MAS REVIEWER

PINEDA, PAULA MARIE S.

BSA 3B

ABSORPTION COSTING AND VARIABLE COSTING

Absorption Costing (Full Costing

Method) Variable Costing (Contribution Margin
Approach)
Sales xx
Sales xx
Less: Cost of Goods Sold (xx)
Gross Profit xx Less: Variable Costs (xx)
Less: Operating Expenses (xx) Contribution Margin xx
Less: Fixed Costs (xx)
Net Income xx
Net Income xx

Absorption Costing Variable Costing

 presenting income informaton to external users.  presenting income inormation to interal users.
 in conformity with GAAP  not in conformity with GAAP
 all direct materials, direct labor and factory overhead  direct materials, direct labor and variable costs are
are part of the cost of the product. deducted to sales (contribution margin)
 fixed costs are deducted against contribution margn to
determine net income.

Features of Variable Costing

 Costs are identifed asa variable cost and fixed cost, not Cost of Goods Sold and OPEX
 Fixed Manufacturing Overhead is treated as a period cost and is charged directly of the entire amount matched against
revenues for that period since whatever level of production, they will be still incurred.
 Under variable costing, fixed overhead costs must not become product costs.

NOTE: the main difference between variable costing method and absorption costing method is the treatment of FIXED
MANUFACTURING OVERHEAD.

Pro-forma and explanatory Statement of

Income
Pro-forma and explanatory Statement of
Absorption Costing Income
Variable Costing
Sales (Units sold x Selling Price) xx
x Sales (Units sold x Selling Price) xx
COGS (Units sold x DM cost per unit) x x
x VC (Units sold x DM cost per unit) x
(Units sold x DL cost per unit) x x
(Units sold x Variable Overhead x (Units sold x DL cost per unit) x
per unit) x (Units sold x Variable Overhead x
(Units sold x (total fixed OH x (xx per unit) x
cost/units produced) x ) (Units sold x Variable selling & x (xx
admin per unit) x )
Gross Profit xx
OPEX (Units sold x Variable selling & x Contribution Margin xx
admin per unit x FC (Total fixed manufacturing x
(Total fixed selling and admin x (xx overhead costs) x
expenses x ) (Total fixed selling and admin x (xx
expenses) x )
Net Income xx
Net Income xx
Problem 1.

Nobita Company makes Doraemon laptop tables that sells for P250 each. The company's annual
production level is 120,000 laptop tables. 100,000 tables were sold. In addition to P4,305,000 fixed
manufacturing overhead and P1,590,000 fixed administrative expenses, the following per-unit costs
have been determined for each laptop table:
Direct materials ₱60.00
Direct labor ₱30.00
Variable manufacturing overhead ₱8.00
Variable selling expense ₱22.00
TotalVariable cost per unit ₱120.00
MAS REVIEWER

PINEDA, PAULA MARIE S.

BSA 3B

COST-VOLUME-ANALYSIS (CVP)

Break-even Point

Sample
Formula
Break-even
BEP in units = Fixed Cost
Point
CM per unit
Per Percenta
unit ge
BEP in sales = Fixed Cost
₱400,000.
CM ratio
Sales 00 40.00 100%
-
Less: Variable ₱280,000.
Costs 00 28.00 70%
Contribution ₱120,000.
Margin 00 12.00 30%
-
₱120,000.
Less: Fixed Costs 00 12.00
Net Income ₱- 0.00

*10,000 units

Contribution Margin per unit > Sales in unit x CM per unit = Total Contribution Margin
- selling price per unit less variable cost per unit. > Contribution Margin / Contribution Margin per unit =
Number of units sold
Contribution Margin Ratio > At break even point, fixed costs = contribution margin
- is divided to sales (contribution margin) > Therefore, fixed cost / contribution margin per unit = break
- percentage even point in units.

Problem 1.
Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit.
Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead
and P10 in variable selling and administrative expense. Fixed costs per period amounts
to P90,000.

1. How much is the Contribution per unit?

2. How many units should the entity sell every month to break-
even?
3. How much sales should the entity achieve every month to break-
even?
4. Compute BEP through equation approach.
CVP Analysis with Target net income
Required units = Fixed cost + Target Net Income
CM per unit

Required sales = Fixed cost + Target Net Income

CM ratio
Note: Target Net Income should be before tax.

Problem 2.
Tiddy Company is a manufacturer of teddy bears which currently sells at P250 per unit.
Variable cost per unit includes P80 in materials, P50 in labor, P20 in variable overhead
and P10 in variable selling and administrative expense. Fixed costs per period amounts
to P90,000. Entity's desired net income is P270,000.
1. How many units should the entity sell every month to achieve the target
net income?
2. How much sales should the entity achieve every month to achieve the
target net income?

Margin of Safety
- measures the potential effect of the risk that sales will fall short of planned sales, which is the difference betwee actual or
budgeted sales oer break-even sales.
MOS = Actual or Budgeted Sales - Break-even sales

Problem 3.
Charlotte Manu Company's budget for the coming year
revealed the
following unit data:
Budgeted net income P875,000
Unit costs:
Variable Fixed
Manufacturing P14.00 P12.00
Selling 2.50 5.50
General 0.25 7.00

Selling Price per unit P50

Compute for the Margin of safety in peso amount and percentage.

Sales Mix
- refers to the relative proportions in whih a company’s prducts are old. The idea is to achieve the combintion, or mix that will
yield the greatest amount of profits.

Problem 4.
Calculate the break-even point in the following sales mix, both in
units and peso sales.

Product A B C
Selling price per unit P150 P210 P360
Variable cost per unit P90 P140 P190
Sales mix percentage 20% 20% 60%
Total Fixed Cost P400,000

Operating Leverage
- represents the relationship between the entity’s fixed costs and variable costs.
- the degree of operating leverage measures how well an entity generates profit using its fixed costs.

DOL = Contribution Margin

Net Income

Problem 4.
Determine tthe DOL of the following entities and
interpret.
A B
Sales P3,000,000 P3,000,000
VC -300,000 -900,000
CM 2,700,000 2,100,000
FC -1,000,000 -400,000
Net Income 1,700,000 1,700,000
MAS REVIEWER

PINEDA, PAULA MARIE S.

BSA 3B

STANDARD COSTING AND VARIANCE ANALYSIS

Cost control
- leads to cost reduction Variance Analysis applied in Cost control
- setting standard costs would help an entity control cost and - standars enable management to make periodic
manage it accordingly. comparisons of actual results with planned results.
- differences that arise between actual results and planned
Standard cost results are called VARIANCES.
- scientifically predetermined costs of manufacturing a single
unit or a unit of product or of rendering a service during a Variance Analysis
specified future period. - technique that can be used by management to measure
- no single standard costing technique is appropriate for all performance, correct inefficiencies and deal with
situations. accountability function.
Variance Analysis for Materials
Material Price Variance (point of
Actual Price x Actual Quantity
purchase)
Standard Price x Actual Quantity
Standard Material Quantity Variance (point of
Standard Price x
Quantity usage)

Variance Analysis for Labor

Actual rate x Actual hours Labor Rate Variance
Standard rate x Actual hours
Standard rate x Standard hours Labor Efficiency Variance

Variance Analysis for Overhead (4-way)

VOH Spending
Actutal Variable Overhead
Variance
Variable OH rate x Actual Activity
Standard VOH Efficiency
Variable OH rate x
Activity Variance

Variance Analysis for

Overhead (3-way)
FOH Spending
Actual Fixed Overhead
Variance
Budgeted Fixed Overhead
FOH Volume
Standard Fixed Overhead
Variance

Variance Analysis for Overhead (2-way)

Actual VOH + Actual FOH Budget Variance
(VOH rate x Standard
Activity) + Budgeted FOH
 (VOH rate x Standard
Volume Variance
Activity) + Standard FOH

Variance Analysis for

Overhead (1-way)
Actual VOH + Actual FOH Total OH Variance
(VOH rate x Standard cost)
+ Standard FOH

MAS REVIEWER

PINEDA, PAULA MARIE S.

BSA 3B

Financial Planning Model

Inputs Outputs
Current Financia Statements Project Financial Statements
Planning Process Operational Financial
Assumption about future conditions
Budgets
Scenario Analysis

Budget Master budget

- a realitic plan, expressed in quantitative terms for a certain - encompasses the organization’s operating and finanial
future periods of time. plans for a certain future period of time (budet report). It is
composed of the operating budget and financial budget.

Budget Production
Budgeted Sales xx
Add: Desired ending FG
xx
inventory
Total xx
Less: Expected beg FG (x
inventory x)
Budget Production xx
 Budgeted Materials Purchases
Types of Budget
Budget Production xx
 Static Budget - a budget based on only one level of activity
x Quantity of materials required per unit xx
(sales or production volume)
 Flexible Budget - a series of budgets prepared for many Total Materials to be used xx levels of
activity. It makes possible the adjustment of the budget Add: Desired end materials inventory xx to the
actual level of activity before comparing the budget Total xx figures
Less: Expected beg materials inventory (xx) with the
Budget actual
Budgeted Materials Purchases xx
Merchandise results.
Purchases 
Cash Budget
Budgeted Sales xx Cash balance, beginning xx
Add: Desired ending merhcandise
xx Add: Receipts xx
inventory
Total Cash avail before current financing xx
Total xx
Less: Disbursements (xx)
Less: Expected beg merchandise inventory (xx)
Budget Merchandise Purchases xx Excess of cash avail over disbursements xx
Zero-based Budgeting (ZBB) - a budget is prepared every Financing xx
period from a base of zero. All expenditures must be Cash balance, ending xx
justified regardless of variances from previous periods.

MAS REVIEWER

PINEDA, PAULA MARIE S.

BSA 3B

Relevant Costing and Differential Analysis

Relevant Costs for Decision Making

- In decision-making, it will be useful instead to use relevant costs - a cost that only related to a specific management decisions.
What must be considered?
1. Out of pocket costs - are items that require a future outlay Differential Cost Analysis
of cash. It is relevant for current and future decision-making The relevant costs in decision-making are the incremental
since it spells out the amount of cash outlay needed for every costs, also knows as differential costs.
decisions.
 Future intended purchases of equipment will involve Differential costs - are the additional costs incurred if a
out of pocket costs. company pursues a certain course of action under different
 This purchase cost is relevant in deciding whether to choices or alternatives.
replace an old equipment.
Relevant Benefits
2. Opportunity Cost - is the potential benefit lost by choosing Management must also be able to consider the relevant
a specific action when two or more alternative choices are benefits in choosing an alternative. They are considered as
being decided upon. the incremental revenue from the decision chosen.
 An entity creating standardized products can be offered  The relevant benefits should exceed relevant costs.
by a customer or a special order. In deciding whether to  It should be noted, however, managers should also look
accept or reject this order, not only the profits in taking into different qualitative factors not easily expressed in
the special order should be considered, but also the costs or benefits in choosing an alternative.
profit in giving up a portion of the standard operations
in accommodating the special order.

1. Make or Buy Decision normal operations have to be dropped to accommodate

- is a determination scenario on whether an item should be the special order.
made internally or bought from an outside supplier. 
 Sometimes, entities have idle capacity. This idle capacity
can be used to consider manufacturing an item, part or
sub-assembly they are currently purchasing.
Skribikin Comapny is purchasing 2,000 parts of Product A from
outside suppliers for P170 per part.
Should the entity make the part internally, costs that will be
assigned to the part are as follows:
Direct Materials P120,000
Direct Labor 100,000
Variable OH 60,000
Fixed OH 80,000
 The management accountant is asked to compare the
cost of manufacturing a part internally with the cost of
purchasing it.
Should the company maufacture the parts or buy from the
supplier?
 If the entity will simply be comparing the purchase cost
per unit versus the manufacturing cost per unit…
 The cost to purchase is lesser han the cost to
manufacture. However, whether the entity purchases or
manufactures the part, fixed costs will still be incured.
Thus, fixed costs are irrelevant in decision.
 Therefore, the entity must take 2,000 parts inernally
since costs to make is lower than costs to buy.

2. Accept or Reject Special Order

- In an accept or rejecta special order decision, the entity is
to check whtehr it will be beneficial for them to accept a MAS REVIEWER
special order at a certain one-time special selling price, or
just reject it. The entity chooses the alternative that would be PINEDA, PAULA MARIE S.
more profitable for them. BSA 3B
 The entity has to identify the relevant costs in accepting Cost Terms, Concepts and Behavior
the special order.
 The entity also has to consider whetehr or not they have
excess capacity to accept the special order, or if some
 Cost based on Functional areas

 Manufacturing cost - cost that is incurred in the entity’s  Nonmanufacturing cost - cost that is incurred in the
operations on producing products and services. entity’s operations in making the product known, selling
> Direct Materials them, and other administrative expenses.
> Direct Labor > Operating expenses like marketing and
> Manufacturing Overhead advertisement, administrative expenses, selling
expenses.

Cost based on timing of matching with Revenues

 Product cost - cost assigned to products until they are  Period cost - cost incurred are recognized based on time
sold. periods.
> Goods not yet completed - WIP inventory > Operating expenses like rent, salaries and other
> Goods completed - FG inventory administrative and general expenses.
> Goods sold - Cost of Goods Sold

Cost Traceability

 Direct cost - cost that are traceable to a particular  Indirect cost - cost that are not traceable to a particular
product line, segment, department, division or branch. product line, segment, department, division or branch.

Cost Controllability

 Controllable cost - cost that can be influenced by the  Uncontrollable cost - costs that cannot be influenced by
manager on how it will be incurred and can be altered in the manager on how it will be incurred. It can be altered
the short run. in the long run.
> Direct materials and Direct labor > Depreciation
> Donations and contributions > Insurance
> Training costs > Allocated overhead
> Bonuses > Allocated rent

Costs as to decision making

 Opportunity cost - these are the  Differential Cost - differences of  Marginal cost - extra cost
benefits foregone in choosing one cost under alternative actions or incurred when one additional unit
alternative over the other course decisions. is produced. It determines the
of action. quantity must efficient to
produce.

 Average cost per unit - total cost  Sunk cost - cost that has been  Out of pocket cost - costs or
to produce divided by the total already incurred that will not expenses that require a cash
number of units manufactured. affect future costs since they are payment in the current period or
already paid for or incurred and during a project.
cannot be changed by any future
action.

Variable Costs Fixed Costs

> constant on a per unit > constant when presented
basis. as total
> varies when presented as
> varies on a per unit basis
a total
Cost behavior
 Variable costs - costs that change as the quantity of the
goods produced changes. Total amount of variable costs
is dependent to the level of production.
> Cost of Materials
> cost of direct labor per hour.
Assume an entity's normal manufacturing process with a range of
 Fixed costs - at whatever level of production, within 5,000 to 7,000
relevant range, this cost does not change. It is units of goods with a variable cost per unit of P20 and P15,000
independent of the level of production. fixed costs.
> Rent of facilities VC/
> Depreciation of equipment Total VC FC FC/unit
unit
at 5,000 ₱100,000.0 ₱15,000.0
Cost equation: P20.00 ₱3.00
units 0 0
y = a + bx at 6,000 ₱120,000.0
20.00 15,000.00 2.50
units 0
y = total cost at 7,000 ₱140,000.0
a = total fixed cost 20.00 15,000.00 2.14
units 0
b = variable cost per unit
x = volume of activity

Problem 1.
How much is the total cost to manufacture products
with a variable manufacturing
cost per unit of P25 and total of manufacturing fixed
cost of P40,000 at the following
production levels.
a. 2,000 units
b. 4,500 units
c. 7,250 units
Mixed Cost - refers to costs that has both variable and fixed Step costs - costs that are constant on a certain level of
components. actiity but increases on another certain level of activity.
> Utilities and mantenance costs, since these are charged > Salaries and commission of agents that goes higher with
or is incurred with a basic amount and goes higher with any different ranges of activity.
usage over he base amount.

Separation of Mixed Costs

1. High-Low method
2. Least squares Regression Method
3. Scatter Diagram

High-Low Method
Step 1. Determine the highest and lowest activity and the
costs associated thereunto.
Step 2. Obtain the variable cost per unit by dividing
thechange in cost over the change in activity.
Step 3. Obtain the total fixed costs by removing the variable
cost component in the total costs.