Chapter 7 Variable Costing: a tool for Management True/False Questions



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Ch07 Variable Costing A Tool for Management
Multiple Choice Questions
16. How would the following costs be classified (product or period) under variable costing at a retail clothing store?






Cost of purchasing clothing

Sales commissions

A)

Product

Product

B)

Product

Period

C)

Period

Product

D)

Period

Period

Ans:  B
17. The principal difference between variable costing and absorption costing centers on:

A) whether variable manufacturing costs should be included as product costs.

B) whether fixed manufacturing costs should be included as product costs.

C) whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

D) none of these.

Ans:  B
18. Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method?

A) direct material cost

B) property taxes on the factory building

C) sales manager's salary

D) all of the above

Ans:  A
19. Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that:

A) variable costing treats only direct materials and direct labor as product cost while absorption costing treats direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

B) variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs while absorption costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

C) variable costing treats only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

D) variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

Ans:  D
20. The costing method that treats all fixed costs as period costs is:

A) absorption costing.

B) job-order costing.

C) variable costing.

D) process costing.

Ans:  C
21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.)








Variable costing

Absorption costing

A)

Increase

Increase

B)

Decrease

Increase

C)

Decrease

Decrease

D)

No effect

Decrease

Ans:  D LO:  2


22. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will:

A) fluctuate in direct proportion to changes in production.

B) remain constant.

C) fluctuate inversely with changes in production.

D) be greater than net operating income under absorption costing.

Ans:  B LO:  2


23. Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?

A) fixed manufacturing overhead cost

B) fixed selling and administrative expense

C) variable selling and administrative expense

D) all of the above

Ans:  D LO:  2 Level:  Hard


24. Which of the following will usually be found on an income statement prepared using the absorption costing method?






Contribution Margin

Gross Margin

A)

Yes

Yes

B)

Yes

No

C)

No

Yes

D)

No

No

Ans:  C LO:  2


25. Net operating income under variable and absorption costing will generally:

A) always be equal.

B) never be equal.

C) be equal only when production and sales are equal.

D) be equal only when production exceeds sales.

Ans:  C
26. When production exceeds sales, net operating income reported under variable costing generally will be:

A) greater than net operating income reported under absorption costing.

B) less than net operating income reported under absorption costing

C) equal to net operating income reported under absorption costing.

D) higher or lower because no generalization can be made.

Ans:  B
27. Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?

A) change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit.

B) number of units produced during the period times the fixed manufacturing overhead rate per unit.

C) change in the quantity of units in inventory times the variable manufacturing cost per unit.

D) number of units produced during the period times the variable manufacturing cost per unit.

Ans:  A
28. When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will:

A) tend to fluctuate in the same direction as fluctuations in the level of production.

B) tend to remain constant.

C) tend to fluctuate inversely with fluctuations in the level of production.

D) none of these

Ans:  A
29. A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:

A) they omit variable expenses entirely in computing net operating income.

B) they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.

C) they include all fixed manufacturing overhead on the income statement each year as a period cost.

D) they ignore inventory levels in computing income charges.

Ans:  B
30. Under the theory of constraints (TOC), which of the following is treated as a period cost?








Direct labor

Direct material

A)

Yes

Yes

B)

Yes

No

C)

No

Yes

D)

No

No

Ans:  B
31. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing?

A) $800 decrease

B) $200 decrease

C) $0

D) $200 increase



Ans:  B

Solution:

Change in inventory × Fixed manufacturing costs per unit

= 100 × $2 = $200 decrease


32. Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:






Unit product cost under variable costing

$5.20 per unit




Fixed manufacturing overhead cost for the year

$260,000




Fixed selling and administrative cost for the year

$180,000




Units (calculators) produced and sold

400,000

What is Shun's unit product cost under absorption costing for last year?

A) $4.10

B) $4.55


C) $5.85

D) $6.30


Ans:  C
Solution:
Unit fixed manufacturing overhead = Fixed manufacturing overhead ÷ Units produced = $260,000 ÷ 400,000 units = $0.65 per unit

Unit product cost = $5.20 + $0.65 = $5.85


33. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:






Units in beginning inventory

0




Units produced

7,100




Units sold

7,000




Units in ending inventory

100













Variable costs per unit:







Direct materials

$33




Direct labor

$53




Variable manufacturing overhead

$1




Variable selling and administrative

$7













Fixed costs:







Fixed manufacturing overhead

$170,400




Fixed selling and administrative

$7,000

What is the unit product cost for the month under variable costing?

A) $118

B) $94


C) $111

D) $87


Ans:  D
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $33 + $53 + $1 = $87
34. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:






Units in beginning inventory

0




Units produced

1,900




Units sold

1,700




Units in ending inventory

200













Variable costs per unit:







Direct materials

$33




Direct labor

$32




Variable manufacturing overhead

$2




Variable selling and administrative

$6













Fixed costs:







Fixed manufacturing overhead

$72,200




Fixed selling and administrative

$6,800

What is the unit product cost for the month under absorption costing?

A) $67

B) $105


C) $111

D) $73


Ans:  B
Solution:
Unit fixed manufacturing overhead = $72,200 ÷ 1,900 = $38

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead cost + Fixed manufacturing overhead cost



= $33 + $32 + $2 + $38 = $105
35. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:






Selling price

$79













Units in beginning inventory

0




Units produced

6,600




Units sold

6,300




Units in ending inventory

300













Variable costs per unit:







Direct materials

$14




Direct labor

$30




Variable manufacturing overhead

$4




Variable selling and administrative

$8













Fixed costs:







Fixed manufacturing overhead

$46,200




Fixed selling and administrative

$88,200

What is the total period cost for the month under the variable costing approach?

A) $138,600

B) $134,400

C) $46,200

D) $184,800

Ans:  D
Solution:
Total variable selling and administrative cost = $8 × 6,300 = $50,400

Period cost = Total variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= $50,400 + $46,200 + $88,200 = $184,800

36. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:








Selling price

$97













Units in beginning inventory

0




Units produced

2,200




Units sold

2,100




Units in ending inventory

100













Variable costs per unit:







Direct materials

$32




Direct labor

$25




Variable manufacturing overhead

$2




Variable selling and administrative

$9













Fixed costs:







Fixed manufacturing overhead

$8,800




Fixed selling and administrative

$37,800

What is the total period cost for the month under the absorption costing approach?

A) $56,700

B) $65,500

C) $8,800

D) $37,800

Ans:  A
Solution:

Total variable selling and administrative cost = $9 × 2,100 = $18,900

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $18,900 + $37,800 = $56,700

37. Mullee Corporation produces a single product and has the following cost structure:








Number of units produced each year

7,000




Variable costs per unit:







Direct materials

$51




Direct labor

$12




Variable manufacturing overhead

$2




Variable selling and administrative expense

$5




Fixed costs per year:







Fixed manufacturing overhead

$441,000




Fixed selling and administrative expense

$112,000

The unit product cost under absorption costing is:

A) $149

B) $65


C) $63

D) $128


Ans:  D
Solution:
Unit fixed manufacturing overhead = $441,000 ÷ 7,000 = $63

Unit product cost = $63 + $51 + $12 + $2 = $128


38. Stoneberger Corporation produces a single product and has the following cost structure:






Number of units produced each year

4,000




Variable costs per unit:







Direct materials

$50




Direct labor

$72




Variable manufacturing overhead

$6




Variable selling and administrative expense

$3




Fixed costs per year:







Fixed manufacturing overhead

$296,000




Fixed selling and administrative expense

$76,000

The unit product cost under variable costing is:

A) $128

B) $125


C) $202

D) $131


Ans:  A
Solution:
Unit product cost = $50 + $72 + $6 = $128
39. Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations:






Number of units produced

8,000




Variable costs per unit:







Direct materials

$37




Direct labor

$56




Variable manufacturing overhead

$4




Variable selling and administrative expense

$2




Fixed costs:







Fixed manufacturing overhead

$312,000




Fixed selling and administrative expense

$448,000

There were no beginning or ending inventories. The unit product cost under absorption costing was:

A) $93

B) $97


C) $136

D) $194


Ans:  C
Solution:
Unit fixed manufacturing overhead = $312,000 ÷ 8,000 = $39

Unit product cost = $37 + $56 + $4 + $39 = $136


40. Kray Inc., which produces a single product, has provided the following data for its most recent month of operations:






Number of units produced

3,000




Variable costs per unit:







Direct materials

$91




Direct labor

$13




Variable manufacturing overhead

$7




Variable selling and administrative expense

$6




Fixed costs:







Fixed manufacturing overhead

$237,000




Fixed selling and administrative expense

$165,000

There were no beginning or ending inventories. The unit product cost under variable costing was:

A) $111

B) $190


C) $117

D) $110


Ans:  A
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $91 + $13 + $7 = $111
41. The following data pertain to last year's operations at Clarkson, Incorporated, a company that produces a single product:






Units in beginning inventory

0




Units produced

100,000




Units sold

98,000













Selling price per unit

$10.00













Variable costs per unit:







Direct materials

$1.50




Direct labor

$2.50




Variable manufacturing overhead

$1.00




Variable selling and administrative

$2.00













Fixed costs per year:







Fixed manufacturing overhead

$200,000




Fixed selling and administrative

$50,000

What was the absorption costing net operating income last year?

A) $44,000

B) $48,000

C) $50,000

D) $49,000

Ans:  B LO:  2
Solution:

Unit fixed manufacturing overhead = $200,000 ÷ 100,000 = $2

Unit product cost = $1.50 + $2.50 + $1 + $2 = $7




Absorption costing income statement










Sales ($10 × 98,000)




$980,000




Cost of goods sold ($7 × 98,000)




 686,000




Gross margin




294,000




Selling and administrative expenses expenses:










Variable selling and administrative

$196,000







Fixed selling and administrative

   50,000

 246,000




Net operating income




$   48,000

42. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:








Selling price

$135













Units in beginning inventory

0




Units produced

6,400




Units sold

6,200




Units in ending inventory

200













Variable costs per unit:







Direct materials

$49




Direct labor

$38




Variable manufacturing overhead

$6




Variable selling and administrative

$11













Fixed costs:







Fixed manufacturing overhead

$108,800




Fixed selling and administrative

$74,400

The total contribution margin for the month under the variable costing approach is:

A) $155,000

B) $260,400

C) $192,200

D) $83,400

Ans:  C LO:  2
Solution:






Sales revenue ($135 × 6,200)




$837,000




Variable cost:










Direct materials ($49 × 6,200)

$303,800







Direct labor ($38 × 6,200)

235,000







Variable manufacturing overhead ($6 × 6,200)

37,200







Variable selling and administrative ($11 × 6,200)

68,200

644,800




Contribution margin




$192,200

43. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:








Selling price

$123













Units in beginning inventory

0




Units produced

1,000




Units sold

900




Units in ending inventory

100













Variable costs per unit:







Direct materials

$41




Direct labor

$26




Variable manufacturing overhead

$4




Variable selling and administrative

$6













Fixed costs:







Fixed manufacturing overhead

$17,000




Fixed selling and administrative

$11,700

What is the net operating income for the month under variable costing?

A) $12,700

B) $5,600

C) $1,700

D) $14,400

Ans:  A LO:  2
Solution:






Sales ($123 × 900)




$110,700




Variable cost of goods sold ($71 × 900)




63,900




Less variable selling and administrative ($6 × 900)




     5,400




Contribution margin




41,400




Fixed cost:










Fixed manufacturing overhead

$17,000







Fixed selling and administrative

 11,700

   28,700




Net operating income




$   12,700

44. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing?

A) $15,000

B) $25,000

C) $40,000

D) $55,000

Ans:  D
Solution:

Difference between absorption costing net income and variable costing net income = Change in inventory in units × Unit fixed manufacturing overhead

= (27,000 − 22,000) × $3 = 5,000 × $3 = $15,000

Net income under absorption costing = $40,000 + $15,000 = $55,000


45. Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year?

A) 8,200 units

B) 8,800 units

C) 11,200 units

D) 11,800 units

Ans:  B Level:  Hard


Solution:
Direct material + Direct labor + Variable manufacturing overhead

= Variable unit product cost = $9 – $1 = $8

Unit fixed manufacturing overhead = $11 – $8 = $3

Difference in net income between methods ÷ Unit fixed manufacturing overhead = ($3,600) ÷ $3 per unit = (1,200) units

Units produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800
46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:









Year 1

Year 2




Units (spice racks) produced

40,000

40,000




Units (spice racks) sold

37,000

41,000




Absorption costing net operating income

$44,000

$52,000




Variable costing net operating income

$38,000

???

Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2?

A) $48,000

B) $50,000

C) $54,000

D) $56,000

Ans:  C Level:  Hard
Solution:

Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory = ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2

Variable costing net operating income = Absorption costing net income − Difference in net operating income

= $52,000 − [(40,000 − 41,000) × $2)]

= $52,000 − ($2,000) = $54,000

47. Sipho Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $90,900. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $21,900. What was the absorption costing net operating income last year?

A) $69,000

B) $90,900

C) $21,900

D) $112,800

Ans:  A
Solution:
Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory

= $90,900 – $21,900 = $69,000


48. Last year, Kirsten Corporation's variable costing net operating income was $63,400. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $10,700. What was the absorption costing net operating income last year?

A) $10,700

B) $74,100

C) $63,400

D) $52,700

Ans:  D
Solution:


Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory

= $63,400 – $10,700 = $52,700


49. Bellue Inc. manufactures a variety of products. Variable costing net operating income was $96,300 last year and ending inventory decreased by 2,600 units. Fixed manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year?

A) $2,600

B) $93,700

C) $96,300

D) $98,900

Ans:  B
Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory

= $96,300 − [2,600 × $1] = $96,300 − $2,600 = $93,700


50. Last year, Tinklenberg Corporation's variable costing net operating income was $52,400 and its ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost was $8 per unit. What was the absorption costing net operating income last year?

A) $41,200

B) $11,200

C) $63,600

D) $52,400

Ans:  A
Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory

= $52,400 − [1,400 × $8] = $52,400 − $11,200 = $41,200

Use the following to answer questions 51-53:
Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and sold 12,000 units. Production costs for the year were as follows:





Direct materials

$150,000




Direct labor

$180,000




Variable manufacturing overhead

$135,000




Fixed manufacturing overhead

$210,000

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that direct labor is a variable cost.


51. The contribution margin per unit would be:

A) $25


B) $39

C) $34


D) $35

Ans:  C LO:  2 Level:  Hard


Solution:






Unit selling price ($840,000 ÷ 12,000)




$70




Less direct materials ($150,000 ÷ 15,000)

$10







Less direct labor ($180,000 ÷ 15,000)

12







Less variable manufacturing overhead ($135,000 ÷ 15,000)

9







Less variable selling and administrative ($60,000 ÷ 12,000)

5

36




Contribution margin




$34

52. Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be:

A) $135,000

B) $93,000

C) $105,000

D) $0


Ans:  A
Solution:
Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $10 + $12 + $9 + $14 = $45

Carrying value = Unit product cost × Ending inventory in units

= $45 × (15,000 − 12,000) = $45 × 3,000 = $135,000
53. Under variable costing, the company's net operating income for the year would be:

A) $42,000 higher than under absorption costing

B) $30,000 higher than under absorption costing

C) $30,000 lower than under absorption costing

D) $42,000 lower than under absorption costing

Ans:  D LO:  2


Solution:

Unit fixed manufacturing overhead × Change in inventory in units

= $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000

Since the units produced are greater than the units sold (inventory increased), net income under absorption costing will be higher than net income under variable costing.



Use the following to answer questions 54-61:
Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$81













Units in beginning inventory

0




Units produced

7,300




Units sold

7,000




Units in ending inventory

300













Variable costs per unit:







Direct materials

$20




Direct labor

$30




Variable manufacturing overhead

$7




Variable selling and administrative

$11













Fixed costs:







Fixed manufacturing overhead

$65,700




Fixed selling and administrative

$21,000

54. What is the unit product cost for the month under variable costing?

A) $77

B) $66


C) $68

D) $57


Ans:  D
Solution:
Direct materials + Direct labor + Variable manufacturing overhead

= $20 + $30 + $7 = $57


55. What is the unit product cost for the month under absorption costing?

A) $66


B) $77

C) $57


D) $68

Ans:  A
Solution:


Unit fixed manufacturing overhead = $65,700 ÷ 7,300 = $9

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66


56. The total contribution margin for the month under the variable costing approach is:

A) $91,000

B) $168,000

C) $105,000

D) $25,300

Ans:  A LO:  2


Solution:






Unit selling price




$81




Less unit variable costs:










Direct materials

$20







Direct labor

30







Variable manufacturing overhead

7







Variable selling and administrative

11

68




Contribution margin




$13

Total contribution margin = $13 × 7,000 = $91,000

57. The total gross margin for the month under the absorption costing approach is:

A) $105,000

B) $124,800

C) $7,000

D) $91,000

Ans:  A LO:  2
Solution:

Unit fixed manufacturing overhead = $9

Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66




Sales revenue ($81 × 7,000)

$567,000




Cost of goods sold ($66 × 7,000)

462,000




Gross margin

$105,000

58. What is the total period cost for the month under the variable costing approach?

A) $65,700

B) $163,700

C) $98,000

D) $86,700

Ans:  B LO:  2 Level:  Hard
Solution:

Variable selling and administrative cost + Fixed costs

= ($11 × 7,000) + ($65,700 + $21,000)

= $77,000 + $86,700 = $163,700

59. What is the total period cost for the month under the absorption costing approach?

A) $98,000

B) $65,700

C) $21,000

D) $163,700

Ans:  A LO:  2 Level:  Hard


Solution:

Variable selling and administrative cost + Fixed selling and administrative cost

= $11 × 7,000 + $21,000

= $77,000 + $21,000 = $98,000


60. What is the net operating income for the month under variable costing?

A) $2,700

B) $4,300

C) $7,000

D) $(12,800)

Ans:  B LO:  2


Solution:






Sales revenue ($81 × 7,000)




$567,000




Variable costs:










Product cost ($57 × 7,000)

$399,000







Variable selling and administrative ($11 × 7,000)

   77,000


 476,000




Contribution margin




91,000




Fixed costs:










Fixed manufacturing overhead

$ 65,700







Fixed selling and administrative

   21,000

   86,700




Contribution margin




$   4,300

61. What is the net operating income for the month under absorption costing?

A) $7,000

B) $4,300

C) $(12,800)

D) $2,700

Ans:  A LO:  2
Solution:






Sales revenue ($81 × 7,000)




$567,000




Cost of goods sold ($66 × 7,000)




 462,000




Gross margin




105,000




Selling and administrative expenses:










Variable selling and administrative ($11 × 7,000)

$77,000







Fixed selling and administrative

 21,000

   98,000




Net operating income




$   7,000

Use the following to answer questions 62-65:


Hopkins Company manufactures a single product. The following data pertain to the company's operations last year:





Selling price per unit

$24




Variable costs per unit:







Production

$8




Selling and administration

$2




Fixed costs in total:







Production

$48,000




Selling and administration

$36,000

At the beginning of the year there were no units in inventory. A total of 12,000 units were produced during the year, and 10,000 units were sold.


62. Under variable costing, the unit product cost is:

A) $8.00


B) $10.00

C) $12.00

D) $14.00

Ans:  A
Solution:


Production cost = $8
63. Under absorption costing, the unit product cost is:

A) $8.00


B) $10.00

C) $12.00

D) $15.00

Ans:  C
Solution:


Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4

Unit product cost = $8 + $4 = $12


64. The net operating income under variable costing would be:

A) $64,000

B) $60,000

C) $56,000

D) $52,000

Ans:  C LO:  2


Solution:






Sales revenue ($24 × 10,000)




$240,000




Variable costs:










Variable cost of goods sold ($8 × 10,000)

$80,000







Variable selling and administrative ($2 × 10,000)

 20,000


 100,000




Contribution margin




140,000




Fixed costs:










Fixed manufacturing overhead

$48,000







Fixed selling and administrative

 36,000

   84,000




Net operating income




$ 56,000

65. The net operating income under absorption costing would be:

A) the same as the income under variable costing.

B) $8,000 greater than the income under variable costing.

C) $12,000 greater than the income under variable costing.

D) $8,000 less than the income under variable costing.

Ans:  B LO:  2
Solution:

Unit fixed manufacturing overhead × Change in number of units in ending inventory = $4 × (12,000 − 10,000) = $4 × 2,000

= $8,000 greater than the income under variable costing since inventory increased

Use the following to answer questions 66-68:


Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost structure:








Variable cost per parachute

Total fixed cost for the year




Manufacturing cost

$160

$342,000




Selling and administrative

$10

$171,000

In its first year of operations, Phearsum produced and sold 4,000 parachutes. The parachutes sold for $310 each.


66. If Phearsum would have sold only 3,800 parachutes in its first year, what total amount of cost would have been assigned to the 200 parachutes in finished goods inventory under the variable costing method?

A) $28,000

B) $32,000

C) $34,000

D) $49,100

Ans:  B
Solution:

Unit product cost = $160

Total cost of ending finished goods inventory = $160 × 200 = $32,000

67. Refer back to the original data. How would Phearsum's absorption costing net operating income been affected in its first year if only 3,800 parachutes were sold instead of 4,000?

A) net operating income would have been $2,350 lower

B) net operating income would have been $10,900 lower

C) net operating income would have been $12,900 lower

D) net operating income would have been $28,000 lower

Ans:  B LO:  1,2 Level:  Hard


Solution:

Unit fixed manufacturing overhead = $342,000 ÷ 4,000 = $85.50

Unit product cost under absorption costing = $160 + $85.50 = $245.50

Unit gross margin = $310 − $245.50 = $64.50






Cost savings ($10 × 200)

$ 2,000




Less: decrease in gross margin ($64.50 × 200)

12,900




Net operating income increase (decrease)

($10,900)

68. Refer back to the original data. How would Phearsum's variable costing net operating income been affected in its first year if 4,500 parachutes were produced instead of 4,000 and Phearsum still sold 4,000 parachutes?

A) net operating income would not have been affected

B) net operating income would have been $38,000 higher

C) net operating income would have been $57,000 higher

D) net operating income would have been $75,000 lower



Ans:  A LO:  1,2
Use the following to answer questions 69-72:
Feery Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$110













Units in beginning inventory

0




Units produced

3,800




Units sold

3,700




Units in ending inventory

100













Variable costs per unit:







Direct materials

$32




Direct labor

$34




Variable manufacturing overhead

$6




Variable selling and administrative

$11













Fixed costs:







Fixed manufacturing overhead

$68,400




Fixed selling and administrative

$14,800

69. What is the unit product cost for the month under variable costing?

A) $72

B) $90


C) $83

D) $101


Ans:  A
Solution:
Direct materials + Direct labor + Variable manufacturing overhead

= $32 + $34 + $6 = $72


70. What is the unit product cost for the month under absorption costing?

A) $83


B) $90

C) $72


D) $101

Ans:  B
Solution:


Unit fixed manufacturing overhead = $68,400 ÷ 3,800 = $18

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $32 + $34 + $6 + $18 = $90


71. What is the net operating income for the month under variable costing?

A) $1,800

B) $16,700

C) $9,500

D) $18,500

Ans:  B LO:  2


Solution:






Sales revenue ($110 × 3,700)




$407,000




Variable costs:










Variable cost of goods sold ($72 × 3,700)

$266,400







Variable selling and administrative ($11 × 3,700)

   40,700


 307,100




Contribution margin




99,900




Fixed costs:










Fixed manufacturing overhead

$ 68,400







Fixed selling and administrative

   14,800

   83,200




Net operating income




$ 16,700

72. What is the net operating income for the month under absorption costing?

A) $18,500

B) $1,800

C) $9,500

D) $16,700

Ans:  A LO:  2
Solution:






Sales revenue ($110 × 3,700)




$407,000




Cost of goods sold ($90 × 3,700)




 333,000




Gross margin




74,000




Selling and administrative expenses costs:










Variable selling and administrative ($11 × 3,700)

$40,700







Fixed selling and administrative

 14,800

   55,500




Net operating income




$ 18,500

Use the following to answer questions 73-76:


Jarbo Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$129













Units in beginning inventory

500




Units produced

3,600




Units sold

3,800




Units in ending inventory

300













Variable costs per unit:







Direct materials

$13




Direct labor

$59




Variable manufacturing overhead

$4




Variable selling and administrative

$8













Fixed costs:







Fixed manufacturing overhead

$97,200




Fixed selling and administrative

$64,600

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.


73. What is the unit product cost for the month under variable costing?

A) $76


B) $103

C) $84


D) $111

Ans:  A
Solution:


Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $13 + $59 + $4 = $76
74. What is the unit product cost for the month under absorption costing?

A) $84


B) $76

C) $103


D) $111

Ans:  C
Solution:


Unit fixed manufacturing overhead = $97,200 ÷ 3,600 = $27

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $13 + $59 + $4 + $27 = $103


75. What is the net operating income for the month under variable costing?

A) $3,800

B) $24,400

C) $9,200

D) $8,100

Ans:  C LO:  2


Solution:






Sales revenue ($129 × 3,800)




$490,200




Variable costs:










Variable cost of goods sold ($76 × 3,800)

$288,800







Variable selling and administrative ($8 × 3,800)

   30,400


 319,200




Contribution margin




171,000




Fixed costs:










Fixed manufacturing overhead

$ 97,200







Fixed selling and administrative

   64,600

 161,800




Net operating income




$   9,200

76. What is the net operating income for the month under absorption costing?

A) $8,100

B) $9,200

C) $3,800

D) $24,400

Ans:  C LO:  2
Solution:






Sales revenue ($129 × 3,800)




$490,200




Cost of goods sold ($103 × 3,800)




 391,400




Gross margin




98,800




Selling and administrative expenses costs:










Variable selling and administrative ($8 × 3,800)

$30,400







Fixed selling and administrative

 64,600

   95,000




Net operating income




$   3,800

Use the following to answer questions 77-79:


Beach Corporation, which produces a single product, budgeted the following costs for its first year of operations. These costs are based on a budgeted volume of 30,000 towels produced and sold:





Direct materials

$96,000




Direct labor

$48,000




Variable manufacturing overhead

$72,000




Fixed manufacturing overhead

$60,000




Variable selling and administrative

$12,000




Fixed selling and administrative

$36,000

During the first year of operations, Beach Towel actually produced 30,000 towels but only sold 24,000 towels. Actual costs did not fluctuate from the cost behavior patterns described above. The 24,000 towels were sold for $16 per towel. Assume that direct labor is a variable cost.


77. What is the total cost that would be assigned to Beach Towel's finished goods inventory at the end of the first year of operations under the variable costing method?

A) $43,200

B) $45,600

C) $55,200

D) $64,800

Ans:  A
Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 30,000 units = ($96,000 + $48,000 + $72,000) ÷ 30,000 = $7.20

Total cost of ending finished goods inventory = Unit product cost × Ending inventory = $7.20 × (30,000 − 24,000) = $7.20 × 6,000 = $43,200


78. Under the absorption costing method, what is Beach Towel's actual net operating income for its first year?

A) $60,000

B) $115,200

C) $117,600

D) $124,800

Ans:  C LO:  2


Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead) ÷ 30,000 units

= ($96,000 + $48,000 + $72,000 + $60,000) ÷ 30,000 = $9.20

Unit variable selling and administrative cost = $12,000 ÷ 30,000 = $0.40






Sales revenue ($16 × 24,000)




$384,000




Cost of goods sold ($9.20 × 24,000)




 220,800




Gross margin




163,200




Selling and administrative expenses:










Variable selling and administrative ($0.40 × 24,000)

$ 9,600







Fixed selling and administrative

 36,000

   45,600




Net operating income




$117,600

79. Assuming no change in cost structure, which of the following would have increased Beach Towel's net operating income under the variable costing method in its first year of operations?

A) an increase in sales volume with no increase in production volume

B) an increase in production volume with no increase in sales volume

C) both A and B above

D) none of the above

Ans:  A LO:  2
Use the following to answer questions 80-83:
Blake Corporation, which produces a single product, has provided the following absorption costing income statement for the month of June:





Blake Corporation

Income Statement



For the month ended June 30






















Sales (9,500 units)




$285,000




Cost of goods sold:










Beginning inventory

$ 16,000







Add cost of goods manufactured

160,000







Goods available for sale

176,000







Less ending Inventory

  24,000







Cost of goods sold




 152,000




Gross margin




133,000




Selling and administrative expenses:










Fixed

$ 75,000







Variable

  19,000

   94,000




Net operating income




$ 39,000

During June, the company's variable production costs were $10 per unit and its fixed manufacturing overhead totaled $60,000. A total of 10,000 units were produced during June and the company had 1,000 units in the beginning inventory. The company uses the LIFO method to value inventories.


80. The contribution margin per unit during June was:

A) $20


B) $18

C) $16


D) $14

Ans:  B LO:  2


Solution:






Selling price ($285,000 ÷ 9,500)

$30




Less variable product cost

10




Less unit variable selling and administrative ($19,000 ÷ 9,500)

2




Unit contribution margin

$18

81. The carrying value on the balance sheet of the company's inventory on June 30 under the variable costing method would be:

A) $10,000

B) $12,000

C) $15,000

D) $24,000

Ans:  C
Solution:
Ending inventory = Beginning inventory + Units produced − Units sold

= 1,000 + 10,000 − 9,500 = 1,500

Carrying value = Ending inventory in units × Variable production cost

= 1,500 × $10 = $15,000

82. Net operating income under the variable costing method for June would be:

A) $36,000

B) $40,000

C) $53,000

D) $60,000

Ans:  A LO:  2


Solution:






Sales revenue (9,500 units)




$285,000




Variable costs:










Variable cost of goods sold ($10 × 9,500)

$95,000







Variable selling and administrative

 19,000

 114,000




Contribution margin




171,000




Fixed costs:










Fixed manufacturing overhead

$60,000







Fixed selling and administrative

 75,000

 135,000




Net operating income




$ 36,000

83. The break-even point in units for the month under variable costing would be:

A) 6,000 units

B) 6,750 units

C) 7,500 units

D) 9,000 units

Ans:  C
Solution:






Sales revenue (9,500 units)




$285,000




Variable costs:










Variable cost of goods sold ($10 × 9,500)

$95,000







Variable selling and administrative

19,000

114,000




Contribution margin




$171,000

Fixed costs ÷ Unit contribution margin = (Fixed manufacturing overhead + Fixed selling and administrative) ÷ Unit contribution margin = ($60,000 + $75,000) ÷ ($171,000 ÷ 9,500) = $135,000 ÷ $18 per unit = 7,500 units

Use the following to answer questions 84-87:


Haaikon Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$86













Units in beginning inventory

0




Units produced

3,400




Units sold

3,300




Units in ending inventory

100













Variable costs per unit:







Direct materials

$17




Direct labor

$39




Variable manufacturing overhead

$1




Variable selling and administrative

$8













Fixed costs:







Fixed manufacturing overhead

$40,800




Fixed selling and administrative

$23,100

84. What is the unit product cost for the month under variable costing?

A) $77

B) $57


C) $69

D) $65


Ans:  B
Solution:
Unit product cost = Direct materials + Direct Labor + Variable manufacturing overhead = $17 + $39 + $1 = $57
85. The total contribution margin for the month under the variable costing approach is:

A) $56,100

B) $28,500

C) $95,700

D) $69,300

Ans:  D LO:  2


Solution:






Sales revenue ($86 × 3,300)




$283,800




Variable costs:










Variable cost of goods sold ($57 × 3,300)

$188,100







Variable selling and administrative ($8 × 3,300)

26,400


214,500




Contribution margin




$ 69,300

86. What is the total period cost for the month under the variable costing approach?

A) $40,800

B) $90,300

C) $49,500

D) $63,900

Ans:  B LO:  2 Level:  Hard
Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= ($8 × 3,300) + $40,800 + $23,100

= $26,400 + $40,800 + $23,100 = $90,300

87. What is the net operating income for the month under variable costing?

A) $6,600

B) $(300)

C) $5,400

D) $1,200

Ans:  C LO:  2


Solution:






Sales revenue ($86 × 3,300)




$283,800




Variable costs:










Variable cost of goods sold ($57 × 3,300)

$188,100







Variable selling and administrative ($8 × 3,300)

   26,400


 214,500




Contribution margin




69,300




Fixed costs:










Fixed manufacturing overhead

$ 40,800







Fixed selling and administrative

   23,100

   63,900




Net operating income




$   5,400

Use the following to answer questions 88-89:


Ibarra Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$81













Units in beginning inventory

0




Units produced

6,900




Units sold

6,600




Units in ending inventory

300













Variable costs per unit:







Direct materials

$22




Direct labor

$28




Variable manufacturing overhead

$6




Variable selling and administrative

$5













Fixed costs:







Fixed manufacturing overhead

$69,000




Fixed selling and administrative

$66,000

88. What is the unit product cost for the month under variable costing?

A) $71

B) $66


C) $56

D) $61


Ans:  C
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead

= $22 + $28 + $6 = $56


89. What is the net operating income for the month under variable costing?

A) $0


B) $(19,800)

C) $(3,000)

D) $3,000

Ans:  C LO:  2


Solution:






Sales revenue ($81 × 6,600)




$534,600




Variable costs:










Variable cost of goods sold ($56 × 6,600)

$369,600







Variable selling and administrative ($5 × 6,600)

   33,000


 402,600




Contribution margin




132,000




Fixed costs:










Fixed manufacturing overhead

$ 69,000







Fixed selling and administrative

   66,000

 135,000




Net operating income




$ (3,000)

Use the following to answer questions 90-92:


Yankee Company manufactures a single product. The company has the following cost structure:





Variable costs per unit:







Production

$4




Selling and administrative

$1




Fixed costs in total:







Production

$12,000




Selling and administrative

$8,000

Last year, 4,000 units were produced and 3,500 units were sold. There were no beginning inventories.


90. Under variable costing, the unit product cost would be:

A) $4


B) $5

C) $7


D) $8

Ans:  A
Solution:


Production cost = $4
91. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:

A) the same as under absorption costing

B) $1,500 less than under absorption costing

C) $2,000 higher than under absorption costing

D) $2,000 less than under absorption costing

Ans:  B
Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3

Difference in carrying value of ending finished goods inventory = Unit fixed manufacturing overhead × Change in inventory in units

= $3 × (4,000 − 3,500)

= $1,500 less than under absorption costing

92. Under absorption costing, the cost of goods sold for the year would be:

A) $28,000

B) $24,500

C) $17,500

D) $14,000

Ans:  B LO:  2


Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3

Product cost = $4 + $3 = $7

Cost of goods sold = $7 × 3,500 = $24,500


Use the following to answer questions 93-94:
Peterson Company produces a single product. Data from the company's records for last year follow:





Units in beginning inventory

0




Units produced

70,000




Units sold

60,000













Sales

$1,400,000




Manufacturing costs:







Variable

$630,000




Fixed

$315,000




Selling and administrative expenses:







Variable

$98,000




Fixed

$140,000

93. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:

A) $90,000

B) $104,000

C) $105,000

D) $135,000

Ans:  A Source:  CPA, adapted
Solution:

Unit variable product cost = $630,000 ÷ 70,000 = $9

Change in inventory in units = 70,000 − 60,000 = 10,000

Carrying value of ending inventory = $9 × 10,000 = $90,000


94. Under the absorption costing method, Peterson's net operating income would be:

A) $217,000

B) $307,000

C) $352,000

D) $374,500

Ans:  C LO:  2 Source:  CPA, adapted


Solution:

Product cost = $9 + $4.50 = $13.50






Sales revenue




$1,400,000




Cost of goods sold ($13.50 × 60,000)




810,000




Gross margin




590,000




Selling and administrative expenses:










Variable selling and administrative

$ 98,000







Fixed selling and administrative

140,000

238,000




Net operating income




$ 352,000

Use the following to answer questions 95-97:


McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost structure:







Variable cost per monitor

Total fixed cost for the year




Manufacturing cost

$75.20

$912,000




Selling and administrative

$14.60

$456,000

In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000. McCoy's gross margin in this first year was $2,629,600. McCoy's contribution margin in this first year was $2,109,000.


95. Under the variable costing method, what is McCoy's net operating income for its first year?

A) $266,000

B) $741,000

C) $1,261,600

D) $2,173,600

Ans:  B LO:  2


Solution:






Contribution margin




$2,109,000




Fixed costs:










Fixed manufacturing overhead

$912,000







Fixed selling and administrative

456,000

1,368,000




Net operating income




$ 741,000

96. Under the absorption costing method, what is McCoy's net operating income for its first year?

A) $266,000

B) $786,600

C) $1,261,600

D) $2,173,600

Ans:  B LO:  2
Solution:






Gross margin




$2,629,600




Selling and administrative expenses:










Variable selling and administrative ($14.60 × 95,000)

$1,387,000







Fixed selling and administrative

456,000

1,843,000




Net operating income




$ 786,600

97. If McCoy produces 100,000 monitors and sells 100,000 monitors in the second year of operations, which of the following statements will be true? (Assume no change in cost structure or selling price.)

A) McCoy's variable costing net operating income in its second year will be greater than its absorption costing net operating income

B) McCoy's absorption costing unit product cost will decrease in the second year

C) McCoy's gross margin will be equal to its contribution margin in its second year

D) Both A and B above

E) none of the above

Ans:  E Level:  Hard


Use the following to answer questions 98-100:
Mediocre Manufacturing Company produces a single product. Management budgeted the following costs for its first year of operations. These costs are based on a budgeted volume of 4,000 units produced and sold:





Direct materials

$28,000




Direct labor

$14,000




Manufacturing overhead:







Variable

$56,000




Fixed

$63,000




Selling and administrative:







Variable

$7,000




Fixed

$42,000

During the first year of operations, Mediocre actually produced 4,000 units but only sold 3,500 units. Actual costs did not fluctuate from the cost behavior patterns described above. The 3,500 units were sold for $72 per unit. Assume that direct labor is a variable cost.


98. What is the total cost that would be assigned to Mediocre's finished goods inventory at the end of the first year of operations under the absorption costing method?

A) $12,250

B) $20,125

C) $23,000

D) $26,250

Ans:  B


Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $28,000 + $14,000 + $56,000 + $63,000 = $161,000

Unit product cost = $161,000 ÷ 4,000 = $40.25

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $40.25 × (4,000 − 3,500) = $20,125

99. Under the variable costing method, what is Mediocre's actual net operating income for its first year?

A) $42,000

B) $54,250

C) $55,125

D) $63,000

Ans:  C LO:  2
Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 4,000 units = ($28,000 + $14,000 + $56,000) ÷ 4,000 = $24.50







Sales revenue ($72 × 3,500)




$252,000




Variable costs:










Variable cost of goods sold ($24.50 × 3,500)

$85,750







Variable selling and administrative ($1.75 × 3,500)

6,125


91,875




Contribution margin




160,125




Fixed costs:










Fixed manufacturing overhead

$63,000







Fixed selling and administrative

42,000

105,000




Net operating income




$ 55,125

100. Assuming no change in cost structure, which of the following would have increased Mediocre's net operating income under the absorption costing method in its first year of operations?

A) an increase in sales volume with no increase in production volume

B) an increase in production volume with no increase in sales volume

C) both A and B above

D) none of the above

Ans:  C LO:  2
Use the following to answer questions 101-102:
JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000 units were produced and 80,000 units were sold. There were no beginning inventories. The company has the following cost structure:








Fixed Costs

Variable Costs




Raw materials

--

$1.50 per unit produced




Direct labor

--

$1.00 per unit produced




Factory overhead

$150,000

$0.50 per unit produced




Selling and administrative

$80,000

$0.50 per unit sold

101. The unit product cost under absorption costing is:

A) $2.50

B) $3.00


C) $3.50

D) $4.50


Ans:  D Source:  CPA, adapted
Solution:
Unit fixed overhead = $150,000 ÷ 100,000 = $1.50

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $1.50 + $1.00 + $0.50 + $1.50 = $4.50
102. The net operating income under variable costing is:

A) $50,000

B) $80,000

C) $90,000

D) $120,000

Ans:  A LO:  2 Source:  CPA, adapted


Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead

= $1.50 + $1 + $0.50 = $3





Sales revenue ($7 × 80,000)




$560,000




Variable costs:










Variable cost of goods sold ($3 × 80,000)

$240,000







Variable selling and administrative ($0.50 × 80,000)

40,000


280,000




Contribution margin




280,000




Fixed costs:










Fixed manufacturing overhead

150,000







Fixed selling and administrative

80,000

230,000




Net operating income




$ 50,000

Use the following to answer questions 103-106:


Gadepelli Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$106













Units in beginning inventory

0




Units produced

1,600




Units sold

1,400




Units in ending inventory

200













Variable costs per unit:







Direct materials

$15




Direct labor

$14




Variable manufacturing overhead

$6




Variable selling and administrative

$4













Fixed costs:







Fixed manufacturing overhead

$51,200




Fixed selling and administrative

$23,800

103. The total contribution margin for the month under the variable costing approach is:

A) $54,600

B) $99,400

C) $93,800

D) $42,600

Ans:  C LO:  1,2
Solution:

Unit product cost = $15 + $14 + $6 = $35







Sales revenue ($106 × 1,400)




$148,400




Variable costs:










Variable cost of goods sold ($35 × 1,400)

$49,000







Variable selling and administrative ($4 × 1,400)

5,600


54,600




Contribution margin




$ 93,800

104. The total gross margin for the month under the absorption costing approach is:

A) $25,200

B) $54,600

C) $68,000

D) $93,800

Ans:  B LO:  2
Solution:

Unit fixed manufacturing overhead = $51,200 ÷ 1,600 = $32

Unit product cost = $15 + $14 + $6 + $32 = $67





Sales revenue ($106 × 1,400)

$148,400




Cost of goods sold ($67 × 1,400)

93,800




Gross margin

$ 54,600

105. What is the total period cost for the month under the variable costing approach?

A) $75,000

B) $80,600

C) $29,400

D) $51,200

Ans:  B LO:  2 Level:  Hard
Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= $4 × 1,400 + $51,200 + $23,800

= $5,600 + $51,200 + $23,800 = $80,600

106. What is the total period cost for the month under the absorption costing approach?

A) $29,400

B) $80,600

C) $23,800

D) $51,200

Ans:  A LO:  2 Level:  Hard


Solution:
Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 1,400 + $23,800 = $29,400
Use the following to answer questions 107-109:
During its first year of operations, Carlos Manufacturing Company incurred the following costs to produce 8,000 units of its product:





Direct materials

$7 per unit




Direct labor

$3 per unit




Variable manufacturing overhead

$18 per unit




Fixed manufacturing overhead

$450,000 in total

The company also incurred the following costs in the sale of 7,500 units of product during its first year:







Variable selling and administrative

$2 per unit




Fixed selling and administrative

$60,000 in total

Assume that direct labor is a variable cost.

107. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the absorption costing method?

A) $15,000

B) $42,125

C) $44,000

D) $47,125

Ans:  B


Solution:

Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $84.25 × (8,000 − 7,500) = $84.25 × 500 = $42,125


108. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the variable costing method?

A) $15,000

B) $42,125

C) $44,000

D) $14,000

Ans:  D


Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $7 + $3 + $18 = $28

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000

109. If Carlos' absorption costing net operating income for this first year is $118,125, what would its variable costing net operating income be for this first year?

A) $86,000

B) $90,000

C) $104,125

D) $146,250

Ans:  B
Solution:

Variable costing net income = Absorption costing net income – (Unit fixed manufacturing overhead × Change in inventory in units)

= $118,125 − ($56.25 × 500) = $118,125 − $28,125 = $90,000
Use the following to answer questions 110-111:
Kern Company produces a single product. Selected information concerning the operations of the company follow:





Units in beginning inventory

0




Units produced

10,000




Units sold

9,000













Direct materials

$40,000




Direct labor

$20,000




Variable factory overhead

$12,000




Fixed factory overhead

$25,000




Variable selling and administrative expenses

$4,500




Fixed selling and administrative expenses

$30,000

Assume that direct labor is a variable cost.


110. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:

A) $7,200

B) $7,650

C) $8,000

D) $9,700

Ans:  A Source:  CPA, adapted


Solution:

Unit product cost = ($40,000 + $20,000 + $12,000) ÷ 10,000

= $72,000 ÷ 10,000 = $7.20

Ending inventory = Units produced − Units sold = 10,000 − 9,000 = 1,000

Carrying value of ending finished goods inventory = Unit product cost × Units in ending inventory = $7.20 × 1,000 = $7,200
111. Which costing method, absorption or variable costing, would show a higher operating income for the year and by what amount?

A) Absorption costing net operating income would be higher than variable costing net operating income by $2,500.

B) Variable costing net operating income would be higher than absorption costing net operating income by $2,500.

C) Absorption costing net operating income would be higher than variable costing net operating income by $5,500.

D) Variable costing net operating income would be higher than absorption costing net operating income by $5,500.

Ans:  A Source:  CPA, adapted


Solution:

Unit fixed manufacturing overhead = $25,000 ÷ 10,000 = $2.50

Difference between absorption costing net income and variable costing net income = Unit fixed manufacturing overhead × Change in ending inventory in units = $2.50 × (10,000 − 9,000) = $2,500

Since inventory has increased (production exceeds sales), absorption costing net income would be higher than variable costing net income.

Use the following to answer questions 112-113:
Lina Co. produced 100,000 units of its single product during the month of June. Costs incurred during June were as follows:





Direct materials

$100,000




Direct labor

$80,000




Variable manufacturing overhead

$40,000




Fixed manufacturing overhead

$50,000




Variable selling and administrative expenses

$12,000




Fixed selling and administrative expenses

$45,000

Assume that direct labor is a variable cost.


112. The unit product cost under absorption costing would be:

A) $3.27


B) $2.70

C) $2.20

D) $1.80

Ans:  B Source:  CPA, adapted


Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= ($100,000 + $80,000 + $40,000 + $50,000) ÷ 100,000

= $270,000 ÷ 100,000 = $2.70
113. The unit product cost under variable costing would be:

A) $2.82


B) $2.70

C) $2.32

D) $2.20

Ans:  D Source:  CPA, adapted


Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 100,000 units = ($100,000 + $80,000 + $40,000) ÷ 100,000 = $220,000 ÷ 100,000 = $2.20
Use the following to answer questions 114-115:
Bauxar Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$98













Units in beginning inventory

0




Units produced

2,200




Units sold

2,100




Units in ending inventory

100













Variable costs per unit:







Direct materials

$29




Direct labor

$17




Variable manufacturing overhead

$5




Variable selling and administrative

$9













Fixed costs:







Fixed manufacturing overhead

$33,000




Fixed selling and administrative

$29,400

114. What is the unit product cost for the month under variable costing?

A) $75

B) $66


C) $51

D) $60


Ans:  C
Solution:
Direct materials + Direct labor + Variable manufacturing overhead

= $29 + $17 + $5 = $51


115. What is the unit product cost for the month under absorption costing?

A) $66


B) $51

C) $60


D) $75

Ans:  A


Solution:
Unit fixed manufacturing overhead = $33,000 ÷ 2,200 = $15

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $29 + $17 + $5 + $15 = $66


Use the following to answer questions 116-118:
Crossbow Corp. produces a single product. Data concerning June's operations follow:





Units in beginning inventory

0




Units produced

6,000




Units sold

5,000













Variable costs per unit:







Manufacturing

$7




Selling and administrative

$3













Fixed costs in total:







Manufacturing

$12,000




Selling and administrative

$3,000

116. Under variable costing, ending inventory on the balance sheet would be valued at:

A) $10,000

B) $7,000

C) $9,000

D) $12,000

Ans:  B
Solution:

Unit product cost = $7

Ending inventory = Beginning inventory + Units produced − Units sold

= 0 + 6,000 − 5,000 = 1,000

Value of ending inventory = Unit product cost × Units in ending inventory

= $7 × 1,000 = $7,000

117. Under absorption costing, ending inventory on the balance sheet would be valued at:

A) $10,000

B) $7,000

C) $9,000

D) $12,000

Ans:  C LO:  2


Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 6,000 = $2

Unit product cost = $7 + $2 = $9

Value of ending inventory = Unit product cost × Units in ending inventory

= $9 × 1,000 = $9,000
118. For the year in question, net operating income under variable costing will be:

A) higher than net operating income under absorption costing.

B) lower than net operating income under absorption costing.

C) the same as net operating income under absorption costing.

D) none of these

Ans:  B
Use the following to answer questions 119-120:


Dearne Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$67













Units in beginning inventory

0




Units produced

5,200




Units sold

4,900




Units in ending inventory

300













Variable costs per unit:







Direct materials

$20




Direct labor

$16




Variable manufacturing overhead

$3




Variable selling and administrative

$4













Fixed costs:







Fixed manufacturing overhead

$41,600




Fixed selling and administrative

$73,500

119. What is the total period cost for the month under the variable costing approach?

A) $41,600

B) $93,100

C) $115,100

D) $134,700

Ans:  D Level:  Hard
Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= $4 × 4,900 + $41,600 + $73,500

= $19,600 + $41,600 + $73,500 = $134,700

120. What is the total period cost for the month under the absorption costing approach?

A) $93,100

B) $73,500

C) $134,700

D) $41,600

Ans:  A Level:  Hard


Solution:

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 4,900 + $73,500 = $93,100


Use the following to answer questions 121-122:
Tat Corporation produces a single product and has the following cost structure:





Number of units produced each year

7,000




Variable costs per unit:







Direct materials

$77




Direct labor

$89




Variable manufacturing overhead

$5




Variable selling and administrative expenses

$3




Fixed costs per year:







Fixed manufacturing overhead

$532,000




Fixed selling and administrative expenses

$574,000

121. The unit product cost under absorption costing is:

A) $247

B) $166


C) $332

D) $171


Ans:  A
Solution:
Unit fixed manufacturing overhead = $532,000 ÷ 7,000 = $76

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $77 + $89 + $5 + $76 = $247


122. The unit product cost under variable costing is:

A) $169


B) $171

C) $247


D) $174

Ans:  B


Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $77 + $89 + $5 = $171
Use the following to answer questions 123-124:
Caruso Inc., which produces a single product, has provided the following data for its most recent month of operations:





Number of units produced

4,000




Variable costs per unit:







Direct materials

$39




Direct labor

$71




Variable manufacturing overhead

$5




Variable selling and administrative expense

$8




Fixed costs:







Fixed manufacturing overhead

$220,000




Fixed selling and administrative expense

$308,000

There were no beginning or ending inventories.


123. The unit product cost under absorption costing was:

A) $170


B) $115

C) $255


D) $110

Ans:  A


Solution:
Unit fixed manufacturing overhead = $220,000 ÷ 4,000 = $55

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $39 + $71 + $5 + $55 = $170


124. The unit product cost under variable costing was:

A) $115


B) $123

C) $118


D) $170

Ans:  A


Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $39 + $71 + $5 = $115
Use the following to answer questions 125-126:
Cloer Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$95













Units in beginning inventory

0




Units produced

8,900




Units sold

8,500




Units in ending inventory

400













Variable costs per unit:







Direct materials

$10




Direct labor

$48




Variable manufacturing overhead

$5




Variable selling and administrative

$11













Fixed costs:







Fixed manufacturing overhead

$106,800




Fixed selling and administrative

$68,000

125. The total contribution margin for the month under the variable costing approach is:

A) $178,500

B) $71,700

C) $272,000

D) $170,000

Ans:  A LO:  2
Solution:
Unit product cost = $10 + $48 + $5 = $63




Sales revenue ($95 × 8,500)




$807,500




Variable costs:










Variable cost of goods sold ($63 × 8,500)

$535,500







Variable selling and administrative ($11 × 8,500)

93,500


629,000




Contribution margin




$178,500

126. The total gross margin for the month under the absorption costing approach is:

A) $200,000

B) $170,000

C) $8,500

D) $178,500

Ans:  B LO:  2
Solution:

Unit fixed manufacturing overhead = $106,800 ÷ 8,900 = $12

Unit product cost = $10 + $48 + $5 + $12 = $75





Sales revenue ($95 × 8,500)

$807,500




Cost of goods sold ($75 × 8,500)

637,500




Gross margin

$ 170,000

Use the following to answer questions 127-128:


Hirsch Company produces a single product. Variable manufacturing costs are $6 per unit, and fixed manufacturing costs are $2 per unit based on 50,000 units produced each year. In the current year, 50,000 units were produced, and 40,000 units were sold.
127. Under absorption costing, the amount of manufacturing cost (variable and fixed) deducted from revenue in the current year would be:

A) $320,000

B) $400,000

C) $240,000

D) $300,000

Ans:  A LO:  2


Solution:

Total manufacturing cost deducted from revenue = Total per unit product cost × Units sold = ($6 + $2) × 40,000 = $320,000


128. Under variable costing, the amount of manufacturing cost (variable and fixed) deducted from revenue in the current year would be:

A) $320,000

B) $240,000

C) $340,000

D) $400,000

Ans:  C LO:  2


Solution:

Total fixed cost = Per unit fixed cost × Units produced

Total fixed cost = $2 × 50,000 = $100,000

Total manufacturing cost deducted from revenue = (Variable per unit product cost × Units sold) + Total fixed cost

= ($6 × 40,000) + $100,000

= $240,000 + $100,000 = $340,000

Use the following to answer questions 129-130:
Osawa Inc. manufactured 200,000 units of its only product in its first year of operations. Variable manufacturing costs were $30 per unit. Fixed manufacturing costs were $600,000 and selling and administrative costs totaled $400,000. Osawa sold 120,000 units at a selling price of $40 per unit.
129. Osawa's net operating income using absorption costing would be:

A) $200,000

B) $440,000

C) $600,000

D) $840,000

Ans:  B LO:  2


Solution:

Unit fixed manufacturing cost = $600,000 ÷ 200,000 = $3

Unit product cost = $30 + $3 = $33





Sales revenue ($40 × 120,000)

$4,800,000




Cost of goods sold ($33 × 120,000)

3,960,000




Gross margin

840,000




Selling and administrative expenses cost

400,000




Net operating income

$ 440,000

130. Osawa's net operating income using variable costing would be:

A) $200,000

B) $440,000

C) $800,000

D) $600,000

Ans:  A LO:  2
Solution:






Sales revenue ($40 × 120,000)




$4,800,000




Variable cost of goods sold ($30 × 120,000)




3,600,000




Contribution margin




1,200,000




Fixed costs:










Fixed manufacturing costs

$600,000







Selling and administrative

400,000

1,000,000




Net operating income




$ 200,000

Use the following to answer questions 131-132:


Eldrick Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$85













Units in beginning inventory

0




Units produced

4,500




Units sold

4,400




Units in ending inventory

100













Variable costs per unit:







Direct materials

$29




Direct labor

$13




Variable manufacturing overhead

$7




Variable selling and administrative

$5













Fixed costs:







Fixed manufacturing overhead

$117,000




Fixed selling and administrative

$4,400

131. What is the net operating income for the month under variable costing?

A) $10,100

B) $2,600

C) $15,000

D) $17,600

Ans:  C LO:  2
Solution:

Unit product cost = $29 + $13 + $7 = $49






Sales revenue ($85 × 4,400)




$374,000




Variable costs:










Variable cost of goods sold ($49 × 4,400)

$215,600







Variable selling and administrative ($5 × 4,400)

22,000


237,600




Contribution margin




136,400




Fixed costs:










Fixed manufacturing overhead

$117,000







Fixed selling and administrative

4,400

121,400




Net operating income




$ 15,000

132. What is the net operating income for the month under absorption costing?

A) $17,600

B) $10,100

C) $15,000

D) $2,600

Ans:  A LO:  2
Solution:

Unit fixed manufacturing overhead = $117,000 ÷ 4,500 = $26

Unit product cost = $29 + $13 + $7 + $26 = $75





Sales revenue ($85 ×4,400)




$374,000




Cost of goods sold ($75 × 4,400)




330,000




Gross margin




44,000




Selling and administrative expenses:










Variable selling and administrative ($5 × 4,400)

$22,000







Fixed selling and administrative

4,400

26,400




Net operating income




$ 17,600

Use the following to answer questions 133-134:


Kiefer Company, which has only one product, has provided the following data concerning its most recent month of operations:





Selling price

$133













Units in beginning inventory

600




Units produced

6,600




Units sold

6,800




Units in ending inventory

400













Variable costs per unit:







Direct materials

$34




Direct labor

$52




Variable manufacturing overhead

$2




Variable selling and administrative

$11













Fixed costs:







Fixed manufacturing overhead

$158,400




Fixed selling and administrative

$61,200

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.


133. What is the net operating income for the month under variable costing?

A) $6,800

B) $9,600

C) $29,200

D) $11,600

Ans:  D LO:  2


Solution:






Sales revenue ($133 × 6,800)




$904,400




Variable costs:










Variable cost of goods sold ($88 × 6,800)

$598,400







Variable selling and administrative ($11 × 6,800)

74,800


673,200




Contribution margin




231,200




Fixed costs:










Fixed manufacturing overhead

$158,400







Fixed selling and administrative

61,200

219,600




Net operating income




$ 11,600

134. What is the net operating income for the month under absorption costing?

A) $11,600

B) $6,800

C) $29,200

D) $9,600

Ans:  B LO:  2
Solution:

Unit fixed manufacturing overhead= $24

Unit product cost = $34 + $52 + $2 + $24 = $112





Sales revenue ($133 × 6,800)




$904,400




Cost of goods sold ($112 × 6,800)




761,600




Gross margin




142,800




Selling and administrative expenses:










Variable selling and administrative ($11 × 6,800)

$74,800







Fixed selling and administrative

61,200

136,000




Net operating income




$ 6,800

Use the following to answer questions 135-136:


Danahy Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:





Variable costing net operating income, last year

$52,000




Variable costing net operating income, this year

$68,000




Fixed manufacturing overhead costs released from inventory under absorption costing, last year

$4,000




Fixed manufacturing overhead costs deferred in inventory under absorption costing, this year

$6,000

135. What was the absorption costing net operating income last year?

A) $50,000

B) $48,000

C) $52,000

D) $56,000

Ans:  B
Solution:
Absorption costing net income = Variable costing net operating income – Fixed manufacturing overhead released = $52,000 – $4,000 = $48,000
136. What was the absorption costing net operating income this year?

A) $62,000

B) $74,000

C) $70,000

D) $66,000

Ans:  B


Solution:
Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $68,000 + $6,000 = $74,000
Use the following to answer questions 137-138:
Helmers Corporation manufactures a variety of products. Variable costing net operating income last year was $86,000 and this year was $103,000. Last year, $32,000 in fixed manufacturing overhead costs were released from inventory under absorption costing. This year, $12,000 in fixed manufacturing overhead costs were deferred in inventory under absorption costing.
137. What was the absorption costing net operating income last year?

A) $106,000

B) $86,000

C) $54,000

D) $118,000

Ans:  C


Solution:
Absorption costing net income = Variable costing net operating income – Fixed manufacturing overhead released = $86,000 – $32,000 = $54,000
138. What was the absorption costing net operating income this year?

A) $81,000

B) $83,000

C) $115,000

D) $123,000

Ans:  C


Solution:
Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $103,000 + $12,000 = $115,000
Use the following to answer questions 139-140:
Norenberg Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:





Variable costing net operating income, last year

$88,600




Variable costing net operating income, this year

$96,100




Increase in ending inventory, last year

600 units




Decrease in ending inventory, this year

2,300 units




Fixed manufacturing overhead cost per unit

$7

139. What was the absorption costing net operating income last year?

A) $92,800

B) $88,600

C) $84,400

D) $76,700

Ans:  A
Solution:

Fixed manufacturing overhead deferred = 600 × $7 = $4,200

Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $88,600 + $4,200 = $92,800
140. What was the absorption costing net operating income this year?

A) $80,000

B) $100,500

C) $108,000

D) $112,200

Ans:  A


Solution:

Fixed manufacturing overhead released = 2,300 × $7 = $16,100

Absorption costing net income = Variable costing net operating income − Fixed manufacturing overhead released = $96,100 − $16,100 = $80,000
Use the following to answer questions 141-142:
Rosal Corporation manufactures a variety of products. Variable costing net operating income was $74,700 last year and was $82,300 this year. Last year, ending inventory increased by 2,600 units. This year, ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost is $5 per unit.
141. What was the absorption costing net operating income last year?

A) $61,700

B) $74,700

C) $80,700

D) $87,700

Ans:  D


Solution:
Fixed manufacturing overhead deferred = $5 × 2,600 = $13,000

Absorption costing net income = Variable costing net operating income + Fixed manufacturing overhead deferred = $74,700 + $13,000 = $87,700


142. What was the absorption costing net operating income this year?

A) $75,300

B) $89,300

C) $76,300

D) $68,700

Ans:  A


Solution:

Fixed manufacturing overhead released = $5 × 1,400 = $7,000



Absorption costing net income = Variable costing net operating income − Fixed manufacturing overhead released = $82,300 − $7,000 = $75,300


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