VARIABLE COSTING

MANACT1
 True or False
1. Variable costing and absorption costing
income statements may differ because of
their treatment of fixed factory overhead.
1. ANS: T
 True or False
2. Inventory costs under variable costing include
only direct materials, direct labor, and variable
factory overhead.
2. ANS: T
 True or False
3. Inventory under absorption costing includes
only direct materials and direct labor.
 3. ANS: F
Inventory under absorption costing includes
direct materials, direct labor, variable factory
overhead, and fixed factory overhead.
 True or False
4. If the number of units produced in a period is
larger than the number of units sold in a
period, absorption costing income will be
higher than variable costing income.
4. ANS: T
 True or False
5. If the number of units produced in a period is
smaller than the number of units sold in
period, absorption costing income will be
higher than variable costing income.
5. ANS: F
 6. Carrying costs
a.the costs of not having a product available
when demanded by a customer
b.the costs of carrying inventory
c.approach that maintains goods should be
pulled through the system by present demand
d.the number of units in the order quantity that
minimizes the total cost
e.the costs of placing and receiving an order
6. ANS: B
 7. Economic order quantity
a.the costs of not having a product available
when demanded by a customer
b.the costs of carrying inventory
c.approach that maintains goods should be
pulled through the system by present demand
d.the number of units in the order quantity that
minimizes the total cost
e.the costs of placing and receiving an order
7. ANS: D
8. Just-in-time
a.the costs of not having a product available
when demanded by a customer
b.the costs of carrying inventory
c.approach that maintains goods should be
pulled through the system by present demand
d.the number of units in the order quantity that
minimizes the total cost
e.the costs of placing and receiving an order
8. ANS: C
 9. Ordering costs
a.the costs of not having a product available
when demanded by a customer
b.the costs of carrying inventory
c.approach that maintains goods should be
pulled through the system by present demand
d.the number of units in the order quantity that
minimizes the total cost
e.the costs of placing and receiving an order
9. ANS: E
 10. Stockout costs
a.the costs of not having a product available
when demanded by a customer
b.the costs of carrying inventory
c.approach that maintains goods should be
pulled through the system by present demand
d.the number of units in the order quantity that
minimizes the total cost
e.the costs of placing and receiving an order
10. ANS: A
 11. Which of the following types of costs
does not appear on a variable costing income
statement?
a.direct materials
b.direct labor
c.fixed factory overhead per unit sold
d.variable selling expense
e.total administrative expense
11. ANS: C
 12. Which of the following is never included
in product cost?
a.overhead
b.direct materials
c.variable selling expense
d.fixed factory overhead
e.direct labor
12. ANS: C
 13. Generally Accepted Accounting
Principles (GAAP) require the use of which
accounting method for external reporting?
a.absorption costing.
b.variable costing.
c.transfer price costing.
d.responsibility costing.
e.all of these are acceptable for GAAP.
13. ANS: A
 14. Variable costing is
a.a good way to value inventories for the
balance sheet.
b.used for external reporting purposes.
c.not useful for companies with multiple
segments.
d.a useful tool for management decision
making.
e.can only be used by start-up companies.
• 14. ANS: D
15. A disadvantage of absorption costing is
a.that it is not a useful format for decision
making.
b.that it assigns only manufacturing costs to the
product.
c.all of these
d.none of these
• 15. ANS: A
16. Gross margin is to absorption costing as
____ is to variable costing.
a. gross profit
b. contribution margin
c. income
d. territory margin
16. ANS: B
17. When monthly production volume is constant
and sales volume is less than production, income
determined with variable costing procedures will
a. always be greater than income determined using
absorption costing.
b. always be less than income determined using
absorption costing.
c. be equal to income determined using absorption
costing.
d. be equal to contribution margin per unit times
units sold.
• 17. ANS: B
18. When production is less than sales volume,
income under absorption costing will be ____
income using variable costing procedures.
a. greater than
b. less than
c. equal to
d. randomly different than
18. ANS: B
19. Inventory values calculated using variable
costing as opposed to absorption costing will
generally be
a. equal.
b. less.
c. greater.
d. twice as much.
19. ANS: B
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of
$12. Costs for last year were as follows:

Direct materials $25,000

Direct labor 35,000
Variable factory overhead 12,000
Fixed factory overhead 37,000
Variable selling expense 9,000
Fixed selling expense 7,500
Fixed administrative expense 15,500

Fixed factory overhead is applied based on expected production. Last year, Fabre
expected to produce 20,000 units.

20. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value
of ending inventory under absorption costing?
a. $5,480
b. $4,500
c. $10,900
d. $12,600
e. $5,750
20. ANS: C
Unit product cost = ($25,000 + $35,000 +
$12,000 + $37,000)/20,000 = $5.45
Ending inventory = $5.45 x 2,000 = $10,900
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of
$12. Costs for last year were as follows:

Direct materials $25,000

Direct labor 35,000
Variable factory overhead 12,000
Fixed factory overhead 37,000
Variable selling expense 9,000
Fixed selling expense 7,500
Fixed administrative expense 15,500

Fixed factory overhead is applied based on expected production. Last year, Fabre
expected to produce 20,000 units.

21. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value
of ending inventory under variable costing?
a. $3,300
b. $2,500
c. $5,000
d. $3,720
e. $7,200
21. ANS: E
Unit product cost = ($25,000 + $35,000 +
$12,000)/20,000 = $3.60
Ending inventory = $3.60 x 2,000 = $7,200
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of
$12. Costs for last year were as follows:

Direct materials $25,000

Direct labor 35,000
Variable factory overhead 12,000
Fixed factory overhead 37,000
Variable selling expense 9,000
Fixed selling expense 7,500
Fixed administrative expense 15,500

Fixed factory overhead is applied based on expected production. Last year, Fabre
expected to produce 20,000 units.

22. Refer to Figure 8-1. What is operating income for last year under absorption
costing?
a. $41,000
b. $67,520
c. $85,900
d. $111,300
e. $45,000
22. ANS: C
Sales 216,000
Less: COGS 98,100
Gross margin 17,900
Less:
Selling expenses 16,500
Admin. expenses 15,500
Operating income 85,900
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of
$12. Costs for last year were as follows:

Direct materials $25,000

Direct labor 35,000
Variable factory overhead 12,000
Fixed factory overhead 37,000
Variable selling expense 9,000
Fixed selling expense 7,500
Fixed administrative expense 15,500

Fixed factory overhead is applied based on expected production. Last year, Fabre
expected to produce 20,000 units.

23. Refer to Figure 8-1. What is operating income for last year under variable costing?
a. $111,800
b. $91,780
c. $82,200
d. $78,400
e. $66,350
23. ANS: C
Sales 216,000
Less: variable expenses:
Variable COGS 64,800
Variable selling expense 9,000
Contribution margin 142,200
Less: fixed expenses:
Fixed factory overhead 37,000
Fixed selling expense7,500
Fixed admin. Expense 15,500
Operating income 82,200
Figure 8-2.
Loring Company had the following data for the month:

Variable costs per unit:

Direct materials $4.00
Direct labor 3.20
Variable overhead 1.00
Variable selling expenses .40

Fixed overhead is $4,000 per month; it is applied to production based on normal

activity of 2,000 units. During the month, 2,000 units were produced. Loring started
the month with 300 units in beginning inventory, with unit product cost equal to this
month's unit product cost. A total of 2,100 units were sold during the month at price
of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.

24. Refer to Figure 8-2. What is the unit product cost under absorption costing?
a. $8.60
b. $10.60
c. $8.20
d. $10.20
e. $7.20
24. ANS: D
Direct materials $ 4.00
Direct labor 3.20
Variable overhead 1.00
Fixed overhead 2.00
Total $10.20
Figure 8-2.
Loring Company had the following data for the month:

Variable costs per unit:

Direct materials $4.00
Direct labor 3.20
Variable overhead 1.00
Variable selling expenses .40

Fixed overhead is $4,000 per month; it is applied to production based on normal

activity of 2,000 units. During the month, 2,000 units were produced. Loring started
the month with 300 units in beginning inventory, with unit product cost equal to this
month's unit product cost. A total of 2,100 units were sold during the month at price
of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.

25. Refer to Figure 8-2. What is operating income under variable costing?
a. $3,540
b. $7,980
c. $11,340
d. -$540
e. $3,740
25. ANS: E
Sales $29,400
- Var. COGS 17,220
- Var. Selling expense 840
Contribution margin $11,340
- Fixed factory overhead 4,000
- Fixed selling and admin. Expense 3,600
Operating income $ 3,740

Direct materials $4.00

Direct labor 3.20
Variable overhead 1.00
Total $8.20

2,100 units sold @ $14 = $29,400

2,100 units cost @ $8.20 = $17,220
2,100 units variable selling cost @.40 = $840
Figure 8-2.
Loring Company had the following data for the month:

Variable costs per unit:

Direct materials $4.00
Direct labor 3.20
Variable overhead 1.00
Variable selling expenses .40

Fixed overhead is $4,000 per month; it is applied to production based on normal

activity of 2,000 units. During the month, 2,000 units were produced. Loring started
the month with 300 units in beginning inventory, with unit product cost equal to this
month's unit product cost. A total of 2,100 units were sold during the month at price
of $14. Selling and administrative expense for the month, all fixed, totaled $3,600.

26. Refer to Figure 8-2. What is the unit product cost under variable costing?
a. $8.60
b. $10.60
c. $8.20
d. $10.20
e. $7.20
26. ANS: C
Direct materials $4.00
Direct labor 3.20
Variable overhead 1.00
Total $8.20
Figure 8-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials $4.00
Direct labor 3.20
Variable overhead 1.00
Variable selling expenses .40
Fixed overhead is $4,000 per month; it is applied to production based on
normal activity of 2,000 units. During the month, 2,000 units were produced.
Loring started the month with 300 units in beginning inventory, with unit
product cost equal to this month's unit product cost. A total of 2,100 units
were sold during the month at price of $14. Selling and administrative
expense for the month, all fixed, totaled $3,600.
27. Refer to Figure 8-2. What is operating income under absorption costing?
a. $3,540
b. $7,980
c. $11,340
d. -$540
e. $3,740
27. ANS: A
Sales $29,400
- COGS 21,420
Gross margin $ 7,980
- Variable selling expense 840
- Fixed selling & admin. Expense3,600
Operating income $ 3,540

Sales = $14 ´ 2,100

COGS = $10.20 ´ 2,100
Variable Selling expense = .40 ´ 2,100

Direct materials $ 4.00

Direct labor $ 3.20
Variable overhead $ 1.00
Fixed overhead $ 2.00
Total $10.20
Figure 8-4.
The following information pertains to Mayberry Corporation:
Beginning inventory 1,000 units
Ending inventory 6,000 units
Direct labor per unit $40
Direct materials per unit 20
Variable overhead per unit 10
Fixed overhead per unit 30
Variable selling and admin. costs per unit 6
Fixed selling and admin. costs per unit 14
28. Refer to Figure 8-4. What is the value of the ending
inventory using the absorption costing method?
a. $240,000
b. $360,000
c. $600,000
d. $420,000
28. ANS: C
SUPPORTING CALCULATIONS:
($40 + $20 + $10 + $30) ´ 6,000 = $600,000
Figure 8-4.
The following information pertains to Mayberry Corporation:
Beginning inventory 1,000 units
Ending inventory 6,000 units
Direct labor per unit $40
Direct materials per unit 20
Variable overhead per unit 10
Fixed overhead per unit 30
Variable selling and admin. costs per unit 6
Fixed selling and admin. costs per unit 14
29. Refer to Figure 8-4. Absorption costing income would be
____ variable costing income.
a. $150,000 greater than
b. $150,000 less than
c. $240,000 less than
d. $240,000 greater than
29. ANS: A
SUPPORTING CALCULATIONS:
Fixed overhead in beginning inventory $ 30,000
Fixed overhead in ending inventory 180,000
Difference $150,000

Since production exceeds sales, absorption

costing income is larger by $150,000.
Figure 8-4.
The following information pertains to Mayberry Corporation:
Beginning inventory 1,000 units
Ending inventory 6,000 units
Direct labor per unit $40
Direct materials per unit 20
Variable overhead per unit 10
Fixed overhead per unit 30
Variable selling and admin. costs per unit 6
Fixed selling and admin. costs per unit 14
30. Refer to Figure 8-4. What is the value of the ending
inventory using the variable costing method?
a. $240,000
b. $360,000
c. $350,000
d. $420,000
30. ANS: D
SUPPORTING CALCULATIONS:
($40 + $20 + $10) ´ 6,000 = $420,000
Figure 8-5.
Sanders Company has the following information for 2011:
Selling price $190 per unit
Variable production costs $52 per unit produced
Variable selling and admin. Expenses $18 per unit sold
Fixed production costs $240,000
Fixed selling and admin. Expenses $180,000
Units produced 12,000
Units sold 7,000
There were no beginning inventories.

31. Refer to Figure 8-5. What is the value of ending inventory for
Sanders using the absorption costing method?
a. $360,000
b. $280,000
c. $220,000
d. 380,000
31. ANS: A
SUPPORTING CALCULATIONS:
[($52 +( $240,000)/12,000))] x 5,000 = $360,000
Figure 8-5.
Sanders Company has the following information for 2011:
Selling price $190 per unit
Variable production costs $52 per unit produced
Variable selling and admin. Expenses $18 per unit sold
Fixed production costs $240,000
Fixed selling and admin. Expenses $180,000
Units produced 12,000
Units sold 7,000
There were no beginning inventories.
32. Refer to Figure 8-5. What is the income for Sanders using
the absorption costing method?
a. $520,000
b. $480,000
c. $1,200,000
d. $500,000
32. ANS: A
SUPPORTING CALCULATIONS:
[($190 - $72) x 7,000] - $180,000 - (7,000 x $18)
= $520,000
Figure 8-5.
Sanders Company has the following information for 2011:
Selling price $190 per unit
Variable production costs $52 per unit produced
Variable selling and admin. Expenses $18 per unit sold
Fixed production costs $240,000
Fixed selling and admin. Expenses $180,000
Units produced 12,000
Units sold 7,000
There were no beginning inventories.
33. Refer to Figure 8-5. What is the cost of ending inventory for
Sanders using the variable costing method?
a. $300,000
b. $280,000
c. $120,000
d. $260,000
33. ANS: D
SUPPORTING CALCULATIONS:
$52 x 5,000 = $260,000
Figure 8-5.
Sanders Company has the following information for 2011:
Selling price $190 per unit
Variable production costs $52 per unit produced
Variable selling and admin. Expenses $18 per unit sold
Fixed production costs $240,000
Fixed selling and admin. Expenses $180,000
Units produced 12,000
Units sold 7,000
There were no beginning inventories.
34. Refer to Figure 8-5. What is the income for Eastwood using the
variable costing method?
a. $420,000
b. $480,000
c. $520,000
d.$500,000
34. ANS: A
SUPPORTING CALCULATIONS:
[($190 - $52 - $18) x 7,000] - $420,000 =
$420,000
Figure 8-6.
Bailey Company incurred the following costs in manufacturing desk
calculators:
Direct materials $18
Indirect materials (variable) 3
Direct labor 9
Indirect labor (variable) 7
Other variable factory overhead13
Fixed factory overhead 34
Variable selling expenses 26
Fixed selling expenses 12
During the period, the company produced and sold 2,000 units.
35. Refer to Figure 8-6. What is the inventory cost per unit using
absorption costing?
a. $104
b. $77
c. $84
d. $32
35. ANS: C
SUPPORTING CALCULATIONS:
$50 + $34 = $84
Figure 8-6.
Bailey Company incurred the following costs in manufacturing desk
calculators:
Direct materials $18
Indirect materials (variable) 3
Direct labor 9
Indirect labor (variable) 7
Other variable factory overhead13
Fixed factory overhead 34
Variable selling expenses 26
Fixed selling expenses 12
During the period, the company produced and sold 2,000 units.
36. Refer to Figure 8-6. What is the inventory cost per unit using
variable costing?
a. $52
b. $66
c. $72
d. $50
36. ANS: D
SUPPORTING CALCULATIONS:
Direct materials $18
Indirect materials (variable) 3
Direct labor 9
Indirect labor (variable) 7
Other variable factory overhead 13
Total $50
Figure 8-7.
Ramon Company reported the following units of production and sales
for June and July 2011:
Units
Month Produced Sold
June 2011 100,000 90,000
July 2011 100,000 105,000

Income under absorption costing for June was $40,000; income under
variable costing for July was $50,000. Fixed costs were $600,000
for each month.
37. Refer to Figure 8-7. How much was income for July using
absorption costing?
a. $50,000
b. $20,000
c. $80,000
d. $40,000
37. ANS: B
SUPPORTING CALCULATIONS:
($600,000/100,000) ´ 5,000 = $30,000

Absorption costing is lower by $30,000.

Therefore, $50,000 less $30,000 equals a
profit of $20,000.