ABSORPTION & VARIABLE COSTING with PRICING DECISION (Extra: ACTIVITY-BASED COSTING)

Question 1

1. Mojito manufactures a single product. Unit variable production costs are P 20 and fixed production costs are P
   150,000. Mojito uses a normal activity of 10,000 units to set its standard costs. Mojito began the year with no
   inventory, produced 11,000 units, and sold 10,500 units. Ending inventory under absorption costing (AC) is:
   a. P 10,000
   b. P 15,000
   c. P 17,500
   d. P 20,000

Answer 1

c. P 17,500

Solution: AC inventory: [20 + (150,000 ÷ 10,000)] x (11,000 – 10,500) Incidentally, VC inventory: 20 (500)
Note: Once normal capacity is given, the unit FFOH is based on normal production. A capacity or volume variance
explains any difference between the normal production used and actual production attained.

Question 2

2. Sangria’s production facility has an ideal capacity of 12,500 units, which was used as the basis for the normal capacity
   of 10,000 units. The company was able to produce 11,000 units during the period. Fixed manufacturing costs were
   P 200,000 while variable manufacturing costs were also P 200,000. The volume or capacity variance is:
   a. P 20,000 unfavorable
   b. P 20,000 favorable
   c. P 24,000 favorable
   d. P 40,000 favorable

Answer 2

b. P 20,000 favorable

Solution: Volume (Capacity) Variance: (Actual Production – Normal Production) unit FFOH
= (11,000 – 10,000) (200,000 ÷ 10,000) Favorable: Actual Production > Normal Production
Note: Volume or capacity variable only exists under AC. No volume variance exists under variable costing (VC).

Question 3

3. When monthly production volume is constant and sales volume is less than production, profit determined with
   variable costing procedures will:
   a. Always be greater than profit determined using absorption costing
   b. Always be less than profit determined using absorption costing
   c. be equal to profit determined using absorption costing
   d. be equal to contribution margin per unit times units sold

Answer 3

Note 1: If Production > Sales, then Ending Inventory > Beginning Inventory, and also, AC profit > VC profit.
Note 2: Inventory cost under AC > Inventory cost under VC, regardless of production and sales.

Question 4

4. Margarita Manufacturers had the following costs when it produces 100,000 and sold 80,000 units of its only product:

Manufacturing costs Selling & Admin. Costs
Fixed P 180,000 Fixed P 90,000
Variable 160,000 Variable 40,000

How much lower would Margarita’s profit be if it used variable costing (VC) instead of absorption costing (AC)?
a. P 36,000
b. P 54,000
c. P 68,000
d. P 94,000

Answer 4

Solution: ∆ income = ∆ Inventory x unit FFOH = (100,000 – 80,000) x (180,000 ÷ 100,000)

Question 6

6. Under a traditional costing system, what would be the materials handling costs allocated to one unit of wall mirrors?
   a. P 500
   b. P 1,000
   c. P 2,000
   d. P 5,000

Answer 6

b. P 1,000

Solution: Traditional costing (based on DL hours): 50,000 [200 ÷ (200 + 200)] ÷ 25 units

Question 7

7. Under ABC, what would be the materials handling costs allocated to one unit of wall mirrors?
   a. P 500
   b. P 1,000
   c. P 1,500
   d. P 2,500

Answer 7

a. P 500

Solution: ABC: 50,000 [5 ÷ (5 + 15)] ÷ 25 units

Question 8

8. In target costing
   a. The market price of the product is taken as a given
   b. Only raw materials, labor, and variable overhead cannot exceed a threshold target
   c. Only raw materials cannot exceed a threshold target
   d. Raw materials are recorded directly to cost of goods sold

Answer 8

NOTE: In a highly competitive industry where pricing is largely based on prevailing market price, target cost is
computed as follows: Target cost = market price – desired profit