VARIABLE COSTING EXERCISES

1. Alma Inc. manufactured 700 units of Product A, a new product, in 2001.

Product A’s variable and fixed manufacturing costs per unit were ₱6 and
₱2 respectively. The inventory of Product A on December 31, 200A
consisted of 100 units. There was no inventory on January 1, 200A. What
would be the change in the peso amount of inventory on December 31,
200A if the direct costing method was used instead of the absorption
costing method?
a. ₱800 decrease
b. ₱200 decrease
c. ₱0
d. ₱200 increase
Answer:

Absorption Direct Change

total inventory* 5,600 4,200 1,400
CGS** 4,800 3,600 1,200
end inventory 800 600 200
*700 x 8 and 700 x 6
** (700 -100) x 8 and (700-100) x 6

Items 2 and 3 are based on the following information:

Of the 6,000 units produced by Sta. Teresita Company during September, 5,000
units were sold at ₱45 per unit. Production costs during the month were:
Materials, ₱40,000; Direct labor, ₱50,000; Factory overhead-fixed, ₱30,000;
Factory overhead-variable, ₱36,000; General and administrative expenses, all
fixed, total ₱60,000.
2. The net operating income for September under absorption costing was:
a. ₱25,000
b. ₱30,000
c. ₱35,000
d. ₱26,000

Absorption
Sales 225,000
CGS 130,000 unit cost for absorption
Gross
margin 95,000 Materials 6.666667
Direct Labor 8.333333
Gen & admin 60,000 Factory overhead - variable 6
Profit 35,000 Factory overhead- fixed 5
26
 3. The net operating income for September under variable costing was:
a. ₱25,000
b. ₱30,000
c. ₱35,000
d. ₱21,000

Variable
sales 225,000 unit cost for absorption
Variable 105,000 Materials 6.666667
Contribution margin 120,000 Direct Labor 8.333333
Factory overhead - variable 6
fixed 90,000 21
Profit 30,000

Items 4 to 7 are based on the following information:

Available for Nhecy Corp.’s product line: Selling price per unit ₱15; Variable
manufacturing costs per unit ₱8; Total annual fixed manufacturing costs
₱25,000; Variable administrative costs per unit ₱3; Total annual fixed selling and
administrative expenses ₱15,000.
There was no inventory at the beginning of the year. During the year 12,500
units were produced and 10,000 units were sold.
4. The ending inventory, assuming Nhecy used direct costing, would be:
a. ₱25,000
b. ₱32,500
c. ₱27,500
d. ₱20,000
5. The ending inventory assuming Nhecy used absorption costing would be:
a. ₱23,500
b. ₱27,500
c. ₱20,000
d. ₱25,000

Absorption Direct
total
inventory 125,000 100000 variable manufacturing cost 8
CGS 100,000 80000 fixed manufacturing cost 2
end inventory 25,000 20,000
 6. The total variable costs charged to expenses for the year, assuming
Nhecy uses direct costing, would be:
a. ₱110,000 Variable period
b. ₱100,000 cost 30,000
c. ₱117,500 CGS 80,000
d. ₱80,000 total 110,000

7. The total fixed cost charged against the current year’s operations,
assuming Nhecy uses absorption costing is:
a. ₱35,000
b. ₱40,000
c. ₱25,000
d. ₱15,000
Items 8 and 9 are based on the following information:
Gerlie Company began its operations on January 1, 200A and produces a single
product that sells for ₱10 per unit. Gerlie uses an actual cost system. In 200A,
100,000 units were produced and 80,000 units were sold. There were no work
in process inventory at December 31, 200A.
Manufacturing costs and selling and administrative expenses for 2001 were as
follows:
 Fixed Costs:
Factory overhead ₱120,000
Selling & Administrative ₱70,000
 Variable Costs:
Raw materials ₱2.00 per unit produced
Direct labor ₱1.25 per unit produced
Factory overhead ₱0.75 per unit produced
Selling & administrative ₱1.00 per unit sold
8. What would be Gerlie’s operating income for 200A under variable
(direct) costing method?
a. ₱114,000
b. ₱210,000
c. ₱234,000
d. ₱330,000

Absorption
Sales 800,000 unit cost for absorption
CGS 416,000 Materials 2
Gross
margin 384,000 Direct Labor 1.25
Factory overhead - variable 0.75
Gen & admin 150,000 Factory overhead- fixed 1.2
Profit 234,000 5.2
9. What would be Gerlie’s finished goods inventory at December 31, 200A
under absorption costing method?
Absorption Direct
a. ₱80,000
b. ₱104,000 total inventory 520,000 400,000
c. ₱110,000 CGS 416,000 320,000
d. ₱124,000 end inventory 104,000 80,000
[Link] would be Elma’s finished goods inventory at December 31, 200A
under the direct costing method?
a. ₱7,200 Sino si ELMA???
b. ₱7,650
c. ₱8,000
d. ₱9,700
[Link] costing method, absorption or variable costing, would show a
higher operating income for 2001 and by what amount?
a. Absorption costing ₱2,500
b. Variable costing ₱2,500
c. Absorption costing ₱5,500
d. Variable costing ₱5,500
[Link] would be Peter’s finished goods inventory at December 31, 200A
under the variable costing method?
a. ₱90,000
b. ₱140,000
c. ₱105,000
d. ₱135,000
[Link] the absorption costing method, Peter’s operating income for 200A
would be:
a. ₱217,000
b. ₱307,000
c. ₱352,000
d. ₱374,000
[Link] January 2002, Gabby Inc. produced 10,000 units of Product F with
costs as follows:
Direct Materials ₱40,000
Direct Labor ₱22,000
Variable Overhead ₱13,000
Fixed Overhead ₱10,000
Total ₱85,000
What is Gabby’s unit cost of Product F for January 2002 calculated on the
direct costing method?
a. ₱6.20 Materials 4 40,000/10,000
b. ₱7.20 Direct Labor 2.2 22,000/10,000
c. ₱7.50 Factory overhead - variable 1.3 13,000/10,000
d. ₱8.50
7.5
 [Link] Corp. began operations on January 1, 2001, and produces a single
product that sells for ₱9 per unit. 100,000 units were produced and
90,000 units were sold in 2001. There were no work-in-process inventory
at December 31, 2001. Manufacturing cost and selling/admin expenses:
 Fixed Costs: Factory overhead ₱100,000; Selling & Admin ₱70,000
 Variable Costs: Raw materials ₱1.75/unit; Direct labor ₱1.25/unit;
Factory overhead ₱0.50/unit; Selling & Admin ₱0.60/unit sold
What would be the operating income for 200A using the direct costing
method?
a. ₱181,000
b. ₱271,000
c. ₱281,000
d. ₱371,000

Variable
sales 810,000 unit cost for direct
Variable (product) 315,000
Variable 54,000 Materials 1.75
Contribution margin 441,000 Direct Labor 1.25
Factory overhead - variable 0.5
fixed 170,000 3.5
Profit 271,000

[Link] presenting inventory on the balance sheet at December 31, 200A, the
unit cost under absorption costing is: for absorption
unit cost
a. ₱2.50 Materials 1.75
b. ₱3.00 Direct Labor 1.25
Factory overhead - variable 0.5
c. ₱3.50
Factory overhead- fixed 1
d. ₱4.50 4.5
[Link] is the net income for 200A under direct costing?
a. ₱50,000
b. ₱80,000
c. ₱90,000
d. ₱120,000
[Link] Company, a manufacturer of rivets, uses absorption costing. Keller’s
200A manufacturing costs were as follows:
Direct materials & direct labor ₱800,000
Depreciation of machines ₱100,000
Rent for factory building ₱60,000
Electricity to run machines ₱35,000
How much of these costs should be inventoried?
a. ₱800,000
b. ₱835,000 Materials & direct labor 800,000
c. ₱935,000 Rent for factory 60,000
d. ₱995,000 Electricity to run machines 35,000
Depreciation of machines 100,000
total 995,000
[Link] absorption costing, the inventoriable costs are:
a. ₱680,000
b. ₱730,000
c. ₱750,000
d. ₱800,000
[Link] variable costing, the inventoriable costs are:
a. ₱600,000
b. ₱680,000
c. ₱720,000
d. ₱750,000
[Link] was Product Zee’s unit cost under absorption costing?
a. ₱3.27
b. ₱2.70
c. ₱2.20
d. ₱1.80
[Link] was Product Zee’s unit cost under variable costing?
a. ₱2.82
b. ₱2.70
c. ₱2.32
d. ₱2.20
[Link] Company’s 2001 manufacturing costs were as follows:
Direct materials & direct labor ₱500,000
Depreciation of manufacturing equipment ₱70,000
Depreciation of factory building ₱40,000
Janitor’s wages for cleaning factory premises ₱15,000
How much of these costs should be inventoried for external reporting
purposes? materials & labor 500,000
a. ₱625,000 Depreciation- equipment 70,000
b. ₱610,000 Depreciation- building 40,000
wages 15,000
c. ₱585,000
total 625,000
d. ₱500,000
*Absorption costing is used for external reporting purpose
24. West Co.’s 200A manufacturing costs were as follows:
Direct materials & direct labor ₱700,000
Other variable manufacturing costs ₱100,000
Depreciation of factory building & equipment ₱80,000
Other fixed manufacturing overhead ₱18,000
What amount should be considered product costs for external reporting
purposes? materials & labor 700,000
a. ₱700,000 Variable cost 100,000
b. ₱800,000 Deprecation 80,000
c. ₱880,000 fixed cost 18,000
total 898,000
d. ₱898,000
Items 25 and 26 are based on the following information:
The company produced 200,000 units and sold 150,000 units. No beginning
and ending WIP, no beginning inventory of finished goods.
Direct materials used ₱350,000
Direct labor ₱550,000
Variable manufacturing overhead ₱375,000
Fixed manufacturing overhead ₱325,000
[Link] value to be assigned to the finished goods inventory at the end of the
period under the direct costing is: unit cost (direct)
a. ₱255,000 materials & labor 2
b. ₱300,000 (50,000 x 6) labor 3
c. ₱320,000
variable 2
d. ₱400,000
total 6
e. None of these
[Link] value to be assigned to the finished goods inventory at the end of the
period under the absorption costing is:cost (Absorption)
unit
a. ₱255,000 materials & labor 2
b. ₱300,000
labor 3
c. ₱320,000
variable 2
d. ₱400,000 (50,000 x 8)
e. None of these fixed cost 2
total 8
[Link] data for a special product manufactured by Coronado, Inc. are given
below:
Selling price per unit ₱60.00
Unit costs:
 Direct materials ₱12.00
 Direct labor ₱10.00

Order cost per unit:

 Variable: Manufacturing ₱5.00; Distribution ₱9.00
 Fixed: Manufacturing ₱12.00; Distribution ₱7.00
Coronado, Inc. sells, on the average, 300,000 units a year. Using this
method, the unit cost of the special product for inventory purposes
Absorption is:
Direct
a. ₱22 materials & labor 12 12
b. ₱24 labor 10 10
c. ₱27 variable 5 5
d. ₱36 fixed cost 12
e. None of these total 39 27

Items 28–30 are based on the following data:

The Yellow Co. has the capacity to manufacture 20,000 units per month. Present
plans call for monthly production and sales of 15,000 units of ₱21.00 each.
 Costs per unit are as follows:
Direct material ₱7.00
Direct labor ₱4.20
Variable factory overhead ₱1.05
Fixed factory overhead ₱2.10
Variable marketing expense ₱0.35
Fixed administrative expense ₱1.40
Total: ₱16.10
[Link] that Yellow Co. accepted a special order of 5,000 units at ₱15.00
per unit. The increase or decrease in contribution margin shall amount to:
a. ₱5,500 decrease
b. ₱12,000 decrease
c. ₱13,750 increase
d. ₱20,000 increase
e. None of these
[Link] unit cost figure the company would use in costing inventory using
Absorption Direct
direct costing is: materials & labor 7.00 7.00
labor 4.20 4.20
a. ₱12.25 variable 1.05 1.05

b. ₱12.60c. ₱14.70 fixed

total
cost 2.10
14 12.25
d. ₱16.10
[Link] that the regular sales price of the company is reduced to
₱19.00, resulting in a 10% increase in sales volume, the effect in the
monthly contribution margin will be:
a. ₱20,400 decrease
b. ₱20,400 increase
c. ₱30,000 increase
d. ₱33,000 increase
e. None of these

Items 31–40
[Link] following information has been obtained from the records of
Valenzuela Company for the year ended December 31, 2001:
Finished goods inventory, 1/1/25 ₱75,000
Finished goods inventory, 12/31/25 ₱125,000
Cost of goods manufactured ₱360,000
Operating expenses ₱65,000
Sales ₱500,000
What is the gross profit for 2001?
a. ₱140,000
b. ₱150,000 sales 500,000
c. ₱160,000 CGS 360,000
d. ₱175,000 Gross profit 140,000

[Link] of the following is not included in product cost under

absorption costing?
a. Direct labor
b. Variable overhead
 c. Fixed overhead
d. Selling expense
[Link] of the following is included in product cost under variable
costing?
a. Variable selling expense
b. Fixed manufacturing overhead
c. Variable manufacturing overhead
d. Fixed administrative expense
[Link] of the following is true about variable costing?
a. Both fixed and variable factory overhead are treated as product costs.
b. Only fixed factory overhead is treated as product cost.
c. Only variable factory overhead is treated as product cost.
d. Neither fixed nor variable factory overhead is treated as product cost.
[Link] costing is also known as:
a. Direct costing
b. Marginal costing
c. Full costing
d. Differential costing
[Link] of the following will cause the difference between absorption
costing net income and variable costing net income?
a. Variable selling and administrative expenses
b. Fixed selling and administrative expenses
c. Fixed manufacturing overhead
d. Variable manufacturing overhead
[Link] production is greater than sales, absorption costing will show:
a. Higher net income than variable costing
b. Lower net income than variable costing
c. The same net income as variable costing
d. Zero net income
[Link] sales are greater than production, absorption costing will show:
a. Higher net income than variable costing
b. Lower net income than variable costing
c. The same net income as variable costing
d. Zero net income
[Link] of the following statements is correct regarding the relationship
between variable costing and absorption costing?
a. Net income under absorption costing is always higher.
b. Net income under variable costing is always higher.
c. The two methods always result in the same net income.
d. The two methods may result in different net incomes depending
on the relationship between sales and production.
[Link] difference in reported net income between absorption costing and
variable costing is due to:
a. The treatment of fixed manufacturing overhead
b. The treatment of variable manufacturing overhead
c. The treatment of selling expenses
d. The treatment of administrative expenses
[Link] of the following costing methods is required for external financial
reporting?
a. Variable costing
 b. Direct costing
c. Absorption costing
d. Marginal costing
[Link] main advantage of variable costing for internal reporting is:
a. It includes all costs in inventory valuation.
b. It matches expenses with revenues better.
c. It prevents manipulation of net income by changes in production.
d. It is simpler than absorption costing.
[Link] of the following statements about absorption costing is true?
a. It expenses fixed manufacturing overhead in the period incurred.
b. It defers a portion of fixed manufacturing overhead to
inventory.
c. It treats variable selling expenses as product costs.
d. It is not acceptable under GAAP.
[Link] variable costing, fixed manufacturing overhead is:
a. Included in inventory
b. Treated as a product cost
c. Treated as a period cost
d. Deferred to the following period
[Link] inventory levels increase, which costing method will generally report
higher income?
a. Absorption costing
b. Variable costing
c. Marginal costing
d. Both absorption and variable costing
[Link] inventory levels decrease, which costing method will generally
report higher income?
a. Absorption costing
b. Variable costing
c. Marginal costing
d. Both absorption and variable costing
47. The difference between absorption costing and variable costing income
statements lies mainly in the treatment of:
a. Direct materials
b. Direct labor
c. Factory overhead
d. Selling expenses