National Review Center

Claro M. Recto Avenue, Manila

Management advisory Services Prof. Ma. Teresa B. De Jesus
Topic IV : Direct Costing/ Absorption Costing
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Variable Costing Defined:
Variable (Direct, Differential, or Marginal) costing refers to the method of costing products
whereby the product costs consist only variable manufacturing costs: direct materials (DM), direct labor
(DL) and variable factory overhead (VFOH) with fixed factory overhead (FFOH) treated as period cost.
Absorption Costing Defined:
Absorption (Full, Conventional, Traditional) costing refers to the method of costing products
whereby the product costs consist of all manufacturing costs, fixed and variable (direct materials, direct
labor, variable factory overhead and fixed factory overhead).

SUMMARY OF THE DIFFERENCES BETWEEN THE TWO METHODS:

DIRECT COSTING ABSORPTION COSTING
1. Segregation of Costs
All costs and expenses are There is no need to segregate costs into
segregated into fixed and variable fixed and variable
2. Product Cost /Inventory Values
The inventoriable costs are: The inventoriable costs are:
Direct materials P xxx Direct materials P xxx
Direct labor xxx Direct labor xxx
Variable Factory Overhead xxx Variable Factory Overhead xxx
Fixed Factory Overhead xxx
3. Period costs
Fixed Factory Overhead xxx
Fixed Operating Expenses xxx Fixed Operating Expenses xxx
Variable Operating expenses xxx Variable Operating expenses xxx
4. Income Statement Presentation
Sales P xxx Sales P xxx
Less: Var. Mfg Costs Less: Cost of Good Sold
DM P xxx DM P xxx
DL xxx DL xxx
VFOH xxx xxx VFOH xxx
Contribution Margin, Mfg xxx Fixed factory Overhead xxx xxx
Less: Var. Oper. Exp. xxx Gross profit xxx
Contribution Margin, Final xxx Less: Operating Expenses
Less: Fixed Costs Fixed Oper. Exp. xxx
Fixed Factory Overhead xxx Variable Oper. Exp. xxx xxx
Fixed Oper. Expenses xxx xxx Net Income xxx
Net Income xxx ===
===
5. Operating Income: Relationship between
Production(P) and Sales(S) Net Income Inventory
a. P = S AC = DC BI = EI
b. P > S AC > DC BI < EI
c. P < S AC < DC BI > EI
6. Reconciliation of Net Income Figures:
Operating Income under absorption costing xxx
Add: Fixed Factory Overhead in Beg. Inventory xxx
Less: Fixed Factory Overhead in End Inventory (x x x)
Operating Income under absorption costing xxx
====
Fill in the blanks.
1. Direct costing is sometimes called _____________ or ____________ or _____________ costing.
2. Absorption costing is sometimes referred to as ______________ or _______________.
3. The difference between direct and absorption costing is the way _______________ are handled.
4. Product costs, representing the cost of goods manufactured under absorption costing consist of
all __________________ manufacturing costs.
5. Under direct costing, fixed overhead costs are charged to expense as _______________ costs;
while under absorption costing treats fixed costs as part of _____________________.
6. If production exceeds sales _________ costing will show a greater profit than ________ costing.
7. When there is an inventory decrease, e.g. sales in units exceed the units produced ___________
costing will show a greater profit than _______________ costing.
8. Both methods of costing will show the same results, when production and sales ____________
each other.
9. If production fluctuated and sales are constant, ______________ profit fluctuates and _________
profit is constant.
10. If __________ is constant and ___________ fluctuates, both vary in the direction of sales.
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MAS : Direct Costing Prof. Ma. Teresa B. De Jesus

Problem 1 : At the capacity of 10,000 units, the following costs are given for GSM Corporation :
Total Amount Per unit
Direct materials ……………………………… P 250,000 P 25
Direct labor …………………………………… 150,000 15
Variable factory overhead …………………….. 120,000 12
Fixed manufacturing overhead ……………….. 90,000 9
Variable operating expenses ………………….. 60,000 6
Fixed operating expenses ……………………... 50,000 5

During 2025, GSM Corporation produced 9,000 units and sold 8,000 units of its product at
P 100 per unit . Beginning inventory is 1,000 units at P 63.25 per unit.

Required : Computer the following for TSM Corporation for the year ended December 31, 2025:

1. Product unit cost Direct Costing Absorption Costing Normal Costing

2024 2025 2024 2025 2024 2025

Direct Materials
Direct Labor
Variable Factory Overhead
Fixed Factory Overhead ____________________________________________________
Unit Cost
==================================================
2. Cost of Ending Inventory:
Number of Units
X Unit Cost ______________________________________________________
Cost of Ending Inventory
===================================================
3. Prepare the Income Statement under both methods

4. Total Fixed costs charged during the year under

a. Direct Costing was ___________________

b. Absorption costing was ________________

5. Total Variable costs charged during the year under :

a. Direct Costing was ___________________
b. Absorption costing was ________________

6. Total Period costs charged during the year under :

a. Direct Costing b. Absorption costing
Fixed Factory Overhead
Variable Operating expenses
Fixed Operating Expenses ______________ _____________

============= ============
Problem 2 : Sgt. Khatie Company produced 22,000 units of product in 2024selling at P30 per unit.
There were no beginning inventories but there were 2,000 units on hand at the end of 2023. Cost for the
year are as follows:
Fixed Costs Variable Costs
Direct Materials P 132,000
Direct Labor 110,000
Overhead P 88,000 66,000
Selling Expenses 10% of Sales
Administrative 62,000 44,000
Compute for the following for 2016
1. Sales for the year was _____________ 6. Breakeven point in unit was ____________

2. Gross Margin was _______________ 7. Cost of ending inventory under variable

costing _____________

3. Gross Margin rate was _____________ 8. Cost of ending inventory under absorption
costing _____________

4. Contribution Margin was ____________ 9. Operating income under variable

costing _____________

5. Contribution Margin rate was _________ 10. Operating income under absorption costing
_______________
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MAS : Direct Costing Prof. Ma. Teresa B. De Jesus
MULTIPLE CHOICE
1-2 During January, 2024, Fernandez, Inc. produced 15,000 units of product G with cost as follows:
Direct Materials P 60,000 Variable Overhead 22,500
Direct Labor 45,000 Fixed Overhead 30,000
1. What is Fernandez’s unit cost of product G for January, 2024 calculated on the
direct costing method? a. P7 b. P8.50 c. P10.5 d. none of these

2. What is fernandez’s unit cost of Product G for January 2024 calculated on the
absorption costing method? a. P7 b. P8.50 c. P10.5 d. none of these

3 – 4 Jones Co. a manufacturer of rivets, was absorption costing. The

company’s manufacturing costs were as follows:
Direct Materials P500,000 Rent for the factory building 100,000
Direct Labor 400,000 Electricity 50,000
3. How much these costs should be inventoried? A. P900,000 B. P950,000 C. P1,000,000 D. P1050,000

4. Under direct costing, the inventoriable cost are:A. P900,000 B. P950,000 C. P1,000,000 D. P1050,000

5 – 12 Solomon Co., produced 10,000 units of its products and sold 8,000 units during 2024 at P20
per unit. Production costs during the month were: Materials, P50,000; Direct labor, P40,000; Factory
Overhead variable, P30,000; Factory Overhead-fixed, P25,000; General and Administrative Expenses-
fixed, P10,000; and Variable administrative Expenses P24,000.
5. The net operating income for 2008 under absorption costing was:
a. P5,000 b. (P5,000) c. P 0 d. P2,500

6. The net operating income for 2008 under variable costing was:
a. P5,000 b. (P5,000) c. P 0 d. P2,500

7. The total fixed cost charged against the current year’s operation under absorption costing?
a. P30,000 b. P35,000 c. P25,000 d. P10,000

8. The total fixed cost charged against the current year’s operation under variable costing
a. P30,000 b. P35,000 c. P25,000 d. P10,000

9. The total variable costs charged to expenses for the year under direct costing would be:
a. P155,000. b. P119,000. c. P123,200 d. P120,000

10. The total variable costs charged to expenses for the year under absorption costing?
a. P155,000 b. P119,000 c. P123,200 d. P120,000

11. The total period costs charged to expenses for the year under direct costing would be:
a. P 35,000 b. P 49,000 c. P 59,000 d. P 34,000

12. The total period costs charged to expenses for the year under absorption costing would be:
a. P 35,000 b. P 49,000 c. P 59,000 d. P 34,000

13 - 16 Roxie Corporation’s absorption costing income statement for May 2024 follows:
Sales (9,500 units) …………………………………….. P427,500
Cost of Goods Sold:
Beginning Inventory …………………………….. P 11 ,200
Add: Cost of Goods Manufactured 280,000
Goods Available for sale 291,200
Less: Ending Inventory ……………………………… 25,200 266,000
Gross Margin ………………………………………… 161,500
Less: Operating Expenses:
Fixed Administrative Expenses………………. P 57,000
Variable Selling Expense ……………………… 47,500 104,500
Net Operating Income ………………………………... P 57,000
The company’s variable production costs are P20 per unit and its Fixed manufacturing
Overhead totals P 80,000 per month.
13The carrying value on the balance sheet of Roxie’s ending inventory under variable costing would be
a. P21,200 b. P22,000 c. P18,000 d. P25,200

14. The contribution margin per unit during May was a. P17 b. P20 c. P25 d. P6

15. The net operating income under the variable costing method for May would be:
a. P53,000 b. P49,800 c. 61,000 d. P57,000

16. The breakeven point in units for the month under variable costing would be:
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MAS : Direct Costing Prof. Ma. Teresa B. De Jesus
a. 6,850 b. 4,000 c. 3,200 d. 5,100