Chapter 3Predetermined Overhead Rates, Flexible Budgets, and Absorption/Variable Costing

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LO 1 Why and how are overhead costs allocated to products and services? LO 2 What causes underapplied or overapplied overhead, and how is it treated at the end of a period? LO 3 What impact do different capacity measures have on setting predetermined overhead rates? LO 4 How are the high low method and least s!uares regression analysis used in analy"ing mi#ed costs? LO $ How do managers use fle#i%le %udgets to set predetermined overhead rates? LO & How do a%sorption and varia%le costing differ? LO ' How do changes in sales or production levels affect net income computed under a%sorption and varia%le costing?
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&R)!/FA '! 1) *%sorption costing is commonly used for e#ternal reporting)

4+

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2) *%sorption costing is commonly used for internal reporting) *,-. 2 012. 3asy O45. 3 1

3) 6aria%le costing is commonly used for internal reporting) *,-. / 012. 3asy O45. 3 1

4) 6aria%le costing is commonly used for e#ternal reporting) *,-. 2 012. 3asy O45. 3 1

$) 1n an actual cost system, factory overhead is assigned directly to products and services) *,-. / 012. 3asy O45. 3 1

&) 1n a normal cost system, factory overhead is assigned directly to products and services) *,-. 2 012. 3asy O45. 3 1

') 1n a normal cost system, factory overhead is assigned to an overhead control account and then allocated to products and services) *,-. / 012. 3asy O45. 3 1

() 1n an actual cost system, factory overhead is assigned to an overhead control account and then allocated to products and services) *,-. 2 012. 3asy O45. 3 1

+) * de%it to the factory overhead account represents actual overhead costs) *,-. / 012. 3asy O45. 3 1

17) * de%it to the factory overhead account represents applied overhead costs) *,-. 2 012. 3asy O45. 3 1

11) * credit to the factory overhead account represents actual overhead costs) *,-. 2 012. 3asy O45. 3 1

12) * credit to the factory overhead account represents applied overhead costs) *,-. / 012. 3asy O45. 3 1

13) 1f actual overhead e#ceeds applied overhead, factory overhead is said to %e overapplied) *,-. 2 012. 3asy O45. 3 2

14) 1f actual overhead e#ceeds applied overhead, factory overhead is said to %e underapplied)

$7

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1$) 1f overapplied factory overhead is immaterial, the account is closed %y a credit to 8ost of 9oods -old) *,-. / 012. 3asy O45. 3 2

1&) 1f overapplied factory overhead is material, the account is closed %y a credit to 8ost of 9oods -old) *,-. 2 012. 3asy O45. 3 2

1') 1f overapplied factory overhead is immaterial, the account is closed %y a de%it to 8ost of 9oods -old) *,-. 2 012. 3asy O45. 3 2

1() 1f underapplied factory overhead is immaterial, the account is closed %y a de%it to 8ost of 9oods -old) *,-. / 012. 3asy O45. 3 2

1+) 1f underapplied factory overhead is immaterial, the account is closed %y a credit to 8ost of 9oods -old) *,-. 2 012. 3asy O45. 3 2

27) 1f underapplied factory overhead is material, it is prorated among Wor: in ;rocess 1nventory, 2inished 9oods 1nventory, and 8ost of 9oods -old) *,-. / 012. 3asy O45. 3 2

21) /he estimated ma#imum potential activity for a specified time is :nown as theoretical capacity) *,-. / 012. <oderate O45. 3 3

22) ;ractical capacity does not ad=ust for routine downtime in a production process) *,-. 2 012. <oderate O45. 3 3

23) ,ormal capacity considers present and future production levels and cyclical fluctuations) *,-. / 012. <oderate O45. 3 3

24) 3#pected capacity is a long run measure of activity) *,-. 2 012. <oderate O45. 3 3

2$) ;ractical capacity is the capacity that can %e achieved during normal wor:ing hours) *,-. / 012. <oderate O45. 3 3

2&) /he regression e!uation y = a+ bX assumes that the function is curvilinear in nature) *,-. 2 012. <oderate O45. 3 4

2') /he regression e!uation y = a+ bX assumes that the function is linear in nature)

$1

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2() /he slope of a regression line is determined %y dividing the change in activity level %y the change in total cost) *,-. 2 012. <oderate O45. 3 4

2+) /he slope of a regression line is determined %y dividing the change in total cost %y the change in activity level) *,-. / 012. <oderate O45. 3 4

37) /he high low method e#cludes outliers from the calculation of the slope of a regression line) *,-. 2 012. <oderate O45. 3 4

31) When using the high low method, fi#ed costs are computed %efore the varia%le component is computed) *,-. 2 012. <oderate O45. 3 4

32) When using the high low method, the varia%le component is computed %efore the fi#ed component is) *,-. / 012. <oderate O45. 3 4

33) * fle#i%le %udget is a planning document that presents e#pected varia%le and fi#ed overhead costs at different activity levels) *,-. / 012. 3asy O45. 3 $

34) * master %udget is a planning document that presents e#pected varia%le and fi#ed overhead costs at different activity levels) *,-. 2 012. 3asy O45. 3 $

3$) ;lantwide overhead rates provide a more accurate computation of factory overhead than departmental overhead rates *,-. 2 012. 3asy O45. 3 $

3&) ;lantwide overhead rates provide a less accurate computation of factory overhead than departmental overhead rates *,-. / 012. 3asy O45. 3 $

3') *%sorption costing conforms with generally accepted accounting principles) *,-. / 012. <oderate O45. 3 $

3() 0irect costing conforms with generally accepted accounting principles)

$2

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3+) /he 1nternal >evenue -ervice allows the use of %oth varia%le and a%sorption costing) *,-. 2 012. <oderate O45. 3 &

47) -ales minus cost of goods sold is referred to as varia%le contri%ution margin) *,-. 2 012. <oderate O45. 3 &

41) ;hantom profits result when a%sorption costing is used and sales e#ceed production) *,-. 2 012. <oderate O45. 3 &

42) ;hantom profits result when a%sorption costing is used and production e#ceeds sales) *,-. / 012. <oderate O45. 3 &

43) 1f production e#ceeds sales, a%sorption costing net income e#ceeds varia%le costing net income) *,-. / 012. <oderate O45. 3 '

44) 1f production e#ceeds sales, a%sorption costing net income is less than varia%le costing net income) *,-. 2 012. <oderate O45. 3 '

4$) 1f sales e#ceed production, a%sorption costing net income is less than varia%le costing net income) *,-. / 012. <oderate O45. 3 '

4&) 1f sales e#ceed production, a%sorption costing net income e#ceeds varia%le costing net income) *,-. 2 CO+P !&#O" 1) 1n a?n@ AAAAAAAAA cost system, factory overhead is assigned directly to products and services) *,-. actual 012. 3asy O45. 3 1 012. <oderate O45. 3 '

$3

2) 1n a?n@ AAAAAAAAA cost system, factory overhead is assigned to an overhead control account and then allocated to products and services) *,-. normal 012. 3asy O45. 3 1

3) /he dollar amount of overhead assigned to wor: in process inventory using a predetermined rate is :nown as AAAAAAAAAAAAAAAAAA overhead) *,-. applied 012. 3asy O45. 3 1

4) 1f actual overhead e#ceeds applied overhead, factory overhead is said to %e AAAAAAAAAAAAAA) *,-. underapplied 012. 3asy O45. 3 2

$) 1f actual overhead is less than applied overhead, factory overhead is said to %e AAAAAAAAAAAAAA) *,-. overapplied 012. 3asy O45. 3 2

&) 1f underapplied or overapplied factory overhead is material, it is prorated among AAAAAAAAAAAAAAAAAAAAAA, AAAAAAAAAAAAAAAAAAAAAAAAA, and AAAAAAAAAAAAAAAAAAAAAAA) *,-. Wor: in ;rocess 1nventory, 2inished 9oods 1nventory, 8ost of 9oods -old 012. 3asy O45. 3 2

') 1f underapplied or overapplied factory overhead is immaterial, it is charged to AAAAAAAAAAAAAAAAAAAAAAA) *,-. 8ost of 9oods -old 012. 3asy O45. 3 2

() /he performance measure that considers routine interruptions is :nown as AAAAAAAAAAAAAAAAAAA capacity) *,-. practical 012. <oderate O45. 3 3

$4

+) * performance measure that encompasses a firmBs long run average activity is referred to as AAAAAAAAAAAAAAAAAA capacity) *,-. normal 012. <oderate O45. 3 3

17) * performance measure that assumes all production factors are operating perfectly is referred to as AAAAAAAAAAAAAAAAAAA capacity) *,-. theoretical 012. <oderate O45. 3 3

11) * performance measure that is short run in nature and represents a firmBs anticipated activity level for the upcoming period is AAAAAAAAAAAAAAAAAAAA capacity) *,-. e#pected 012. <oderate O45. 3 3

12) 8onsider the regression e!uation y = a + bX. /he portion of the e!uation that represents fi#ed costs is AAAAAAAA) *,-. a 012. 3asy O45. 3 4

13) 8onsider the regression e!uation y = a + bX. /he portion of the e!uation that represents the varia%le rate is AAAAAAAA) *,-. b 012. 3asy O45. 3 4

14) 8onsider the regression e!uation y = a + bX. /he portion of the e!uation that represents the activity %ase is AAAAAAAA) *,-. X 012. 3asy O45. 3 4

1$) *n o%servation that is found outside the relevant range is referred to as a?n@ AAAAAAAAAAAAAA) *,-. outlier 012. <oderate O45. 3 4

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1&) When a relationship %etween several independent varia%les and one dependent varia%le is analy"ed, the regression is referred to as AAAAAAAAAAAAA) *,-. multiple 012. <oderate O45. 3 4

1') When a relationship %etween one independent varia%le and one dependent varia%le is analy"ed, the regression is referred to as AAAAAAAAAAAAA) *,-. simple 012. <oderate O45. 3 4

1() * AAAAAAAAAAAAAAAAAAAAAAAAAA is a planning document that presents e#pected varia%le and fi#ed overhead costs at different activity levels) *,-. fle#i%le %udget 012. 3asy O45. 3 $

1+) /he costing techni!ue that treats manufacturing overhead as a period cost is referred to as AAAAAAAAAAAAAAAAA costing) *,-. varia%le or direct 012. 3asy O45. 3 &

27) /he costing techni!ue that treats all manufacturing costs as inventoria%le is referred to as AAAAAAAAAAAAAAAAA costing) *,-. a%sorption or full 012. 3asy O45. 3 &

21) -ales less varia%le cost of goods sold is referred to as AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA) *,-. product contri%ution margin 012. <oderate O45. 3 &

22) /emporary profits that result when a%sorption costing is used and production e#ceeds sales are referred to as AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA) *,-. phantom profits 012. 3asy O45. 3 &

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+) &#P ! C,O#C! 1) -ince overhead costs are indirect costs, a) they re!uire some process of allocation) %) they can %e easily traced to production) c) a predetermined overhead rate is not advantageous) d) they cannot %e allocated) *,-. * 012. 3asy O45. 3 1

2) 8ost allocation is the assignment of AAAAAA costs to one or more products using a reasona%le %asis) direct a) %) c) d) yes yes no no indirect yes no no yes 012. 3asy O45. 3 1

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3) *n actual cost system differs from a normal cost system in that an actual cost system a) assigns overhead as it occurs during the manufacturing cycle) %) assigns overhead at the end of the manufacturing process) c) does not assign overhead at all) d) does not use an Overhead 8ontrol account) *,-. 4 012. 3asy O45. 3 2

4) 1n a normal cost system, which of the following is used? *ctual direct materials a) %) c) d)
yes yes yes no

*ctual direct la%or

no yes yes yes

*ctual overhead
yes yes no no

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$) ;redetermined overhead rates are computed %ased on estimated overhead costs a) %) c) d)

yes yes no no

estimated level of activity

yes no yes no

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&) One reason annual overhead application rates are used is a) %ecause of seasonal varia%ility of overhead costs) %) to help %udget overhead costs) c) to minimi"e the overhead cost assigned to products) d) to ma#imi"e the overhead cost assigned to products) *,-. * 012. 3asy O45. 3 1

') Which of the following is not a reason to use predetermined overhead rates? a) to overcome the pro%lems of assigning overhead to diverse types of products %) to compensate for fluctuations in monthly overhead costs c) to provide a means for assigning overhead during the period rather than at the end of the period d) to smooth out the amount of overhead cost assigned to products when monthly production activity differs *,-. * 012. <oderate O45. 3 1

() When a manufacturing company has a highly automated manufacturing plant producing many different products, which of the following is the more appropriate %asis of applying manufacturing overhead costs to wor: in process? a) direct la%or hours %) direct la%or dollars c) machine hours d) cost of materials used *,-. 8 012. 3asy O45. 3 1

+) * mi#ed cost has which of the following components? 6aria%le component a) %) c) d)

yes yes no no

2i#ed component
no yes no yes

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17) 1n the formula y C a D %E, y represents a) fi#ed costs) %) total cost) c) varia%le costs) d) mi#ed costs) *,-. 4 012. 3asy O45. 3 4

11) 1n the formula y C a D %E, a represents a) mi#ed cost) %) varia%le cost) c) total cost) d) fi#ed cost) *,-. 0 012. 3asy O45. 3 4

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12) 1n relationship to changes in activity, varia%le overhead changes in total a) %) c) d)

no no yes yes

per unit
no yes yes no

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13) 1n relationship to changes in activity, fi#ed overhead changes in total a) %) c) d)

yes no no yes

per unit
yes no yes no

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14) 1f the level of activity increases, a) varia%le cost per unit and total fi#ed costs increase) %) fi#ed cost per unit and total varia%le cost increase) c) total cost will increase and fi#ed cost per unit will decrease) d) varia%le cost per unit and total cost increase) *,-. 8 012. 3asy O45. 3 4

1$) Wea:nesses of the high low method include all of the following ex-ept a) only two o%servations are used to develop the cost function) %) the high and low activity levels may not %e representative) c) the method does not detect if the cost %ehavior is nonlinear) d) the mathematical calculations are relatively comple#) *,-. 0 012. 3asy O45. 3 4

1&) 1f there is no FaF value in a linear cost e!uation, this is an indication that the cost is a) fi#ed) %) mi#ed) c) varia%le) d) either fi#ed or mi#ed) *,-. 8 012. 3asy O45. 3 4

1') *n outlier is a) something that happens outside the organi"ation that does not affect production) %) always used in analy"ing a mi#ed cost) c) something that happens inside the organi"ation that does not affect production) d) never used in analy"ing a mi#ed cost) *,-. 0 012. 3asy O45. 3 4

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1() *pplied overhead consists of which of the following? a) actual activity times predetermined overhead rate %) estimated activity times predetermined overhead rate c) actual activity times actual overhead rate d) estimated activity times actual overhead rate *,-. * 012. 3asy O45. 3 2

1+) 1f a company used two overhead accounts ?actual overhead and applied overhead@, the one that would receive the most de%its would %e a) actual overhead) %) applied overhead) c) %oth would receive an e!ual num%er of de%its) d) impossi%le to determine without additional information) *,-. * 012. 3asy O45. 3 2

27) 1f underapplied overhead is considered to %e immaterial, it is closed to which of the following accounts? Wor: in ;rocess a) %) c) d)
yes no yes no

2inished 9oods
yes yes no no

8ost of 9oods -old

yes yes no yes

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21) *ll other things %eing e!ual, if actual cost per unit is greater than %udgeted cost per unit, varia%le overhead will %e a) overapplied) %) the same as fi#ed overhead) c) underapplied) d) applied to 2inished 9oods) *,-. 8 012. 3asy O45. 3 2

22) Overapplied overhead will result if a) the plant is operated at less than e#pected capacity) %) overhead costs incurred were greater than estimated overhead costs) c) overhead costs incurred were less than overhead costs charged to production) d) overhead costs incurred were greater than overhead charged to production) *,-. 8 012. 3asy O45. 3 2

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23) *ctual overhead e#ceeds applied overhead and the amount is immaterial) Which of the following will %e true. Gpon closing, Overhead is a) %) c) d) underapplied overapplied overapplied underapplied 8ost of 9oods -old will increase decrease increase decrease 012. 3asy O45. 3 2

*,-. *

24) 1f actual overhead is less than applied overhead, which of the following will %e true? Gpon closing, Overhead is a) %) c) d) underapplied underapplied overapplied overapplied 8ost of 9oods -old is credited de%ited de%ited credited 012. 3asy O45. 3 2

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2$) /he estimated ma#imum potential activity for a specified time is. a) theoretical capacity c) normal capacity %) practical capacity d) e#pected capacity *,-. * 012. <oderate O45. 3 3

2&) /he measure of activity that allows for routine variations in manufacturing activity is. a) theoretical capacity c) normal capacity %) practical capacity d) e#pected capacity *,-. 4 012. <oderate O45. 3 3

2') /he measure of production that considers historical and estimated future production levels and cyclical fluctuations is referred to as. a) theoretical capacity c) normal capacity %) practical capacity d) e#pected capacity *,-. 8 012. <oderate O45. 3 3

2() * short run measure of activity that represents a firmBs anticipated activity level for an upcoming period %ased upon e#pected demand is referred to as. a) theoretical capacity c) normal capacity %) practical capacity d) e#pected capacity *,-. 0 012. <oderate O45. 3 3

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2+) *n item or event that has a cause effect relationship with the incurrence of a varia%le cost is called a a) mi#ed cost) %) predictor) c) direct cost) d) cost driver) *,-. 0 012. 3asy O45. 3 2

37) 2urman /ailors has gathered information on utility costs for the past year) /he controller has decided that utilities are a function of the hours wor:ed during the month) /he following information is availa%le and representative of the companyBs utility costs. Hours wor:ed Low point High point
1,300 1,680

Gtility cost incurred

$ 903 1,074

1f 1,42$ hours are wor:ed in a month, total utility cost ?rounded to the nearest dollar@ using the high low method should %e a) H+4') %) H+$4) c) H+$+) d) H+'&) *,-. 8 6aria%le portion.

2i#ed ;ortion +73 7)4$ ? 1,377@ C H31( I C H31( D H7)4$?1,42$@ C H+$+ 012. <oderate O45. 3 4

31) >eno 8orporation uses a predetermined overhead application rate of H)37 per direct la%or hour) 0uring the year it incurred H34$,777 dollars of actual overhead, %ut it planned to incur H3&7,777 of overhead) /he company applied H3&3,777 of overhead during the year) How many direct la%or hours did the company plan to incur? a) 1,1$7,777 %) 1,1+7,777 c) 1,277,777 d) 1,217,777 *,-. 8 H3&7,777 J )37 C 1,277,777 direct la%or hours 012. 3asy O45. 3 4

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32) 4irmingham <achine Wor:s had the following data regarding monthly power costs. <onth 5un 5ul *ug -ept) <achine hours
300 600 400 200

;ower cost
$680 720 695 640

*ssume that management e#pects $77 machine hours in Octo%er) Gsing the high low method, calculate Octo%erBs power cost using machine hours as the %asis for prediction) a) H'77 %) H'7$ c) H'17 d) H1,327 *,-. * 6aria%le portion.

2i#ed portion. H&47 ?277 KH7 )27@ C H&77 H&77 D ?$77KH7)27@ C H'77 012. 3asy O45. 3 4

33) 9ary 8orporation has developed the following fle#i%le %udget formula for monthly overhead. 2or output of less than 277,777 units. 2or output of 277,777 units or more. H3&,&77 D H)(7?units@ H43,777 D H)(7?units@

How much overhead should 9ary e#pect if the firm plans to produce 277,777 units? a) H$2,&77 %) H$+,777 c) H1+&,&77 d) H273,777 *,-. 0 H43,777 D H7)(7?277,777@ C H43,777 D H1&7,777 C H273,777 012. 3asy O45. 3 $

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34) Walton 8orporation wishes to develop a single predetermined overhead rate) /he companyLs e#pected annual fi#ed overhead is H347,777 and its varia%le overhead cost per machine hour is H2) /he companyLs relevant range is from 277,777 to &77,777 machine hours) Walton e#pects to operate at 42$,777 machine hours for the coming year) /he plantLs theoretical capacity is ($7,777) /he predetermined overhead rate per machine hour should %e a) H2)47) %) H2)$') c) H2)(7) d) H2)($) *,-. 8 2i#ed component.

6aria%le component C H2)77 per unit /otal predetermined overhead C H2)(7 per unit 012. 3asy Bur/e Corporation 4ur:e 8orporation has the following data for use of its machinery <onth 5un 5ul *ug -ept Oct Gsage
600 650 420 500 450

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8ost
$750 775 550 650 570

3$) >efer to 4ur:e 8orporation) Gsing the high low method, compute the varia%le cost element) a) H1)72 %) H)+( c) H1)31 d) H1)1+ *,-. 4

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3&) >efer to 4ur:e 8orporation) Gsing the high low method, compute the fi#ed cost element ?to the nearest whole dollar@) a) H22$ %) H13( c) H411 d) H3&4 *,-. 4 H''$ &$7?)+(@ C H''$ &3' C H13( 012. 3asy 0enith Corporation /he records of Menith 8orporation revealed the following data for the current year) Wor: in ;rocess 2inished 9oods 8ost of 9oods -old 0irect La%or 0irect <aterial
$ 73,150 115,000 133,650 111,600 84,200

O45. 3 4

3') >efer to Menith 8orporation) *ssume, for this !uestion only, actual overhead is H+(,'77 and applied overhead is H+3,2$7) <anufacturing overhead is. a) overapplied %y H12,+77) %) underapplied %y H1(,3$7) c) overapplied %y H$,4$7) d) underapplied %y H$,4$7) *,-. 0 H+(,'77 H+3,2$7 C H$,4$7 underapplied 012. 3asy O45. 3 2

3() >efer to Menith 8orporation) *ssume that Menith has underapplied overhead of H3',277 and that this amount is material) What =ournal entry is needed to close the overhead account? ?>ound decimals to nearest whole percent)@ a) 0e%it Wor: in ;rocess H(,4$&N 2inished 9oods H13,2+4N 8ost of 9oods -old H1$,4$7 and credit Overhead H3',277 %) 0e%it Overhead H3',277 and credit Wor: in ;rocess H(,4$&N 2inished 9oods H13,2+4N 8ost of 9oods -old H1$,4$7 c) 0e%it Wor: in ;rocess H3',277 and credit Overhead H3',277 d) 0e%it 8ost of 9oods -old H3',277 and credit Overhead H3',277 *,-. * W1;. '3,1$7J321,(77 C H (,4$& 29. 11$,777J321,(77 C H13,2+4 31. 133,&$7J321,(77 C H1$,4$7 012. <oderate O45. 3 2

&$

3+) >efer to Menith 8orporation) *ssume that Menith has underapplied overhead of H17,777 and that this amount is immaterial) What is the %alance in 8ost of 9oods -old after the underapplied overhead is closed? a) H133,&$7 %) H123,&$7 c) H143,&$7 d) H13',(73 *,-. 8 8O9- D Gnderapplied Overhead C *d=usted 8O9H133,&$7 D H 17,777 C H143,&$7

012. 3asy

O45. 3 2

47) >efer to Menith 8orporation) *ssume that Menith has overapplied overhead of H2$,777 and that this amount is material) What is the %alance in 8ost of 9oods -old after the overapplied overhead is closed? a) H123,2&' %) H144,733 c) H1$(,&$7 d) H17(,&$7 *,-. * H133,&$7JH321,(77 K H2$,777 C H17,3(3 H133,&$7 H17,3(3 C H123,2&' 012. <oderate O45. 3 2

41) *"tec 8ompany is relocating its facilities) /he company estimates that it will ta:e three truc:s to move office contents) 1f the per truc: rental charge is H1,777 plus 2$ cents per mile, what is the e#pected cost to move (77 miles? a) H1,777 %) H1,277 c) H2,477 d) H3,&77 *,-. 0 3 truc:s K ?H1,777 D H7)2$?(77@@ C 3 K H1,277 C H3,&77 012. 3asy O45. 3 2

&&

42) *!uatic <otor 8ompany is e#ploring different prediction models that can %e used to forecast indirect la%or costs) One independent varia%le under consideration is machine hours) 2ollowing are matching o%servations on indirect la%or costs and machine hours for the past si# months. <onth 1 2 3 4 $ & <achine hours 377 477 247 3'7 277 22$ 1ndirect la%or costs H27,777 H24,777 H1',777 H22,777 H13,777 H14,777

1n a high low model, which monthsL o%servations would %e used to compute the modelLs parameters? a) %) c) d) 2 and $ 1 and & 2 and & 4 and $ 012. 3asy O45. 3 4

*,-. *

43) 8onsider the following three product costing alternatives. process costing, =o% order costing, and standard costing) Which of these can %e used in con=unction with a%sorption costing? a) =o% order costing %) standard costing c) process costing d) all of the a%ove *,-. 0 012. 3asy O45. 3 &

44) *nother name for a%sorption costing is a) full costing) %) direct costing) c) =o% order costing) d) fi#ed costing) *,-. * 012. 3asy O45. 3 &

4$) 1f a firm produces more units than it sells, a%sorption costing, relative to varia%le costing, will result in a) higher income and assets) %) higher income %ut lower assets) c) lower income %ut higher assets) d) lower income and assets) *,-. * 012. <oderate O45. 3 &

4&) Gnder a%sorption costing, fi#ed manufacturing overhead could %e found in all of the following ex-ept the a) wor: in process account) %) finished goods inventory account) c) 8ost of 9oods -old) d) period costs) *,-. 0 012. 3asy O45. 3 &

&'

4') 1f a firm uses a%sorption costing, fi#ed manufacturing overhead will %e included a) only on the %alance sheet) %) only on the income statement) c) on %oth the %alance sheet and income statement) d) on neither the %alance sheet nor income statement) *,-. 8 012. 3asy O45. 3 &

4() Gnder a%sorption costing, if sales remain constant from period 1 to period 2, the company will report a larger income in period 2 when a) period 2 production e#ceeds period 1 production) %) period 1 production e#ceeds period 2 production) c) varia%le production costs are larger in period 2 than period 1) d) fi#ed production costs are larger in period 2 than period 1) *,-. * 012. <oderate O45. 3 '

4+) /he 2*-4 re!uires which of the following to %e used in preparation of e#ternal financial statements? a) varia%le costing %) standard costing c) activity %ased costing d) a%sorption costing *,-. 0 012. 3asy O45. 3 &

$7) *n ending inventory valuation on an a%sorption costing %alance sheet would a) sometimes %e less than the ending inventory valuation under varia%le costing) %) always %e less than the ending inventory valuation under varia%le costing) c) always %e the same as the ending inventory valuation under varia%le costing) d) always %e greater than or e!ual to the ending inventory valuation under varia%le costing) *,-. 0 012. 3asy O45. 3 &

$1) *%sorption costing differs from varia%le costing in all of the following ex-ept a) treatment of fi#ed manufacturing overhead) %) treatment of varia%le production costs) c) accepta%ility for e#ternal reporting) d) arrangement of the income statement) *,-. 4 012. 3asy O45. 3 &

$2) Which of the following is not associated with a%sorption costing? a) functional format %) gross margin c) period costs d) contri%ution margin *,-. 0 012. 3asy O45. 3 &

&(

$3) Gna%sor%ed fi#ed overhead costs in an a%sorption costing system are a) fi#ed manufacturing costs not allocated to units produced) %) varia%le overhead costs not allocated to units produced) c) e#cess varia%le overhead costs) d) costs that cannot %e controlled) *,-. * 012. 3asy O45. 3 &

$4) ;rofit under a%sorption costing may differ from profit determined under varia%le costing) How is this difference calculated? a) 8hange in the !uantity of all units in inventory times the relevant fi#ed costs per unit) %) 8hange in the !uantity of all units produced times the relevant fi#ed costs per unit) c) 8hange in the !uantity of all units in inventory times the relevant varia%le cost per unit) d) 8hange in the !uantity of all units produced times the relevant varia%le cost per unit) *,-. * 012. 3asy O45. 3 &

$$) What factor, related to manufacturing costs, causes the difference in net earnings computed using a%sorption costing and net earnings computed using varia%le costing? a) *%sorption costing considers all costs in the determination of net earnings, whereas varia%le costing considers fi#ed costs to %e period costs) %) *%sorption costing allocates fi#ed overhead costs %etween cost of goods sold and inventories, and varia%le costing considers all fi#ed costs to %e period costs) c) *%sorption costing FinventoriesF all direct costs, %ut varia%le costing considers direct costs to %e period costs) d) *%sorption costing FinventoriesF all fi#ed costs for the period in ending finished goods inventory, %ut varia%le costing e#penses all fi#ed costs) *,-. 4 012. 3asy O45. 3 '

$&) /he costing system that classifies costs %y functional group only is a) standard costing) %) =o% order costing) c) varia%le costing) d) a%sorption costing) *,-. 0 012. 3asy O45. 3 &

$') * functional classification of costs would classify Fdepreciation on office e!uipmentF as a a) product cost) %) general and administrative e#pense) c) selling e#pense) d) varia%le cost) *,-. 4 012. 3asy O45. 3 &

$() /he costing system that classifies costs %y %oth functional group and %ehavior is a) process costing) %) =o% order costing) c) varia%le costing) d) a%sorption costing) *,-. 8 012. 3asy O45. 3 &

&+

$+) Gnder varia%le costing, which of the following are costs that can %e inventoried? a) varia%le selling and administrative e#pense %) varia%le manufacturing overhead c) fi#ed manufacturing overhead d) fi#ed selling and administrative e#pense *,-. 4 012. 3asy O45. 3 &

&7) 8onsider the following three product costing alternatives. process costing, =o% order costing, and standard costing) Which of these can %e used in con=unction with varia%le costing? a) =o% order costing %) standard costing c) process costing d) all of them *,-. 0 012. 3asy O45. 3 &

&1) *nother name for varia%le costing is a) full costing) %) direct costing) c) standard costing) d) ad=usta%le costing) *,-. 4 012. 3asy O45. 3 &

&2) 1f a firm uses varia%le costing, fi#ed manufacturing overhead will %e included a) only on the %alance sheet) %) only on the income statement) c) on %oth the %alance sheet and income statement) d) on neither the %alance sheet nor income statement) *,-. 4 012. 3asy O45. 3 &

&3) Gnder varia%le costing, a) all product costs are varia%le) %) all period costs are varia%le) c) all product costs are fi#ed) d) product costs are %oth fi#ed and varia%le) *,-. * 012. 3asy O45. 3 &

&4) How will a favora%le volume variance affect net income under each of the following methods? *%sorption a) %) c) d)
reduce reduce increase increase

6aria%le
no effect increase no effect reduce

*,-. 8

012. 3asy

O45. 3 '

'7

&$) 6aria%le costing considers which of the following to %e product costs? 2i#ed <fg) 8osts a) %) c) d)
yes yes no no

2i#ed -elling O *dm)

no no no no

6aria%le <fg) 8osts

yes yes yes yes

6aria%le -elling O *dm)

no yes yes no

*,-. 0

012. 3asy

O45. 3 &

&&) /he varia%le costing format is often more useful to managers than the a%sorption costing format %ecause a) costs are classified %y their %ehavior) %) costs are always lower) c) it is re!uired for e#ternal reporting) d) it =ustifies higher product prices) *,-. * 012. 3asy O45. 3 &

&') /he difference %etween the reported income under a%sorption and varia%le costing is attri%uta%le to the difference in the a) income statement formats) %) treatment of fi#ed manufacturing overhead) c) treatment of varia%le manufacturing overhead) d) treatment of varia%le selling, general, and administrative e#penses) *,-. 4 012. 3asy O45. 3 '

&() Which of the following costs will vary directly with the level of production? a) total manufacturing costs %) total period costs c) varia%le period costs d) varia%le product costs *,-. 0 012. 3asy O45. 3 &

&+) On the varia%le costing income statement, the difference %etween the Fcontri%ution marginF and Fincome %efore income ta#esF is e!ual to a) the total varia%le costs) %) the 8ost of 9oods -old) c) total fi#ed costs) d) the gross margin) *,-. 8 012. 3asy O45. 3 '

'7) 2or financial reporting to the 1>- and other e#ternal users, manufacturing overhead costs are a) deducted in the period that they are incurred) %) inventoried until the related products are sold) c) treated li:e period costs) d) inventoried until the related products have %een completed) *,-. 4 012. 3asy O45. 3 &

'1

'1) 1n the application of Fvaria%le costingF as a cost allocation process in manufacturing, a) varia%le direct costs are treated as period costs) %) nonvaria%le indirect manufacturing costs are treated as product costs) c) varia%le indirect manufacturing costs are treated as product costs) d) nonvaria%le direct costs are treated as product costs) *,-. 8 012. 3asy O45. 3 &

'2) * %asic tenet of varia%le costing is that period costs should %e currently e#pensed) What is the rationale %ehind this procedure? a) ;eriod costs are uncontrolla%le and should not %e charged to a specific product) %) ;eriod costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the %enefits) c) *llocation of period costs is ar%itrary at %est and could lead to erroneous decision %y management) d) 4ecause period costs will occur whether production occurs, it is improper to allocate these costs to production and defer a current cost of doing %usiness) *,-. 0 012. <oderate O45. 3 &

'3) Which of the following is a term more descriptive of the term Fdirect costingF? a) out of poc:et costing %) varia%le costing c) relevant costing d) prime costing *,-. 4 012. 3asy O45. 3 &

'4) What costs are treated as product costs under varia%le ?direct@ costing? a) only direct costs %) only varia%le production costs c) all varia%le costs d) all varia%le and fi#ed manufacturing costs *,-. 4 012. 3asy O45. 3 &

'$) Which of the following must %e :nown a%out a production process in order to institute a varia%le costing system? a) the varia%le and fi#ed components of all costs related to production %) the controlla%le and non controlla%le components of all costs related to production c) standard production rates and times for all elements of production d) contri%ution margin and %rea: even point for all goods in production *,-. * 012. 3asy O45. 3 &

'&) Why is varia%le costing not in accordance with generally accepted accounting principles? a) 2i#ed manufacturing costs are treated as period costs under varia%le costing) %) 6aria%le costing procedures are not well :nown in industry) c) ,et earnings are always overstated when using varia%le costing procedures) d) 6aria%le costing ignores the concept of lower of cost or mar:et when valuing inventory) *,-. * 012. 3asy O45. 3 &

'2

'') Which of the following is an argument against the use of direct ?varia%le@ costing? a) *%sorption costing overstates the %alance sheet value of inventories) %) 6aria%le factory overhead is a period cost) c) 2i#ed manufacturing overhead is difficult to allocate properly) d) 2i#ed manufacturing overhead is necessary for the production of a product) *,-. 0 012. 3asy O45. 3 &

'() Which of the following statements is true for a firm that uses varia%le costing? a) /he cost of a unit of product changes %ecause of changes in the num%er of units manufactured) %) ;rofits fluctuate with sales) c) *n idle facility variation is calculated) d) ,one of the a%ove) *,-. 4 012. 3asy O45. 3 &

'+) *n income statement is prepared as an internal report) Gnder which of the following methods would the term contri%ution margin appear? *%sorption costing a) %) c) d)
no no yes yes

6aria%le costing
no yes no yes

*,-. 4

012. 3asy

O45. 3 &

(7) 1n an income statement prepared as an internal report using the varia%le costing method, fi#ed manufacturing overhead would a) not %e used) %) %e used in the computation of operating income %ut not in the computation of the contri%ution margin) c) %e used in the computation of the contri%ution margin) d) %e treated the same as varia%le manufacturing overhead) *,-. 4 012. 3asy O45. 3 '

(1) 6aria%le costing has an advantage over a%sorption costing for which of the following purposes? a) analysis of profita%ility of products, territories, and other segments of a %usiness %) determining the 86; relationship among the ma=or factors of selling price, sales mi#, and sales volume c) minimi"ing the effects of inventory changes on net income d) all of the a%ove *,-. 0 012. 3asy O45. 3 &

(2) 1n the varia%le costing income statement, which line separates the varia%le and fi#ed costs? a) selling e#penses %) general and administrative e#pense c) product contri%ution margin d) total contri%ution margin *,-. 0 012. 3asy O45. 3 &

'3

(3) * firm presently has total sales of H177,777) 1f its sales rise, its a) net income %ased on varia%le costing will go up more than its net income %ased on a%sorption costing) %) net income %ased on a%sorption costing will go up more than its net income %ased on varia%le costing) c) fi#ed costs will also rise) d) per unit varia%le costs will rise) *,-. * 012. <oderate O45. 3 '

angle1 Corporation Langley 8orporation has the following standard costs associated with the manufacture and sale of one of its products. 0irect material 0irect la%or 6aria%le manufacturing overhead 2i#ed manufacturing overhead 6aria%le selling e#penses 2i#ed -9O* e#pense H3)77 per unit 2)$7 per unit 1)(7 per unit 4)77 per unit ?%ased on an estimate of $7,777 units per year@ )2$ per unit H'$,777 per year

0uring its first year of operations Langley manufactured $1,777 units and sold 4(,777) /he selling price per unit was H2$) *ll costs were e!ual to standard) (4) >efer to Langley 8orporation) Gnder a%sorption costing, the standard production cost per unit for the current year was a) H11)37) %) H ')37) c) H11)$$) d) H13)7$) *,-. * 0< D 0L D 62OH D 22OH C -tandard 8ost per Gnit H3)77 D H2)$7 D H1)(7 D H4)77 C H11)37 012. 3asy O45. 3 '

($) >efer to Langley 8orporation) /he volume variance under a%sorption costing is a) H(,777 2) %) H4,777 2) c) H4,777 G) d) H(,777 G) *,-. 4 1,777 favora%le units production variance K H4)77 fi#ed factory overhead C H4,777 2 012. <oderate O45. 3 '

'4

(&) >efer to Langley 8orporation) Gnder varia%le costing, the standard production cost per unit for the current year was a) H11)37) %) H')37) c) H')$$) d) H11)$$) *,-. 4 0< D 0L D 6OH C -tandard ;roduction 8ost per Gnit H3)77 D H2)$7 D H1)(7 C H')37 012. 3asy O45. 3 '

(') >efer to Langley 8orporation) 4ased on varia%le costing, the income %efore income ta#es for the year was a) H$'7,&77) %) H$&7,777) c) H$&2,&77) d) H$4',$77) *,-. 8 -ales. 6aria%le 3#penses 8ontri%ution <argin 2i#ed 3#penses Overhead ,et 1ncome H1,277,777 3&2,477 H (3',&77 H 277,777 '$,777 H $&2,&77 CCCCCCCCC

012. <oderate

O45. 3 '

'$

Ford Compan1 /he following information is availa%le for 2ord 8ompany for its first year of operations. -ales in units ;roduction in units <anufacturing costs. 0irect la%or 0irect material 6aria%le overhead 2i#ed overhead ,et income ?a%sorption method@ -ales price per unit $,777 (,777 H3 per unit $ per unit 1 per unit H177,777 H37,777 H47

(() >efer to 2ord 8ompany) 1f 2ord 8ompany had used varia%le costing, what amount of income %efore income ta#es would it have reported? a) H37,777 %) ?H',$77@ c) H&',$77 d) canLt %e determined from the information given *,-. 4 ,et 1ncome *%sorption 8osting 2i#ed OH in 3nding 1nventory. H177,777 K ?3,777J(,777@ ,et Loss 6aria%le 8osting H 37,777 ?H3',$77@ ?H ',$77@ CCCCCCC

012. <oderate

O45. 3 '

(+) >efer to 2ord 8ompany) What was the total amount of -elling,9eneral and *dministrative e#pense incurred %y 2ord 8ompany? a) H37,777 %) H&2,$77 c) H&,777 d) canLt %e determined from the information given *,-. 4 -ales 8O99ross ;rofit -9O* ,et 1ncome E C H&2,$77 012. <oderate O45. 3 ' H277,777 17',$77 +2,$77 E H 37,777

'&

+7) >efer to 2ord 8ompany) 1f 2ord 8ompany were using varia%le costing, what would it show as the value of ending inventory? a) H127,777 %) H&4,$77 c) H2',777 d) H24,777 *,-. 8 3,777 units K H+)77Junit C H2',777 012. 3asy Clinton Corporation /he following information has %een e#tracted from the financial records of 8linton 8orporation for its first year of operations. Gnits produced Gnits sold 6aria%le costs per unit. 0irect material 0irect la%or <anufacturing overhead -9O* 2i#ed costs. <anufacturing overhead -9O* 17,777 ',777 H( + 3 4 H'7,777 37,777 O45. 3 '

+1) >efer to 8linton 8orporation) 4ased on a%sorption costing, 8linton 8orporationLs income in its first year of operations will %e a) H21,777 higher than it would %e under varia%le costing) %) H'7,777 higher than it would %e under varia%le costing) c) H37,777 higher than it would %e under varia%le costing) d) higher than it would %e under varia%le costing, %ut the e#act difference cannot %e determined from the information given) *,-. * 3,777 unsold units K H')77 fi#ed overheadJunit C H21,777 higher under a%sorption costing) 012. <oderate O45. 3 '

''

+2) >efer to 8linton 8orporation) 4ased on a%sorption costing, the 8ost of 9oods <anufactured for 8linton 8orporationLs first year would %e a) H277,777) %) H2'7,777) c) H377,777) d) H217,777) *,-. 4 8O9< C 6aria%le Overhead D 2i#ed Overhead 8O9< C ?177,777 units K H27Junit@ D H'7,777 8O9< C H2'7,777 012. <oderate O45. 3 '

+3) >efer to 8linton 8orporation) 4ased on a%sorption costing, what amount of period costs will 8linton 8orporation deduct? a) H'7,777 %) H'+,777 c) H37,777 d) H$(,777 *,-. 0 ;eriod costs C 6aria%le -9O* D 2i#ed -9O* H$(,777 C ?',777 K H4@ D H37,777 012. <oderate O45. 3 '

+4) 2or its most recent fiscal year, a firm reported that its contri%ution margin was e!ual to 47 percent of sales and that its net income amounted to 17 percent of sales) 1f its fi#ed costs for the year were H&7,777, how much were sales? a) H1$7,777 %) H277,777 c) H&77,777 d) canLt %e determined from the information given *,-. 4 Let - C -ales Let 8< C )47Let ,1 C )1728 C )37H&7,777 C )37- C H277,777 012. <oderate O45. 3 '

'(

+$) *t its present level of operations, a small manufacturing firm has total varia%le costs e!ual to '$ percent of sales and total fi#ed costs e!ual to 1$ percent of sales) 4ased on varia%le costing, if sales change %y H1)77, income will change %y a) H7)2$) %) H7)17) c) H7)'$) d) canLt %e determined from the information given) *,-. * Let - C 1)77 Let 68 C )'$Let 8< C )2$Gnder varia%le costing every dollar of sales will increase net income %y H7)2$) 012. 3asy O45. 3 '

+&) /he following information regarding fi#ed production costs from a manufacturing firm is availa%le for the current year. 2i#ed costs in the %eginning inventory 2i#ed costs incurred this period
$ 16,000 100,000

Which of the following statements is not true? a) /he ma#imum amount of fi#ed production costs that this firm could deduct using a%sorption costs in the current year is H11&,777) %) /he ma#imum difference %etween this firmLs the current year income %ased on a%sorption costing and its income %ased on varia%le costing is H1&,777) c) Gsing varia%le costing, this firm will deduct no more than H1&,777 for fi#ed production costs) d) 1f this firm produced su%stantially more units than it sold in the current year, varia%le costing will pro%a%ly yield a lower income than a%sorption costing) *,-. 8 012. <oderate O45. 3 '

!nigma Corporation /he following information was e#tracted from the first year a%sorption %ased accounting records of 3nigma 8orporation /otal fi#ed costs incurred /otal varia%le costs incurred /otal period costs incurred /otal varia%le period costs incurred Gnits produced Gnits sold Gnit sales price H177,777 $7,777 '7,777 37,777 27,777 12,777 H12

'+

+') >efer to 3nigma 8orporation) What is 8ost of 9oods -old for 3nigma 8orporationLs first year? a) H(7,777 %) H+7,777 c) H4(,777 d) canLt %e determined from the information given *,-. 8 /otal varia%le manufacturing costs C H$7,777 37,777 C H27,777 /otal fi#ed period costs incurred C H'7,777 37,777 C H47,777 /otal fi#ed manufacturing costs C H177,777 47,777 C H&7,777 /otal manufacturing costs C H&7,777 D H27,777 C H(7,777 ;ercent of goods sold. 12,777J27,777 C &7P H(7,777 K &7P C H4(,777 012. 0ifficult O45. 3 '

+() >efer to 3nigma 8orporation) 1f 3nigma 8orporation had used varia%le costing in its first year of operations, how much income ?loss@ %efore income ta#es would it have reported? a) ?H&,777@ %) H$4,777 c) H2&,777 d) H2,777 *,-. 0 -ales Less. 6aria%le 8osts <anufacturing H27,777 K &7P ;eriod 8osts H37,777 8ontri%ution <argin 2i#ed 8osts 6aria%le 8osting ,et 1ncome H144,777 12,777 37)777 H172,777 177,777 2,777 CCCCCC

012. 0ifficult

O45. 3 '

++) >efer to 3nigma 8orporation) 4ased on varia%le costing, if 3nigma had sold 12,771 units instead of 12,777, its income %efore income ta#es would have %een a) H+)$7 higher) %) H11)77 higher) c) H()$7 higher) d) H()33 higher) *,-. 8 -ales ;rice per Gnit. 6aria%le 8osts per Gnit ?H$7,777 J 27,777@ 8ontri%ution <argin H12)77 2)$7 H ()$7 CCCCCC

012. <oderate

O45. 3 '

(7

2ing Corporation Qing 8orporation produces a single product) /he following cost structure applied to its first year of operations. 6aria%le costs. -9O* ;roduction 2i#ed costs ?total cost incurred for the year@. -9O* ;roduction H2 per unit H4 per unit H14,777 H27,777

177) >efer to Qing 8orporation) *ssume for this !uestion only that during the current year Qing 8orporation manufactured $,777 units and sold 3,(77) /here was no %eginning or ending wor: in process inventory) How much larger or smaller would Qing 8orporationLs income %e if it uses a%sorption rather than varia%le costing? a) /he a%sorption costing income would %e H&,777 larger) %) /he a%sorption costing income would %e H&,777 smaller) c) /he a%sorption costing income would %e H4,(77 larger) d) /he a%sorption costing income would %e H4,777 smaller) *,-. 8 *dd %ac: fi#ed manufacturing portion of units unsold ?1,277J$,777@ K H27,777 C H4,(77) 012. <oderate O45. 3 '

171) >efer to Qing 8orporation) *ssume for this !uestion only that Qing 8orporation manufactured and sold $,777 units in the current year) *t this level of activity it had an income of H37,777 using varia%le costing) What was the sales price per unit? a) H1&)77 %) H1()(7 c) H12)(7 d) H14)(7 *,-. 4 -ales $,777 units K 345657/unit 6aria%le 8osts. <anufacturing -9O* 8ontri%ution <argin 2i#ed 8osts <anufacturing -9O* ,et 1ncome H+4,777 27,777 17,777 H&4,777 14,777 27,777 H37,777 CCCCC

012. <oderate

O45. 3 '

(1

172) >efer to Qing 8orporation) *ssume for this !uestion only that Qing 8orporation produced $,777 units and sold 4,$77 units in the current year) 1f Qing uses a%sorption costing, it would deduct period costs of a) H24,777) %) H34,777) c) H2',777) d) H23,777) *,-. 0 6aria%le -9O* 8osts ?4,$77 units K H2Junit@ 2i#ed -9O* 8osts /otal period costs to %e deducted H +,777 14,777 H23,777 CCCCCC

012. <oderate

O45. 3 '

173) >efer to Qing 8orporation) *ssume for this !uestion only that Qing 8orporation manufactured $,777 units and sold 4,777 in the current year) 1f Qing employs a costing system %ased on varia%le costs, the company would end the current year with a finished goods inventory of a) H4,777) %) H(,777) c) H&,777) d) H$,777) *,-. * 1,777 units K H4)77 varia%le cost per unit C H4,777 012. <oderate O45. 3 '

Companies R, ', and & /hree new companies ?>, -, and /@ %egan operations on 5anuary 1 of the current year) 8onsider the following operating costs that were incurred %y these companies during the complete calendar year. ;roduction in units -ales price per unit 2i#ed production costs 6aria%le production costs 6aria%le -9O* 2i#ed -9O* 8ompany > 17,777 H17 H17,777 H37,777 H17,777 H37,777 8ompany 17,777 H17 H27,777 H27,777 H27,777 H27,777 8ompany / 17,777 H17 H37,777 H17,777 H37,777 H17,777

174) >efer to 8ompanies >, -, and /) 4ased on sales of ',777 units, which company will report the greater income %efore income ta#es if a%sorption costing is used? a) 8ompany > %) 8ompany c) 8ompany / d) *ll of the companies will report the same income) *,-. 0 Gnder a%sorption costing, the net income for all three companies is the same) 012. <oderate O45. 3 '

(2

17$) >efer to 8ompanies >, -, and /) 4ased on sales of ',777 units, which company will report the greater income %efore income ta#es if varia%le costing is used? a) 8ompany > %) 8ompany c) 8ompany / d) *ll of the companies will report the same income) *,-. * -ince 8ompany > has the largest varia%le manufacturing costs, income will increase %y the amount that was held in finished goods inventory) 012. <oderate O45. 3 '

17&) >efer to 8ompanies >, -, and /) 4ased on sales of 17,777 units, which company will report the greater income %efore income ta#es if varia%le costing is used? a) 8ompany > %) 8ompany c) 8ompany / d) *ll of the companies will report the same income %efore income ta#es) *,-. 0 -ince all the companies have the same net income and all had the same amount of sales, all three companies would have the same net income under varia%le costing) 012. <oderate O45. 3 '

17') * firm has fi#ed costs of H277,777 and varia%le costs per unit of H&) 1t plans on selling 47,777 units in the coming year) /o reali"e a profit of H27,777, the firm must have a sales price per unit of at least a) H11)77) %) H11)$7) c) H17)77) d) H17)$7) *,-. 4 -ales 47,777 units K H44687/unit 6aria%le 8osts. <anufacturing 8ontri%ution <argin 2i#ed 8osts ,et 1ncome H4&7,777 247,777 H227,777 277,777 H 27,777 CCCCC

012. <oderate

O45. 3 '

(3

Bennett Corporation 4ennett 8orporation produces a single product that sells for H')77 per unit) -tandard capacity is 177,777 units per yearN 177,777 units were produced and (7,777 units were sold during the year) <anufacturing costs and selling and administrative e#penses are presented %elow) /here were no variances from the standard varia%le costs) *ny under or overapplied overhead is written off directly at year end as an ad=ustment to cost of goods sold) 0irect material 0irect la%or <anufacturing overhead -elling O *dministration e#pense 2i#ed costs H7 7 H1$7,777 (7,777 6aria%le costs H1)$7 per unit produced 1)77 per unit produced 7)$7 per unit produced 7)$7 per unit sold

4ennett 8orporation had no inventory at the %eginning of the year) 17() >efer to 4ennett 8orporation) 1n presenting inventory on the %alance sheet at 0ecem%er 31, the unit cost under a%sorption costing is a) H2)$7) %) H3)77) c) H3)$7) d) H4)$7) *,-. 0 0< D 0L D 6OH D 2OH C *%sorption 8ost per Gnit H1)$7 D H1)77 D H7)$7 D H?1$7,777J177,777@ C H4)$7 J Gnit 012. <oderate O45. 3 '

17+) >efer to 4ennett 8orporation) What is the net income under varia%le costing? a) H$7,777 %) H(7,777 c) H+7,777 d) H127,777 *,-. * -ales 6aria%le 8osts. <aterials La%or Overhead -elling and *dministrative 8ontri%ution <argin 2i#ed 8osts Overhead -elling and *dministrative ,et 1ncome H$&7,777 H127,777 (7,777 47,777 47,777 H2(7,777 1$7,777 (7,777 H $7,777 CCCCCCC

012. <oderate

O45. 3 '

(4

117) >efer to 4ennett 8orporation) What is the net income under a%sorption costing? a) H$7,777 %) H(7,777 c) H+7,777 d) H127,777 *,-. 4 -ales 8ost of 9oods -old. <aterials La%or Overhead ?6aria%le and 2i#ed@ 9ross ;rofit 2i#ed 8osts. -elling and *dministrative ,et 1ncome H$&7,777 H127,777 (7,777 1&7,777 H277,777 H127,777 H (7,777 CCCCCCC

012. <oderate

O45. 3 '

($

',OR& A"'9!R 1) What are three reasons that overhead must %e allocated to products? *,-. Overhead must %e allocated %ecause it is necessary to ?1@ determine fill cost, ?2@ it can motivate managers, and ?3@ it allows managers to compare alternative courses of action) 012. <oderate O45. 3 1

2) Why should predetermined overhead rates %e used? *,-. ;redetermined overhead rates should %e used for three reasons. ?1@ to assign overhead to Wor: in ;rocess during the production cycle instead of at the end of the periodN ?2@ to compensate for fluctuations in actual overhead costs that have no %earing on activity levelsN and ?3@ to overcome pro%lems of fluctuations in activity levels that have no impact on actual fi#ed overhead costs) 012. <oderate O45. 3 1

3) What are the primary reasons for using a predetermined overhead rate? *,-. 1) * predetermined overhead rate allows overhead to %e assigned during a period and therefore improves the timeliness of information) 2) * predetermined overhead rate ad=usts for variations in actual overhead costs that are unrelated to activity) 3) * predetermined overhead rate overcomes the pro%lem of fluctuations in activity levels that have no impact on actual fi#ed overhead costs) 4) Gsing a predetermined overhead rate often allows managers to %e more aware of individual product or product line profita%ility as well as the profita%ility of doing %usiness with a particular customer or vendor) 012. <oderate O45. 3 1

4) 0iscuss underapplied and overapplied overhead and its disposition at the end of the period) *,-. 0uring the course of the production cycle, actual overhead costs are incurred) When overhead is applied to Wor: in ;rocess, it is commonly applied using a predetermined rate) Overhead application at a predetermined rate may cause overhead to %e under or overapplied) 1f actual overhead is greater than applied overhead, then underapplied overhead results and a de%it %alance e#ists in the overhead account) 1f applied overhead is greater than actual overhead, then overapplied overhead results and a credit %alance e#ists in the overhead account) 1f the amount of under or overapplied overhead is immaterial, it is closed directly to 8ost of 9oods -old) 1f the amount is material, it must %e allocated among Wor: in ;rocess, 2inished 9oods, and 8ost of 9oods -old) 012. <oderate O45. 3 2

(&

$) List and e#plain the four alternative measures of capacity) *,-. /heoretical capacity /his is the estimated ma#imum potential activity for a specified time) 1t assumes that all production factors are operating perfectly) 1t disregards such factors as machinery %rea:downs and reduced plant operations) ;ractical capacity /his measure reduces theoretical capacity %y ongoing regular operating interruptions) 1t represents the capacity that could realistically %e achieved during normal wor:ing hours) ,ormal capacity /his measure considers historical and estimated future production levels and cyclical fluctuations) 3#pected capacity /his is a short run capacity measure that represents the firmBs anticipated activity level for the upcoming period %ased upon pro=ected product demand) 012. 0ifficult O45. 3 3

&) 0iscuss the high low method) *,-. /he high low method is a techni!ue for analy"ing mi#ed costs) /he high low method analy"es changes at two levels of activity ?the high end and the low end@ within the relevant range) /he changes in cost and activity are calculated for these two levels of activity) 0ividing the change in cost %y the change in activity determines the varia%le cost element portion of the mi#ed cost) Once this is determined, the fi#ed portion is computed %y su%tracting the varia%le element times either the high or low level of activity from respectively, total cost at either the high or low level of activity) 012. <oderate O45. 3 4

') Why do managers fre!uently prefer varia%le costing to a%sorption costing for internal use? *,-. <anagers may prefer varia%le costing %ecause it classifies costs %oth %y their function and their %ehavior) When costs are classified %y %ehavior, managers can more accurately predict how total costs will change when volume changes) With more accurate information, managers can ma:e %etter production and pricing decisions) 012. <oderate O45. 3 &

() Why is varia%le costing not used e#tensively in e#ternal reporting? *,-. 6aria%le costing is not used e#tensively outside of the firm %ecause a%sorption costing is re!uired %y 9**; and the 1>-) 012. <oderate O45. 3 &

('

+) How can a company produce %oth varia%le and a%sorption costing information from a single accounting system? *,-. 2irms only have one accounting information system) /his system will %e %ased on either varia%le or a%sorption costing) 1f the system needs to provide information in %oth the varia%le and a%sorption formats, the systemLs accounting information can %e converted from one format to the other) /he conversion re!uires an ad=ustment to the product inventory accounts and the amount of product costs charged against the periodLs income) /he conversion is typically easier if standard costing is employed) 012. <oderate O45. 3 '

17) What are the ma=or differences %etween varia%le and a%sorption costing? *,-. /he ma=or difference %etween varia%le costing and a%sorption costing is in the way each defines product cost) While a%sorption costing includes fi#ed manufacturing overhead as a product cost, varia%le costing treats it as a cost of the period) * secondary difference %etween the two methods is the format of the income statement) *%sorption costing utili"es the traditional income statement format that categori"es costs %y their function only) 6aria%le costing uses an income statement format that categori"es costs %y %oth their function and %ehavior) 012. <oderate O45. 3 &

11) Why is a%sorption costing not used for 86; analysis? *,-. *%sorption costing is not used in %rea: even analysis %ecause it presents a classification of costs %y function rather than %y %ehavior) Without a %ehavioral classification of costs, it is impossi%le to predict how total costs change as volume changes) 012. <oderate O45. 3 '

12) How do differences in sales and production level affect net income computed under a%sorption costing and varia%le costing? *,-. 1f production e!uals sales, a%sorption costing net income e!uals varia%le costing net income) 1f production e#ceeds sales, a%sorption costing net income e#ceeds varia%le costing net income, %ecause some fi#ed manufacturing overhead is deferred as inventory cost on the %alance sheet) 1f production is less than sales, a%sorption costing net income is less than varia%le costing net income, %ecause some fi#ed manufacturing overhead that had %een deferred as inventory cost is now e#pensed) 012. <oderate O45. 3 '

((

PROB !+ 1) Hume 8orporation has the following data for the current year. 0irect La%or 0irect <aterial *ctual Overhead *pplied Overhead >aw <aterial Wor: in ;rocess 2inished 9oods 8ost of 9oods -old
$220,000 137,800 320,000 395,000 51,394 101,926 111,192 250,182

What is the amount of under or overapplied overhead? ;repare the necessary =ournal entry to dispose of under or overapplied overhead) *,-. *pplied Overhead *ctual Overhead
$395,000 320,000 $ 75,000

overapplied

W1; H171,+2&JH4&3,377C)22 29 H111,1+2JH4&3,377C)24 89- H2$7,1(2JH4&3,377C)$4 <anufacturing Overhead Wor: in ;rocess 2inished 9oods 8ost of 9oods -old 012. <oderate O45. 3 2

# # #

H'$,777 C H1&,$77 H'$,777 C H1(,777 H'$,777 C H47,$77

$75,000 $16,500 18,000 40,500

2) Leon 8orporation has the following data relating to its power usage for the first si# months of the current year) <onth 5an) 2e%) <ar) *pr) <ay 5une Gsage $77 $$7 4'$ 42$ 4$7 '2$ ?Qw@8ost H4$7 4$$ 3+$ 317 3(7 4(4

*ssume usage is within the relevant range of activity) Re:uired; a) Gsing the high low method, compute the cost formula)

(+

%) Leon 8orporation estimates its power usage for 5uly at &&7 watts) 8ompute the total power cost for 5uly) *,-. Gsage High Low
725 425 300

8ost
$484 310 $174

H1'4J377 C H)$( # 42$ C H24&)$7 /otal varia%le cost H317 ?/8@ H24&)$7 ?/68@ C H&3)$7 2i#ed cost /8 C H&3)$7 D H7)$(?68@ *t &&7 :w, the total cost would %e /8 C H&3)$7 D H7)$(?&&7 :wh@ /8 C H44&)37 012. <oderate O45. 3 4

3) <iller 8orporation applies overhead at the rate of '7 percent of direct la%or) <iller incurred H4$7,777 of direct la%or during the current year) <iller incurred actual overhead of H3&',777) ?a@ 8ompute the amount of under or overapplied overhead for <iller 8orporation for the current year ?%@ ;repare the necessary =ournal entry to dispose of the under or overapplied overhead ?assuming that the amount is immaterial@) *,-. a) H4$7,777 # '7P C H31$,777 applied overhead 3&',777 actual overhead H $2,777 underapplied overhead
$52,000 $52,000

%)

8ost of 9oods -old <anufacturing Overhead O45. 3 2

012. 3asy

4) *ction /rainers provides a personali"ed training program that is popular with many companies) /he num%er of programs offered over the last five months, and the costs of offering these programs are as follows. ;rograms Offered 5an 2e% <ar *pril
55 45 60 50

8osts 1ncurred
$15,400 14,050 18,000 14,700

+7

<ay a) %)

75

19,000

Gsing the high low method, compute the varia%le cost per program and the total fi#ed cost per month) Gsing the least s!uares regression method, compute the varia%le cost per program and the total fi#ed cost per month)

*,-. a) 6aria%le cost per program.

8hange in costs H1+,777 H14,7$7 C H1&$ per program 8hange in activity '$ 4$ 2i#ed cost. *t high activity C H1+,777 ?'$ # H1&$@ C H&,&2$ per month *t low activity C H14,7$7 ?4$ # H1&$@ C H&,&2$ per month %) #
55 45 60 50 75 285

y
$15,400 14,050 18,000 14,700 19,000 $81,150

#y
$ 847,000 632,250 1,080,000 735,000 1,425,000 $4,719,250

#2
3,025 2,025 3,600 2,500 5,625 16,775

C $' C 1&,237 % C 4,'1+,2$7 ?$ $' 1&,237@ % C 1'&)'+ a C 1&,237 ?1'&)'+ $'@ a C &,1$2)+' 012. <oderate O45. 3 4 ?1&,''$ ?$ $' @

$) /he facility manager of 4ello 8orporation as:ed the systems analyst for information to help in forecasting handling costs) /he following printout was generated using the least s!uares regression method) 2i#ed cost 6aria%le cost per unit *ctivity varia%le a) %) H2$$7 1)($ units of production volume

Gsing the information from the printout, develop a cost function that can %e used to estimate handling costs at different volume levels) 3stimate handling costs if e#pected production for ne#t month is 27,777 units)

*,-.

+1

a) %)

/otal handling costs C H2,$$7 D H1)($ ?unit production@ /otal handling costs C H2,$$7 D ?H1)($ # 27,777@ C H3+,$$7 O45. 3 4

012. <oderate

&) /he <c*lister 8o) has the following information availa%le regarding costs and revenues for two recent months) -elling price is H27) <arch -ales revenue 8ost of goods sold 9ross profit Less other e#penses. *dvertising Gtilities -alaries and commissions -upplies ?%ags, cleaning supplies etc)@ 0epreciation *dministrative costs /otal ,et income Re:uired; a) %) c) d) 1dentify each of the companyLs e#penses ?including cost of goods sold@ as %eing either varia%le, fi#ed, or mi#ed) 4y use of the high low method, separate each mi#ed e#pense into varia%le and fi#ed elements) -tate the cost formula for each mi#ed e#pense) What is the total cost e!uation? 3stimate total cost if sales C H'$,777)
$60,000 -36,000 $24,000 $ 600 4,200 3,200 320 2,300 1,900 -12,520 $11,480

*pril
$100,000 - 60,000 $ 40,000 $ 600 5,600 4,000 400 2,300 1,900 -14,800 $25,200

*,-. a) 8ost 8O9*dvertising Gtilities -alaries, 3tc) 3,277J&7,777C$)3P -upplies 0epreciation *dministration Gtilities H1,477 H47,777 *pril
36,000/60,000=60% 600 4,200/60,000= 7% 4,000/100,000=4% 320/60,000 !53% 2,300 1,900

<ay
60,000/100,000=60% 600 5,600/100,000=5!6% " 400/100,000=!4% 2,300 1,900

4ehavior
V "

"

%)

C 3)$P -ales

28 C H4,277 ?3)$P # &7,777@ C H2,177 -alaries H(77JH47,777 C 2P -ales

+2

28 C H3,277 ?2P # &7,777@ C H2,777 -upplies H(7JH47,777 C )2P sales

28 C H327 ?)2P # H&7,777@ C H277 c) /otal 28 C H&77 D H2,377 D H1,+77 D H2,177 D H2,777 D H277 C H+,177 /otal 68 C &7P D 3)$P D 2P D )2P C &$)'P sales /8 C H+,177 D &$)'P sales /8 C H+177 D ?&$)'P # H'$,777@ C H$(,3'$ O45. 3 4

d)

012. <oderate

') 4rowning 8ompany owns two lu#ury automo%iles that are used %y employees on company %usiness) <ileage and e#penses, e#cluding depreciation, %y !uarters for the most recent year are presented %elow. Ruarter 2irst -econd /hird 2ourth <ileage
3,000 3,500 2,000 3,500 12,000

3#penses
$ 550 560 450 600 $2,160

Re:uired; 0etermine the varia%le cost per mile ?nearest tenth of a cent@ and the fi#ed costs per !uarter, using the method of least s!uares) *,-. E 1-/ 2,0 3>0 4/H
3,000 3,500 2,000 3,500 12,000

I
$550 560 450 600 $2,160

EI
$1,650,000 1,960,000 900,000 2,100,000 $6,610,000

E2
9,000,000 12,250,000 4,000,000 12,250,000 37,500,000

A E C 12,777J4 C 3,777Jmiles per !uarter A I C H2,1&7J4 C H$47 % C H&,&17,777 4 ?3,777@ ?H$47@ C H137,777 C H)7('Jmile H3',$77,777 4 ?3,777@ ?3,777@ H1,$77,777 a C H$47 ?H)7('@ ?3,777@ C H2'+ /8 C H2'+ D )7('Jmile 012. <oderate O45. 3 4

+3

() On 0ecem%er 37, a fire destroyed most of the accounting records of the *dams 0ivision, a small one product manufacturing division that uses standard costs and fle#i%le %udgets) *ll variances are written off as additions to ?or deductions from@ incomeN none are pro rated to inventories) Iou have the tas: of reconstructing the records for the year) /he general manager informs you that the accountant has %een e#perimenting with %oth a%sorption costing and varia%le costing) /he following information is availa%le for the current year. a) %) c) d) e) f) g) h) i) =) :) l) m) n) o) 8ash on hand, 0ecem%er 31 -ales *ctual fi#ed indirect manufacturing costs *ccounts receiva%le, 0ecem%er 31 -tandard varia%le manufacturing costs per unit 6ariances from standard of all varia%le manufacturing costs Operating income, a%sorption costing %asis *ccounts paya%le, 0ecem%er 31 9ross profit, a%sorption costing at standard ?%efore deducting variances@ /otal lia%ilities Gnfavora%le %udget variance, fi#ed manufacturing costs ,otes receiva%le from chief accountant 8ontri%ution margin, at standard ?%efore deducting variances@ 0irect material purchases, at standard prices *ctual selling and administrative costs ?all fi#ed@
$10 $128,000 21,000 20,000 1 $5,000 $14,400 18,000 22,400 100,000 1,000 4,000 48,000 50,000 6,000

Re:uired; 8ompute the following items ?ignore income ta# effects@) 1) 2) 3) 4) $) &) ') () Operating income on a varia%le costing %asis) ,um%er of units sold) ,um%er of units produced) ,um%er of units used as the denominator to o%tain fi#ed indirect cost application rate per unit on a%sorption costing %asis) 0id inventory ?in units@ increase or decrease? 3#plain) 4y how much in dollars did the inventory level change ?a@ under a%sorption costing, ?%@ under varia%le costing? 6aria%le manufacturing cost of goods sold, at standard prices) <anufacturing cost of goods sold at standard prices, a%sorption costing)

*,-. 1) 8< 28 Operating 1ncome ?-/0@ unfavora%le variances Operating 1ncome ?actual@ -ales 8< C 68 -ales
48,000 #26,000$ $22,000 #6,000$ $16,000

*ctual fi# mfg unfavora%le 6*> fi# cost S-/0

$21,000 #1,000$ $20,000

2)

$128,000 #48,000$ $ 80,000 /$1 %&'( = 80,000 units so)d $128,000

3)

+4

9< 8O9-

#22,400$ $105,600 /80,000 = $1!32

0ifference in O1 C ?; -@ fi# mfgJunit H?1,&77@ C ?; (7,777@ H)32 ; C '$,777 4) O1 a%sorption cost C H22,477 H&,777 C variances other 6*> 6OL 6*> H4,777 2 C ?'$,777 E@ H)32 E C &2,$77 units produced $) &) 1nventory decreased) O1 a%sorption is less than O1 varia%le) *%sorption cost $,777 units H1)32 C H&,&77 6aria%le cost $,777 units H1 C H$,777 (7,777 units H1 C H(7,777 (7,777 H1)32 C H17$,&77 O45. 3 '
$ 16,400 #14,400$ $ 2,000 6,000 $ 4,000

O1 -/0 O1 *8/ G,2 G,2 2*6

') ()

012. 0ifficult

+) -ports 1nnovators has developed a new design to produce hurdles that are used in trac: and field competition) /he companyLs hurdle design is innovative in that the hurdle yields when hit %y a runner and its height is e#traordinarily easy to ad=ust) <anagement estimates e#pected annual capacity to %e +7,777 unitsN overhead is applied using e#pected annual capacity) /he companyLs cost accountant predicts the following 2771 activities and related costs. -tandard unit varia%le manufacturing costs 6aria%le unit selling e#pense 2i#ed manufacturing overhead 2i#ed selling and administrative e#penses -elling price per unit Gnits of sales Gnits of production Gnits in %eginning inventory H12 H$ H4(7,777 H13&,777 H3$ (7,777 ($,777 17,777

Other than any possi%le under or overapplied fi#ed overhead, management e#pects no variances from the previous manufacturing costs) Gnder or overapplied fi#ed overhead is to %e written off to 8ost of 9oods -old) Re:uired; 1) 0etermine the amount of under or overapplied fi#ed overhead using ?a@ varia%le costing and ?%@ a%sorption costing) 2) 3) ;repare pro=ected income statements using ?a@ varia%le costing and ?%@ a%sorption costing) >econcile the incomes derived in part 2)

+$

*,-. 1) a) %) 2) a) H7 ?+7,777 ($,777@ H$)33 C H2&,&$7 G -ales ?(7,777 H3$@ C 68 ?(7,777 H1'@ C 8< 28 1ncome %efore income ta#es -ales ?(7,777 H3$@ 8O9- ?H1')33 (7,777@ 9< -O* 1ncome %efore income ?-/0@ 6OL 6*> 1ncome %efore income ta#es
$2,800,000 #1,360,000$ $1,440,000 #616,000$ $ 824,000 $2,800,000 #1,386,400$ $1,413,600 #536,000$ $ 877,600 #26,650$ $ 850,950

%)

3)

$,777 H$)33 C H2&,&$7) O45. 3 '

012. <oderate

17) -herrill 8orporation produces a single product) /he following is a cost structure applied to its first year of operations) -ales price 6aria%le costs. -9O* ;roduction 2i#ed costs ?total cost incurred for the year@. -9O* ;roduction H1$ per unit H2 per unit H4 per unit H14,777 H27,777

0uring the first year, -herrill 8orporation manufactured $,777 units and sold 3,(77) /here was no %eginning or ending wor: in process inventory) a) %) c) How much income %efore income ta#es would %e reported if -tanley uses a%sorption costing? How much income %efore income ta#es would %e reported if varia%le costing was used? -how why the two costing methods give different income amounts)

*,-. a) 1ncome under a%sorption costing is. -ales H1$ 3,(77 C 8O9- 3,(77 ?H4 D H27,777J$,777@ 9< Oper) 3#p)
$57,000 30,400 $26,600

+&

6-3 H2 3,(77 C 2-3 *%sorption income %efore income ta#es %) 1ncome under varia%le costing. 8<G C -; 6;rod)8ost 6-9* C H1$ H4 H2 C H+ 6ol) sold 3,(77 8< Less. 28 ;roduction -9O* 6aria%le costing income %efore income ta#es >eason for difference in income. 2i#ed costs e#pensed under a%sorp) costing 8O9- 3,(77 H27,777J$,777 units 2i#ed -9O* /otal 2i#ed costs e#pensed under varia%le costing 2i#ed -9O* 2i#ed ;roduction /otal 28 0ifference in 28 e#pensed under two methods

$ 7,600 14,000

#21,600$ $ 5,000

$34,200 #20,000$ #14,000$ $ 200

c)

$15,200 14,000 $29,200 $14,000 20,000 $34,000 $ 4,800

/his is also the difference in income amounts) 012. <oderate O45. 3 '

11) /rent 5ohnson 8ompany used least s!uares regression analysis to o%tain the following

output. ;ersonnel 0epartment 8ost 3#plained %y ,um%er of 3mployees 8onstant -tandard error of I estimate > s!uared ,o) of o%servations 0egrees of freedom E coefficient?s@ -tandard error of coefficient?s@ a) What is the total fi#ed cost? %) What is the varia%le cost per employee? c) ;repare the linear cost function) d) What is the coefficient of determination? 8omment on the goodness of fit) +' H$,(77 H&37 7)(+24 27 1( 1)+72 7)7+&&

*,-.

a) /he constant or intercept is the total fi#ed cost of H$,(77) %) /he varia%le cost per employee is the E coefficient of H1)+72) c) ;ersonnel department cost C H$,(77 D H1)+72 K ?num%er of employees@) d) /he coefficient of determination is the > s!uared of 7)(+24) /his represents a very high goodness of fit) /he closer to 1)7, the %etter the cost driver e#plains the dependent varia%le) /herefore, the conclusion can %e drawn that there is a significant relationship %etween the cost of the personnel department and the num%er of employees)
012. 0ifficult O45. 3 '

+(