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ABSORPTON &VARHBLE C0STIftG MS-03: ABSORPTION COSTIIIG .

VARIABLE COSTING -

is a costing method that includes all manufacturing costs - direct materials, direct labor, variable and fixed factory oyerhead - in the cost of a unit of .product. It treats fixed factory overhead (FFOH)as a product cost. Absorption costing is also known as full costing. is a costing method that includes only variable manufacturing costs - direct materials, dired labor, and variable manufacturing overhead * in the cost of a unit of product. It treats FFOHas a period cost Variable costing is.also called dired costing'

PRODUCT rc. PERI(X) C(XIT A productcdst is an inventoriable cost that is subject to allocation between sold and unsold units. Current income is reduced only by the amount allsteited to the'sold unlts.

UNSOr.t)Ul{lTS.t S*t

(as Inventory)

) Expcnse(as Costof G@ds Saldl SOLD'UNITS A period co,stis a cost that is charged ai'exp€ns€ ogainst ipcome, reEardlessof the sates perfbrrnance. No allocaUon is necessary so current income is redgced by thB futl'amount of ttr€ perlod cost.

FULLYEXPET{SED in the period irrcurred ABSOR,PTIOilI vr. Yrfit*ELE GO$r'ril€ Invgrtoricc Under Sgorptiorl @stirig., SqH F a podrct ao64 nfse it is a padd cort uri&r variable costing. As a costhg is olways h,wct thgn the peso vahre of rcsult, thc Be$ value of idtrantptries under.varia& Inve ntdn-ef 6fff E|r.|GDrp$Gtr?oEilsl$ hfbndr il are incurred in order to have thc capdt Supporters of variable costing argftre that FRl}l gtt produce units in a gived per{od. Thctt costs arc Fxrfrt€d whethcr or not the capacity is acturlly utd f make output. thus, FFOH,having no ftrture s€Mtc po'Ential, shoulcl be chargredagainst th€ pGrfodand not tncluded in the product cost. Supporte6 gf absorptlon cdstfng, on the other trard, betiwe th6t all mahuficturtng costs -- variablc and fixed -- 6re necdssary for production to take pltce artd shouH not be Bhorta iri &tdt?fiiding product costs. AccGpt blltry Since trt*lng FFOHee rn *,r.fntoriabb cost is corlsistent wfth qccorrntlrg starsards, only'absorption coitirlg is acceptcbh br finaneirl reporting ard tax prrposes- Variable costing, which violates the 'rnatching prind#cr;r * e€sptrb}e lb finamhtl rrpoiting and tax purposes. Y NOTE: Matcfiing priaciflc b an accountiry princirlc th* cdE for the rcogr4ition of expense by matching it with the rc*ctttl revenqe in the same accounting period. It st pports the treatment of cost of sales as expense only,vdrnir rafrted urd,tshave.be€n,rold. Incomc statqnGrt An income stattfncftt preparcd under absorption costing distinguishes between production and other costs. Production c@s pertairting to Cotd,Unitsare-firct deducted from sales to arrive at gross profit, and then other costs are deducted to obtain net income.

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Under variable costing, the incorde statement dlsttngulshes b€tw€€n eariable and fixed costs. All variable costs are'fi'rst deducted-from ravenue to afhre rt th€ cofttilbuttoil fiargin, artd then fixed costs are deducted to obtain profit. I ' Income GomPutatlon Variable costing income may differ from absorption costing income kcause of t{re difeienee .in. the amount of FFOH recognired as exp€nse during an aceounting period. This is acturallycaused by th€ difference:between produetion and sales. In the long run, howsrer, both methods wsuld yi€ld thq,$r-ng resufts since sales cannot continuously exceed production, nor production can continuously exceed sales.(NOTE:the term "income'is liberallyused to mean'profit") Page 1 of4 pages

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& VARIABLECOSTING ABSORPTION

R,ECONCILIATIOT{OF I]{COTIIE UNDER AB$RPTION ANd VARIABLE G.OETIilG o T-hedifference between the absorption costing income ard variable costing income is primarily a timing difference-- when to recognizEthe FFOHas an expense. r . In vaiiable costing, it is expensed when FFOJ-Iis incurred, while in absohption costing, it is expFnsed in the periodwhen the relatedunits are sold. r The reiationshipbetween production and sales generatly indicate the following income pattems: 1. When production is equal to sales, there is no chairge in inventory. FFOHexpensed under dbsorption gosling (AC) equals,FFOHexpensedunder variable Costing(VC).

Incomeun&r AC= In@meur&r \tC

mADLtrnON = 94LES c=:}

Z. When production is gneater than sales, there is an increase in inventory. FFOH expensed . under absorption coiting is ,less thqn FFOH expensed under variable costing. Tlt€ref0fe, absorption income is greater than variable income'

IncomeunderAC> Inome underVC

PRODttClTgt> 94LES F+

3. When production is fess than sal'Os,there is a decr€as€ in irwentory. FFOI'IexperFed under absorption costing is grqater than FFOH expensed under variable costing. Therefore, absorption income is less Stan variabfe inorne.

tncomeurder AC< In@tne{JnderVC

PROBtEfIqt < SATES € o

METHODSof RECONCIUATION: Income, Absorptjoncosting Add; FFOHin beginning inventory Total Less: FFOHin ending inventory Income, Variable costing

Method 2 .

P xxx xxx P xxx (xxx)

A Incom€ = A Inventoryx FFOH/u

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ADV*'I?AG€3 OF USI||G VARIABT"ECOETIiG 1. Variabtecosting reports are simpler aid morl understandable. 2. The grohle*S i{w€fY€d +R*}b€st+ng fs€d €€rtt r+c t*im*r#. 3. Data neqded for bteak-even afid cost-vofurnFFpGt anahEcs ert readily- available.. 4. Variabte.bosting.isrnore.compdlHc wftfi thc *tandardrcost acountine svstqn. S. Var$ablecostinlireprts provide useful inferrnation for pricing decisions and other decislon-ngfttng probbms errcnuntercd bY managcment' DISADYATTA€!|S Of I.|3III€ YrIIAII.E C(}STI]IG 1, This costing is}not in accerdance with GAAP; heace, it ls not acceptSle for exFrnal rcporting. 2. SegregBtion of costs irtto fixed and variable might be difficult. 3. mi ntarcning principle is violated by using variable costing, which e$lA€s FFOH from produCt cgsb rnd charyes the same re perircd costs regsrdfess of productlon afid 3e83. 4. With variablb i6"tirtg; inventory costs and other related accounts, srch as wqrkiflg capitAl, current product cost.'

EN4VARTABI.E €QSTIRG, : ABSORFTIQHT €XERCISES 1. Adriel,€ompaFymcfbs';st*e-of-the-6rt. Oikints. €ach biklni *lls for P 1,ooo each. Data for 2013',s operationsafe as fiollorvs: UBiE.l

BeginningInventory Productioo Ending lrwentory

5 80 ,15

S.I"f

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Variable Costs; Oirect i'laterials Direct Labor Factory Overhead Sglling and Administrative FiN Costs: Factory Overhead Selling and Administrative-

P 20,000 2,000

x f' €

REQUIRED:

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A

/ .r' .r' X

P 24,000 16,000 8,000 4,000

.or*,no{@{u * ' &dl" I yf andvariabte ll'Tii"","ry costperunitunderabsoiption

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2 . Cost of ending inventory under absorption and variable costing' , 3 . Prepareincornestatements under absorption and variable costing. 4 . Prwide r€conciliation of income under the two costing methods. (Adapted : Managertal Ac&ufiting by Garrison,et.al.)

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SOLUTIQN 9UIDE to requirement1

ABSORPTIONCOSTING VARIABLEQOSTINQ Per Unit Per Unit Total

DM DtVFQH FFOH Tstal SOLUTIONGUIDEto requirement 3 ADRIELCOilPANY Income Staternent For the period of 2013

Sales - Costof sdles Gross'profit - Expen$es Net lncome

'. Sales : Variablecost Contributbn rnargin - Fixedcost Profit

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the booksof lrene Company,,"t i.r, 2 . Tfrefoflowinginforrnationt .ffirfrom ""ru.nffit-in, (FIFO),forinlentory cost flow: 2013 Inventory(in units) e012 - None??? Beginninginv€$tory 10,000units 9,00o units Production 1,00ounits 3,500 units _el$si_fte!_qg '-,* Sales (P 2 per unit) Variable manufacturing costs .(PO.75 -par'tnl) Fixd manrltactrri ng costs Selting and adrninistrative co'sts(gO% viri$+e)

. ??? P 7,500 P 5,OO0 P 4,500

first.out

??? P 6,750 p 5,400 P 7,500

R.EQUTfrED: 1. &termlne 2O12profit under variableand absorptioncosting. 2. Rtcrorrcife thc tfio income.figur€sin No. 1. 3. Dttefrntsrb2013 proft un&r variableafld absot?tioncocting. 4. Recoffiileth€ two $ncomefigurestn ttb. 3.

(A&ptad: Cost Aeounting by.Horngren, et.al.)

EOLUTIOI* S ANSIVEflSto item no. 3 '- ' 2013 ' , , ,.,. ." 1.o. 1.2 . .. , ,AMrptlon Variable.' Varlqble .Apso(fiion P 23,000 P P Sales 13,000 23,000 Sales P 13,000 Sales Sales (L2,375\ (7,1.25) (1s.175) (9;1"?51 vc vc ccs cGs . .P 10,625 P 5,875 GP P 7,825 cM P 4,875 CM GP (9,150) (7,500) FxC (4,5pq)- FxC (7,?5q) Expense Expense 32s Profit Income P:J*125. P Inrcme eJ&& E&5 loss 2012: CGS=615S0xP 1.25 = P8,125 VC i'(6,5,S0x PO.75) + (4,5O0x 500'6)'-?7,t25 Fxc * 5rS0 + (rt,500.{ 8o%l * P 7,250 Reconcitiation: Alncome = (3,5O0- 0) P0.50 = P 1,750 + 375 = (-1,375) 2OL3: CGS= (3,5OOxF 1.25) + (8,000xP 1.35) = P 15,175(usin$FIFO) VC = (11,500x P 0.75) + (7,500x 50o/o)= P L2,375 ' + (7,500 x 5oolo)= P 9,150 FxC -'5,490 Reconcitiatioii: A Income = A Inve0tory x FFOH/u 'be$irininginventory p1t2layer): 3,500 x P 0.50 = P 1,75O (600) 1,000 x P 0.60 = ending inventory(2013 layer): P 1,750 ) L,475- 325

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ABSORPTION& VARIABLECOSTING

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tfffia.rabsorption

(TRUEoR FALSE;MU4[BLE{HoICE).,*._.-\ EXERCISES WRAP-UP !*.r,nt ! '-"--t overheadtoiti are best describedas costing,fixed mqnufqcturing

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variable costing, fiXe4manufQcturing overhead Costsar€ best described as Z.Ander -' cj pirectproductcb-ss a. Directperiodioftl-'"-r \ +,,-.^l .' l-t h \/ d. tndirect product costs Indire& period costs , u fi. product variable. are costs all costing, Zz/Under variable

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variablecosting,all variableexBensesare treated as productcosts.

./' / iue pro*.rction crists arel-L?dand ired of 10,000 gnits. Whlte b.e-ganthe year with --''

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the unit ffiduct cost under variable costing c. P 35.00 P 2O.OO p '?:' d. P 40.00 32.50 b. ' .,K 6. Determine the unit product cost under absorption costing /#termine

a. P 20.00 y'b. P 32.sO 1/O*ermine the capacityor volumevariance ( unfavorable a. P 24,OOO b. ' P'24,0O0favorable

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P 35.00

P 40.00

c. P30

:f h P> NP :11

*P/MP

P 30,000 favorable -t: = production (actual - norinal productbn) x ur*t FFOH variance volume or capacity NOTE. { A. There b no voiume or capacity ybriance under variabfe costing. g. If productTon ts higher than sales, ttten abriorptitxr coctltlg lncornc is expected to be a. LOWeithan variable costing income 4'- Higher than variable costing income c. Egual to the variable costing income

d. Irrcomparablewith variablecostingincome 10. Blact CompanyprduCed 10,000 units and sold 9r0O0unlts. FixedmanufacturirUoyerncl{ cosB ffcf'e p 20,000, and vaHablemanufacturlngoverhed eS werc | 3 pcr unit. yvhtchof the followirE burt describesthe nrt income under the aBorpttoft €'Btf mctlpd? tncorw-|ro(E vlE|,g!h eosl$g ffithod _+ P a,ooo mg:salc*. b. P 5,000 morethan net incorneffidcr varirb*ecoctirigmethod ,, q. P 2;000 ]essthan net'incomeundervariatie dostingmdhod i,tw "n ' d. P 5,O0Olessttran nQtincomeundervariabl'ecosting geVu* - a SYcn perid._-Beginnlhg for using-dirccfqqFting P 5O,OOO income of f.f. e.eln Companyhas optreti@ and effttlg irwgnto66 fior thit period were 13,0O0unitsiitl-f.8,(X)O units, qspetively.. If the fixed factory ooirtteaOapplirationrate is P 2 per unit, then what is the operatingidcomeusing the absorption = I ' o CCa c osun f? 5 @v 2 P c. 50,n^^ a. P 70,OO0

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d' P40,;;;

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variable had 16,000units in its beginninginventory. Duringth6 year, the conlpany''s rz. -- r6iet ir.;-;; The unit. 4 were costs .P overhead Oer marx.rfacturing fixed per its unit and were 6 | ilfiqtion:\o6tr under it was than costing absorpti0n low€r urder year P 24,OO0 was fbr'the ificonle iompeay's n€t variabb costing. Her* many urllts does th€ cornparty 'c. - tgve in its ending - inventorv? ^

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6;009 unite

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Llk f,*d ep&', -- "d' 4,000 uniti Y 10,000units , ^__-^ ^^^ using 13. pink Co. had a net incorne of P 85,500 u$iog vtridble costing'and net income of P 90,000 production was absorpbon corti.rE. Total fixed manufacturirg cvcrhead.co6t w_as,f \50,000, and 100,000units. How did the inventorylevel changc&rring the year? hn 5 : a. IncreasedbY4,5O0units , gp -- it'x t.< t;'/ a. ze,osodnf&

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Ar^cli,7u'qsq ilffi;qtt;qry^*ry: ; units J DecreagedbY 4,5O0

Lc. d, Decreas€dbY 3,O00 units lncome under absorption costlng tends to be €qual 14. Under a Just-h-Hme (JIT) production eJr.rvlronment, variable costing. with incone under l'.--J .ALl-,O 15. Variable costing income fluctuates wittiiloduction and does not react to Changesin sales. 16. Variable costing is unacceptablefor Financial rePorting ..n b. Cost-volume-ProfitanalYsis c. ResPonsibilitYaccounting d. Siort-term decision-making

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MANAGEMENT. SERVICES

Quizzer: MS-03

COS.T|]|G & VARI/IBLE ABSORPTIOII test banks Sources:CMA/ClA/RPGPA/AtCPAA/arious overfieadco6ts, costsand manufacturing 1. Whichmethodof inventorycostingtreatsdiiect manufactur,ing costs? fixed, as inventoriable variable and both ' c"z Absorptioncostiqg a. Directcosting C d. Conversioncosting b. Variablecosting 2. The eostingmethodthat treatsallfixed costsas periodcostpis crz Variablecosting a. Absorptioncosting d. Processcosting Job-oidercosting g. g15ckCo.'s 2013 fixed manufaeturingoverheadcoats totaled P 100,OOO and variablesclling costs totaledP 80',000.UnOerdirect(variable)costing,how stould thesecostsbe classified? Pro-ductCosts Period.CostS P 180,000 PO a. D P 100,000 P 80.000 b. P 80,000 P 100.000 c,' PA, P 180:00O tt/ A manufacturerat the end of its fiscalyear recordedthe data below:

imecost

Variabtemantrtacturingov.ertqad Fixed'r.nanuf*tlringorerhcd . VaTAUAqsHir€and oilrer expoRecs 4. $ hemaaufe€frr6eruseeyeri*;il"Fg. a. P 8O0,0W B . b./ P 900,0q)

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fP 9gg,!{y, \.:.0}', I 19,Pq, L-160,000X 80,000

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GoaFbr $refiS Sc iw#ir* c. P 9€0,000 * ;1,060,{,0

5. Urc eqqptin (tun)costing,invetrbd& codr i! c/ P 1,q60,000 a. p g00,om d 'P 't;60,S09 . b. P 900,ooo

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A sefisdelbacbs. t*ect mabrbtsr4fa(l$ner box-an!4 6. Forp 1,00Operbox,Gray,lrrc.prorluogsqncl ctirectm*rdechrrrg taOorawragcs { 75 per Uox. \r*i*aa owrfn.d B (g lOr-dox and lixed per year, dqGes. all fixact,run-P4,500.0OO orygrhd rjoctis P i2.5m,000per yeaVEOn$nistrative which is met 1$,@0z6oxes, is expectcd to bs pGr Pro
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b PqTo

c. P 625 dl P 500

8. Undervariabb cc$,lg, a. Hct inconre will tend to rnove upwardand'downwardin responseto chargcs in'levels of Production U"2i""""t"ry costs witl atwaysbe lolftr than undel absorptioncostirqf c. NetincoinetvinEnd to vary inversetywi0t productirncianges , d. Net incsme'wfilafrray$be hrghelthan underabsorptioncosting g. Whichof the followingnrustbe knownin orderto institutea direct(viriable)costingsyStan? componentsof alt costsrelatedb producfon a. The controtlabbpnd non-controllable for all elementsof prodtrction times b. $tandardprodUctionratesand point for ell groodsin production' and break-even rnargin c. CiJntributibn . a./fne variableand fixedcomponentqof all costsrelatedto productiori Page1 of4 Pages

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& VARIABLECOSTING ABSORPTION 10. White Company manufacturesa single productand has the followingcost structure

VariablecosfsPer unit: Directmaterials Directlabor overhead Variablemanufacturing expense Variablesellingand administrative FxedcosfsPermonth: ovethead Fixedmanufacturing Fixedsellingand administrative

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C

P{

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P 100,00r-60,900

The companyproducdp20,000unitseachmonth. The^unitproductcostunderabsorptioncosting ci P13 a. P1 0 d' P15 b . p1 2

11. Refertothe datain'No.10,whatis the unitproductcostundervariablecosting? c. P 11 A { P8 d. P13 b. P10 and 20,000unitsare produced 12. Referto the datain No. 10,assumingthereare no beginninginventories prfe what is the net incomeunder is F 20, r.rl|ing lf unit the and 1g,000units afe sold in a monFr.

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costingfor themonth? absorPtion a. P 30,000 b"' P 35,000

c. P 38;009, P 42,S0

d.

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and 20,000unitsare produced 13. Referto the.ctatain No. 10,assumingthereare no beginninginventories isthe net incomeunder and.1g,000unitsare sold in a tnonltt. lf the unitseitingpfne is P 20, what ' variab$Costingfor the month? ,prtr"se.L€ P c. 38,000 p .! 30,000 a./ A P 4 2 , 0 0 0 d P3 5 ,00 0 b. . -:'...,..---. units- Tfiorc injs$Scon:lsf€dof-1q0 Thccnrf+ng 14. Btond€;liio.-|1ienEfffiffi6{r?;o06;ffiits"f*$year.

noo"e was iltr:["? :lli S5".1^T #* ;*"f m*'Hffs :* ffi l*lf l costswere,F ffi-u *as used instcadof absorptioncosting? u.ii"Of* cos Clil-,

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c. P oa/ p 200 decrease

a. P Boodecreaee b. p 200 increase

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costsaref zlan!fixed production 't5,Violeteo W R#g'tuscFa singteproduct.Unitvbriableproduction '10,o00units to set ils-{tandardcosts' Vblet costsare q...;1ffiilViolet ,"*r " noirnatactivityof units,and sold 10,500units Endinginventory proc*"d 11;0ci0 begantn" y"#ffi';;;;r6t, co3ting underabsorPtion a . P 10 ;000 b. P 15,000

.cr P 17,500 d. P 20,000

l6.TheRainbowComparryhadtlfp;loltowingcostsfor20l3' '"ryliilot

brilding ractory

x P?d':dry

Rawmateriers

X t fl ggg'

X IOO,OA{ Rentfor sabsbffice S?ry Directtabor 2+900 g0,6OO Depreciation equipment store on (fixed) FOf{ K . Miscsllaneous on machin"s X 40,000 Depreciation underabsorpJion(ry3{:Tgble(V)costingmethods? Howmuch " ofthesecostsshouldbe inventoried

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ffie@uct ;;;;ffi

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(v)800'000 e/ (^)e70,00o (v)8o0'00o d (A)e30'000

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P]alt?g a1were Tt5ll1ll*l:o' asfollows for thatyear costs actual ani Planned unitt.

I i n i tS fi fS t yeai

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Manufqptpring Nqn-menufFglurino P 500,000 P 600,000 300,000 400,000 price P 30perunit' of selling product a at of units 85,000 sold Thecompany protty-T operating thecompany's 17.Using - ; : absorption,costing' c Pe75' 000 p7sb,000 Variable Fixed

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& VARIABLECOSTING ABSORPTION 18. Using variablecosting,the company'soperatingprofitwas c. P 915,000 ?. ,P 750,000

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n./ Peao,ooo

d. P 975,000

beganits operationson January'1,2013,and producesa singleprOductthat sellsfor 1g. Broa6.Qompany cost system. In 2013, {00,000unitswere produced R 1g'pelVnit. broWnusesan actual(historical) aN-80{00 units were sold. There was no work-in-processinventory at Decernber31, 2013. expensesfor 2013wereas follows: costsand sellingand administrative Manr.rfacturing ' Fixedcosts Variablecgsts P 2.00 per unit producefl 7 Rawmaterials P 1.25perunitprodrcd I { . Dkict l&or P 0.75 per unit producecl-Ji 7 P 120,000 Factoryoverhead P 1.00perunitsoH ) 70,000 Sellingand administrative What.wouldbe Brown'soperatingincomefor 2013undervariable(direct)costingme{hod? c. P 234.000 a. P 114,000 d. P 330.000 v P 210.@ 24. Incqmeundet6bsorptioncostingmay differfrom incornedeterminedundervariabb ccting. Howis this catculated? diffiarence a/" Changein the quantityof unitsin inventorytlnresthe fixedfactoryoverheadrde per unit b. Nrrmter of units producedduringthe periodtimcs the fixed factoryoverhed rate per unit c. Ch*rge in the quantityd units in irwentorytimes the variablemanufacturingcost per unit cost per unit d. Nurribr of unitsprodudduring the periodtimesthe variablemanufacturihg 2 1 .\A/hatbeet accountsfor p.ofit differ.encebetrveenabeorptioncosti4gand variabb costingrnethod? c. Difierencein salesrevenu€ a. Differencein fixedcostsincurred D €Oitterence in inventoryvaluation incurred coets b. Difbrence in variable gfo*rcd *22. Duririgits first year of operations,a compAny r"ilildt*Gil;h"ru.k {ttt*-IEA" '

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Directm#fia*s Directlabor overhead Msnufiacturing Sellingand sdniniBtrative ToCelfixedeoet Manufrctrringoverhead Sellingand administrative

unite. Tb 275"m0 unitq and soH 250,,Q00 P 15.00 10.00 12"50 2.50 P 2,200,000 P 1'375'000

The differoncetratweenoperatingprofttcetlriirtcd on the absorptioncosting basis and on the variable costinsbasis is that absorptioncodtingoperatingprdt is *'7i-no;odo

dieate'

A

b. P 220,000$€{ter

c P325,ooo srster d. P 62'S0l€ss

overheadcosts exce€6 5des, fixedmanufacturing 23. Whenproductign 'Aro rclGasedftmri inventoryunderabsorptknncoeiling a. b. Are d€fCnedin inveirtoryuntFr absorptiql eosttngr c. Are releasedfrom inventoryundervarldbfecosting d. Are deferrcdin inventoryundervariableco$ting. by contractingin advance-ofproduction. -24. A companyrianufacturesa singb productfor its customcrs only unitsthatwill be sold by the end of eaehperiod. Duringthe last in"t"fire, ne companyproOuce-s period,the followingsaleswere madeand cbstsitlclilred: P+30U Sabspeoplelssalar'iss P 40,000 Sales tt$l') lt.ZOO^ 1/3 (2/3 office) factory, 9,050- Insurance r DirectMaterials 4'4 OfticesuPPlies 6,050' nDirectlabor +os Advertising e/r"aRent'(9/10factory,1/10 office) }0gUaP 600 of an offrce equipment Depreciation 2,000/ "Ddpreciatedon factoryequiprnent J00 loan on Interest 1,209t6. 1/3 office) factory, {r ,.SUpervisar{213

c

br the last period(roundedto the near$t %) Basedon the dbovedata; the gross marginpercentage was a. 41o/o b, . 44o/o

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& VARIABLECOSTING ABSORPTION r

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costingwas'F 3,60q/lowerthan its income under 25. LaVendefCompany'sincorneunder,absorption eosting. The companysold 10,000unitsduringthe year,and its variable!9lF were P 9 per -". variable p unit, 1 of tlrtiicf'representsthe variablesellingexpense.'lf productioncostweisPq$'per unit under duringtheyeafT.. costing,then howmanyunit$did the companyproduce absorption | | r,o .p 1 1 , t 0 0 u n it s c. ( V rl S /) k t { a, B,Zg0 u nits B r units u"rrs d' 11,800 J Or A,A00units ' ^' ''svv s'q' lo?0 '"?t** 26. Btuecompany had p 100,000incomeusingabsorptioncosting Blryj.|fi-ry variablemanufacturing costs. Aelinninginventorywas P 15,000arid endinginventorywas P 22,000. Incomeundervariable costingwouldhavebeen c. P 100,0m a. P 78,000 B d. P'107,000 P 93,000 b/ pp{i;

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and absorptioilcostingwill show the sameincomeswhenthere are no 27. Vanable.cogting -;- -BA-i-ini'ng \' c. V€riablecosts tlrii..i I inventoribs D -*1--:^- i Qv ' ' Beginningand endinginventories b, Eri;ilg iriventories .d-. costingand variablecosting? is correctregardingabsorption 2S. Whichone of the followingstatements methods both costinq manner under same in the treated a. \Overheadcostsaie B income in higher resu{ts cmtihg absorption increases, gbods inventory -bl lf finished costing under variable lower are costs mlnUfacturing c. Varibbile d. \Gross marginsare the same underbothcoetingmethod$ costingand variablecostingdifferin that 29. Absorption but not with variable.costing. be usedwith absorptioncosting, Standardjcan C - b . A b s oa. r p ti on co stinginventoriesaremorec o n e c t y v a lu e d . V proctuctioninfluencesinconreundorabsorptioncosting,but not undervariablecosting. d. companiesusing ab*option bo$tinghave lowerfixedcosts. 30. Whensalesare constantnutprdgptFn fluctuates,^. a. N€tineO$owillbeendbunderwriabtscocn*rg D costingwill ahrayl lhs* ar*fsp b. Absdrpti'on c'Va r ia b le costingwil|alwaysshow a p o s it iv e n e t jn c o me Net incomewill be enatic underabsorptioncosting . O--2 is truefor a firm that usesvarisle costing? 31. wrich Ofthe followingstatrements manufactured of ciange in numberof units becaOse a The costof a unitof producichanges '": B sdes : h-- Profit'fluctuates'with c. An idteffiitity vbristft)nig calculated adminblrativecosts d. Frodrrc-t'cosF'inchde'variafle productionwas higherin 2013than in 32. Red Co. had the seme activityin 2013 as in 2012exceptthat

c

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thanin2012 in2013

b. The sn*heincomein bothYears c/ Tht sf,rneincomein bothyearsundervariablecosting 'd'The=.scHheihcorn&inbothyearsunderabeorp1ionco$ting

33Acompa'vi'#sHffi,Jm--\l;;**"1iffi,:y":K*"?i the normalci i;;;;;;;riiffirig

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alsoP 200'000' costswere nianufacturing F zooooownircvariabtE

Whatwas the vo|umeor capacityvariancef,orthe production? c P ?4,000favorable e. P 20.000unfavorable d. P 40,000favorable p 10,000favorable i,t ga.:R basictenet of directcostingis that periodcostqshouldbe cunentlyexpensed. What iE the basic rationalebehindthis Procedure? l to a specificproduct and shouldnot be chargred a. periodcosti are uncontrollable irraterial in amountand-thecost of assigningthe amountto b., period r*t*li"-gn*irri11 the beneflts wouldouhrueigh speific products -of at best and could lead to erroneousdecisionsby is period irbitrary costs c. Altocation Fan a g ement . -- : ^ : - : r?erio,i or not prod(ctionoccursand so it is improperto allocate wul occurwhether O -'i n .'.1 o i"oits G l op'roo,'ti on.andd e f e r a c u r r e n t c o s t o f d o in g b u s in e s s )