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Variable costing
1. To apply direct costing method it is necessary that you know
A. Variable and fixed cost related to production
B. Controllable and uncontrollable cost of production
C. Contribution margin and break even point in production
D. Standard production rate and times of production elements
2. The following statements about the adoption of variable costing are true, except:
A. A direct cost may not become a product cost.
B. An indirect cost may be assigned as part of product cost.
C. It is an acceptable method for general reporting purposes.
D. All fixed manufacturing costs are recognized as period costs.
3. Which of the following is NOT an advantage of using variable costing for internal
reporting purposes?
A. The impact of fixed costs on profits is emphasized.
B. Total costs may be overlooked when evaluating profits.
C. Profits are directly influenced by changes in sales volume.
D. Fixed costs are reported at incurred values, not absorbed values, thus improving
control over those costs.
7. Under the variable-costing concept, unit product cost would most likely be increased
by
A. A decrease in the number of units produced.
B. An increase in the commission paid to salesman for each unit sold.
C. A decrease in the remaining useful life of factory machinery depreciated on the
units-of-production method.
D. An increase in the remaining useful life of factory machinery depreciated on the
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sum-of-the-year’s digits method.
9. Which of the following statements is true for a firm that uses variable costing?
A. Profits fluctuate with sales.
B. An idle facility variation is calculated.
C. Product costs include variable administrative costs.
D. The cost of a unit of product changes because of changes in number of units
manufactured.
10. The change in period-to-period operating income when using variable costing can be
explained by the change in the
A. Unit sales level multiplied by the unit sales price.
B. Unit sales level multiplied by a constant unit contribution margin.
C. Finished goods inventory level multiplied by the unit sales price.
D. Finished goods inventory level multiplied by a constant unit contribution margin.
Absorption costing
11. All of the following are names for the product costing method in which both fixed and
variable costs are included in overhead rates, except:
A. absorption costing C. direct costing
B. conventional costing D. full costing
13. Under absorption costing, fixed manufacturing overhead could be found in all of the
following except the
A. Cost of Goods Sold. C. period costs.
B. finished goods inventory account. D. work-in-process account.
14. Jansen, Inc. pays bonuses to its managers based on operating income. The
company uses absorption costing, and overhead is applied on the basis of direct
labor hours. To increase bonuses, Jansen’s managers may do all of the following
except
A. Produce those products requiring the most direct labor.
B. Defer expenses such as maintenance to a future period.
C. Decrease production of those items requiring the most direct labor.
D. Increase production schedules independent of customer demands.
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16. When a firm prepares financial reports by using absorption costing
A. Profits will always increase with increases in sales.
B. Profits will always decrease with decreases in sales.
C. Decreased output and constant sales result in increased profits.
D. Profits may decrease with increased sales even if there is no change in selling
prices and costs.
17. 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 1 production exceeds period 2 production.
B. period 2 production exceeds period 1 production.
C. fixed production costs are larger in period 2 than period 1.
D. variable production costs are larger in period 2 than period 1.
19. If unit costs remain unchanged and sales volume and sales price per unit both
increase from the preceding period when operating profits were earned, operating
profits must
A. Increase under the variable costing method.
B. Decrease under the variable costing method.
C. Increase under the absorption costing method.
D. Decrease under the absorption costing method.
20. When comparing absorption costing with variable costing, which of the following
statements is not true?
A. When sales volume is more than production volume, variable costing will result in
higher operating profit.
B. Under absorption costing, operating profit is a function of both sales volume and
production volume.
C. Absorption costing enables managers to increase operating profits in the short
run by increasing inventories.
D. A manager who is evaluated based on variable costing operating profit would be
tempted to increase production at the end of a period in order to get a more
favorable review.
21. A firm presently has total sales of $100,000. If its sales rise, its
A. fixed costs will also rise.
B. per unit variable costs will rise.
C. net income based on absorption costing will go up more than its net income
based on variable costing.
D. net income based on variable costing will go up more than its net income based
on absorption costing.
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22. Both Company Y and Company Z produce similar products that need negligible
distribution costs. Their assets operation and accounting are very similar in all
respects except that Company Y uses direct costing and Company Z uses
absorption costing.
A. Co. Z would report a higher net income than Co. Y for the years in which
production equals sales
B. Co. Y would report a higher inventory value than Co. Z for the years in which
production exceeds sales
C. Co. Z would report a higher inventory value than Co. Y for the years in which
production exceeds sales
D. Co. Y would report a higher inventory value than Co. Z for the years in which
production exceeds the normal or practical capacity
23. Absorption costing and variable costing are two different methods of assigning costs
to units produced. Of the following five cost items listed, identify the one that is not
correctly accounted for as a product cost.
Part of Product Cost under
Absorption Cost Variable Cost
A. Direct labor cost Yes Yes
B. Insurance on factory Yes No
C. Manufacturing supplies Yes Yes
D. Packaging and shipping Yes Yes
costs
24. A company’s net income recently increased by 30% while its inventory increased to
equal a full year’s sales requirements. Which of the following accounting methods
would be most likely to produce the favorable income results?
A. Absorption costing. C. Standard direct costing.
B. Direct costing. D. Variable costing.
25. Variable costing and absorption costing will show the same incomes when there are
no
A. beginning and ending inventories.
B. beginning inventories.
C. ending inventories.
D. variable costs.
27. In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and
deducted $30,000 of fixed manufacturing overhead. Marvel Co. must be using
A. absorption costing. C. standard costing.
B. direct costing. D. variable costing.
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28. Other things being equal, net income computed by direct costing method would
exceed net income computed by absorption costing method if
A. Units sold were to exceed units produced.
B. Units produced were to exceed units sold.
C. Fixed manufacturing costs were to increase.
D. Variable manufacturing costs were to increase.
29. Net income is lower under variable costing than under absorption costing when
A. Production equals sales.
B. Production exceeds sales.
C. Production is less than sales.
D. Production increases from the previous period.
30. President X of WXY Corporation requested you to explain the difference of net
income between the variable costing income statements presentation and the
absorption costing method. You would say that the difference
A. Is attributable to the variable costs in the inventory.
B. Is attributable to the fixed costs in ending inventory.
C. Is equal to the fixed costs per unit times the number of units sold.
D. Is none if there is no change in the fixed costs in the beginning and ending
inventories.
32. A manufacturing company prepares income statements using both absorption- and
variable-costing methods. At the end of the period, actual sales revenues, total
gross margin, and total contribution margin approximated budgeted figures, whereas
net income was substantially below the budgeted amount. There were no beginning
or ending inventories. The most likely explanation of the net income shortfall is that,
compared to budget, actual
A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had increased.
C. Sales price and variable costs had declined proportionately.
D. Sales prices had declined proportionately more than variable costs.
33. As compared with total absorption costing profit over the entire life of a company,
total variable costing profit will
A. Be less.
B. Be equal.
C. Be greater.
D. Be substantially greater or less depending upon external factors
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34. How will a favorable volume variance affect net income under each of the following
methods?
A. B. C. D.
Absorption Increase Increase Reduce Reduce
Variable No effect Reduce Increase No effect
35. A single-product company prepares income statements using both absorption and
variable costing methods. Manufacturing overhead cost applied per unit produced in
2001 was the same as in 2000. The 2001 variable costing statement reported a
profit whereas the 2001 absorption costing statement reported a loss. The
difference in reported income could be explained by units produced in 2001 being
A. Less than units sold in 2001.
B. In excess of units sold in 2001.
C. Less than the activity level used for allocating overhead to the product.
D. In excess of the activity level used for allocating overhead to the product.
PROBLEMS
Variable costing
1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single
product in 2000, its first year of operations. Variable manufacturing costs were P30
per unit of product. Planned and actual fixed manufacturing costs were P600,000,
and marketing and administrative costs totaled P400,000 in 2000. MNO sold
120,000 units of product in 2000 at a selling price of P40 per unit. What is the cost
of the ending inventory assuming variable costing is used?
A. P2,250,000 C. P2,640,000
B. P2,400,000 D. P2,750,000
2. LY & Company completed its first year of operations during which time the following
information were generated:
Total units produced 100,000
Total units sold @ P100 per unit 80,000
Work in process ending inventory 20,000
Costs Variable Cost per Fixed Costs
Unit
Raw materials P20.00
Direct labor 12.50
Factory overhead 7.50 P1.2 million
Selling and administrative 10.00 0.7 million
If the company used variable (direct) costing method, the operating income would be
A. P2,100,000 C. P3,040,000
B. P2,480,000 D. P4,000,000c.
3. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest
market for these cookies are as gifts that college students buy for their business
teachers. There are 100 cookies per box. The following income statement shows
the result of the first year of operations. This statement was the one included in the
company’s annual report to the stockholders.
Sales (400 boxes at P12.50 a box) P5,000.00
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Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income 1,000.00
Variable selling and administrative expenses are P0.90 per box sold. The company
produced 500 boxes during the year. Variable manufacturing costs are P5.25 per
box and fixed manufacturing overhead costs total P1,375 for the year.
What is the company’s direct costing net income?
A. P 725 C. P2,265
B. P1,000 D. P2,540
Absorption costing
4. The total production cost for 20,000 units was P21,000 and the total production cost
for making 50,000 units was P34,000. Once production exceeds 25,000 units,
additional fixed costs of P4,000 were incurred. The full production cost per unit for
making 30,000 units is:
A. P0.30 C. P0.84
B. P0.68 D. P0.93
7. Z Corp. incurred the following costs in 2001 (its first year of operations) based on
production of 10,000 units:
Direct material $5 per unit
Direct labor $3 per unit
Variable product costs $2 per unit
Fixed product costs (in total) $100,000
When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was
listed at $100,000. Based on this information, which of the following statements must
be true:
A. Z Corp. sold 5,000 units.
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B. Z Corp. had a very profitable year.
C. Z Corp. sold all 10,000 units that it produced.
D. From the information given, one cannot tell whether Z Corp.'s financial
statements were prepared based on variable or absorption costing.
9. The Blue Company has failed to reach its planned activity level during its first 2 years
of operation. The following table shows the relationship among units produced,
sales, and normal activity for these years and the projected relationship for Year 3.
All prices and costs have remained the same for the last 2 years and are expected to
do so in Year 3. Income has been positive in both Year 1 and Year 2.
Units Produced Sales Planned Activity
Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000
Because Blue Company uses an absorption-costing system, gross margin for year 3
should be
A. Equal to Year 1. C. Greater than Year 1.
B. Equal to Year 2. D. Greater than Year 2.
10. Don Juan Ltd. Manufactures a single product for which the costs and selling prices
are:
Variable production costs P 50 per unit
Selling price¶ P125 per unit
Fixed production overhead P200,000 per quarter
Fixed selling and administrative overhead P80,000 per quarter
Normal capacity 20,000 units per quarter
Production in first quarter was 19,000 units and sales volume was 16,000 units. No
opening inventory for the quarter.
The absorption costing profit for the quarter was
A. P920,000 C. P960,000
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B. P950,000 D. P970,000
13. A company had an income of P50,000 using direct costing for a given month.
Beginning and ending inventories for the month are 13,000 units and 18,000 units,
respectively. Ignoring income tax, if the fixed overhead application rate was P2 per
unit, what was the income using absorption costing?
A. P40,000 C. P60,000
B. P50,000 D. P70,000
14. GHI Company had P100,000 income using absorption costing. GHI has no variable
manufacturing costs. Beginning inventory was P5,000 and ending inventory was
P12,000. What is the income under variable costing?
A. P88,000 C. P100,000.
B. P93,000 D. P107,000
15. Fleet, Inc. manufactured 700 units of Product A, a new product, during the year.
Product A’s variable and fixed manufacturing costs per unit were $6.00 and $2.00
respectively. The inventory of Product A on December 31, consisted of 100 units.
There was no inventory of Product A on January 1. What would be the change in
the dollar amount of inventory on December 31 if variable costing were used instead
of absorption costing?
A. $0 C. $200 increase.
B. $200 decrease. D. $800 decrease.
16. At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on
hand. Variable and fixed manufacturing cost per unit were $90 and $20,
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respectively. If Killo uses absorption costing rather than direct (variable) costing, the
result would be a higher pretax income of
A. $0. C. $70,000.
B. $20,000. D. $90,000.
17. A company manufactures 50,000 units of a product and sells 40,000 units. Total
manufacturing cost per unit is $50 (variable manufacturing cost, $10; fixed
manufacturing cost, $40). Assuming no beginning inventory, the effect on net
income if absorption costing is used instead of variable costing is that:
A. net income is the same C. net income is $400,000 lower
B. net income is $200,000 higher D. net income is $400,000 higher
18. During its first year of operations, a company produced 275,000 units and sold
250,000 units. The following costs were incurred during the year:
Variable Cost per Fixed Costs
Unit
Direct materials $15.00
Direct labor 10.00
Manufacturing overhead 12.50 $2,200,000
Selling and administrative 2.50 1,375,000
The difference between operating income calculated on the absorption-costing basis
and on the variable costing basis is that absorption-costing operating income is
A. $62,500 lesser. C. $220,000 greater.
B. $200,000 greater. D. $325,000 greater.
Manufacturing costs:
Direct labor $3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead $100,000
Net income (absorption method) $30,000
Sales price per unit $40
19. What would X Co. have reported as its income before income taxes if it had used
variable costing?
A. ($30,000) C. $30,000
B. ($7,500) D. $67,500
20. What was the total amount of SG&A expense incurred by X Co.?
A. $6,000 C. $36,000
B. $30,000 D. $62,500
21. Based on variable costing, what would X Co. show as the value of its ending
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inventory?
A. $24,000 C. $64,500
B. $27,000 D. $120,000
The 200,000 unit budget has been adopted and will be used for allocating fixed
manufacturing costs to units of Product X. At the end of the first 6 months, the following
information is available:
Units
Production completed 120,000
Sales 60,000
All fixed costs are budgeted and incurred uniformly throughout the year, and all costs
incurred coincide with the budget. Over- and under-applied fixed manufacturing costs
are deferred until year-end. Annual sales have the following seasonal pattern.
22. The amount of fixed factory costs applied to product during the first 6 months under
absorption costing is
A. Over-applied by $20,000. C. Under-applied by $80,000.
B. Under-applied by $40,000. D. Equal to the fixed costs incurred.
23. Reported net income (or loss) for the first 6 months under absorption costing is
A. $(40,000) C. $40,000
B. $0 D. $160,000
24. Reported net income (or loss) for the first 6 months under variable costing is
A. $(180,000) C. $40,000
B. $0 D. $180,000
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25. Assuming that 90,000 units of Product X were sold during the first 6 months and that
this is to be used as a basis, the revised budget estimate for the total number of units
to be sold during this year is
A. 200,000 C. 360,000
B. 240,000 D. None of the above
26. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the
absorption costing bases was
A. $900,000 C. $1,220,000
B. $1,200,000 D. $1,350,000
27. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the
variable costing basis was
A. $750,000 C. $1,125,000.
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B. $1,000,000. D. $1,400,000.
28. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption costing
bases were
A. $2,030,000 C. $2,095,000
B. $2,055,000 D. $2,120,000
29. Valyn Corporation’s actual manufacturing contribution margin for 1995 calculated on
the variable costing basis was
A. $4,375,000 C. $4,910,000
B. $4,935,000 D. $5,625,000.
30. The total variable costs expensed in 1995 by Valyn Corporation on the variable
costing basis was
A. $4,325,000 C. $4,500,000
B. $4,375,000 D. $4,550,000
31. The difference between Valyn Corporation’s 1995 operating income calculated on
the absorption costing basis and calculated on the variable costing basis was
A. $25,000 C. $65,000
B. $40,000 D. $90,000
Questions 32 through 37 are based on the following information.
Louder Industries manufactures a single product. Variable production costs are $20 and
fixed production costs are $150,000. Louder uses a normal activity of 10,000 units to set
its standard costs. Louder began the year with no inventory, produced 11,000 units, and
sold 10,500 units.
36. The standard cost of goods sold under variable costing would be
A. $200,000 C. $367,500
B. $210,000 D. Some other number.
37. The standard cost of goods sold under absorption costing would be
A. $200,000 C. $367,500
B. $210,000 D. Some other number.
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When the going gets tough, the tough gets going.
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ANSWER KEY
Theory Problem
1. A 21. D 1. B 21. B
2. C 22. C 2. A 22. A
3. B 23. D 3. A 23. C
4. D 24. A 4. D 24. B
5. C 25. A 5. D 25. D
6. D 26. D 6. D 26. B
7. C 27. A 7. A 27. B
8. B 28. A 8. D 28. C
9. A 29. B 9. A 29. D
10. B 30. D 10. B 30. B
11. C 31. B 11. C 31. A
12. A 32. B 12. B 32. A
13. C 33. B 13. C 33. C
14. C 34. A 14. B 34. A
15. D 35. A 15. B 35. C
16. D 16. B 36. B
17. B 17. D 37. C
18. E 18. B
19. A 19. B
20. D 20. D
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