PROBLEM 2. META, which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 37,000 units at P15/unit
Production costs:
Variable: P4/unit
Fixed: P260,000
Selling and administrative costs:
Variable: P1/unit
Fixed: P32,000
1. Under absorption costing, what gross margin would the company disclose in the income statement?
2. Under absorption costing, what contribution margin would the company disclose in the income statement?
3. Under variable costing, what contribution margin would the company disclose in the income statement?
4. How much is the profit/(loss) of the company under variable costing?
5. Explain why, if production exceeds sales, absorption costing net income exceeds variable costing net income.
Answer (1)
To solve this problem, we need to understand absorption costing and variable costing methods.
In absorption costing, both fixed and variable manufacturing costs are allocated to the product. In contrast, variable costing only assigns variable manufacturing costs to the product, while fixed manufacturing costs are treated as period costs and expensed entirely in the period they are incurred.
Let's break down each part of the problem step-by-step:
Under absorption costing, the gross margin that the company would disclose in income statement is:
Total Sales: 37 , 000 units × P 15/ unit = P 555 , 000
Production Costs under Absorption Costing:
Variable Production Cost per Unit: P 4/ unit
Fixed Production Cost per Unit: 40 , 000 units P 260 , 000 = P 6.5/ unit
Total Production Cost per Unit: P 4 + P 6.5 = P 10.5/ unit
Total Production Cost of Sold Units: 37 , 000 units × P 10.5/ unit = P 388 , 500
Gross Margin: P 555 , 000 − P 388 , 500 = P 166 , 500
Under absorption costing, the contribution margin that the company would disclose in income statement is not applicable, as contribution margin is part of variable costing.
Under variable costing, the contribution margin that the company would disclose in income statement is:
Variable Costs:
* Variable Production Cost: 37 , 000 units × P 4/ unit = P 148 , 000
* Variable Selling and Administrative Cost: 37 , 000 units × P 1/ unit = P 37 , 000
Total Variable Costs: P 148 , 000 + P 37 , 000 = P 185 , 000
Contribution Margin: P 555 , 000 − P 185 , 000 = P 370 , 000
How much is the profit/(loss) of the company under variable costing?
Total Fixed Costs:
Fixed Manufacturing Costs: P 260 , 000
Fixed Selling and Administrative Costs: P 32 , 000
Total Fixed Costs: P 260 , 000 + P 32 , 000 = P 292 , 000
Profit/(Loss): P 370 , 000 − P 292 , 000 = P 78 , 000
Explain why if production exceeds sales, absorption costing net income exceeds variable costing net income.
When production exceeds sales under absorption costing, part of the fixed manufacturing costs are allocated to unsold inventory, deferring these costs to future periods. This results in lower expenses on the income statement, increasing net income compared to variable costing, where all fixed manufacturing costs are expensed in the period incurred, regardless of the amount sold.
