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THEORY 6. Cay Co.’s 1995 fixed manufacturing overhead costs totaled $100,000, and variable selling
Variable costing costs totaled $80,000. Under variable costing, how should those costs be classified?
1. To apply direct costing method it is necessary that you know A. B. C. D.
A. Variable and fixed cost related to production Period Costs $0 $ 80,000 $100,000 $180,000
B. Controllable and uncontrollable cost of production Product Costs $180,000 $100,000 $ 80,000 $0
C. Contribution margin and break even point in production
D. Standard production rate and times of production elements 7. Under the variable-costing concept, unit product cost would most likely be increased by
A. A decrease in the number of units produced.
2. The following statements about the adoption of variable costing are true, except: B. An increase in the commission paid to salesman for each unit sold.
A. A direct cost may not become a product cost. C. A decrease in the remaining useful life of factory machinery depreciated on the units-of-
B. An indirect cost may be assigned as part of product cost. production method.
C. It is an acceptable method for general reporting purposes. D. An increase in the remaining useful life of factory machinery depreciated on the sum-of-
D. All fixed manufacturing costs are recognized as period costs. the-year’s digits method.
3. Which of the following is NOT an advantage of using variable costing for internal reporting 8. Calculating income under variable costing does NOT require knowing
purposes? A. selling price. C. unit sales.
A. The impact of fixed costs on profits is emphasized. B. unit production. D. unit variable manufacturing costs.
B. Total costs may be overlooked when evaluating profits.
C. Profits are directly influenced by changes in sales volume. 9. Which of the following statements is true for a firm that uses variable costing?
D. Fixed costs are reported at incurred values, not absorbed values, thus improving control A. Profits fluctuate with sales.
over those costs. B. An idle facility variation is calculated.
C. Product costs include variable administrative costs.
4. A criticism of variable costing for managerial accounting purposes is that it D. The cost of a unit of product changes because of changes in number of units
A. overstates inventories. manufactured.
B. does not reflect cost-volume-profit relationships.
C. is not acceptable for product line segmented reporting. 10. The change in period-to-period operating income when using variable costing can be
D. might encourage managers to emphasize the short term at the expense of the long term. explained by the change in the
5. Under variable costing, A. Unit sales level multiplied by the unit sales price.
A. all product costs are fixed. B. Unit sales level multiplied by a constant unit contribution margin.
B. all period costs are variable. C. Finished goods inventory level multiplied by the unit sales price.
C. all product costs are variable. D. Finished goods inventory level multiplied by a constant unit contribution margin.
D. product costs are both fixed and variable.
MSQ-2 – Variable Costing & Absorption Costing Page 1 of 11
MANAGEMENT ADVISORY SERVICE HILARIO G. TAN
Absorption costing C. Decreased output and constant sales result in increased profits.
11. All of the following are names for the product costing method in which both fixed and variable D. Profits may decrease with increased sales even if there is no change in selling prices and
costs are included in overhead rates, except: costs.
A. absorption costing C. direct costing
B. conventional costing D. full costing 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
12. Which of the following is not associated with absorption costing? A. period 1 production exceeds period 2 production.
A. contribution margin C. gross margin B. period 2 production exceeds period 1 production.
B. functional format D. Period costs C. fixed production costs are larger in period 2 than period 1.
D. variable production costs are larger in period 2 than period 1.
13. Under absorption costing, fixed manufacturing overhead could be found in all of the following
except the Variable & absorption costing
A. Cost of Goods Sold. C. period costs. 18. A cost that is included as part of product costs under both absorption costing and direct
B. finished goods inventory account. D. work-in-process account. costing is:
A. insurance D. variable marketing expenses.
14. Jansen, Inc. pays bonuses to its managers based on operating income. The company uses B. managerial staff costs E. variable materials handling labor
absorption costing, and overhead is applied on the basis of direct labor hours. To increase C. taxes on factory building
bonuses, Jansen’s managers may do all of the following except
A. Produce those products requiring the most direct labor. 19. If unit costs remain unchanged and sales volume and sales price per unit both increase from
B. Defer expenses such as maintenance to a future period. the preceding period when operating profits were earned, operating profits must
C. Decrease production of those items requiring the most direct labor. A. Increase under the variable costing method.
D. Increase production schedules independent of customer demands. B. Decrease under the variable costing method.
C. Increase under the absorption costing method.
15. Unabsorbed fixed overhead costs in an absorption costing system are D. Decrease under the absorption costing method.
A. costs that cannot be controlled.
B. excess variable overhead costs. 20. When comparing absorption costing with variable costing, which of the following statements is
C. variable overhead costs not allocated to units produced. not true?
D. fixed manufacturing costs not allocated to units produced. A. When sales volume is more than production volume, variable costing will result in higher
operating profit.
16. When a firm prepares financial reports by using absorption costing B. Under absorption costing, operating profit is a function of both sales volume and
A. Profits will always increase with increases in sales. production volume.
B. Profits will always decrease with decreases in sales. C. Absorption costing enables managers to increase operating profits in the short run by
29. Net income is lower under variable costing than under absorption costing when 33. As compared with total absorption costing profit over the entire life of a company, total variable
A. Production equals sales. costing profit will
B. Production exceeds sales. A. Be less.
C. Production is less than sales. B. Be equal.
D. Production increases from the previous period. C. Be greater.
D. Be substantially greater or less depending upon external factors
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 34. How will a favorable volume variance affect net income under each of the following methods?
method. You would say that the difference A. B. C. D.
A. Is attributable to the variable costs in the inventory. Absorption Increase Increase Reduce Reduce
B. Is attributable to the fixed costs in ending inventory. Variable No effect Reduce Increase No effect
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. 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
31. If inventory quantities increase during a period, same as in 2000. The 2001 variable costing statement reported a profit whereas the 2001
A. Variable costing profits will equal absorption costing profits. absorption costing statement reported a loss. The difference in reported income could be
B. Absorption costing profits will exceed variable costing profits. explained by units produced in 2001 being
C. Variable costing profits will exceed absorption costing profits. A. Less than units sold in 2001.
D. Variable costing will show a higher inventory value than absorption costing. B. In excess of units sold in 2001.
C. Less than the activity level used for allocating overhead to the product.
32. A manufacturing company prepares income statements using both absorption- and variable- D. In excess of the activity level used for allocating overhead to the product.
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 PROBLEMS
below the budgeted amount. There were no beginning or ending inventories. The most likely Variable costing
explanation of the net income shortfall is that, compared to budget, actual 1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single product in
A. Manufacturing fixed costs had increased. 2000, its first year of operations. Variable manufacturing costs were P30 per unit of product.
B. Selling and administrative fixed expenses had increased. Planned and actual fixed manufacturing costs were P600,000, and marketing and
C. Sales price and variable costs had declined proportionately. administrative costs totaled P400,000 in 2000. MNO sold 120,000 units of product in 2000 at
D. Sales prices had declined proportionately more than variable costs. 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
MSQ-2 – Variable Costing & Absorption Costing Page 4 of 11
MANAGEMENT ADVISORY SERVICE HILARIO G. TAN
B. P2,400,000 D. P2,750,000
2. LY & Company completed its first year of operations during which time the following Absorption costing
information were generated: 4. The total production cost for 20,000 units was P21,000 and the total production cost for
Total units produced 100,000 making 50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed
Total units sold @ P100 per unit 80,000 costs of P4,000 were incurred. The full production cost per unit for making 30,000 units is:
Work in process ending inventory 20,000 A. P0.30 C. P0.84
Costs Variable Cost per Unit Fixed Costs B. P0.68 D. P0.93
Raw materials P20.00
Direct labor 12.50 5. West Co.’s 1988 manufacturing costs were as follows:
Factory overhead 7.50 P1.2 million Direct materials and direct labor $700,000
Selling and administrative 10.00 0.7 million Other variable manufacturing costs 100,000
If the company used variable (direct) costing method, the operating income would be Depreciation of factory building and manufacturing equipment 80,000
A. P2,100,000 C. P3,040,000 Other fixed manufacturing overhead 18,000
B. P2,480,000 D. P4,000,000c. What amount should be considered product cost for external reporting purposes?
A. $700,000 C. $880,000
3. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest market for B. $800,000 D. $898,000
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 6. Coomber Industries manufactures a single product using standard costing. Variable
operations. This statement was the one included in the company’s annual report to the production costs are $13 and fixed production costs are $125,000. Coomber uses a normal
stockholders. activity of 12,500 units to set its standard costs. Coomber began the year with 1,000 units in
Sales (400 boxes at P12.50 a box) P5,000.00 inventory, produced 11,000 units, and sold 11,500 units. The standard cost of goods sold
Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00 under absorption costing would be
Gross margin 1,800.00 A. $115,000 C. $253,000
Less: Selling and administrative expenses 800.00 B. $149,500 D. $264,500
Net income 1,000.00
7. Z Corp. incurred the following costs in 2001 (its first year of operations) based on production of
Variable selling and administrative expenses are P0.90 per box sold. The company produced 10,000 units:
500 boxes during the year. Variable manufacturing costs are P5.25 per box and fixed Direct material $5 per unit
manufacturing overhead costs total P1,375 for the year. Direct labor $3 per unit
What is the company’s direct costing net income? Variable product costs $2 per unit
A. P 725 C. P2,265 Fixed product costs (in total) $100,000
B. P1,000 D. P2,540
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 inventory?
A. $24,000 C. $64,500
B. $27,000 D. $120,000
A. $750,000 C. $1,125,000.
B. $1,000,000. D. $1,400,000. 34. The volume variance under variable costing would be
A. $0 C. $15,000
28. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption costing bases were B. $10,000 D. Some other number.
A. $2,030,000 C. $2,095,000
B. $2,055,000 D. $2,120,000 35. The volume variance under absorption costing would be
A. $0 C. $15,000
29. Valyn Corporation’s actual manufacturing contribution margin for 1995 calculated on the B. $10,000 D. Some other number.
variable costing basis was
A. $4,375,000 C. $4,910,000 36. The standard cost of goods sold under variable costing would be
B. $4,935,000 D. $5,625,000. A. $200,000 C. $367,500
B. $210,000 D. Some other number.
30. The total variable costs expensed in 1995 by Valyn Corporation on the variable costing basis
was 37. The standard cost of goods sold under absorption costing would be
A. $4,325,000 C. $4,500,000 A. $200,000 C. $367,500
B. $4,375,000 D. $4,550,000 B. $210,000 D. Some other number.
31. The difference between Valyn Corporation’s 1995 operating income calculated on the
absorption costing basis and calculated on the variable costing basis was
When the going gets tough, the tough gets going.
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.
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