
costing method that includes all manufacturing_c_osts (direct materials, direct labor, and both
• variable and fixed manufacturing overhead) in the cost of a unit of product. It treats fixed
manufacturing overhead as a product cost

VARIABLE COSTING (also called direct costing)

costing method that include • a - • : - • e. costs (direct materials, direct labor,
and variable manufacturing overhead) in the cost of a unit of product. It treats fixed
manufacturing overhead as a period cost

DISTINCTIONS BETWEEN PERIOD COSTS AND PRODUCT COSTS:

PERIOD COST PRODUCT COST
I. Refers to an item charged aoinst_current I. Refers to a - is a ez,a a • se
revenue on the basis of time period costing which is apportioned between
regardless of the difference between the sold and unsold units.
production and sales volume. •

2. Does not form part of the cost of 2. The portion of the cost, which has been
inventory allocated to the unsold units, becomes
part of the inveLitw.
3. Dirni ishes cur that portion
3. Diminishes income for the current period ' thereof identified witlithe sold units only
by its full amount with the re . a a - a,- a a a - - - a to til,
next accountingpd as part of the cost
of ending inventory.

PRINCIPAL DIFFERENCES BETWEEN VARIABLE AND CONVENTIONAL ABSORPTION

COSTING:
1
ABSORPTION COSTING VARIABLE COSTING
. Seldom segregates costs into Costs are segregated intasariable
. Cost segregation and fixed
variable and fixed_.........____........._
costs
Cost of inventory includes all the Cost of inventory includes only the
manufacturing costs: materials, variable manufacturing costs:
2. Cost of Inventor)/ materials, labor, and variable
labor, variable factory overhead,
and fixed factory overhead factory overhead
. Treatment of Fixed factory overhead is treated
Fixed factory overhead is treated
as product cost, as period cost
overhead
Distinouishes be tween variable
Distinguishes betwe n production - -
4 . Income and fixed costs.
and other costs. / -
statement

Net income between the two methods may differ from each other
because of the difference in the amount of fixed overhead costs
recognized as expense during an accounting period. This is due to
. Net income variations between sales and production. In the loncuun, however,
both methods give substanbail the same results since sales ca not
continuo exceed production nor aro uction can con Inua ex eed
sales
 MAS 8206 PRODUCT COSTING Page 2 of 12

DIFFERENCE IN NET INCOME UNDER ABSORPTION AND VARIABLE COSTING:

Variable and absorption costing methods of accounting for fixed. wsfacturing overhead result in
different levels of net income in most cases. The differences a •..rirling diffeti i.e., when to
recognize the fixed manufacturing overhead as an expense. In variable costing, it is expensed
during the period when the fixed overhead is incurred, while in absorption costing, it is expensed
in the period when the units to which such fixed overhead has been related are sold.

Production Equals Sales:

When productiorLis-equakto sales, there is no change in inventory . Fixed overhead expensed
under absorption costing equals fixed overhead expensed under variable costing. Therefore,
absorption costing income equals variable costing income.
•
Pioduction is Greater Than Sales
When production is greater than sales, there is an increase in inventory. Fixed overhead
expensed under absorption costing is less than fixed overhead expensed under variable costing.
Therefore, absorption income is greater than variable costing.

Production Is Less Than Sales -

When production is less than sales, there is decrease in Inventory . Fixed overhead expensed
under absorption is greater than fixed overhead expensed under variable costing. Therefore,
absorption income is less than variable costing income.

ARGUMENTS FOR THE USE OF VARIABLE COSTING

1. Variable costing reports are simpler and more understandable.
2. Data needed for break-even and cost-volume-profit analyses are readily eavailable.
3. The problems invol z• • • s;tins fixed costs are - iminated.
4. Varia • I- • Jog is more compatible with the standar stem.
5. Variable costing reports provide uierfut-i•nformation-ft lecisions and other decision-
making r.1 Is a * * rs, • • 1 • • aient

ARGUMENTS AGAINST VARIABLE COSTING

1. Segregation of costs into fixed and variable r .tt e inc ult, particularly in the case of mixed
costs.
2. The m._ him. • • ". * • • Zke 9 g variable costing which excludes fixed overhead
from product costs and charges the same to period costs regardless of production and sales.
3. With_vatiabie-costing, inventory costs and other related accounts, such as working capital,
current ratio, and acid-test ratio re ", ndersta eip because of the exclusion of fixed overhead in
the computation of product cost

THROUGHPUT COSTING (or SUPERVARIABLE COSTING)

An extreme form of variable costing in which only direct material costs are included as
inventoriable-eosts. All other costs are costs 0 le • .riod Ai* I • - incurred.

= Reven_ue - Direct material cost of he goods sold

EXERCISES:

1. The following data relate to a company's first year of operation, when 25,000 units were
produced and 21,000 units were sold.
Variable costs per unit:
Direct material • P50
Direct labor 30
Variable overhead 14
Variable selling costs 12
 MAS 8205 PRODUCT COSTING Page 3 of 12

Axed costs:
Selling and administrative P750,000
Manufacturing 500,000

Selling price P180

REQUIRED: 3gLit, OD° 3 0q, 006

1. Prepare income statements based on absorption and variable costing.
2. Compute the throughput margin and income under throughput costing.
2,, 130, 0 00 t a ged0()
2. A company uses an absorption costing system based on standard costs. Total variable
manufacturing costs, including direct materials costs, were P3 per unit; the standard
production rate was tOits r machine hour. Total budgeted and actual fixed
manufacturing overhead costs were P420,000. Fixed manu acturing overhead was allocated at
P7 per machine hour (P420,000 ÷, 60,000 machine hours of denominator level). Selling price is
P5 per unit. Variable marketing and administrative costs, which are driven by units sold, were
P1 per unit. Fixed marketing and administrative costs were P120,000. Beginning inventory in
2017 was 30,000 units; ending inventory was 40,000 units. Sales in 2017 were 540,000 units.
The same standard unit costs 'Persisted throughout 2016 and 2017. Actual variable
manufacturing costs incurred in 2017 were P1,600,000.

Required:
I. Prepare an income statement for 2017 assuming that all variances are written off directly
at year-end as an adjustment to Cost of Goods Sold.
2. The president has heard about variable costing. He asks you to recast the 2017 income
statement as it would appear under variable costing.
3. Explain the difference in operating income as calculated in requirements I and 2.

VIA 3. Livvanag, Ltd., manufactures tactical LED flashlights in Manila. The firm uses an absorption
costing system for internal reporting purposes; however, the company is considering using
variable costing. Data regarding planned and actual operations for 2017 follow:
RI trinintM rinctc
Actual Costs VCAr •
Per Unit Total
Direct material P 6.00 P 840,000 P 785,000 5,000UF
Direct labor 4.50 630,000 588,000 A0000
Variable manufacturing overhead 2.00 280,000 251,000 1,000 P
Fixed manufacturing overhead 2.„5.9,_ IS* 350,000 337,000 141,00otif
Variable selling expenses 4.00 560,000 500,000
Fixed selling expenses 3.50 490,000 490,000 i 3 21. 50 0
Variable administrative expenses 1.00 140,000 125,000
Fixed administrative expenses 1.50 23.0,00Q 212,500
Total F:25,1Q. icliaULLO palaQQQ

Planned Activity Actual Activity

Sales in units 140,000 125,000
Production in units 140,000 130,000
Beginning finished-goods inventory in units 35,000 35,000

The standard per-unit cost figures were based on the company producing and selling 140,000
units in 2017. A total manufacturing overhead rate of P4.50 per unit was employed for
absorption costing purposes in 2017. All variances are closed to the Cost of Goods Sold
account at the end of the year The 2017 beginning finished-goods inventory for absorption
--
costing purposes 1A /Mtra ued at the 2016 standard unit manufacturing cost, which was the
same as the 2017 standard unit manufacturing cost There are no work-in-process inventories
at either the beginning or the end of the year The planned and actual unit selling price for
2017 was 1)5 per unit.
 MAS 8206 PRODUCT COSTING Page 4 of 12

REQUIRED:
Was Liwanag's 2017 operating income higher under absorption costing or variable costing?
Why? Compute the following amounts.
1. Income under absorption and variable costing. Ay = P1,161,500; Vy = P1,149,000
2. The value of the 2017 ending finished-goods inventory under absorption costing and
under variable costing Abs = (40,000 x P15) = P600,000; Var (40,000 x P1250) = P500,000
3. The difference between Liwanag's 2017 reported operating income calculated under
absorption costing and calculated under variable costing. P12,500

1 4. Gramps' Remedy manufactures athletes' foot powder. The company uses a standard
costing system. Following are data pertaining to the company's operations for 2017:

Production for the year 175,000 units

Sales for the year (sales price per unit, P1.20) 170,000 units •

Beginning 2017 inventory 10,000 units

STANDARD COSTS TO PRODUCE I UNIT \tar .

Direct material P0.15
Direct labor 0.10 Lf 4, 500
Variable overhead . 3 0.05
Fixed overhead 0.20 45,000u pP

SELLING AND ADMINISTRATIVE COSTS

Variable (per unit sold) P0.14
Fixed (per year) P80,000

Fixed manufacturing overhead is assigned to units of production based on a

predetermined rate using a normal production capacity units per year The
actual fixed overhead cost incurred was equal to the budgeted amount during the year
Actual variable manufacturing costs incurred during the year amounted to P48 000. All
variances are closed to cost of goods sold.

a. What is the estimated annual fixed manufacturing overhead? 200,000 x 0. 20 = P40, 000
b. How much is income under absorption costing? Under variable costing?
P14,700; P13,700

V S. Kotsekotsehan Motors assembles and sells miniature toy motor vehicles and uses standard
costing. Actual data relating to April and May 2017 are as follows:

Unit data Apri[ May

Beginning inventory 0 150
Production 500 400
Sales 350 520

Variable costs:
Manufacturing cost per unit produced P10,000 P10,000
Operating (marketing) cost per unit sold 3,000 3,000

Fixed costs:
Manufacturing costs P2,000,000 P2,000,000
Operating (marketing) costs 600,000 600,000

The selling price per toy vehicle is P24,000. The budgeted level of production used to
calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price,
efficiency, or spending variances. Any production-volume variance is written off to cost of
goods sold in the month in which it occurs.
MAS 8205 PRODUCT COSTING Page 5 of 12

REQUIRED:
1. Prepare April and May 2017 income statements for Kotsekotsehan Motors under
(a) variable costing and (b) absorption costing. (a) P1,250,000; P3,120,000 (b)
P1,850,000; p2640,000
2. Prepare a numerical reconciliation and explanation of the difference between
operating income for each month under variable costing and absorption costing.
3. The variable manufacturing costs per unit of Kotsekotsehan Motors are as follows:

April May
Direct materials P6,700 P6,700
Direct labor 1,500 1,500
Factory overhead 1,800 1,800

Prepare income statements for Kotsekotsehan Motors in April and May of

2016 under throughput costing. P755,000; P3,516,000

6. The following information is available for Yamyam Company's new product line:
Sale price per unit P 15
Variable manufacturing cost per unit of production
Total annual fixed manufacturing cost 25,000
Variable administrative cost per unit
Total annual fixed and administrative expenses 15,000

There was no inventory at the beginning of the year. Normal capacity is 12,500 units.
During the year, 12,500 units were produced and 10,000 units were sold.

REQUIRED:
I.. Ending inventory, assuming the use of direct costing. 2,500 x P8 -= P20,000
2. Ending inventory, assuming the use of absorption costing. 2,500 x P10 = P25,000
3. Total variable cost charged to expense for the year, assuming the use of direct
costing. 10„000 x (P8 + P3) = P110,000
4. Total fixed cost charged to expense for the year, assuming the use of absorption
costing. (10,000x P2) + P15,000 ---, P35; 000

7. Lorrea Company was organized just a year ago. The results of the company's first year of
operations are shown below (absorption costing basis):

Le, RREA COMPANY

Income Statement --

Sales (2,000 units) P135,000

Less: Cost of goods sold/variable cost
Beginning inventory P -
Cost of goods manufactured JQQQQ
Goods available for sale P105,000
Ending inventory 21 000 JLQQQ
Gross margin 51 000
Less: Selling and administrative expenses .Q00
Net income P 9,20.11

The company's selling and administrative expenses consist of F3.2,000 or...year in fixed
expenses and P...5_42er_unitsold in variable expenses. The company's unit product cost is
computed as follows:

Variable manufacturing cost P32 .

Fixed manufacturing overhead (based on normal capacity of 2,500 units) 10
Unit product cost pj2
 MAS 8205 PRODUCT COSTING Page 6 of 12

REQUIRED: 1. Redo the company's income statement in the contribution format using
variable costing. Profit = P4,000
2. Reconcile any difference between the net income figure on your variable
costing income statement and the net income figure on the absorption
costing income statement above. 0/f in income = [500 x PIO] P5,000

8. The following information pertains to Nickos Company:

Maximum productive capacity 24,000 units per year
Normal capacity 20,000 units
Standard variable manufacturing cost per unit P10
Fixed factory overhead P40,0004
Variable selling expenses per unit P4
Fixed selling expenses P30,000
Unit sales price P20

2017 operating results:

Sales 19,000 units
Production 19,200 units
Net unfavorable variance for standard variable manufacturing cost P10,000
k ‘i
REQUIRED: 1. Income under both costing methods. P34,400; P34,000
2. Break-even point 11,666.67 units or P233,333.33
3. Margin of safety for 2013 7,333,33 UP&
4. Required sales to earn after-tax-profit of P140,000 (Tax rate is 30%).
P9004,000
. .
5. Required sales in pesos to earn profit of 10% of sales. P350, 000

ll 9. M. Raagas Company produces and sells a single product. The following costs relate to its
production and sales:
Variable costs per unit:
Materials P9
.
Labor 10
• Manufacturing overhead _ 5
Selling and administrative expenses 3

Fixed costs per year '

Manufacturing overhead P150,000
Selling and administrative expenses 400,000

During the year, 30,000 units were produced and 25,000 units were sold. The finished
Goods Inventory account at the end of the year shows a balance of P120,000 for • the
5,000 unsold units.

REQUIRED: 1. Is the company using absorption costing or ..v.grigtjg costing to cost

units in the Finished Goods inventory account?
2. Assume that the company wishes to prepare 'financial statements for
the year to issue to its stockholders. Is the P120,000 figure for Finished
Goods inventory the correct amount to Use on these statements for
external reporting purposes? Explain. No, `IC stiolat€s Matching
principlo,
t
'
0
10 . Ebony Company produces a single product. It !ises a standard absorption costing system
with a planned production volume of 200,000 units. During the period, no variances were
incurred and there were no fixed selling or administrative expenses. Inventory at the end
of the period was 40,000 higher than the inventory at the beginning of the period, and net
income for the year was P400,000.
 MAS 8205 • PRODUCT COSTING Page 7 of 12

If Blanco had used variable costing, its net income would have been P340,000.
200, 000 x S- (AO°
REQUIRED: Compute the breakeven point in units. 300,00° 75, 000 - LI " °°

L i
11. Els Company had net income for the first 10 months of the current year of P200,000.
They used a standard costing system, and there were no variances through October 31.
One un thousa.nd units were manufactured during the period, and 1140110....uRitse
,ja,....jil
were solci f. Fixed manufacturing overhead was riod. There are
no selling and administrative expenses for Els Company. All variances are disposed of at
year-end by an adjustment to cost of goods sold. Both variable and fixed costs are
expected to continue at the same rates for the balance ,he year (i.e., fixed costs at
P200,000 per month and variable costs at the same variaee cost per unit). There were
10,000 units in inventory on October 31. Eighteen thousand units are to be produced
and 22,000 units are to be sold in total over the last two months of the current year
Assume the standard unit variable cost is the same in the current year as in the previous
year. Di. 22

REQUIRED: 1. If operations proceed as described, will net income be higher under

variable or absorption costing for the current year in total? Variable costing
2. If operations proceed as described, what will net income for the year in
total be under: a) variable costing; and b) absorption costing? Ignore
income taxes. P284,000; P204,000

12. "Now this doesn't make any sense at all," said Florence Gale, financial vice president for
Warner Bros. Company. "Our sales have been steadily rising over the last several months,
but profits have been going in the opposite direction. In September we finally hit
P2,000,000 in sales, but the bottom line for that month drops off to a P100,000 loss. Why
aren't profits more closely correlated with sales?"

The statements to which Ms Gale was referring are shown below:

3iti1y Agaggt September

Sales (©P25) P1,750,000 P1,875,000 P2,000,000
Less cost of goods sold:
Beginning inventory 80_,011 320,000 _DIM
Cost applied to production:
Variable manufacturing costs z- 765,000 720,000 540,000
Fixed manufacturing overhead _ 595,000 560,000 42Q,000
Cost of goods manufactured 360,000 _41.8,L)
1 00Q 960,000

Goods available for sale 1,440,000 1,600,000 1,360,000

Less ending inventory •400,000 80,000
320,000
Cost of goods sold 1,:q0,000 1,200,000 1,280,000
Underapplieci or (overapplied) fixed
Overhead cost 0 511(K) • -0-
140,000
Adjusted cost of goods sold _IMISOO j.„2,SELQ__
00 el.„52_,0A_
V0
Gross margin 665,000 675,000 580,000
Less selling and administrative expenses 620MQ _____65.10.0 680,000
Net income (loss) P.,_45,110 0 P 25.000 Ella=

Harry Harp, a new graduate from a state university who has just been hired by Warner, has
stated to Ms. Gale that the contribution approach, with variable costing, is a much better
way to report profit data to management. Sales and production data for the last quarter
follow:
 MAS 8206 PRODUCT COSTING Page 8 of 12

July August September

Production in units 85,000 80,000 60,000
Sales in units 70,000 75,000 80,000

Additional information about the company's operations is given below:

a. Five thousand units were in inventory on July 1.
b. Fixed manufacturin9 overhead costs total Pl. 680S100 Der quarter and are incurred
_ jjytirou hout the quart er. This fixed manufacturing overhead cost is applied
eve
to units of product on the basis of a budgeted production volume of 80,000 units
per month. 7
C . Variable selling and adrninitrative expenses are P6 r unit sold. The remainder
orth-CsgIFFir— ici administrative expenses on the statements a ove are fixed.
d. The company uses a jf9jventory flow assunpo Warkio_pracess inventories
aregaig
• n'jf.c&i.
a. and can be ignored. _

"I know producOon is somewhat out of step with sales," said Karla Cortes, the company's
controller. "But we had to build inventory early in the quarter in anticipation of a strike in
September. Since the union settled without a strike, we then had to cut back production in
September in order to work off the excess inventories. The income statements you have
are completely accurate."

REQUIRED:
Ie Without preparing income statements, compute the income for each month using
variable costing. (60,000); (p.m 000); #040,000
2. Compute the monthly breakeven point under variable costing. 76,000
3. Explain to Ms. Gale why profits have moved erratically over the three-month period
shown in the absorption costing statements above and why profits have not been
more closely related to changes in sates volume.
4. Reconcile the variable costing and absorption costing net income (loss) figures for
each month.
5. Assume that the company had dedded to introduce JIT inventory methods at the
beginning of September. (Sales and production during July and August were as
shown above.)
a. How many units would have been produced during September under 3111 5&,0
b. Starting with the next quarter (October — December) would you expect any
difference between the income reported under absorption costing and under
variable costing? Explain why there would or would not be any difference. gb

WINDING UP RODUCT COSTING

C I. The term that means all manufacturing costs (direct and indirect, fixed and variable) which can
contribute to the production of the product, are traced to output and inventories is
a. job order costing c. absorption costing
b. process costing d. direct costing
,
The term that is most descriptive of the type of cost accounting often called direct costing is
a. out-of-pocket costing c. relevant costing
b. variable costing , d. prime costing
3. Costs treated as product costs under direct . .
Losting are .
t a. prime costs only c. all variable costs
b. variable production cost only d. all variable and fixed manufacturing costs

P 4. The basic assumption made in direct costing with respect to fixed costs is that fixed cost is
a. a controllable cost „ c. an irrelevant cost
b. a product cost ri. a period cost
 MAS 8205 PRODUCT COSTING Page 9 of 12
•
ft 5. Operating income computed using the direct costing would generally exceed operating income
computed using the absorption costing if
a. units sold exceed units produced
b. units sold are less than units produced
C. units sold equal units produced
d. the unit fixed cost is zero

ci 6. A company has operating 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. If the
fixed factory overhead application rate is P2 per unit, the operating income using the absorption
costing is:
a. P40,000 • C. P60,000
b. P50,000 d. Not determinable from the information
given

7. Absorption costing differs from variable costing in the:

a, fact that standard costs can be used with absorption costing but not with direct costing
b. kinds of activities for which each can be used to report
c. amounts of costs assigned to individual units of product
d. amount of fixed costs that will be incurred

tA6 8. When a firm uses direct costing

v a. the cost of a unit product changes because of changes in the number of units
manufactured.
b. profits fluctuate with sales.
c. an idle capacity variance is calculated by a direct costing method.
d. product costs include variable administrative costs.

C (9. When using direct-costing information, the contribution margin discloses the excess of
a. revenue over fixed cost
b. projected revenue over the break-even point
c. revenue over variable cost
d. variable over fixed cost

fk 10. Operating income under absorption costing can be reconciled to operating income determined
under direct costing by computing the difference between:
a. inventoried fixed costs in the beginning and ending inventories and any deferred over or
underapplied fixed factory overhead.
b. inventoried discretionary costs in the beginning and ending inventories
c, gross profit (absorption costing method) and contribution margin (direct costing)
d. sales recorded under the absorption costing method

44 1 Under the direct costing concept, unit groductcost would most likely be increased by
a. a decrease in the remaining useful life of factory machinery depreciated by the units-of-
production method
b. a decrease in the number of units produced
C. a decrease in the remaining useful life of factory machinery depreciated by the sum-of-
the-years-digits method
di an increase in the commission paid to sales persons for each unit sold.

ITEMS 12 and 13 ARE BASED ON THE FOLLOWING INFORMATION:

Selected information concerning the operations of Prima Donna Company for the year ended
December 31, 2017, is available as follows:
Units produced 10,000
Units sold 9,000
Direct materials used P40,000
Direct labor cost incurred 20,000
Fixed factory overhead 25,000
Variable factory overhead 12,000
Fixed selling and administrative expenses 30,000
Variable selling and administrative expenses 4,500
Finished goods inventory, January 1, 2015 None
 MAS 8206 PRODUCT COSTING Page 10 of 12

There were no_work-in-process inventories at the beginning and end of 2017.

A 12. What would be Prima Donna's finished goods inventory cost at December 31, 2017, under the
variable (direct) costing method?
a. P7,200 - c. P8,000
b. P7,650 d. P9,700

A, 13. Which costing method, absorption or variable, would show a higher operating income for 2017
and by what amount?
Costing method • Amount
a. Absorption costing P2,500
b. Variable costing P2,500
• c. Absorption costing P5,500
d. Variable costing P5,500

01 14. Jeanne Corporation began its operations on January I, 2017, and produces a single product
4' that sells for P9,00 per unit. India uses an actual (historical) cost system. 100,000 units were
produced and 90,000 units were sold in 2017. There was no work-in-process inventory at
December 31, 2017. Manufacturing costs and administrative expenses for 2017 were as
follows:

Fixed costs Variable costs

Raw materials – P 1.75 per unit produced
Direct labor P 125 per unit produced
Factory overhead P100,000 P 0.50 per unit produced
Selling and administrative 70,000 P 0.60 per unit sold

What would be Indiana's operating income for 2017 using the direct costing method?
a. P181,000 C. P231,000
b. P271,000 d. P371,000

a 15, Operating income using direct costing as compared to absorption costing would be higher
a. when the quantity of beginning inventory equals the quantity of ending inventory.
b. when the quantity of beginning inventory is more than the quantity of ending inventory.
C . when the quantity of beginning inventory is less than the quantity of ending inventory.
d. under no circumstances.

1, 16. When using full absorption costing, what costs attendant to an element of production (material,
tabor, and overhead) are used in order to compute variances from standard amount?
a. Controllable costs c. Variable costs
b. Total costs d. Fixed costs

• 7. What factor, related to manufacturing costs, causes the difference in net earnings computed
13 using absorption costing and net earnings computed using direct costing?
- a. Absorption costing considers ail costs in the determination of net earnings, whereas
direct costing considers only direct costs.
b. Absorption costing allocates fixed costs between cost of goods sold and inventories,
while direct costing considers all fixed costs to be period costs.
C . Absorption costing "inventories all direct costs, but direct costing considers direct costs
to be period costs.
d. Absorption costing Inventories" all fixed costs for the period in ending finished goods
inventory, but direct costing expenses all fixed costs.

18. A basic tenet of direct costing is that period costs should be currently expensed. What is the
— basic rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the amount to
specific products would outweigh the benefits.
C . Allocation of period costs is arbitrary at best and could to erroneous decisions by
management.
d. Period costs will occur whether or not production occurs and so it is improper to allocate
these costs to productions and defer a current cost of doing business.
 MAS 8205 • PRODUCT COSTING Page 11 of 12

ik 19. The contribution margin increases when sales volume remains the same and
a. variable cost per unit decreases, c. fixed costs decrease.
b. variable cost per unit increases. d. fixed costs increase.

ITEMS 20 and 21 ARE BASED ON THE FOLLOWING INFORMA TION:

Shinty Company began its operations on January 1, 2017, and produces a single product that
sells for P10.00 per unit. Shinly uses an actual (historical) cost system. In 2017, 100,000 units
were produced and 80,000 units were sold. There was no work-in-process inventory at
December 31, 2017. Manufacturing costs and selling and administrative expenses for 2017 /
were as follows:
Fixed costs Variable costs
Raw materials P 2.00 per unit
Direct labor e P 1.25 per unit
Factory overhead P120,000 • P 0.75 per unit
Selling and administrative 70,000 P 1.00 per unit

13 20. What would be Shinly's operating income for 2017 under the variable (direct) costing method?
a. P114,000 c. P234,000
b. P210,000 d. P330,000

21. What would be Shinly's finished goods inventory at December 31, 2017 under the absorption
V costing method?
a. P 80,000 C. P110,000 -
b. P104,000 d. P124,000

22. The production volume variance occurs when using •

a. the absorption costing approach because of production exceeding the sales.

b. the absorption costing approach because production differs from that used in setting the
fixed overhead rate used in applying fixed overhead to production.
c. the variable costing approach because of sales exceeding the production for the period.
d. the variable costing approach because of production exceeding the sales for the period.

pt 23. Dang & Company completed its first year of operations during which time the following
information were generated:
Total units produced 100,000
Total units sold 80,000 (at P100 per unit)
Work in process ending inventory
Costs:
Fixed costs
Factory overhead P1.2 million
Selling and administrative P0.7 million

Per unit variable costs

Raw materials P20.00
Direct labor 12.50
Factory overhead 7.50
Seffing and administrative 10.00

If the company used the variable (direct) costing method, the operating income would be
a. P2,100,000 c. P2,480,000
b. P4,000,000 d. P3,040,000

tk 24. For P1,000 per box, the Joan Products, Inc. produces and selis delicacies. Direct materials
are P400 per box and direct manufacturing labor averages P75 per box. Variable overhead is
P25 per box and fixed overhead is P12,500,000 per year Administrative expenses, all fixed,
run P4,500,000 per year With sales commissions of P100 per box. Production is expected to
be 100,000 boxes, which is met every year. For the year just ended, 75,000 boxes were sold.
What is the inventoriable cost per box using absorption costing?
a. P625 C. • P770
b. P500 P670

ti 25. If sales exceed production, one would expect net income under the variable costing method
a. to be the same as net incerne under the absorption costing method.
 MAS 8206 PRODUCT COSTING Page 12 of 12

b. to be greater than net income under the absorption costing method.

C . to be differing in as much as the difference between sales and production.
cl. to be less than net income under the absorption costing method.

tb 26. Vemz Writer produces and sells boxes of signing pens for P1,000 per box. Direct materials
are P400 per box and direct manufacturing labor averages P75 per box. Variable overhead is
P25 per box and fixed overhead is P12,500000 per year Administrative expenses, all fixed,
run P4,500,000 per year with sales commissions of P100 per box. Production is expected to
be 100,000 boxes, which is met every year For the year just ended, 75,000 boxes were sold.
What is the inventoriable cost per box using variable costing?
a. P770 c. P475
b. P500 d. P625

C. 27. Manny Co. reported the following per unit cost for the period just ended:
Direct materials • P20
Direct labor 24
Variable overhead
Fixed overhead 14
Variable selling & administrative 4
Fixed selling & administrative • 6

lf the company were using the absorption approach or cost-plus pricing, and adds a 50%
markup to price its product, the selling price per unit would be
a. P75. 0. P90.
b. P105. d. P 69.

.C 4, C 11. A 16. B 21. 13 1] 26. 6

2. B 7, C 12. A 17. B 22. B 27. C
3. B 8. 8 13. A 18. D 23. A
4. D 9. C 14. B JjA 24. A -
5. A _ 10. A 15. 6 j20 B 25. B