Unit II: Absorption, Variable, and Throughput Costing
MULTIPLE CHOICE QUESTIONS
1. Under variable costing, fixed manufacturing overhead is:
A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process Inventory.
E. treated in the same manner as variable manufacturing overhead.
Answer: A LO: 1 Type: RC
2. All of the following are inventoried under variable costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. items "C" and "D" above.
Answer: D LO: 1 Type: RC
3. All of the following are expensed under variable costing except:
A. variable manufacturing overhead.
B. fixed manufacturing overhead.
C. variable selling and administrative costs.
D. fixed selling and administrative costs.
E. items "C" and "D" above.
Answer: A LO: 1 Type: RC
4. All of the following costs are inventoried under absorption costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.
Answer: E LO: 1 Type: RC
5. All of the following are inventoried under absorption costing except:
A. direct labor.
B. raw materials used in production.
C. utilities cost consumed in manufacturing.
D. sales commissions.
E. machine lubricant used in production.
Answer: D LO: 1 Type: N
6. The underlying difference between absorption costing and variable costing lies in the
treatment of:
A. direct labor.
B. variable manufacturing overhead.
C. fixed manufacturing overhead.
D. variable selling and administrative expenses.
E. fixed selling and administrative expenses.
Answer: C LO: 1 Type: RC
7. Which of the following costs would be treated differently under absorption costing and
variable costing?
Variable
Fixed
Direct
Manufacturing
Administrative
Labor
Overhead
Expenses
A.
Yes
No
Yes
B.
Yes
Yes
Yes
C.
No
Yes
No
D.
No
No
Yes
E.
No
No
No
Answer: E LO: 1 Type: RC
8. Lone Star has computed the following unit costs for the year just ended:
Direct material used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative cost
Fixed selling and administrative cost
$12
18
25
29
10
17
Under variable costing, each unit of the company's inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. some other amount.
Answer: B LO: 1 Type: A
9. Prescott Corporation has computed the following unit costs for the year just ended:
Direct material used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative cost
Fixed selling and administrative cost
$18
27
30
32
9
17
Under absorption costing, each unit of the company's inventory would be carried at:
A. $75.
B. $107.
C. $116.
D. $133.
E. some other amount.
Answer: B LO: 1 Type: A
10. Santa Fe Corporation has computed the following unit costs for the year just ended:
Direct material used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative cost
Fixed selling and administrative cost
$25
19
35
40
17
32
Which of the following choices correctly depicts the per-unit cost of inventory under variable
costing and absorption costing?
Variable
Absorption
Costing
Costing
A. $79
$119
B. $79
$151
C. $96
$119
D. $96
$151
E. Some other combination of figures not listed above.
Answer: A LO: 1 Type: A
11. Delaware has computed the following unit costs for the year just ended:
Variable manufacturing cost
Fixed manufacturing cost
Variable selling and administrative cost
Fixed selling and administrative cost
$85
20
18
11
Which of the following choices correctly depicts the per-unit cost of inventory under variable
costing and absorption costing?
A. Variable, $85; absorption, $105.
B. Variable, $85; absorption, $116.
C. Variable, $103; absorption, $105.
D. Variable, $103; absorption, $116.
E. Some other combination of figures not listed above.
Answer: A LO: 1 Type: A
Use the following to answer questions 12-13:
Indiana Company incurred the following costs during the past year when planned production and
actual production each totaled 20,000 units:
Direct materials used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative costs
Fixed selling and administrative costs
$280,000
120,000
160,000
100,000
60,000
90,000
12. If Indiana uses variable costing, the total inventoriable costs for the year would be:
A. $400,000.
B. $460,000.
C. $560,000.
D. $620,000.
E. $660,000.
Answer: C LO: 1 Type: A
13. The per-unit inventoriable cost under absorption costing is:
A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.
Answer: D LO: 1 Type: A
14. Consider the following comments about absorption- and variable-costing income statements:
I.
II.
III.
A variable-costing income statement discloses a firm's contribution margin.
Cost of goods sold on an absorption-costing income statement includes fixed costs.
The amount of variable selling and administrative cost is the same on absorption- and
variable-costing income statements.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer: E LO: 2, 3 Type: N
15. Roberts, 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 $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
The gross margin that the company would disclose on an absorption-costing income statement
is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
Answer: C LO: 2 Type: A
16. McAfee, 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 $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
The contribution margin that the company would disclose on an absorption-costing income
statement is:
A. $0.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
Answer: A LO: 2 Type: A
17. Chicago began business at the start of the current year. The company planned to produce
25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at
$30 each. Costs incurred were:
Fixed manufacturing overhead
Fixed selling and administrative cost
Variable manufacturing cost per unit
Variable selling and administrative cost per unit
$150,000
100,000
8
2
If there were no variances, the company's absorption-costing net income would be:
A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
E. some other amount.
Answer: C LO: 2 Type: A
18. Norton, 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 $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
The contribution margin that the company would disclose on a variable-costing income
statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
Answer: D LO: 3 Type: A
19. Madison began business at the start of the current year. The company planned to produce
30,000 units, and actual production conformed to expectations. Sales totaled 28,000 units at
$32 each. Costs incurred were:
Fixed manufacturing overhead
Fixed selling and administrative cost
Variable manufacturing cost per unit
Variable selling and administrative cost per unit
$150,000
90,000
11
2
If there were no variances, the company's variable-costing net income would be:
A. $270,000.
B. $292,000.
C. $308,000.
D. $532,000.
E. some other amount.
Answer: B LO: 3 Type: A
20. The following data relate to Lobo Corporation for the year just ended:
Sales revenue
Cost of goods sold:
Variable portion
Fixed portion
Variable selling and administrative cost
Fixed selling and administrative cost
$750,000
370,000
110,000
50,000
75,000
Which of the following statements is correct?
A. Lobo’s variable-costing income statement would reveal a gross margin of $270,000.
B. Lobo’s variable costing income statement would reveal a contribution margin of
$330,000.
C. Lobo’s absorption-costing income statement would reveal a contribution margin of
$330,000.
D. Lobo’s absorption costing income statement would reveal a gross margin of $330,000.
E. Lobo’s absorption-costing income statement would reveal a gross margin of $145,000.
Answer: B LO: 2, 3 Type: A
Use the following to answer questions 21-22:
Franz began business at the start of this year and had the following costs: variable manufacturing cost
per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2;
and fixed selling and administrative costs, $220,000. The company sells its units for $45 each.
Additional data follow.
Planned production in units
Actual production in units
Number of units sold
There were no variances.
10,000
10,000
8,500
21. The net income (loss) under absorption costing is:
A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.
Answer: D LO: 2 Type: A
22. The net income (loss) under variable costing is:
A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.
Answer: B LO: 3 Type: A
23. Income reported under absorption costing and variable costing is:
A. always the same.
B. typically different.
C. always higher under absorption costing.
D. always higher under variable costing.
E. always the same or higher under absorption costing.
Answer: B LO: 4 Type: RC
24. Gomez's inventory increased during the year. On the basis of this information, income
reported under absorption costing:
A. will be the same as that reported under variable costing.
B. will be higher than that reported under variable costing.
C. will be lower than that reported under variable costing.
D. will differ from that reported under variable costing, the direction of which cannot be
determined from the information given.
E. will be less than that reported in the previous period.
Answer: B LO: 4 Type: N
25. Which of the following conditions would cause absorption-costing net income to be lower
than variable-costing net income?
A. Units sold exceeded units produced.
B. Units sold equaled units produced.
C. Units sold were less than units produced.
D. Sales prices decreased.
E. Selling expenses increased.
Answer: A LO: 4 Type: N
26. Which of the following situations would cause variable-costing net income to be lower than
absorption-costing net income?
A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by $7 per unit during the accounting period.
E. Selling expenses increased by 10% during the accounting period.
Answer: A LO: 4 Type: N
27. Consider the following statements about absorption- and variable-costing net income:
I.
II.
III.
Yearly income reported under absorption costing will differ from income reported under
variable costing if production and sales volumes differ.
Long-run, total income reported under absorption costing will often be close to that
reported under variable costing.
Differences in income under absorption and variable costing can often be reconciled by
multiplying the change in inventory (in units) by the variable manufacturing overhead
cost per unit.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
Answer: D LO: 4 Type: RC
28. Which of the following formulas can often reconcile the difference between absorption- and
variable-costing net income?
A. Change in inventory units x predetermined variable-overhead rate per unit.
B. Change in inventory units ÷ predetermined variable-overhead rate per unit.
C. Change in inventory units x predetermined fixed-overhead rate per unit.
D. Change in inventory units ÷ predetermined fixed-overhead rate per unit.
E. (Absorption-costing net income - variable-costing net income) x fixed-overhead rate per
unit.
Answer: C LO: 4 Type: RC
29. Monex reported $65,000 of net income for the year by using absorption costing. The
company had no beginning inventory, planned and actual production of 20,000 units, and sales
of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted
fixed manufacturing overhead was $100,000. If there were no variances, net income under
variable costing would be:
A. $15,000.
B. $55,000.
C. $65,000.
D. $75,000.
E. $115,000.
Answer: B LO: 4 Type: A
30. Canyon reported $106,000 of net income for the year by using variable costing. The company
had no beginning inventory, planned and actual production of 50,000 units, and sales of
47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted
fixed manufacturing overhead was $150,000. If there were no variances, net income under
absorption costing would be:
A. $52,000.
B. $97,000.
C. $106,000.
D. $115,000.
E. $160,000.
Answer: D LO: 4 Type: A
31. Consider the following statements about absorption costing and variable costing:
I.
II.
III.
Variable costing is consistent with contribution reporting and cost-volume-profit
analysis.
Absorption costing must be used for external financial reporting.
A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.
Answer: E LO: 5, 6 Type: RC
32. Consider the following statements about absorption costing and variable costing:
I.
II.
III.
Variable costing is consistent with contribution reporting and cost-volume-profit
analysis.
Variable costing must be used for external financial reporting.
A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.
Answer: E LO: 5, 6 Type: RC
33. For external-reporting purposes, generally accepted accounting principles require that net
income be based on:
A. absorption costing.
B. variable costing.
C. direct costing.
D. semivariable costing.
E. activity-based costing.
Answer: A LO: 6 Type: RC
34. Under throughput costing, the cost of a unit typically includes:
A. selling costs.
B. fixed manufacturing overhead.
C. the direct costs incurred whenever a unit is manufactured.
D. administrative costs.
E. all of the above.
Answer: C LO: 7 Type: RC
35. Which of the following methods defines product cost as the unit-level cost incurred each time
a unit is manufactured?
A. Throughput costing.
B. Indirect costing.
C. Process costing.
D. Absorption costing.
E. Back-flush costing.
Answer: A LO: 7 Type: RC
36. Orion's management recently committed to incurring direct labor and all manufacturing
overhead charges regardless of the number of units produced. Under throughput costing, the
company's cost of goods sold would include charges for:
A. selling and administrative costs.
B. direct materials.
C. direct labor and manufacturing overhead.
D. direct materials, direct labor, and manufacturing overhead.
E. direct materials, direct labor, manufacturing overhead, and selling and administrative
costs.
Answer: B LO: 8 Type: N
37. Highline Company reported the following costs for the year just ended:
Throughput manufacturing costs
Non-throughput manufacturing costs
Selling and administrative costs
$180,000
600,000
125,000
If Highline uses throughput costing and had sales revenues for the period of $950,000, which
of the following choices correctly depicts the company's cost of goods sold and net income?
Cost of
Net
Goods Sold
Income
A. $180,000
$45,000
B. $180,000
$645,000
C. $305,000
$45,000
D. $305,000
$645,000
E. Some other combination of figures not listed above.
Answer: A LO: 8 Type: A
38. The fixed-overhead volume variance under variable costing:
A. coincides with the fixed manufacturing overhead that was applied to production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget variance.
E. must be unfavorable.
Answer: C LO: 9 Type: RC
39. Which of the following differs between absorption costing and variable costing?
A. The number of units produced.
B. The fixed-overhead volume variance.
C. Sales revenues.
D. The treatment of variable manufacturing overhead.
E. Income tax rates.
Answer: B LO: 9 Type: RC
42. Consider the following three product costing alternatives: process costing, job order costing, and
standard costing. Which of these can be used in conjunction with absorption costing?
a. job order costing
b. standard costing
c. process costing
d. all of the above
ANS: D
PTS: 1
43. Another name for absorption costing is
a. full costing.
b. direct costing.
c. job order costing.
d. fixed costing.
DIF: Easy
OBJ: 3-6
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
44. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in
a. higher income and assets.
b. higher income but lower assets.
c. lower income but higher assets.
d. lower income and assets.
ANS: A
PTS: 1
DIF: Moderate
OBJ: 3-6
45. Under absorption costing, fixed manufacturing overhead could be found in all of the following except
the
a. work-in-process account.
b. finished goods inventory account.
c. Cost of Goods Sold.
d. period costs.
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
46. If a firm uses absorption costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.
ANS: C
PTS: 1
DIF: Easy
OBJ: 3-6
47. Under absorption costing, if sales remain constant from period 1 to period 2, the company will report a
larger income in period 2 when
a. period 2 production exceeds period 1 production.
b. period 1 production exceeds period 2 production.
c. variable production costs are larger in period 2 than period 1.
d. fixed production costs are larger in period 2 than period 1.
ANS: A
PTS: 1
DIF: Moderate
OBJ: 3-7
48. The FASB requires which of the following to be used in preparation of external financial statements?
a. variable costing
b. standard costing
c. activity-based costing
d. absorption costing
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
49. An ending inventory valuation on an absorption costing balance sheet would
a. sometimes be less than the ending inventory valuation under variable costing.
b. always be less than the ending inventory valuation under variable costing.
c. always be the same as the ending inventory valuation under variable costing.
d. always be greater than or equal to the ending inventory valuation under variable costing.
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
50. Absorption costing differs from variable costing in all of the following except
a. treatment of fixed manufacturing overhead.
b. treatment of variable production costs.
c. acceptability for external reporting.
d. arrangement of the income statement.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
51. Which of the following is not associated with absorption costing?
a. functional format
b. gross margin
c. period costs
d. contribution margin
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
52. Unabsorbed fixed overhead costs in an absorption costing system are
a. fixed manufacturing costs not allocated to units produced.
b. variable overhead costs not allocated to units produced.
c. excess variable overhead costs.
d. costs that cannot be controlled.
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
53. Profit under absorption costing may differ from profit determined under variable costing. How is this
difference calculated?
a. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
b. Change in the quantity of all units produced times the relevant fixed costs per unit.
c. Change in the quantity of all units in inventory times the relevant variable cost per unit.
d. Change in the quantity of all units produced times the relevant variable cost per unit.
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
54. What factor, related to manufacturing costs, causes the difference in net earnings computed using
absorption costing and net earnings computed using variable costing?
a. Absorption costing considers all costs in the determination of net earnings, whereas
variable costing considers fixed costs to be period costs.
b. Absorption costing allocates fixed overhead costs between cost of goods sold and
inventories, and variable costing considers all fixed costs to be period costs.
c. Absorption costing "inventories" all direct costs, but variable costing considers direct costs
to be period costs.
d. Absorption costing "inventories" all fixed costs for the period in ending finished goods
inventory, but variable costing expenses all fixed costs.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-7
55. The costing system that classifies costs by functional group only is
a. standard costing.
b. job order costing.
c. variable costing.
d. absorption costing.
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
56. A functional classification of costs would classify "depreciation on office equipment"
as a
a. product cost.
b. general and administrative expense.
c. selling expense.
d. variable cost.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
57. The costing system that classifies costs by both functional group and behavior is
a. process costing.
b. job order costing.
c. variable costing.
d. absorption costing.
ANS: C
PTS: 1
DIF: Easy
OBJ: 3-6
58. Under variable costing, which of the following are costs that can be inventoried?
a. variable selling and administrative expense
b. variable manufacturing overhead
c. fixed manufacturing overhead
d. fixed selling and administrative expense
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
59. Consider the following three product costing alternatives: process costing, job order costing, and
standard costing. Which of these can be used in conjunction with variable costing?
a. job order costing
b. standard costing
c. process costing
d. all of them
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
DIF: Easy
OBJ: 3-6
60. Another name for variable costing is
a. full costing.
b. direct costing.
c. standard costing.
d. adjustable costing.
ANS: B
PTS: 1
61. If a firm uses variable costing, fixed manufacturing overhead will be included
a. only on the balance sheet.
b. only on the income statement.
c. on both the balance sheet and income statement.
d. on neither the balance sheet nor income statement.
ANS: B
PTS: 1
62. Under variable costing,
DIF: Easy
OBJ: 3-6
a.
b.
c.
d.
all product costs are variable.
all period costs are variable.
all product costs are fixed.
product costs are both fixed and variable.
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
63. How will a favorable volume variance affect net income under each of the following methods?
a.
b.
c.
d.
Absorption
Variable
reduce
reduce
increase
increase
no effect
increase
no effect
reduce
ANS: C
PTS: 1
DIF: Easy
OBJ: 3-7
64. Variable costing considers which of the following to be product costs?
Fixed
Mfg. Costs
Fixed
Selling & Adm.
Variable
Mfg. Costs
yes
yes
no
no
no
no
no
no
yes
yes
yes
yes
a.
b.
c.
d.
ANS: D
PTS: 1
Variable
Selling & Adm.
DIF: Easy
no
yes
yes
no
OBJ: 3-6
65. The variable costing format is often more useful to managers than the absorption costing format
because
a. costs are classified by their behavior.
b. costs are always lower.
c. it is required for external reporting.
d. it justifies higher product prices.
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
66. The difference between the reported income under absorption and variable costing is attributable to the
difference in the
a. income statement formats.
b. treatment of fixed manufacturing overhead.
c. treatment of variable manufacturing overhead.
d. treatment of variable selling, general, and administrative expenses.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-7
67. Which of the following costs will vary directly with the level of production?
a. total manufacturing costs
b. total period costs
c. variable period costs
d. variable product costs
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
68. On the variable costing income statement, the difference between the "contribution margin" and
"income before income taxes" is equal to
a. the total variable costs.
b. the Cost of Goods Sold.
c. total fixed costs.
d. the gross margin.
ANS: C
PTS: 1
DIF: Easy
OBJ: 3-7
69. For financial reporting to the IRS and other external users, manufacturing overhead costs are
a. deducted in the period that they are incurred.
b. inventoried until the related products are sold.
c. treated like period costs.
d. inventoried until the related products have been completed.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
70. In the application of "variable costing" as a cost-allocation process in manufacturing,
a. variable direct costs are treated as period costs.
b. nonvariable indirect manufacturing costs are treated as product costs.
c. variable indirect manufacturing costs are treated as product costs.
d. nonvariable direct costs are treated as product costs.
ANS: C
PTS: 1
DIF: Easy
OBJ: 3-6
71. A basic tenet of variable costing is that period costs should be currently expensed. What is the
rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the amounts to
specific products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by
management.
d. Because period costs will occur whether production occurs, it is improper to allocate these
costs to production and defer a current cost of doing business.
ANS: D
PTS: 1
DIF: Moderate
OBJ: 3-6
72. Which of the following is a term more descriptive of the term "direct costing"?
a. out-of-pocket costing
b. variable costing
c. relevant costing
d. prime costing
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
73. What costs are treated as product costs under variable (direct) costing?
a. only direct costs
b. only variable production costs
c. all variable costs
d. all variable and fixed manufacturing costs
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
74. Which of the following must be known about a production process in order to institute a variable
costing system?
a. the variable and fixed components of all costs related to production
b. the controllable and non-controllable components of all costs related to production
c. standard production rates and times for all elements of production
d. contribution margin and break-even point for all goods in production
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
75. Why is variable costing not in accordance with generally accepted accounting principles?
a. Fixed manufacturing costs are treated as period costs under variable costing.
b. Variable costing procedures are not well known in industry.
c. Net earnings are always overstated when using variable costing procedures.
d. Variable costing ignores the concept of lower of cost or market when valuing inventory.
ANS: A
PTS: 1
DIF: Easy
OBJ: 3-6
76. Which of the following is an argument against the use of direct (variable) costing?
a. Absorption costing overstates the balance sheet value of inventories.
b. Variable factory overhead is a period cost.
c. Fixed manufacturing overhead is difficult to allocate properly.
d. Fixed manufacturing overhead is necessary for the production of a product.
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
77. Which of the following statements is true for a firm that uses variable costing?
a. The cost of a unit of product changes because of changes in the number of units
manufactured.
b. Profits fluctuate with sales.
c. An idle facility variation is calculated.
d. None of the above.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
78. An income statement is prepared as an internal report. Under which of the following methods would
the term contribution margin appear?
Absorption costing
Variable costing
no
no
yes
yes
no
yes
no
yes
a.
b.
c.
d.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-6
79. In an income statement prepared as an internal report using the variable costing method, fixed
manufacturing overhead would
a. not be used.
b. be used in the computation of operating income but not in the computation of the
contribution margin.
c. be used in the computation of the contribution margin.
d. be treated the same as variable manufacturing overhead.
ANS: B
PTS: 1
DIF: Easy
OBJ: 3-7
80. Variable costing has an advantage over absorption costing for which of the following purposes?
a. analysis of profitability of products, territories, and other segments of a business
b. determining the CVP relationship among the major factors of selling price, sales mix, and
sales volume
c. minimizing the effects of inventory changes on net income
d. all of the above
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
81. In the variable costing income statement, which line separates the variable and fixed costs?
a. selling expenses
b. general and administrative expense
c. product contribution margin
d. total contribution margin
ANS: D
PTS: 1
DIF: Easy
OBJ: 3-6
82. A firm presently has total sales of $100,000. If its sales rise, its
a. net income based on variable costing will go up more than its net income based on
absorption costing.
b. net income based on absorption costing will go up more than its net income based on
variable costing.
c. fixed costs will also rise.
d. per unit variable costs will rise.
ANS: A
PTS: 1
DIF: Moderate
OBJ: 3-7
Young Corporation has the following standard costs associated with the manufacture and sale of one
of its products:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expenses
Fixed SG&A expense
$3.00 per unit
2.50 per unit
1.80 per unit
4.00 per unit (based on an estimate
of 50,000 units per year)
.25 per unit
$75,000 per year
During its first year of operations Young manufactured 51,000 units and sold 48,000. The
selling price per unit was $25. All costs were equal to standard.
83.
Refer to Young Corporation. Under absorption costing, the standard production cost
per unit for the current year was
a. $11.30.
b. $ 7.30.
c. $11.55.
d. $13.05.
ANS: A
DM + DL + VFOH + FFOH = Standard Cost per Unit
$3.00 + $2.50 + $1.80 + $4.00 = $11.30
PTS: 1
a.
b.
c.
d.
DIF: Easy
OBJ: 3-7
84.
Refer to Young Corporation. The volume variance under absorption costing is
$8,000 F.
$4,000 F.
$4,000 U.
$8,000 U.
ANS: B
1,000 favorable units production variance * $4.00 fixed factory overhead = $4,000 F
PTS: 1
DIF: Moderate
OBJ: 3-7
85.
Refer to Young Corporation. Under variable costing, the standard production cost per
unit for the current year was
a. $11.30.
b. $7.30.
c. $7.55.
d. $11.55.
ANS: B
DM + DL + VOH = Standard Production Cost per Unit
$3.00 + $2.50 + $1.80 = $7.30
PTS: 1
DIF: Easy
OBJ: 3-7
86.
Refer to Young Corporation. Based on variable costing, the income before income
taxes for the year was
a. $570,600.
b. $560,000.
c. $562,600.
d. $547,500.
ANS: C
Sales:
Variable Expenses
Contribution Margin
Fixed Expenses
Overhead
Net Income
$1,200,000
362,400
$ 837,600
$ 200,000
75,000
$ 562,600
=========
PTS: 1
DIF: Moderate
OBJ: 3-7
Preston Company
The following information is available for Preston Company for its first year of operations:
Sales in units
Production in units
Manufacturing costs:
Direct labor
Direct material
Variable overhead
Fixed overhead
Net income (absorption method)
Sales price per unit
5,000
8,000
$3 per unit
5 per unit
1 per unit
$100,000
$30,000
$40
87.
Refer to Preston Company. If Preston Company had used variable costing, what
amount of income before income taxes would it have reported?
a. $30,000
b. ($7,500)
c. $67,500
d. can't be determined from the information given
ANS: B
Net Income--Absorption Costing
Fixed OH in Ending Inventory:
$100,000 * (3,000/8,000)
Net Loss--Variable Costing
PTS: 1
DIF: Moderate
$ 30,000
($37,500)
($ 7,500)
=======
OBJ: 3-7
88.
Refer to Preston Company. What was the total amount of Selling,General and
Administrative expense incurred by Preston Company?
a. $30,000
b. $62,500
c. $6,000
d. can't be determined from the information given
ANS: B
Sales
COGS
Gross Profit
SG&A
Net Income
X = $62,500
$200,000
107,500
92,500
X
$ 30,000
PTS: 1
DIF: Moderate
OBJ: 3-7
89.
Refer to Preston Company. If Preston Company were using variable costing, what
would it show as the value of ending inventory?
a. $120,000
b. $64,500
c. $27,000
d. $24,000
ANS: C
3,000 units * $9.00/unit = $27,000
PTS: 1
DIF: Easy
OBJ: 3-7
McCain Corporation
The following information has been extracted from the financial records of McCain Corporation for its
first year of operations:
Units produced
Units sold
Variable costs per unit:
Direct material
Direct labor
Manufacturing overhead
SG&A
Fixed costs:
Manufacturing overhead
SG&A
10,000
7,000
$8
9
3
4
$70,000
30,000
90.
Refer to McCain Corporation. Based on absorption costing, McCain Corporation's
income in its first year of operations will be
a. $21,000 higher than it would be under variable costing.
b. $70,000 higher than it would be under variable costing.
c. $30,000 higher than it would be under variable costing.
d. higher than it would be under variable costing, but the exact difference cannot be
determined from the information given.
ANS: A
3,000 unsold units * $7.00 fixed overhead/unit = $21,000 higher under absorption costing.
PTS: 1
DIF: Moderate
OBJ: 3-7
91.
Refer to McCain Corporation. Based on absorption costing, the Cost of Goods
Manufactured for McCain Corporation's first year would be
a. $200,000.
b. $270,000.
c. $300,000.
d. $210,000.
ANS: B
COGM = Variable Overhead + Fixed Overhead
COGM = (10,000 units * $20/unit) + $70,000
COGM = $270,000
PTS: 1
DIF: Moderate
OBJ: 3-7
92.
Refer to McCain Corporation. Based on absorption costing, what amount of period
costs will McCain Corporation deduct?
a. $70,000
b. $79,000
c. $30,000
d. $58,000
ANS: D
Period costs = Variable SG&A + Fixed SG&A
$58,000 = (7,000 * $4) + $30,000
PTS: 1
DIF: Moderate
OBJ: 3-7
93.
For its most recent fiscal year, a firm reported that its contribution margin was equal
to 40 percent of sales and that its net income amounted to 10 percent of sales. If its fixed costs for the
year were $60,000, how much were sales?
a. $150,000
b. $200,000
c. $600,000
d. can't be determined from the information given
ANS: B
Let S = Sales
Let CM = .40S
Let NI = .10S
FC = .30S
$60,000 = .30S
S = $200,000
PTS: 1
DIF: Moderate
OBJ: 3-7
94.
At its present level of operations, a small manufacturing firm has total variable costs
equal to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based on variable
costing, if sales change by $1.00, income will change by
a. $0.25.
b. $0.10.
c. $0.75.
d. can't be determined from the information given.
ANS: A
Let S = 1.00
Let VC = .75S
Let CM = .25S
Under variable costing every dollar of sales will increase net income by $0.25.
PTS: 1
DIF: Easy
OBJ: 3-7
95.
The following information regarding fixed production costs from a manufacturing
firm is available for the current year:
$ 16,000
100,000
Fixed costs in the beginning inventory
Fixed costs incurred this period
Which of the following statements is not true?
a. The maximum amount of fixed production costs that this firm could deduct using
absorption costs in the current year is $116,000.
b. The maximum difference between this firm's the current year income based on absorption
costing and its income based on variable costing is $16,000.
c. Using variable costing, this firm will deduct no more than $16,000 for fixed production
costs.
d. If this firm produced substantially more units than it sold in the current year, variable
costing will probably yield a lower income than absorption costing.
ANS: C
PTS: 1
DIF: Moderate
OBJ: 3-7
Stellar Corporation
The following information was extracted from the first year absorption-based accounting records of
Stellar Corporation
Total fixed costs incurred
Total variable costs incurred
Total period costs incurred
Total variable period costs incurred
Units produced
Units sold
Unit sales price
$100,000
50,000
70,000
30,000
20,000
12,000
$12
96.
Refer to Stellar Corporation. What is Cost of Goods Sold for Stellar Corporation's first
year?
a. $80,000
b. $90,000
c. $48,000
d. can't be determined from the information given
ANS: C
Total variable manufacturing costs = $50,000 - 30,000 = $20,000
Total fixed period costs incurred = $70,000 - 30,000 = $40,000
Total fixed manufacturing costs = $100,000 - 40,000 = $60,000
Total manufacturing costs = $60,000 + $20,000 = $80,000
Percent of goods sold: 12,000/20,000 = 60%
$80,000 * 60% = $48,000
PTS: 1
DIF: Difficult
OBJ: 3-7
97.
Refer to Stellar Corporation. If Stellar Corporation had used variable costing in its
first year of operations, how much income (loss) before income taxes would it have reported?
a. ($6,000)
b. $54,000
c. $26,000
d. $2,000
ANS: D
Sales
Less: Variable Costs
Manufacturing $20,000 * 60%
Period Costs $30,000
Contribution Margin
Fixed Costs
Variable Costing Net Income
PTS: 1
DIF: Difficult
$144,000
12,000
30.000
$102,000
100,000
2,000
======
OBJ: 3-7
98.
Refer to Stellar Corporation. Based on variable costing, if Stellar had sold 12,001
units instead of 12,000, its income before income taxes would have been
a. $9.50 higher.
b. $11.00 higher.
c. $8.50 higher.
d. $8.33 higher.
ANS: A
Sales Price per Unit:
Variable Costs per Unit ($50,000 / 20,000)
Contribution Margin
PTS: 1
DIF: Moderate
$12.00
2.50
$ 9.50
======
OBJ: 3-7
Monarch Corporation
Monarch Corporation produces a single product. The following cost structure applied to its first year
of operations:
Variable costs:
SG&A
Production
Fixed costs (total cost incurred for the year):
SG&A
Production
$2 per unit
$4 per unit
$14,000
$20,000
99.
Refer to Monarch Corporation. Assume for this question only that during the current
year Monarch Corporation manufactured 5,000 units and sold 3,800. There was no beginning or
ending work-in-process inventory. How much larger or smaller would Monarch Corporation's income
be if it uses absorption rather than variable costing?
a. The absorption costing income would be $6,000 larger.
b. The absorption costing income would be $6,000 smaller.
c. The absorption costing income would be $4,800 larger.
d. The absorption costing income would be $4,000 smaller.
ANS: C
Add back fixed manufacturing portion of units unsold (1,200/5,000) * $20,000 = $4,800.
PTS: 1
DIF: Moderate
OBJ: 3-7
100.
Refer to Monarch Corporation. Assume for this question only that Monarch
Corporation manufactured and sold 5,000 units in the current year. At this level of activity it had an
income of $30,000 using variable costing. What was the sales price per unit?
a. $16.00
b. $18.80
c. $12.80
d. $14.80
ANS: B
Sales--5,000 units * $18.80/unit
Variable Costs:
Manufacturing
SG&A
Contribution Margin
Fixed Costs
Manufacturing
SG&A
Net Income
PTS: 1
DIF: Moderate
$94,000
20,000
10,000
$64,000
14,000
20,000
$30,000
=====
OBJ: 3-7
101.
Refer to Monarch Corporation. Assume for this question only that Monarch
Corporation produced 5,000 units and sold 4,500 units in the current year. If Monarch uses absorption
costing, it would deduct period costs of
a. $24,000.
b. $34,000.
c. $27,000.
d. $23,000.
ANS: D
Variable SG&A Costs (4,500 units * $2/unit)
Fixed SG&A Costs
Total period costs to be deducted
$ 9,000
14,000
$23,000
======
PTS: 1
DIF: Moderate
OBJ: 3-7
102.
Refer to Monarch Corporation. Assume for this question only that Monarch
Corporation manufactured 5,000 units and sold 4,000 in the current year. If Monarch employs a
costing system based on variable costs, the company would end the current year with a finished goods
inventory of
a. $4,000.
b. $8,000.
c. $6,000.
d. $5,000.
ANS: A
1,000 units * $4.00 variable cost per unit = $4,000
PTS: 1
DIF: Moderate
OBJ: 3-7
Companies A, B, and C
Three new companies (A, B, and C) began operations on January 1 of the current year. Consider the
following operating costs that were incurred by these companies during the complete calendar year:
Production in units
Sales price per unit
Fixed production costs
Variable production costs
Variable SG&A
Fixed SG&A
Company A
10,000
$10
$10,000
$30,000
$10,000
$30,000
Company B
10,000
$10
$20,000
$20,000
$20,000
$20,000
Company C
10,000
$10
$30,000
$10,000
$30,000
$10,000
103.
Refer to Companies A, B, and C. Based on sales of 7,000 units, which company will
report the greater income before income taxes if absorption costing is used?
a. Company A
b. Company B
c. Company C
d. All of the companies will report the same income.
ANS: D
Under absorption costing, the net income for all three companies is the same.
PTS: 1
DIF: Moderate
OBJ: 3-7
104.
Refer to Companies A, B, and C. Based on sales of 7,000 units, which company will
report the greater income before income taxes if variable costing is used?
a. Company A
b. Company B
c. Company C
d. All of the companies will report the same income.
ANS: A
Since Company R has the largest variable manufacturing costs, income will increase by the
amount that was held in finished goods inventory.
PTS: 1
DIF: Moderate
OBJ: 3-7
105.
Refer to Companies A, B, and C. Based on sales of 10,000 units, which company will
report the greater income before income taxes if variable costing is used?
a. Company A
b. Company B
c. Company C
d. All of the companies will report the same income before income taxes.
ANS: D
Since all the companies have the same net income and all had the same amount of sales, all
three companies would have the same net income under variable costing.
PTS: 1
DIF: Moderate
OBJ: 3-7
106.
A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling
40,000 units in the coming year. To realize a profit of $20,000, the firm must have a sales price per
unit of at least
a. $11.00.
b. $11.50.
c. $10.00.
d. $10.50.
ANS: B
Sales--40,000 units * $11.50/unit
Variable Costs:
Contribution Margin
Fixed Costs
Net Income
PTS: 1
DIF: Moderate
$460,000
240,000
$220,000
200,000
$ 20,000
=====
OBJ: 3-7
Kempf Corporation
Kempf Corporation produces a single product that sells for $7.00 per unit. Standard capacity is
100,000 units per year; 100,000 units were produced and 80,000 units were sold during the year.
Manufacturing costs and selling and administrative expenses are presented below.
There were no variances from the standard variable costs. Any under- or overapplied overhead is
written off directly at year-end as an adjustment to cost of goods sold.
Direct material
Direct labor
Manufacturing overhead
Selling & Administration expense
Fixed costs
$0
0
$150,000
80,000
Variable costs
$1.50 per unit produced
1.00 per unit produced
0.50 per unit produced
0.50 per unit sold
Kempf Corporation had no inventory at the beginning of the year.
107.
Refer to Kempf Corporation. In presenting inventory on the balance sheet at
December 31, the unit cost under absorption costing is
a. $2.50.
b. $3.00.
c. $3.50.
d. $4.50.
ANS: D
DM + DL + VOH + FOH = Absorption Cost per Unit
$1.50 + $1.00 + $0.50 + $(150,000/100,000) = $4.50 / Unit
PTS: 1
a.
b.
c.
d.
108.
$50,000
$80,000
$90,000
$120,000
DIF: Moderate
Refer to Kempf Corporation. What is the net income under variable costing?
ANS: A
Sales
Variable Costs:
Materials
Labor
Overhead
Selling and Administrative
Contribution Margin
Fixed Costs
Overhead
Selling and Administrative
Net Income
PTS: 1
a.
b.
c.
d.
109.
$50,000
$80,000
$90,000
$120,000
OBJ: 3-7
DIF: Moderate
$560,000
$120,000
80,000
40,000
40,000
$280,000
150,000
80,000
$ 50,000
=======
OBJ: 3-7
Refer to Kempf Corporation. What is the net income under absorption costing?
ANS: B
Sales
Cost of Goods Sold:
Materials
Labor
Overhead (Variable and Fixed)
Gross Profit
$560,000
$120,000
80,000
160,000
$200,000
Period Costs:
Selling and Administrative
Net Income
PTS: 1
DIF: Moderate
$120,000
$ 80,000
=======
OBJ: 3-7
EXERCISES
Characteristics of Absorption Costing and Variable Costing
40. Consider the statements that follow.
1.
2.
3.
4.
5.
6.
7.
Variable selling costs are expensed when incurred.
The income statement discloses a company’s contribution margin.
Fixed manufacturing overhead is attached to each unit produced.
Direct labor becomes part of a unit’s cost.
Sales revenue minus cost of goods sold equals contribution margin.
This method must be used for external financial reporting.
Fixed selling and administrative expenses are treated in the same manner as fixed
manufacturing overhead.
8. This method is sometimes called full costing.
9. This method requires the calculation of a fixed manufacturing cost per unit.
Required:
Determine which of the nine statements:
A. Relate only to absorption costing.
B. Relate only to variable costing.
C. Relate to both absorption costing and variable costing.
D. Relate to neither absorption costing nor variable costing.
LO: 1, 2, 3, 6 Type: RC, N
Answer:
A. 3, 6, 8, 9
B. 2, 7
C. 1, 4
D. 5
Miscellaneous Calculations: Variable and Absorption Costing
41. Information taken from Grille Corporation's May accounting records follows.
Direct materials used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative costs
Fixed selling and administrative costs
Sales revenues
$150,000
80,000
30,000
100,000
51,000
60,000
625,000
Required:
A. Assuming the use of variable costing, compute the inventoriable costs for the month.
B. Compute the month's inventoriable costs by using absorption costing.
C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units
were sold during May. Determine the amount of fixed manufacturing overhead and fixed
selling and administrative costs that would be expensed for the month under (1) variable
costing and (2) absorption costing.
D. Assume the same data as in requirement "C." Compute the contribution margin that
would be reported on a variable-costing income statement.
LO: 1, 2, 3 Type: A
Answer:
A. Direct materials used
Direct labor
Variable manufacturing overhead
Total
$150,000
80,000
30,000
$260,000
B.
Direct materials used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
C.
1.
Fixed manufacturing overhead: $100,000
Fixed selling and administrative costs: $60,000
2.
Fixed manufacturing overhead: ($100,000 ÷ 20,000 units) x 18,000 units = $90,000
Fixed selling and administrative costs: $60,000
D.
$150,000
80,000
30,000
100,000
$360,000
Variable manufacturing costs: $150,000 + $80,000 + $30,000 = $260,000
Variable manufacturing costs per unit: $260,000 ÷ 20,000 units = $13
Contribution margin: $625,000 - [(18,000 x $13) + $51,000] = $340,000
Miscellaneous Calculations: Variable and Absorption Costing
42. Sosa, Inc., began operations at the start of the current year, having a production target of
60,000 units. Actual production totaled 60,000 units, and the company sold 90% of its
manufacturing output at $55 per unit. The following costs were incurred:
Manufacturing:
Direct materials used
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Selling and administrative:
Variable
Fixed
$300,000
420,000
360,000
600,000
120,000
630,000
Required:
A. Assuming the use of variable costing, compute the cost of Sosa's ending finished-goods
inventory.
B. Compute the company's contribution margin. Would Sosa disclose the contribution
margin on a variable-costing income statement or an absorption-costing income
statement?
C. Assuming the use of absorption costing, how much fixed selling and administrative cost
would Sosa include in the ending finished-goods inventory?
D. Compute the company's gross margin.
LO: 1, 2, 3 Type: RC, A
Answer:
A. Variable production costs total $1,080,000 ($300,000 + $420,000 + $360,000), or $18
per unit ($1,080,000 ÷ 60,000 units). Since 6,000 units remain in inventory [0 + 60,000
- (60,000 x 90%)], the ending finished goods totals $108,000 (6,000 x $18).
B.
Sales revenue (60,000 units x 90% x $55)
Less: Variable cost of goods sold
(60,000 units x 90% x $18)
Variable selling and administrative
Contribution margin
$2,970,000
$972,000
120,000
1,092,000
$1,878,000
The contribution margin is disclosed on a variable-costing income statement.
C.
None. All fixed selling and administrative cost is treated as a period cost and expensed
against revenue.
D.
The cost of a unit would increase by $10 ($600,000 ÷ 60,000 units) because of the
addition of fixed manufacturing overhead. Thus:
Sales revenue
Cost of goods sold (60,000 units x 90% x $28)
Gross margin
$2,970,000
1,512,000
$1,458,000
Absorption- and Variable-Costing Income Calculations
43. The following data relate to Venture Company, a new corporation, during a period when the
firm produced and sold 100,000 units and 90,000 units, respectively:
Direct materials used
Direct labor
Fixed manufacturing overhead
Variable manufacturing overhead
Fixed selling and administrative expenses
Variable selling and administrative expenses
$400,000
200,000
250,000
120,000
300,000
45,000
The company met its original planned production target of 100,000 units. There were no
variances during the period, and the firm's selling price is $15 per unit.
Required:
A. What is the cost of Venture's end-of-period finished-goods inventory under the variablecosting method?
B. Calculate the company's variable-costing net income.
C. Calculate the company's absorption-costing net income.
LO: 1, 2, 3 Type: A
Answer:
A. Ending finished-goods inventory (units): 0 + 100,000 - 90,000 = 10,000
Inventoriable costs under variable costing:
Direct materials used
Direct labor
Variable manufacturing overhead
Total
$400,000
200,000
120,000
$720,000
Variable cost per unit produced: $720,000 ÷ 100,000 units = $7.20 per unit
Ending inventory: 10,000 units x $7.20 = $72,000
B.
Sales revenue (90,000 units x $15)
Less: Variable costs [(90,000 units x $7.20) + $45,000]
Contribution margin
Less: Fixed costs ($250,000 + $300,000)
Net income
C.
Predetermined fixed overhead rate: $250,000 ÷ 100,000 units = $2.50
Absorption cost per unit: $7.20 + $2.50 = $9.70
Sales revenue (90,000 units x $15)
Less: Cost of goods sold (90,000 units x $9.70)
Gross margin
Less: Operating costs ($300,000 + $45,000)
Net income
$1,350,000
693,000
$ 657,000
550,000
$ 107,000
$1,350,000
873,000
$ 477,000
345,000
$ 132,000
Absorption- and Variable-Costing Inventory/Income Calculations
44. The following data relate to Hunter, Inc., a new company:
Planned and actual production
Sales at $48 per unit
Manufacturing costs:
Variable
Fixed
Selling and administrative costs:
Variable
Fixed
200,000 units
170,000 units
$18 per unit
$840,000
$7 per unit
$925,000
There were no variances during the period.
Required:
A. Determine the number of units in the ending finished-goods inventory.
B. Calculate the cost of the ending finished-goods inventory under (1) variable costing and
(2) absorption costing.
C. Determine the company's variable-costing net income.
D. Determine the company's absorption-costing net income.
LO: 1, 2, 3 Type: A
Answer:
A. Ending finished-goods inventory: 0 + 200,000 - 170,000 = 30,000 units
B.
Variable costing: 30,000 units x $18 = $540,000
Absorption costing:
Predetermined fixed overhead rate: $840,000 ÷ 200,000 units = $4.20;
30,000 units x ($18.00 + $4.20) = $666,000
C.
Sales revenue (170,000 units x $48)
Less: Variable costs [170,000 units x ($18 + $7)]
Contribution margin
Less: Fixed costs ($840,000 + $925,000)
Net income
$8,160,000
4,250,000
$3,910,000
1,765,000
$2,145,000
D.
Sales revenue (170,000 units x $48)
Less: Cost of goods sold [170,000 units x ($18.00 + $4.20)]
Gross margin
Less: Operating costs [(170,000 units x $7) + $925,000]
Net income
$8,160,000
3,774,000
$4,386,000
2,115,000
$2,271,000
Conversion of Absorption-Cost Data to Variable-Cost Data; Working Backwards
45. Kim, Inc., began business at the start of the current year and maintains its accounting records
on an absorption-cost basis. The following selected information appeared on the company's
income statement and end-of-year balance sheet:
Income-statement data:
Sales revenues (35,000 units x $22)
Gross margin
Total sales and administrative expenses
Balance-sheet data:
Ending finished-goods inventory (12,000 units)
$770,000
210,000
160,000
192,000
Kim achieved its planned production level for the year. The company's fixed manufacturing
overhead totaled $141,000, and the firm paid a 10% commission based on gross sales dollars
to its sales force.
Required:
A. How many units did Kim plan to produce during the year.
B. How much fixed manufacturing overhead did the company apply to each unit produced?
C. Compute Kim's cost of goods sold.
D. How much variable cost did the company attach to each unit manufactured?
LO: 1, 2, 3 Type: A, N
Answer:
A. Sales (35,000 units) + ending finished-goods inventory (12,000 units) = production
(47,000 units). Note: There is no beginning finished-goods inventory.
B.
Since planned and actual production figures are the same, Kim applied $3 to each unit
($141,000 ÷ 47,000 units).
C.
Sales revenue
Gross margin
Cost of goods sold
D.
Kim attached $13 to each unit. This figure can be derived by analyzing cost of goods
sold:
$770,000
210,000
$560,000
Cost of goods sold
Fixed cost in cost of goods sold (35,000 units x $3)
Variable cost of goods sold
$560,000
105,000
$455,000
$455,000 ÷ 35,000 units = $13
The same $13 figure can be obtained by studying the ending finished-good inventory:
Ending finished-goods inventory
Fixed cost (12,000 units x $3)
Variable cost
$192,000
36,000
$156,000
$156,000 ÷ 12,000 units = $13
Reconciliation of Absorption- and Variable-Costing Income
46. Houston Company has per-unit fixed and variable manufacturing costs of $40 and $15,
respectively. Variable selling and administrative costs are $9 per unit. Consider the two cases
that follow for the firm.
Case A: Variable-costing net income, $110,000; sales, 6,000 units; production, 6,000
units
Case B: Variable-costing net income, $178,000; sales, 7,500 units; production, 7,100
units
Required:
A. From a product-costing perspective, what is the basic difference between absorption
costing and variable costing?
B. Compute Houston's absorption-costing net income in Case A.
C. Compute Houston's absorption-costing net income in Case B.
LO: 1, 4 Type: RC, A
Answer:
A. The difference between absorption costing and variable costing lies in the treatment of
fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead
is a product cost and attached to each unit produced. In contrast, under variable costing, it
is written off (expensed) as a period cost.
B. Since the number of units sold equals the number of units produced, variable- and
absorption-income figures are the same: $110,000.
C. With sales of 7,500 units and production of 7,100 units, income computed under
absorption costing includes $16,000 (400 units x $40) of prior-period fixed manufacturing
overhead. Absorption income is therefore $162,000 ($178,000 - $16,000).
Reconciliation of Absorption- and Variable-Costing Income
47. Beachcraft Corporation has fixed manufacturing cost of $12 per unit. Consider the three
independent cases that follow.
Case A: Absorption- and variable costing net income each totaled $240,000 in a period
when the firm produced 18,000 units.
Case B: Absorption-costing net income totaled $320,000 in a period when finishedgoods inventory levels rose by 7,000 units.
Case C: Absorption-costing net income and variable-costing net income respectively
totaled $220,000 and $250,000 in a period when the beginning finished-goods
inventory was 14,000 units.
Required:
A. In Case A, how many units were sold during the period?
B. In Case B, how much income would Beachcraft report under variable costing?
C. In Case C, how many units were in the ending finished-goods inventory?
LO: 4 Type: A
Answer:
A. Absorption- and variable costing income will be the same amount when inventory levels
are unchanged. Thus, sales totaled 18,000 units.
B. The difference between absorption-costing income and variable-costing income is $84,000
(7,000 units x $12). Given that inventories are rising, variable-costing net income will
amount to $236,000 ($320,000 - $84,000).
C. The $30,000 difference in income ($250,000 - $220,000) is explained by the change in
inventory units, multiplied by the fixed overhead per unit. Thus, the inventory changed by
2,500 units ($30,000 ÷ $12). Given that absorption income is less than income computed
by the variable-costing method, inventory levels must have decreased, resulting in an
ending inventory level of 11,500 units (14,000 - 2,500).
Variable- and Absorption-Costing Income Statements, Volume Variance
50. Outdoors Company manufactures sleeping bags that sell for $30 each. The variable standard
costs of production are $19.50. Budgeted fixed manufacturing overhead is $100,000, 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 $0.50 per
sleeping bag sold; fixed selling and administrative costs are $5,000.
Required:
A. Calculate the standard product cost per sleeping bag under absorption costing and variable
costing.
B. Compute the fixed-overhead volume variance.
C. Prepare income statements for the year by using absorption costing and variable costing.
LO: 2, 3, 9 Type: A
Answer:
A. The absorption cost is $29.50 [$19.50 + ($100,000  10,000 units)], and the variable cost is
$19.50.
B.
C.
Volume variance = budgeted fixed overhead - fixed overhead applied
= $100,000 - (12,500 units x $10)
= $(25,000) or $25,000F
Outdoors Company
Absorption-Costing Income Statement
For the Year Ended December 31, 20xx
Sales revenue (11,000 units x $30)
Less: Cost of goods sold (11,000 units x $29.50)
Gross margin (at standard)
Add: Fixed-overhead volume variance
Gross margin (at actual)
Less: Operating expenses [(11,000 units x $0.50) + $5,000]
Net income
$330,000
324,500
$ 5,500
25,000
$ 30,500
10,500
$ 20,000
Outdoors Company
Variable-Costing Income Statement
For the Year Ended December 31, 20xx
Sales revenue (11,000 units x $30)
Less: Var. cost of goods sold (11,000 units x $19.50)
Var. operating expenses (11,000 units x $0.50)
Contribution margin
Less: Fixed costs ($100,000 + $5,000)
Net income
$330,000
$214,500
5,500
220,000
$110,000
105,000
$ 5,000
DISCUSSION QUESTIONS
Absorption Costing, Variable Costing, and Terminology
51. Absorption and variable costing are two different methods of measuring income and costing
inventory.
Required:
A. Product costs are defined as costs associated with the manufacturing process. How does
the operational definition of product cost differ between absorption costing and variable
costing?
B. An absorption-costing income statement will report gross profit or gross margin whereas a
variable-costing income statement will report contribution margin. What is the difference
between these terms?
C. BoSan, Inc., has greatly modified its manufacturing process to reduce non-value-added
activities and has also adopted the just-in-time philosophy. As a result, the average
finished-goods inventory has dropped from six weeks' supply to eight business days'
supply. In view of these changes, will the difference in operating income between
variable costing and absorption costing be greater or less than in the past? Explain.
LO: 1, 2, 3, 6 Type: RC, N
Answer:
A. The sole difference between the two methods is that fixed manufacturing overhead costs
are defined as a product cost under absorption costing and as a period cost under variable
costing.
B. Gross profit (gross margin) is the difference between sales and cost of goods sold. Cost of
goods sold includes variable and fixed manufacturing costs. Contribution margin, on the
other hand, is the difference between sales and variable expenses, namely, variable cost of
goods sold and variable operating expenses. Fixed costs are ignored when calculating the
contribution margin.
C. These changes should reduce the differences in operating income between absorption
costing and variable costing. Inventories of work-in-process and finished goods are much
smaller than previously; thus, changes in inventories will be much less significant, which
reduces differences in income.
Reconciliation of Absorption- and Variable-Costing Income
52. The difference in net income between absorption and variable costing can be explained by the
change in finished-goods inventory (in units) multiplied by the standard fixed manufacturing
overhead rate.
Required:
Explain why this calculation accounts for the difference noted.
LO: 4 Type: RC
Answer:
The only difference between the two methods is the treatment of fixed manufacturing
overhead. Such amounts are expensed under variable costing whereas with absorption
costing, a predetermined amount is attached to each unit manufactured. This applied overhead
moves back and forth between the balance sheet and the income statement depending on what
happens to inventory during the period (i.e., increase or decrease). Because of this situation,
the change in inventory multiplied by the fixed manufacturing overhead per unit corresponds
with the difference in reported income between absorption costing and variable costing.