Chapter 5 Variable Costing 142

MULTIPLE CHOICE

Basic Concepts
1. Under the direct costing, which is classified as product costs?
A. Only variable production costs.
B. Only direct costs.
C. All variable costs.
D. All variable and fixed production costs. (rpcpa)

1. A
? The product costs under the direct costing.
 Under the direct costing model, only variable production costs such as direct
materials, direct labor, and variable factory overhead are included in the
determination of the product costs. Fixed factory overhead is classified as a period
costs, that is, automatically deducted from sales as an expense regardless of sales
volume level. Hence, choice-letter “a” is correct.
Choice-letter “b” is incorrect because there are direct costs that are fixed costs.
Choice-letter “c” is incorrect because it refers to all variable costs and expenses.
Variable expenses are always period costs either under absorption costing or
variable costing model. Choice-letter “d” is incorrect because under direct costing
fixed manufacturing costs are period costs.

2. In absorption costing, as contrasted with direct costing, the following are absorbed
into inventory.
A. All the elements of fixed and variable manufacturing overhead.
B. Only the fixed manufacturing overhead.
C. Only the variable manufacturing overhead.
D. Neither fixed nor variable manufacturing overhead. (rpcpa)

2. A
? The elements absorbed into inventory using the absorption costing model.
 Choice-letter “a” is correct because all manufacturing costs, whether variable or fixed,
are included in the determination of product costing using the absorption costing
method. Because of such principle, choice-letters “b”, “c”. and “d” are all incorrect.

3. The absorption costing method includes in inventory

Fixed factory Variable factory
overhead overhead .
A. No No
B. No Yes
C. Yes Yes
D. Yes No (aicpa)

3. C
? Items included in inventory under absorption costing.
 The following items are included in the inventory cost using the absorption costing
method: direct material, direct labor, variable overhead, and fixed overhead. Choice-
letter “c” is the correct answer.
Chapter 5 Variable Costing 143

4. In an income statement prepared as an internal report using the direct (variable)

costing method, fixed selling and administrative expenses would
A. Not be used.
B. Be used in the computation of the contribution margin.
C. Be used in the computation of operating income but not in the computation of the
contribution margin.
D. Be treated the same as variable selling and administrative expense (aicpa)

4. C
? The use of fixed selling and administrative expenses in preparing an internal report
using the direct (variable) costing.
 Under direct (variable) costing, fixed selling and administrative expenses are treated
as period cost (or expenses) and are charged against revenues in computing
operating income. Contribution margin is sales less variable costs and expenses and
does not include fixed costs and expenses in the computation thereof. Therefore,
choice-letter “c’ is correct and choice-letters “a” and “b” are incorrect.
Fixed expenses and variable expenses are always treated as period costs both
under the absorption costing and direct (variable) costing methods; hence, choice-
letter “d” is not the right answer.

5. In an income statement prepared as internal report using the variable costing

method, variable selling and administrative expense would
A. Not be used.
B. Be used in the computation of the contribution margin.
C. Be used in the computation of operating income but not in the computation of the
contribution margin.
D. Be treated the same as fixed selling and administrative expenses. (aicpa)

5. B
? The use of variable selling and administrative expense in the variable costing income
statement.
 Under variable costing method, variable selling and administrative expenses are
treated as period cost and are included in the computation of contribution margin,
choice-letter “b” is correct.

6. A type of managerial accounting which refers to the determination of he operating

cost regardless of cost behavior, whether variable or non-variable, is
A. Differential accounting. C. Responsibility accounting.
B. Full cost accounting. D. Profitability accounting. (rpcpa)

6. B
? The type of accounting the refers to the determination of the operating cost
regardless of cost behavior, whether variable or non-variable..
 Choice-letter “b” is correct because full cost accounting, or absorption costing,
classifies costs according to their source of incurrence and not based on their
behavior. Choice-letter “a” is incorrect because differential accounting relates to the
technique of using only those costs that differ from one course of action to another.
Chapter 5 Variable Costing 144

Choice-letter “c” is incorrect because responsibility accounting focuses on identifying

costs to each responsible officer managing a defined organizational segment.
Choice-letter “d” incorrect because profitability accounting focuses on measuring and
predicting profit by analyzing those factors that have an impact on profit.

7. When all manufacturing costs used in production are attached to the products,
whether direct, or indirect, variable of fixed, this is called:
A. Process costing C. Variable costing
B. Absorption costing D. Job Order costing (rpcpa)

7. B
? A costing method that includes all manufacturing costs as product costs.
 Absorption costing (or full costing, traditional costing) includes all manufacturing
costs, whether direct or indirect, fixed or variable, controllable or not, etc., as part of
product costs (choice-letter “b” is correct).
Process costing (choice-letter “a”) is incorrect because it refers to the technique
used in accumulating, processing and reporting production costs of homogenous (or
similar) products produced in the same production process and in the same
production run. Choice-letter “c” is incorrect because variable costing does not
include fixed overhead in its product costing. Choice-letter “d”, job order costing is a
costing method used to accumulate, process and generate production cost reports
regarding products that are produced according to the customer’s specifications.

8. For a multiple- product company, in determining the break-even point, which of the
following assumptions are commonly used when variable costing is adopted?
I. Sales equal production.
II. Unit variable cost is constant.
III. Sales mix is constant.
A. I and III
B. I and II
C. I, II and Iii
D. II and III (rpcpa)

8. D
? Assumptions commonly used in variable costing.
 Item I, sales volume equals production, cannot be accepted as an assumption in the
variable costing method because if sales equal production there would no difference
in the operating income of absorption an variable costing method. This assumption,
however, is used in the cost-volume-profit analysis.
Items II and III are assumptions used in variable costing (i.e., unit variable cost is
constant, the sales mix is constant)

9. Care Company’s 2006 fixed manufacturing overhead cost totaled P100,000 and variable
selling costs totaled P80,000. Under direct costing, how should these costs be classified?
Period Cost Product Cost
A. P 0 P180,000
B. P 80,000 P100,000
C. P100,000 P 80,000
D. P180,000 P 0 (aicpa)
Chapter 5 Variable Costing 145

9. D
? Classification of costs under direct costing.
 Using direct costing method, fixed manufacturing overhead is a period cost, and
variable selling costs are also period costs. Period costs are those charged against
sales in the period incurred. Therefore, the total period cost is P180,000 (i.e.,
P100,000 + P80,000).

10. If production is greater than sales (units), then absorption costing net income will
generally be
A. Greater than direct costing net income.
B. Less than direct costing net income.
C. Equal to direct costing net income.
D. Additional data is needed to be able to answer. (rpcpa)

10. A
? The effect to absorption costing net income if production is greater than sales.
 First, let us remember that the unit product cost of absorption costing (AC) which
includes the fixed factory overhead is greater than that of the variable costing (VC).
Therefore, if production is greater than sales, the cost of ending inventory under the
absorption costing method shall be much higher Because of this, the net income
under absorption costing shall also be much higher. Choice-letter “a” is correct.
The general line of analysis goes this way
If Then, net income under or, if
Sales > Production VC > AC Production > Sales
Sales < Production VC < AC Production < Sales
Sales = Production VC = AC Production = Sales

Choice-letters “b” and “c” are incorrect because they do not conform to the
general lien of analysis as presented above. Choice-letter “d” is incorrect because
there is no need for additional data to answer the question of the problem.

11. Which of the following statements is correct?

A. When production is higher than sales, absorption costing net income is lower
than variable costing net income.
B. If all the products manufactured during the period are sold in that period, variable
costing net income is equal to absorption costing net income.
C. When production is lower than sales, variable costing net income is lower than
absorption costing net income.
D. When production and sales level are equal, variable costing net income is lower
than absorption costing net income. (rpcpa)

11. B
? A correct statement with regard to variable and absorption costing methods.
 Choice-letter “b” is the best answer because if production and sales are equal, the
net income under the absorption costing and variable costing methods are also
Chapter 5 Variable Costing 146

equal, under the assumption that the unit cost of production remains constant.
Choice-letter “b” would have been more correct if the problem indicates that there is
no beginning inventory during the period.
Choice-letter “a” is incorrect because if production is higher than sales,
absorption costing net income should also be higher compared to that of variable
costing. Choice-letter “c” is incorrect because if production is lower that sales,
absorption costing net income should also be lower. Choice-letter “d” is incorrect
because when production and sales are equal, the net income under absorption
costing and variable costing would be the same.
Now notice, that absorption costing positively follows the trend in production,
while variable costing positively follows the trend in sales. If production is higher than
sales, absorption costing net income is higher, etc. If sales are greater than
production, variable costing net income is greater than absorption costing, etc.

12. 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. (aicpa)

12. C
? The situation wherein the operating income under absorption costing is higher than
variable costing.
 Choice-letter “c” is correct because when beginning is lower than the ending
inventory, it means that sales are greater than production and income under variable
costing would be higher than absorption costing.
Operating income under absorption costing is higher than variable costing when
production is greater than sales. This is because fixed overhead charged under
absorption costing is lower than that of variable costing. Under absorption costing,
fixed overhead is a product cost and is deducted from sales when units are sold. A
lower number of units sold means a lower amount of fixed overhead (i.e., units sold
times unit fixed overhead) charged against revenue, and therefore, a greater amount
of operating profit. Under variable costing, fixed overhead is an expense without
regard to number of units produced and sold.
Variable costing follows the trend of sales; if sales are greater than production,
variable costing income is also higher than absorption costing, and sales are lower
than production, variable costing income is also lower than absorption costing. This
is one way of saying, that absorption costing, follows the trend in production: if
production is greater than sales, absorption income is greater than variable, and vice-
versa.

13. If sales equal production, one would expect net income under the variable costing
method to be
A. The same as net income under the absorption costing method.
B. Greater than net income under the absorption costing method.
Chapter 5 Variable Costing 147

C. Differing in as much as the difference between sales and production.

D. Less than net income under the absorption costing method. (rpcpa)

13. A
? The behavior of income under variable costing and absorption costing if sales equal
production.
 If sales equal production, the income under absorption and variable costing methods
is the same. Choice-letter “a” is correct. This is because the fixed overhead charged
under each method is also the same.
Choice-letter “b” is incorrect because variable costing income is greater under
absorption costing if sales is greater than production. Choice-letter “c” is incorrect
because there is no difference between sales and production. Choice-letter “d” is
incorrect because variable costing income is less than absorption costing income
when sales are less than, not equal to, production.

14. Determine the following statements as true or false.

Statement 1. Direct costing and variable costing are different terms that mean the
same thing.
Statement 2. In a variable costing income statement, sales revenue is typically
lower than in absorption costing income statement.
Statement 1 Statement 2
A. False True
B. False False
C. True True
D. True False (rpcpa)

14. D
? Identify the statements as true or false.
 Technically, direct costing and variable costing mean differently. Direct costing deals
with the process of underlining the importance of segment margin (or direct margin)
while variable costing emphasizes the contribution margin in its analysis. In practice,
however, some accountants interchange direct costing and variable costing as having
the same meaning. Hence, statement 1 is true.
Statement 2 is false because the sales revenue under absorption costing method
are the same under the variable costing method.

15. If sales exceed production, one would expect net income under the variable costing
method to be
A. The same as net income under the absorption costing method.
B. Greater than net income under the absorption costing method.
C. Differing in as much as the difference between sales and
production.
D. Less than net income under the absorption costing method.
(rpcpa)

15. B
? The net income under variable costing as compared to absorption costing if sales
exceed production.
Chapter 5 Variable Costing 148

 If sales exceed production, the operating income under variable costing (VC) would
be greater than the absorption costing (AC). Variable costing income follows sales; if
sales increase, variable income increases, and vice-versa. If sales are greater than
production, the income under VC is greater than AC and if sales is lower than
production, the income under VC is also lower than AC (choice-letter “b” is correct).
The reason is, if sales are greater than production, the amount of fixed overhead
charged under absorption costing (i.e., units sold x unit fixed overhead) is greater
than the fixed overhead charged under variable costing (i.e., normal capacity x unit
fixed overhead). This lowers the income under absorption and makes the income
under variable costing higher than absorption costing. If sales are lower than
production, the fixed overhead charged in the absorption costing is lower; hence, it
has higher income than variable costing.
Choice-letter “a” is incorrect since production and sales are different, then there
will be a change in the income between VC and AC. Choice-letter “c” is also incorrect
because the difference in the net income between VC and AC is not the same as the
difference in production and sales. Choice-letter “d” is incorrect because it opposes
the correct answer.

16. Other things being equal, income computed by the direct costing method will exceed
that computed by an absorption costing method if
A. Fixed manufacturing cost increases.
B. Units sold exceed units produced.
C. Variable manufacturing costs increase.
D. Units produced exceed units sold. (rpcpa)

16. B
? A situation where the operating income under the direct costing exceeds that of the
absorption costing.
 The operating income under the variable costing (direct costing) and absorption
costing differs if there is a difference in the production and sales. The variable costing
follows the sales pattern. If sales exceed production, variable costing income is
higher than absorption income. If sales are lower than production, variable income is
lower than absorption income.
Choice-letter “b” is correct because if direct costing income is greater than
absorption costing income, sales must exceed production. This reason also makes
choice-letter “d” incorrect.
Choice-letter “a” and “c” are incorrect because the difference in income between
the absorption and direct costing methods does not relate to the increase or
decrease in the fixed and variable costs.

17. President X of WXY Corporation requested you to explain the different in net
income between the variable costing income statement presentation and the
absorption method. You would say that the difference:
A. Is none if there is no change in the fixed costs in the beginning and ending
inventories.
B. Is equal to the fixed cost per unit times the number of units sold.
C. Is attributable to the variable costs in the inventory.
D. Is attributable to the fixed cost in ending inventory. (rpcpa)
Chapter 5 Variable Costing 149

17. A
? A correct statement to explain the difference in net income between variable income
and absorption income.
 The difference in the operating income between variable costing and absorption
costing lies in their treatment of fixed overhead. Under the variable costing (VC), the
fixed overhead is treated as period costs (i.e., immediately charged against sales
without regard to whether the units produced are already sold or not); while under the
absorption costing (AC), the fixed overhead is treated as a product or inventoriable
costs (i.e., charged against sales only when the product is sold). The inventoriable
unit cost under absorption costing is always greater than the variable costing
because of the inclusion of the unit fixed costs.
Therefore, if there is no change in the units of inventory and assuming units costs
do not change from one period to another, then there will be no difference in
operating income between the absorption and variable costing methods. Because of
this, the change in operating income between the absorption and variable costing
methods may also be accounted for as follows:
Change in inventory (production less sales) x
x Unit fixed costs Px
Difference in operating income Px
Choice-letter “b” is incorrect since difference in operating income between AC
and VC is also accounted for as follows:
Choice-letter “c” and “d” are incorrect because the difference in operating income
between AC and VC is attributable to the fixed overhead (not variable overhead)
carried in the beginning and ending inventories (not ending inventory only).

18. Identify the following statements as true or false.

Statement 1. In a variable costing system, fixed overhead costs are included as
cost of inventory.
Statement 2. Under the direct costing method, the contribution margin discloses
the excess of revenues over fixed costs.
A. Statement 1 is true, Statement 2 is true.
B. Statement 1 is true, Statement 2 is false.
C. Statement 1 is false, Statement 2 is true.
D. Statement 1 is false, Statement 2 is false.

18. D
? Identify the given statements as true or false.
 Statement 1 is false because in the variable costing fixed overhead is not included as
cost of inventory but is rather classified as a period cost. Statement 2 is also
incorrect because contribution margin discloses the excess of revenues over variable
costs, not over fixed costs. Hence, choice-letter “d” is correct.

19. Identify the following statements as true or false.

Statement 1. In direct costing, fixed factory overhead forms part of the inventory
value.
Chapter 5 Variable Costing 150

Statement 2. The difference in net income between variable costing and

absorption costing is due entirely to the treatment of fixed
manufacturing overhead.
A. Statement 1 is true, Statement 2 is true.
B. Statement 1 is true, Statement 2 is false.
C. Statement 1 is false, Statement 2 is true.
D. Statement 1 is false, Statement 2 is false.

19. C
? Identify the given statements as true or false.
 Statement 1 is false because under direct costing the fixed factory overhead is a
period cost, an expense, and is not part of the inventory cost. Statement 2 is true.
Hence, choice-letter “c” is correct.

Inventoriable costs
20. Excellent Writer produces and sell 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 P12,500,000 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 variable costing?
A. P770 C. P475
B. P500 D. P625 (rpcpa)

20. B
? The inventoriable cost per box using the variable costing.
 The unit inventoriable cost (or unit product cost) under the variable costing includes
the costs of direct materials, direct labor, and variable overhead.
The unit product cost using the variable costing method is P500 (i.e., direct
materials of P400 + direct labor of P75 + variable overhead of P25).

21. For P1,000 per box, the Majestic Producers, Inc., produces and sell 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
costs per box using absorption costing.
A. P625 C. P770
B. P500 D. P670 (rpcpa)

21. A
? The inventoriable cost per box using absorption costing.
 Under the absorption costing method, the product (or inventoriable) costs include
direct materials, direct labor, variable overhead and fixed overhead. Therefore,
the unit product cost is P625, computed as follows:
Chapter 5 Variable Costing 151

Direct materials P400

Direct labor 75
Variable overhead 25
Fixed overhead (P12,500,000/100,000) 125
Unit product cost P625

22. Compute for the inventory value under the direct costing method using the data
given: units unsold a the end of the period, 45,000; raw materials used, P6.00 per
unit; raw materials inventory, beginning, P5.90 per unit; direct labor, P3.00 per unit;
variable overhead per unit, P2.00 per unit; indirect labor for the month, P33,750.
Total fixed costs, P67,500.
A. P 16.90 C. P 17.45
B. P 11.00 D. P 19.15 (rpcpa)

22. B
? The cost of the ending inventory under the direct costing method.
 The cost of the ending inventory comprises that of the variable production costs, such
as:
Direct materials P 6.00
Direct labor 3.00
Variable factory overhead 2.00
Unit cost-direct costing P11.00
Indirect labor is not included because it is a fixed cost and is not a product cost
under the direct costing method. The total fixed costs are not also included because
fixed costs are period costs under the direct costing method. The materials of P6.00
is included in the cost of ending inventory because it is assumed that the company
uses the FIFO method in accounting its material flows.

23. With a production of 200,000 units of product A during the month of June, Bucayao
Corporation has incurred costs as follows:
Direct materials P 200,000
Direct labor used 135,000
Manufacturing overhead:
Variable 75,000
Fixed 90,000
Selling and administrative expenses:
Variable 30,000
Fixed 85,000
Total P615,000
Under absorption costing, the unit cost of product A was:
A. P 2.20 C. P 3.25
B. P 2.50 D. P 2.05 (rpcpa)

23. B
? The unit cost under absorption costing.
Chapter 5 Variable Costing 152

 The inventoriable costs under absorption costing include direct materials, direct labor,
variable overhead, and fixed overhead, as follows:
Direct materials (P200,000/200,000 units) P 1.000
Direct labor (P135,000/200,000 units) 0.675
Variable overhead (P75,000/200,000 units) 0.375
Fixed overhead (P90,000/200,000 units) 0.450
Total Unit Cost P 2.500

Alternativley, the unit costs may be determined as follows:

Total production costs
( P200,000 + P135,000 + P75000 + P 90,000) P 500,000
/ Production in units 200,000
Unit costs P 2.50

Questions 24 and 25 are based on the following data: Lina Company produced
100,000 units of Product Zee during the month of June. Costs incurred during June
were as follows:
Direct materials P 100,000
Direct labor 80,000
Variable manufacturing overhead 40,000
Fixed manufacturing overhead 50,000
Variable selling and general expenses 12,000
Fixed selling and general expenses 46,000
Total P 327,000

24. What was product Zee’s unit cost under absorption costing?
A. P3.27 C. P2.32
B. P2.70 D. P1.80 (aicpa)

24. B
? The unit cost under absorption costing.
 The unit product cost using absorption costing method includes all variable
production costs (i.e., direct materials, direct labor, and variable overhead) and fixed
manufacturing overhead. Selling and general expenses, both variable and fixed, are
period costs. The unit product costs under absorption costing is P2.70 determined as
follows:
Direct materials (P100,000 / 100,000 units) P1.00
Direct labor (P 80,000 / 100,000 units) 0.80
Variable overhead (P 40,000 / 100,000 units) 0.40
Fixed overhead (P 50,000 / 100,000 units) 0.50
Unit product cost- absorption costing (P270,000 / 100,000 units) P2.70

25. What was product Zee’s unit cost under variable (direct) costing?
A. P2.82 C. P2.32
B. P2.70 D. P2.20 (aicpa)

25. D
? The unit cost under direct costing.
Chapter 5 Variable Costing 153

 The unit product cost using variable costing includes only the variable production
costs of direct materials, direct labor, and variable overhead. Fixed overhead,
variable expenses, and fixed expenses are treated as period costs. The unit cost
under variable costing is P2.20 computed as follows:
Direct materials P1.00
Direct labor 0.80
Variable overhead 0.40
Unit product cost- variable costing P2.20

Operating income
26. LY & 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 @ P100/unit
Work in process ending inventory none
Cost:
Fixed cost:
Factory overhead P1.2 million
Selling and administrative P0.7 million
Per unit variable cost
Raw materials P 20.00
Direct labor 12.50
Factory overhead 7.50
Selling 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 (rpcpa)

26. A
? The operating income using the variable (direct) costing method.
 The total of unit variable costs and expenses is P50 (i.e., P20 + P12.50 +P7.50 +
P10). The analysis in computing operating income is shown below:
Sales (80,000 units x P100) P8,000,000
Variable costs and expenses (80,000 units x P50) (4,000,000)
Fixed costs and expenses (1,900,000)
Operating income – variable costing P2,100,000

27. Gordon Company began its operations on January 1, 2006, and produces a single
product that sells for P10 per unit. Gordon uses an actual (historical) cost system. In
2006, 100,000 units were produced and 80,000 units were sold. There was no work-
in-process inventory at December 31, 2006. Manufacturing costs and selling and
administrative expenses for 2006 were as follows:
Fixed costs Variable costs
Raw materials - P2.00/unit produced
Direct labor - P1.25/unit produced
Factory overhead P 120,000 P0.75/unit produced
Chapter 5 Variable Costing 154

Selling and administrative P 70,000 P1.00/unit produced

What would be Gordon’s operating income for 2006 under the variable (direct)
costing method?
A. P114,000 C. P234,000
B. P210,000 D. P330,000 (aicpa)

27. B
? The operating income under variable costing.
 Under the variable costing system, the operating income is contribution margin less
fixed costs and expenses. The total unit variable costs and expenses is P5 (i.e., P2 +
P1.25 + P.75 + P1) and the unit contribution margin is P5.00 (i.e., P10.00–P5.00).
Total fixed costs and expenses amount to P190,000. The operating income is
P210,000 , as shown in the following computation:
Contribution margin (80,000 units x P5) P400,000
- Fixed costs and expenses 190,000
Operating income P210,000

28. If net earnings were higher using standard direct costing than using standard
absorption costing, what can be said about sales during the period if inventory is
priced using the LIFO method?
A. Sales increased. C. Sales decreased.
B. Sales exceed production. D. Sales were less than production. (rpcpa)

28. B
? The movement of sales if direct costing income is higher than absorption costing
income and inventory is priced using the LIFO method.
 The difference in operating income between variable (or direct) costing and
absorption costing is in the treatment of fixed overhead, not on the type of costing
method used in the valuation of inventory (as in this case, LIFO method).
If variable costing income is higher than the absorption costing income, then
sales exceeds production. Hence, choice-letter “b” is correct. Remember, variable
costing follows the pattern of sales as summarized below:
Then, operating
if income under
Sales > Production VC > AC
Sales < Production VC < AC
Sales = Production VC = AC

Questions 29 and 30 are based on the following information. Expected to operate at

normal capacity, Golden Corporation plans to manufacture 275,000 units of products
in 2006, and the following estimates with respect to sales:
Sales in units 250,000
Unit selling price P 35.00
Finished goods inventory on December 31, 2005 is estimated at 25,000 units costing
P500,000. Included in this amount is the fixed manufacturing overhead amounting to
P300,000. No changes in both the fixed manufacturing cost and the variable cost per
unit of produce are expected in 2006.
Chapter 5 Variable Costing 155

29. What is the estimated income from manufacturing using the absorption costing
method?
A. P 3,750,000 C. P 3,550,000
B. P 3,450,000 D. P 3,750,000 (rpcpa)

29. D
? The amount of income from manufacturing under the absorption costing method.
 Manufacturing income is the difference between sales and variable costs and fixed
overhead. The unit production cost under absorption costing method is P20 (i.e.,
P500,000 / 25,000 units). The manufacturing income under the absorption costing
method is:
Sales (250,000 x P35) P8,750,000
Cost of goods sold (250,000 x P20) ( 5,000,000)
Manufacturing income (Gross profit) P3,750,000

30. What is the estimated income from manufacturing using the variable costing method?
A. P 3,150,000 C. P 3,450,000
B. P 3,550,000 D. P 3,750,000 (rpcpa)

30. C
? The estimated income from manufacturing using the variable costing method.
 Using variable costing model, manufacturing income is sales less variable cost and
fixed overhead. The variable cost component of the finished goods inventory on
December 31, 2005 is P200,000 (i.e., P500,000 – P300,000). Therefore, the unit
variable cost is P8.00 (i.e., P200,000 / 25,000 units). And the unit fixed cost is
P12.00 (i.e., P300,000 / 25,000 units). The manufacturing income shall then be
determined as follows:
Sales (250,000 x P35) P8,750,000
Variable CGS (250,000 x P20) (2,000,000)
Fixed factory overhead (275,000 x P12) (3,300,000)
Manufacturing income P3,450,000
The budgeted fixed factory overhead shall be determined based on normal
capacity, 275,000 units. Fixed factory overhead is treated as a period cost, an
expense, under the variable costing method. Hence, all the fixed overhead is
automatically treated as a deduction from sales.

31. Taba Ching Ching Biscuits manufactures and sells boxed coconut cookies. The
biggest market for these cookies are as gift that college students buy for their
business teachers. There are 100 cookies per box. The following income statement
shows the results of the first year of operations. This statement was the one included
in the company’s annual report to the stockholders.
Sales (400 boxes at P12.50) P 5,000.00
Less: Cost of goods sold (400 boxes at P12.50) 3,200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income P 1,000.00
Chapter 5 Variable Costing 156

Variable selling and administrative expenses are P0.90 per box unit. The company
produced 500 boxes during the year. Variable manufacturing costs are P5.25 per
box and fixed manufacturing overhead costs total P1,375 for the year. What is the
company’s direct costing net income?
A. P 2,540 C. P 1,000
B. P 2,265 D. P 725 (rpcpa)

31. D
? The amount of net income under the direct costing method.
 The net income under the variable costing method is calculated as follows:
Sales (400 boxes at P12.50) P 5,000
Variable CGS (400 boxes at P5.25) (2,100)
Fixed factory overhead (1,375)
Selling and administrative expenses ( 800)
Net income P 725
The fixed factory overhead is classified as a period cost and totally deducted
from sales. The selling and administrative expenses shall be the same regardless of
costing method used.

32. Dotdot, Ltd., manufactures a single product for which the costs and selling prices are:
Variable production costs P 50 / unit
Selling price P 150 / unit
Fixed production overhead P 200,000 / quarter
Fixed selling and administrative overhead P 480,000 / quarter
Normal capacity is 20,000 units per quarter. Production in 1 quarter was 19,000 units
and sales volume was 16,000 units. No opening inventory for the quarter. The
absorption costing profit for the quarter was:
A. P920,000 C. P960,000
B. P950,000 D. P970,000 (rpcpa)

32. B
? The absorption profit for the quarter.
 The determination of the net income would have been easier without the implied
presence of the volume variance. The volume variance occurs because the normal
capacity differs from the actual level of production.
Normal capacity 20,000 units
- Actual production 19,000
Underabsorbed capacity 1,000 UF
x Unit fixed overhead (P200,000 / 20,000) P 10
Volume variance P10,000 UF
The volume variance shall be included in the computation of net income.
Unfavorable variances are added to cost of goods sold or deducted from the net
income. The net income, using the absorption costing method, shall be as follows:
Sales (16,000 x P150) P2,400,000
Variable CGS (16,00 x P50) ( 800,000)
Fixed overhead (16,000 x P10) ( 160,000)
Volume variance – unfavorable ( 10,000) UF
Chapter 5 Variable Costing 157

Fixed expenses ( 480,000)

Net income P 950,000

Questions 33 and 34 are based on the following information. The following operating
data are available from the records of Sheena Company for the month of January
2005:
Sales (P 70 per unit) P 210,000
Direct materials 59,200
Direct labor 48,000
Manufacturing overhead:
Fixed 36,080
Variable 24,000
Marketing and general expenses:
Fixed 11,000
Variable 5% of sales
Production in units - 3,280 units
Beginning inventory- none

33. The ending finished goods inventory under absorption costing method would be
A. P14, 280 C. P12,096
B. P16,968 D. P16,072 (rpcpa)

33. A
? The ending inventory under absorption costing method.
 The cost of the ending inventory shall be the ending inventory in units multiplied by
the unit cost. Since there were 3,000 units sold (i.e., P210,000 / P70), then the
ending inventory in units would be 280 units (i.e., 3,280 – 3,000). The unit cost under
the absorption costing method is P51.00 [(P59,200 + P48,000 + P24,000 +
P36,080) / 3,280 units).
Therefore, the cost of the ending inventory under the absorption costing method
shall be P14,280 (280 units x P51).

34. The net income for the month under the variable costing method would be
A. P32,420 C. P23,320
B. P25,500 D. P22,420 (rpcpa)

34. A
? The net income under the variable costing method.
 First, let us establish the unit variable cost at P40.00 [(P59,200 + P48,000 +
P24,000/ 3,280 units). Now, let us determine the net income.
Sales P210,000
Variable CGS (3,000 units x P40) (120,000)
Variable expenses (P210,000 x 5%) ( 10,500)
Fixed overhead ( 36,080)
Fixed expenses ( 11,000)
Net income P 32,420

Questions 35 through 38 are based on the following information.

Chapter 5 Variable Costing 158

Sales per unit P 15.00

Variable production cost 8.00
Annual fixed production cost 35,000.00
Variable office expense (unit) 3.00
Annual fixed selling expense 15,000.00
Produced 12,500 units during the period
No inventory at January 1 (beg.)
Sold 10,000 units

35. The ending inventory under direct costing is

A. P25,000 C. P20,000
B. P27,500 D. P32,500 (rpcpa)

35. C
? The ending inventory under direct costing method.
 The unit inventoriable cost under direct costing is P8.00 per unit and the ending
inventory in units is 2,500 (i.e., 12,500 units – 10,000 units). The cost of the ending
inventory under direct costing shall be PP20,000 (i.e., 2,500 units x P8).

36. Ending inventory under absorption costing is

A. P32,500 C. P25,000
B. P20,000 D. P27,000 (rpcpa)

36. D
? The ending inventory under absorption costing method.
 The unit fixed overhead is P2.80 (i.e., P35,000 / 12,500 units). The total unit
inventoriable cost under absorption costing method is P10.80 (i.e. P8.00 + P2.80).
Since, the ending inventory in units is 2,500, then the cost of the ending inventory
under the absorption costing method is P27,000 (i.e., 2,500 units x P10.80).

37. Total variable annual cost charged to expense in direct costing

A. P110,000 C. P80,000
B. P117,500 D. P100,000 (rpcpa)

37. A
? Total variable costs charged to expenses.
 The total variable costs charged to expense shall be composed of the variable cost
and variable expenses, as follows:
Variable CGS (10,000 x P8) P 80,000
Variable expenses (10,000 x P3) 30,000
Total variable costs P110,000

38. Total fixed cost charged against current year’s operations in absorption costing.
A. P35,000 C. P15,000
B. P25,000 D. P43,000 (rpcpa)

38. D
Chapter 5 Variable Costing 159

? The total fixed costs charged against current year’s operations in absorption costing
method.
 The total fixed costs charged against operations shall be composed of the fixed
overhead and fixed expenses, determined as follows:
Fixed overhead (10,000 x P2.80) P28,000
Fixed expenses 15,000
Total fixed costs P43,000
As per our previous computation, the unit fixed overhead is P2.80 (i.e., P35,000 /
12,500 units).

Reconciliation of income
Questions 39 and 41 are based on the following information. The books of Mariposa
Company pertaining to the year ended December 31, 2006 operations, showed the
following figures relating to product A:
Beginning inventory-finished goods
and work in process none
No. of units produced 40,000 units
No. of units sold at P15 32,500 units
Direct materials used P 177,500
Direct labor used P 85,000
Manufacturing costs:
Fixed P 110,000
Variable 61,500 P 171,500
Fixed administrative expenses P 30,000

39. Under variable costing, what would be the finished goods inventory as at December
31, 2006?
A. P 81,375.00 C. P 87,000.00
B. P 60,750.00 D. P 49,218.75 (rpcpa)

39. B
? The amount of the finished goods inventory under the variable costing method.
 The cost of the ending inventory under the variable costing model shall be:
Ending inventory in units (40,000 – 32,500) 7,500 units
x Unit product cost
[(P177,500 +P85,000 + P61,500) / 40,000 units] P 8.10
Ending inventory in pesos P60,750

40. Which costing method, variable or absorption costing, would show a higher operating
income for 2006 and by how much?
A. Variable by P20,625. C. Variable by P26,250.
B. Absorption by P20,625. D. Absorption by P26,250. (rpcpa)

40. B
? The costing system that shows a higher net income and by how much.
 The change in net income between absorption and variable costing methods may be
accounted for as follows:
Chapter 5 Variable Costing 160

Change in inventory (40,000 – 32,500) 7,500

X Unit fixed overhead (P110,000 / 40,00) P 2.75
Change in net income (in favor of absorption costing) P20,625
Since production is greater than sales, then absorption costing method shall
have higher net income than variable costing method. Or, on the other perspective,
since variable costing positively follows the trend in sales and if sales are lower than
production, then the net income under variable costing is lower than absorption
costing.

41 During the year 2006, Catara Corporation manufactured 70,000 units of product A, a
new product. Only 65,000 units were sold during the year. There was no beginning
inventory. Manufacturing cost per unit was P20.00 variable and P50.00 fixed. What
would be the effect on net income if absorption costing is used instead of variable
costing?
A. Net income is P250,000 lower.
B. Net income is P250,000 higher.
C. Net income is P100,000 lower.
D. Net income is P100,000 higher. (rpcpa)

41. B
? The effect on net income if absorption costing method is used instead of variable
costing method.
 The problem is basically asking for the difference in net income between absorption
and variable costing methods. The difference in net income between these two
methods may be accounted for as follows:
Change in units (70,000 – 65,000) 5,000
x Unit fixed overhead P 50
Change in net income (in favor of absorption costing) P250,000

If absorption costing method is used, the net income would be higher because
production is higher than sales. This means, higher inventory value, and, eventually,
higher net income.

42. At the end of Kiko Company’s first year operations, 1,000 units of inventory remained
on hand. Variable and fixed manufacturing cost per unit were P90 and P20,
respectively. If Kiko uses absorption costing rather then direct (variable) costing, the
result would be a higher pretax income of
A. P20,000 C. P 0
B. P70,000 D. P90,000 (rpcpa)

42. A
? The operating income if the variable costing (VC) method is used instead of the
absorption costing (AC) method.
 The difference in operating income between AC and VC could be accounted for by
getting the change in inventory (production less sales) then multiply it by the unit
fixed overhead rate. The change in inventory is 1,000 units, the ending inventory
balance after first year of operations. The unit fixed overhead is given at P20.
Chapter 5 Variable Costing 161

The difference in operating income between the two costing methods is P20,000
(that is, 1,000 units x P20). Since inventory increases (remember, there was no
beginning inventory), it means that production is greater than sales, or sales is less
than production. Therefore, the operating income under variable costing is less than
the absorption costing. Variable costing follows the pattern of sales; that is, if sales is
greater than production, then its income is also greater than absorption, and vice-
versa.

Income with variances

43. 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 use 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. (rpcpa)

43. B
? A situation where a production volume variance occurs.
 Volume variances occurs when the normal capacity differs from the standard
capacity. Normal capacity is the average production capacity of the business over a
long-period of time. It is used as a denominator in the computation of unit fixed costs
(UFC), [where, UFC = budgeted fixed costs /normal capacity]. The concept of normal
capacity supports the idea that production fluctuations from year to year would
eventually settle down at the middle or average level. Using the normal capacity as a
denominator would mean a stable unit fixed cost rate that may be used both in short-
term and long-term planning.
Standards capacity is the estimated capacity based on the actual production.
Volume variance relates to fixed overhead in as much as fixed overhead is
controlled in terms of volume, not in price. Volume variance is determined only in
absorption costing since fixed overhead is considered as a product costs under this
method. Being a product cost, the fixed overhead is subject to cost variance analysis.
Hence, choice-letter “b” is correct.

44. Sta. Maria Inc. reported the following data for 2006:
Actual hours 120,000
Denominator hours 150,000
Standards hours allowed for output 140,000
Fixed predetermined overhead rate P6 per hour
Variable predetermined overhead rate P4 per hour
Sta. Maria’s 2006 volume variance was:
a. P60,000 which is neither favorable nor underapplied.
b. P60,000 favorable.
c. No volume variance.
d. P60,000 underapplied . (rpcpa)
Chapter 5 Variable Costing 162

44. D
? The amount of volume variance.
 Volume variance refers to the ability or inability of the business to meet its normal
production capacity. In as much as unit fixed cost is affected by the level of production
(i.e., UFxC decreases as production increases), the volume variance has a direct relation
to the amount of fixed costs charged against the operations. The volume variance is
computed as follows:
Normal hours 150,000 hrs
- Standard hours (140,000) hrs
Underabsorbed hours 10,000 hrs. UF
x Fixed costs rate per hour P 6 per hour
Volume variance P60,000 UF

 done 