Responsibility Accounting and Transfer Pricing

(C. Variable Costing & Segmented Reporting)

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
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
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.

iv

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)

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)

vi

Reconciliation
Income under absorption costing
ii
. 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
iii
. 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

157

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

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

ii

. 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

iii

iv

vi

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