MANAGEMENT ADVISORY SERVICE HILARIO G.

TAN

THEORY B. all period costs are variable.

Variable costing C. all product costs are variable.
1. To apply direct costing method it is necessary that you know D. product costs are both fixed and variable.
A. Variable and fixed cost related to production 6. Cay Co.’s 1995 fixed manufacturing overhead costs totaled $100,000,
B. Controllable and uncontrollable cost of production and variable selling costs totaled $80,000. Under variable costing, how
C. Contribution margin and break even point in production should those costs be classified?
D. Standard production rate and times of production elements A. B. C. D.
Period $0 $ 80,000 $100,000 $180,000
2. The following statements about the adoption of variable costing are true, Costs
except: Product $180,000 $100,000 $ 80,000 $0
A. A direct cost may not become a product cost. Costs
B. An indirect cost may be assigned as part of product cost.
C. It is an acceptable method for general reporting purposes. 7. Under the variable-costing concept, unit product cost would most likely
D. All fixed manufacturing costs are recognized as period costs. be increased by
A. A decrease in the number of units produced.
3. Which of the following is NOT an advantage of using variable costing for B. An increase in the commission paid to salesman for each unit sold.
internal reporting purposes? C. A decrease in the remaining useful life of factory machinery
A. The impact of fixed costs on profits is emphasized. depreciated on the units-of-production method.
B. Total costs may be overlooked when evaluating profits. D. An increase in the remaining useful life of factory machinery
C. Profits are directly influenced by changes in sales volume. depreciated on the sum-of-the-year’s digits method.
D. Fixed costs are reported at incurred values, not absorbed values,
thus improving control over those costs. 8. Calculating income under variable costing does NOT require knowing
A. selling price. C. unit sales.
4. A criticism of variable costing for managerial accounting purposes is that B. unit production. D. unit variable
it manufacturing costs.
A. overstates inventories.
B. does not reflect cost-volume-profit relationships. 9. Which of the following statements is true for a firm that uses variable
C. is not acceptable for product line segmented reporting. costing?
D. might encourage managers to emphasize the short term at the A. Profits fluctuate with sales.
expense of the long term. B. An idle facility variation is calculated.
5. Under variable costing, C. Product costs include variable administrative costs.
A. all product costs are fixed. D. The cost of a unit of product changes because of changes in number
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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
C. Decrease production of those items requiring the most direct labor.
D. Increase production schedules independent of customer demands.
15. Unabsorbed fixed overhead costs in an absorption costing system are
A. costs that cannot be controlled.
B. excess variable overhead costs.
C. variable overhead costs not allocated to units produced.
D. fixed manufacturing costs not allocated to units produced.
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.

12. Which of the following is not associated with absorption costing? 17. Under absorption costing, if sales remain constant from period 1 to
A. contribution margin C. gross margin period 2, the company will report a larger income in period 2 when
B. functional format D. Period costs A. period 1 production exceeds period 2 production.
B. period 2 production exceeds period 1 production.
13. Under absorption costing, fixed manufacturing overhead could be found C. fixed production costs are larger in period 2 than period 1.
in all of the following except the D. variable production costs are larger in period 2 than period 1.
A. Cost of Goods Sold. C. period costs.
B. finished goods inventory account. D. work-in-process Variable & absorption costing
account. 18. A cost that is included as part of product costs under both absorption
costing and direct costing is:
14. Jansen, Inc. pays bonuses to its managers based on operating income. A. insurance D. variable marketing
The company uses absorption costing, and overhead is applied on the expenses.
basis of direct labor hours. To increase bonuses, Jansen’s managers B. managerial staff costs E. variable materials
may do all of the following except handling labor
A. Produce those products requiring the most direct labor. C. taxes on factory building
B. Defer expenses such as maintenance to a future period.

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19. If unit costs remain unchanged and sales volume and sales price per unit A. Co. Z would report a higher net income than Co. Y for the years in
both increase from the preceding period when operating profits were which production equals sales
earned, operating profits must B. Co. Y would report a higher inventory value than Co. Z for the years
A. Increase under the variable costing method. in which production exceeds sales
B. Decrease under the variable costing method. C. Co. Z would report a higher inventory value than Co. Y for the years
C. Increase under the absorption costing method. in which production exceeds sales
D. Decrease under the absorption costing method. D. Co. Y would report a higher inventory value than Co. Z for the years
in which production exceeds the normal or practical capacity
20. When comparing absorption costing with variable costing, which of the
23. Absorption costing and variable costing are two different methods of
following statements is not true?
assigning costs to units produced. Of the following five cost items listed,
A. When sales volume is more than production volume, variable
identify the one that is not correctly accounted for as a product cost.
costing will result in higher operating profit.
B. Under absorption costing, operating profit is a function of both sales Part of Product Cost under
volume and production volume. Absorption Cost Variable Cost
C. Absorption costing enables managers to increase operating profits in A. Direct labor cost Yes Yes
the short run by increasing inventories. B. Insurance on factory Yes No
D. A manager who is evaluated based on variable costing operating C. Manufacturing supplies Yes Yes
profit would be tempted to increase production at the end of a period D. Packaging and shipping Yes Yes
in order to get a more favorable review. costs
24. A company’s net income recently increased by 30% while its inventory
21. A firm presently has total sales of $100,000. If its sales rise, its increased to equal a full year’s sales requirements. Which of the
A. fixed costs will also rise. following accounting methods would be most likely to produce the
B. per unit variable costs will rise. favorable income results?
C. net income based on absorption costing will go up more than its net A. Absorption costing. C. Standard
income based on variable costing. direct costing.
D. net income based on variable costing will go up more than its net B. Direct costing. D. Variable
income based on absorption costing. costing.

22. Both Company Y and Company Z produce similar products that need 25. Variable costing and absorption costing will show the same incomes
negligible distribution costs. Their assets operation and accounting are when there are no
very similar in all respects except that Company Y uses direct costing A. beginning and ending inventories.
and Company Z uses absorption costing. B. beginning inventories.

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C. ending inventories.
D. variable costs.
26. Absorption costing differs from variable costing in that
A. absorption costing inventories are more correctly valued.
B. companies using absorption costing have lower fixed costs.
C. standards can be used with absorption costing, but not with variable
costing.
D. production influences income under absorption costing, but not
under variable costing.
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.
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.
MSQ-2 – Variable Costing & Absorption Costing
HILARIO G. TAN
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.
31. If inventory quantities increase during a period,
A. Variable costing profits will equal absorption costing profits.
B. Absorption costing profits will exceed variable costing profits.
C. Variable costing profits will exceed absorption costing profits.
D. Variable costing will show a higher inventory value than absorption
costing.
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.
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33. As compared with total absorption costing profit over the entire life of a administrative costs totaled P400,000 in 2000. MNO sold 120,000 units
company, total variable costing profit will of product in 2000 at a selling price of P40 per unit. What is the cost of
A. Be less. the ending inventory assuming variable costing is used?
B. Be equal. A. P2,250,000 C. P2,640,000
C. Be greater. B. P2,400,000 D. P2,750,000
D. Be substantially greater or less depending upon external factors 2. LY & Company completed its first year of operations during which time
the following information were generated:
34. How will a favorable volume variance affect net income under each of the Total units produced 100,000
following methods? Total units sold @ P100 per 80,000
A. B. C. D. unit
Absorption Increase Increase Reduce Reduce Work in process ending 20,000
Variable No effect Reduce Increase No effect inventory
Costs Variable Cost Fixed Costs
35. A single-product company prepares income statements using both per Unit
absorption and variable costing methods. Manufacturing overhead cost Raw materials P20.00
applied per unit produced in 2001 was the same as in 2000. The 2001 Direct labor 12.50
variable costing statement reported a profit whereas the 2001 absorption Factory overhead 7.50 P1.2 million
costing statement reported a loss. The difference in reported income Selling and administrative 10.00 0.7 million
could be explained by units produced in 2001 being If the company used variable (direct) costing method, the operating
A. Less than units sold in 2001. income would be
B. In excess of units sold in 2001. A. P2,100,000 C. P3,040,000
C. Less than the activity level used for allocating overhead to the B. P2,480,000 D. P4,000,000c.
product.
D. In excess of the activity level used for allocating overhead to the 3. Youthful Biscuits manufactures and sells boxed coconut cookies. The
product. biggest market for these cookies are as gifts that college students buy for
their business teachers. There are 100 cookies per box. The following
PROBLEMS income statement shows the result of the first year of operations. This
Variable costing statement was the one included in the company’s annual report to the
1. MNO Products, Inc. planned and actually manufactured 200,000 units of stockholders.
its single product in 2000, its first year of operations. Variable Sales (400 boxes at P12.50 a box) P5,000.00
manufacturing costs were P30 per unit of product. Planned and actual Less: Cost of goods sold (400 boxes at P8 per 3,200.00
fixed manufacturing costs were P600,000, and marketing and box)
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Gross margin 1,800.00 are $125,000. Coomber uses a normal activity of 12,500 units to set its
Less: Selling and administrative expenses 800.00 standard costs. Coomber began the year with 1,000 units in inventory,
Net income 1,000.00 produced 11,000 units, and sold 11,500 units. The standard cost of
Variable selling and administrative expenses are P0.90 per box sold. goods sold under absorption costing would be
The company produced 500 boxes during the year. Variable A. $115,000 C. $253,000
manufacturing costs are P5.25 per box and fixed manufacturing B. $149,500 D. $264,500
overhead costs total P1,375 for the year.
What is the company’s direct costing net income? 7. Z Corp. incurred the following costs in 2001 (its first year of operations)
A. P 725 C. P2,265 based on production of 10,000 units:
B. P1,000 D. P2,540 Direct material $5 per unit
Direct labor $3 per unit
Variable product costs $2 per unit
Absorption costing Fixed product costs (in total) $100,000
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. When Z Corp. prepared its 2001 financial statements, its Cost of Goods
The full production cost per unit for making 30,000 units is: Sold was listed at $100,000. Based on this information, which of the
A. P0.30 C. P0.84 following statements must be true:
B. P0.68 D. P0.93 A. Z Corp. sold 5,000 units.
B. Z Corp. had a very profitable year.
5. West Co.’s 1988 manufacturing costs were as follows: C. Z Corp. sold all 10,000 units that it produced.
Direct materials and direct labor $700,000 D. From the information given, one cannot tell whether Z Corp.'s
Other variable manufacturing costs 100,000 financial statements were prepared based on variable or absorption
Depreciation of factory building and manufacturing equipment costing.
Other fixed manufacturing overhead
What amount should be considered product cost for external reporting 8. A company manufactures a single product for its customers by
purposes? contracting in advance of production. Thus, the company produces only
A. $700,000 C. $880,000 units that will be sold by the end of each period. For the last period, the
B. $800,000 D. $898,000 following data were available:
Sales $40,000
6. Coomber Industries manufactures a single product using standard Direct materials 9,050
costing. Variable production costs are $13 and fixed production costs Direct labor 6,050

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Rent (9/10 factory, 1/10 office) Selling price¶ P125 per unit
Depreciation on factory equipment Fixed production overhead P200,000 per quarter
Supervision (2/3 factory, 1/3 office) Fixed selling and administrative overhead P80,000 per quarter
Salespeople’s salaries Normal capacity 20,000 units per quarter
Insurance (2/3 factory, 1/3 office) Production in first quarter was 19,000 units and sales volume was 16,000
Office supplies units. No opening inventory for the quarter.
Advertising The absorption costing profit for the quarter was
Depreciation on office equipment A. P920,000 C. P960,000
Interest on loan B. P950,000 D. P970,000
The gross profit margin percentage (rounded) was
A. 34% C. 44% Variable costing & absorption costing
B. 41% D. 46% 11. In the ABC Company, sales are P800,000, cost of goods under
absorption costing is P600,000, and total operating expenses are
9. The Blue Company has failed to reach its planned activity level during its P120,000. If cost of goods sold is 70% variable and total operating
first 2 years of operation. The following table shows the relationship expenses are 60% fixed, what is the contribution margin under variable
among units produced, sales, and normal activity for these years and the costing?
projected relationship for Year 3. All prices and costs have remained the A. P260,000. C. P332,000.
same for the last 2 years and are expected to do so in Year 3. Income B. P308,000. D. P380,000.
has been positive in both Year 1 and Year 2.
Units Produced Sales Planned 12. A company has the following cost data:
Activity Fixed manufacturing costs $2,000
Year 1 90,000 90,000 100,000 Fixed selling, general, and administrative costs 1,000
Year 2 95,000 95,000 100,000 Variable selling costs per unit sold 1
Year 3 90,000 90,000 100,000 Variable manufacturing costs per unit 2
Beginning inventory 0 units
Because Blue Company uses an absorption-costing system, gross
Production 100 units
margin for year 3 should be
Sales 90 units at $40 per unit
A. Equal to Year 1. C. Greater than Year 1.
Variable and absorption-cost net incomes are:
B. Equal to Year 2. D. Greater than Year 2.
A. $320 variable, $520 absorption C. $520 variable, $320
absorption
10. Don Juan Ltd. Manufactures a single product for which the costs and
B. $330 variable, $530 absorption D. $530 variable, $330
selling prices are:
absorption
Variable production costs P 50 per unit
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A. $0. C. $70,000.
13. A company had an income of P50,000 using direct costing for a given B. $20,000. D. $90,000.
month. Beginning and ending inventories for the month are 13,000 units
and 18,000 units, respectively. Ignoring income tax, if the fixed overhead 17. A company manufactures 50,000 units of a product and sells 40,000
application rate was P2 per unit, what was the income using absorption units. Total manufacturing cost per unit is $50 (variable manufacturing
costing? cost, $10; fixed manufacturing cost, $40). Assuming no beginning
A. P40,000 C. P60,000 inventory, the effect on net income if absorption costing is used instead
B. P50,000 D. P70,000 of variable costing is that:
A. net income is the same C. net income is
14. GHI Company had P100,000 income using absorption costing. GHI has $400,000 lower
no variable manufacturing costs. Beginning inventory was P5,000 and B. net income is $200,000 higher D. net income is
ending inventory was P12,000. What is the income under variable $400,000 higher
costing?
A. P88,000 C. P100,000. 18. During its first year of operations, a company produced 275,000 units
B. P93,000 D. P107,000 and sold 250,000 units. The following costs were incurred during the
year:
15. Fleet, Inc. manufactured 700 units of Product A, a new product, during Variable Cost per Fixed Costs
the year. Product A’s variable and fixed manufacturing costs per unit Unit
were $6.00 and $2.00 respectively. The inventory of Product A on Direct materials $15.00
December 31, consisted of 100 units. There was no inventory of Product Direct labor 10.00
A on January 1. What would be the change in the dollar amount of Manufacturing overhead 12.50 $2,200,000
inventory on December 31 if variable costing were used instead of Selling and administrative 2.50 1,375,000
absorption costing? The difference between operating income calculated on the absorption-
A. $0 C. $200 increase. costing basis and on the variable costing basis is that absorption-costing
B. $200 decrease. D. $800 decrease. operating income is
A. $62,500 lesser. C. $220,000 greater.
B. $200,000 greater. D. $325,000 greater.
16. At the end of Killo Co.’s first year of operations, 1,000 units of inventory Questions 19 through 21 are based on the following information.
remained on hand. Variable and fixed manufacturing cost per unit were The following information is available for X Co. for its first year of operations:
$90 and $20, respectively. If Killo uses absorption costing rather than Sales in units 5,000
direct (variable) costing, the result would be a higher pretax income of Production in units 8,000
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$500,000 $650,000 $800,000

Selling & other expenses
Manufacturing costs: Variable $200,000 $300,000 $400,000
Direct labor $3 per unit Fixed 160,000 160,000 160,000
Direct material 5 per unit $360,000 $460,000 $560,000
Variable overhead 1 per unit Income (or loss) $(60,000) $90000 $240,000
Fixed overhead $100,000
Net income (absorption method) $30,000 The 200,000 unit budget has been adopted and will be used for allocating
Sales price per unit fixed manufacturing costs to units of Product X. At the end of the first 6
months, the following information is available:
19. What would X Co. have reported as its income before income taxes if it Units
had used variable costing? Production completed 120,000
A. ($30,000) C. $30,000 Sales 60,000
B. ($7,500) D. $67,500 All fixed costs are budgeted and incurred uniformly throughout the year, and
all costs incurred coincide with the budget. Over- and under-applied fixed
20. What was the total amount of SG&A expense incurred by X Co.? manufacturing costs are deferred until year-end. Annual sales have the
A. $6,000 C. $36,000 following seasonal pattern.
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

Questions 22 through 25 are based on the following information.

The annual flexible budget below was prepared for use in making decisions
relations to Product X.
100,000 units 150,000 units 200,000 units
Sales volume $ 800,000 $1,200,000 $1,600,000
Manufacturing costs:
Variable $300,000 $450,000 $600,000
Fixed 200,000 200,000 200,000

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Portion of Annual Sales reporting purposes; however, the company is considering using variable
First quarter 10% costing. Data regarding Valyn’s planned and actual operations for the 1995
Second quarter 20% calendar year are presented below.
Third quarter 30% Planned Actual
Fourth quarter 40% Activity Activity
Beginning finished goods 35,000 35,000
22. The amount of fixed factory costs applied to product during the first 6 inventory in units
months under absorption costing is Sales in units 140,000 125,000
A. Over-applied by $20,000. C. Under-applied by Production in units 140,000 130,000
$80,000. The planned per unit cost figures shown in the next schedule were based on
B. Under-applied by $40,000. D. Equal to the fixed the estimated production and sale of 140,000 units in 1995. Valyn uses a
costs incurred. predetermined manufacturing overhead rate for applying manufacturing
overhead to its product. Thus, a combined manufacturing overhead rate of
23. Reported net income (or loss) for the first 6 months under absorption $9.00 per unit was employed for absorption costing purposes in1995. Any
costing is over- or under-applied manufacturing overhead is closed to the cost of goods
A. $(40,000) C. $40,000 sold account at the end of the reporting year.
B. $0 D. $160,000
Planned Cost Incurred
24. Reported net income (or loss) for the first 6 months under variable Per Unit Total Costs
costing is Direct materials $12.00 $1,680,00 $1,560,00
A. $(180,000) C. $40,000 0 0
B. $0 D. $180,000 Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing 4.00 560,000 520,000
overhead
25. Assuming that 90,000 units of Product X were sold during the first 6 Fixed manufacturing 5.00 700,000 715,000
months and that this is to be used as a basis, the revised budget overhead
estimate for the total number of units to be sold during this year is Variable selling expenses 8.00 1,120,000 1,000,000
A. 200,000 C. 360,000 Fixed selling expenses 7.00 980,000 980,000
B. 240,000 D. None of the above
Variable administrative 2.00 280,000 250,000
expenses
Questions 26 through 31 are based on the following information.
Fixed administrative 3.00 420,000 425,000
Valyn Corporation employs an absorption costing system for internal
expenses
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Total $50.00 $7,000,00 $6,620,00 31. The difference between Valyn Corporation’s 1995 operating income
0 0 calculated on the absorption costing basis and calculated on the variable
The 1995 beginning finished goods inventory for absorption costing purposes costing basis was
was valued at the 1994 planned unit manufacturing cost, which was the same A. $25,000 C. $65,000
as the 1995 planned unit manufacturing cost. There are no work-in-process B. $40,000 D. $90,000
inventories at either the beginning or the end of the year. The planned and Questions 32 through 37 are based on the following information.
actual unit selling price for 1995 was $70.00 per unit. Louder Industries manufactures a single product. Variable production costs
are $20 and fixed production costs are $150,000. Louder uses a normal
26. The value of Valyn Corporation’s 1995 actual ending finished goods activity of 10,000 units to set its standard costs. Louder began the year with
inventory on the absorption costing bases was no inventory, produced 11,000 units, and sold 10,500 units.
A. $900,000 C. $1,220,000
B. $1,200,000 D. $1,350,000 32. Ending inventory under variable costing would be
A. $10,000 C. $17,500
27. The value of Valyn Corporation’s 1995 actual ending finished goods B. $15,000 D. $20,000
inventory on the variable costing basis was
A. $750,000 C. $1,125,000. 33. Ending inventory under absorption costing would be
B. $1,000,000. D. $1,400,000. A. $10,000 C. $17,500
D. $20,000 B. $15,000
28. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption
costing bases were 34. The volume variance under variable costing would be
A. $2,030,000 C. $2,095,000 A. $0 C. $15,000
B. $2,055,000 D. $2,120,000 B. $10,000 D. Some other number.

29. Valyn Corporation’s actual manufacturing contribution margin for 1995 35. The volume variance under absorption costing would be
calculated on the variable costing basis was A. $0 C. $15,000
A. $4,375,000 C. $4,910,000 B. $10,000 D. Some other number.
B. $4,935,000 D. $5,625,000.
36. The standard cost of goods sold under variable costing would be
30. The total variable costs expensed in 1995 by Valyn Corporation on the A. $200,000 C. $367,500
variable costing basis was B. $210,000 D. Some other number.
A. $4,325,000 C. $4,500,000
B. $4,375,000 D. $4,550,000 37. The standard cost of goods sold under absorption costing would be

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A. $200,000 C. $367,500
B. $210,000 D. Some other number.

When the going gets tough, the tough gets going

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