Absorption versus Variable Costing (Cost Accounting)

1. Joy Kenneth Sala Biasong, MBA, MPA, M.Ed., D.M., Ed.D., Ph.D.
Graduate School Professor
SY 2008-2009

2.  Absorption (Full) costing is a costing
system which treats all costs of production as
product costs, regardless whether they are
variable or fixed.
 Variable (Direct/ Marginal) costing is a
costing system under which those costs of
production that vary with outputs are treated as
product costs.
(source: mgt for acctg)

3.  Variable Cost
 Fixed Cost
 Direct Cost
 Indirect Cost

 (Source: Statement of Financial Accounting Standards)

4. XYZ company that produces a single product has the following cost structure.
Number of units produced 3,000
Variable Costs Per Unit
Direct Materials 2
Direct Labor 3
Variable Manufacturing Overhead 1
Variable Selling and Administrative Expenses 2
Fixed Costs Per Year:
Fixed Factory Overhead 50,000
Fixed Marketing and Administrative Expenses 10,000

5. Compute the following:
A. unit product cost under absorption costing
method.
B. unit product cost under variable / marginal
costing method.

6. Unit Product Cost
Absorption Costing Method
Direct Materials 2
Direct Labor 3
Variable Manufacturing Overhead 1
Total Variable Production Cost 6
Add: Fixed Manufacturing Overhead 16.67
Unit Product Cost 22.67

7. Unit Product Cost
Variable Costing Method
Direct Materials 2
Direct Labor 3
Variable Manufacturing Overhead 1
Unit Product Cost 6

8. Activity
(refer to handouts- Managerial
Accounting pages 3-8)
Assessment
Solve accounting problems 1-10