Activity No.

7
Variable Costing
By: Jevie M. Villa Abrille, CPA

Problem 1
East Folk Corporation has organized a new division to manufacture and sell specialty cellular phones. The division’s
monthly costs are show below:

Manufacturing costs:
Variable cost per unit
Direct materials P48
Variable manufacturing overhead P2
Fixed manufacturing overhead costs (total) P360,000

Selling and administrative costs:

Variable 12 percent of sales
Fixed (total) P470,000

East Folk Corporation regards all of its workers as full-time employees and the company has a long-standing
no layoff policy. Each cellular phone is priced at P150. Furthermore, production is highly automated. Accordingly, the
company includes its labor costs in its fixed manufacturing overhead. During September, the first month of
operations, the following activity was recorded.

Units produced 12,000

Units sold 10,000

Required:
1. Compute the unit product cost under:
a. Absorption costing
b. Variable costing
2. Prepare an income statement for September using absorption costing.
3. Prepare an income statement for September using variable costing.
4. Reconcile the absorption costing and variable costing net operating income figures in (2) and (3) above.

Problem 2
Red Dragon Inc. produces and sells many recreational products. The company has just opened a new plant to
produce a folding camp cot that will be marketed throughout the Philippines. The following cost and revenue data
relate to May, the first month of the plant’s operation:

Beginning inventory 0
Units produced 10,000
Units sold 8,000
Selling price per unit P75

Selling & administrative expenses:

Variable per unit P6
Fixed (total) P200,000
Manufacturing costs:
Direct materials costs per unit P20
Direct labor cost per unit P8
Variable manufacturing overhead cost per unit P2
Fixed manufacturing overhead cost (total) P100,000
Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be
prepared for May.

Required:
1. Assume the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume the company uses the variable costing approach.
a. Determine the unit product cost.
b. Prepare an income statement for May.
3. Explain the reason for any difference in the ending inventory balance under the two costing methods and the
impact of this difference on reported net operating income.

“The activity you’re most avoiding contains your biggest opportunity.”

By: Robin Sharma