Problem 2 - Variable costing vs, Absorption costing (30 points)

Bong K. Day opened Bong Creations, Inc. a small, manufacturing company at

the beginning of the year. Getting the company through its first year of operations

placed a considerable strain on Mr. Day's personal finances. The following

income statement for the first quarter of the current year was prepared by a friend

who just have completed managerial accounting in his BSA program.

Bong Creations, Inc.

Income Statement

For quarter ended March 31 2019

Sales (28,000 units) P1,120,000

Variable Cost of Sales:

Production P495,000

Finished good invty. (end) 33,000

Variable cost of sales P462,000

Variable selling and admin. 168,000

Total variable cost and expenses 630,000

Contribution Margin P 490,000

Fixed Cost and Expenses

Manufaturing Overhead P300,000

Selling and Admin 200,000 500,000

Net Operating Income (P 10,000)

==========

Bong K. Day is discourage of the loss shown for the current year since he had

planned to use the statement as support for a bank loan. A CPA insists that the

company should be using absorption costing rather than variable costing. At this

point, the company is manufacturing only one product, a swimsuit. Production and

cost data relating to the swimsuit for the first quarter follows:

Variable cost per unit: Units produced 30,000

Directf materials P 3.50 Units sold 28,000

Direct labor 12.00 Fixed mfg. Overhead P300,000

Mfg. Overhead 1.00 Fixed selling & admin 200,000

Selling and admin 6.00

Required:

1. Compute for the following:

a. Unit product cost under absorption costing

b. Redo the company's income statement (showing the value of ending

inventory) for the first quarter using absorption costing

c. Reconcile the net operation income of variable costing and absorption

costing

2. During the second quarter of operation, the company again produced 30,000

units and sold also 30,000 units. (no change in total fixed costs)

a. Prepare income statements for second quarter of 2019 using both

absorption and variable costing (show value of ending inventory)

b. Reconcile the operating income of using variable costing and absorption

costing