Question

Outdoors Company manufactures sleeping bags that sell for P30 each. The variable standard costs of production are P19.50. Budgeted fixed manufacturing overhead is P100,000, and budgeted production is 10,000 sleeping bags. The company actually manufactured 12,500 bags, of which 11,000 were sold. There were no variances during the year except for the fixed-overhead volume variance. Variable selling and administrative costs are P0.50 per sleeping bag sold; fixed selling and administrative costs are P5,000.

Required:
Calculate the standard product cost per sleeping bag under absorption costing and variable costing.
Compute the fixed-overhead volume variance.
What is the net income for the year using absorption costing?
What is the net income for the year using variable costing?

Answer 1

1. Standard product cost per sleeping bag:
Under absorption costing = P29.50 per unit
Under variable costing = P19.50 per unit

Under absorption costing, the product cost includes, variable standard cost of production per unit and fixed overhead cost per unit

Variable standard cost of production per unit = P19.50
Fixed overhead cost per unit = Budgeted fixed manufacturing overhead / Budgeted production units = P100,000 / 10,000 = P10

Standard product cost under absorption costing = P19.50 + P10 = P29.50 per unit

Under variable costing, only variable costs are considered as product costs. Therefore,
Standard product cost under variable costing = Variable standard cost of production per unit = P19.50 per unit

2. Fixed-overhead volume variance = P25,000 (F).

Fixed-overhead volume variance = Actual Output x Fixed overhead absorption rate - Budgeted Output x Fixed overhead absorption rate =

Actual output = 12,500 sleeping bags
Budgeted output = 10,000 sleeping bags
Fixed overhead absorption rate = Budgeted fixed manufacturing overhead / Budgeted production units = P100,000 / 10,000 = P10

Fixed-overhead volume variance = 12,500 × P10 - 10,000 × P10 = P25,000 Favourable

3. Net income for the year using absorption costing = P17,000
Net income for the year using variable costing = P5,000

Absorption costing:

Sales = 11,000 × P30 = P330,000
Cost of goods sold = 11,000 × P27.50 = P324,500

Product cost = Variable product cost per unit + (Fixed manufacturing overhead ÷ Number of units Produced) = P19.50 + (P100,000 ÷ 12,500) = P19.50 + P8 = P27.50

Variable costing:
Sales = 11,000 × P30 = P330,000
Variable costs = (11,000 × P19.50) + (11,000 × P0.50) = P220,000

Fixed costs = Fixed manufacturing overhead costs + Fixed selling and administrative costs = P100,000 + P5,000 = P105,000