Chapter 7 Variable Costing vs.

Absorption Costing
Multiple Choice
16. C Easy A cost that would be included in product costs under both absorption costing and variable costing would be: a. supervisory salaries. b. equipment depreciation. c. variable manufacturing costs. d. variable selling expenses. An allocated portion of fixed manufacturing overhead is included in product costs under: Absorption costing No No Yes Yes Variable costing No Yes No Yes

17. C Easy CPA adapted

a. b. c. d. 18. B Medium CPA adapted

The variable costing method ordinarily includes in product costs the following: a. Direct materials cost, direct labor cost, but no manufacturing overhead cost. b. Direct materials cost, direct labor cost, and variable manufacturing overhead cost. c. Prime cost but not conversion cost. d. Prime cost and all conversion cost. Cay Company's fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should these costs be classified? Period costs $0 $80,000 $100,000 $180,000 Product costs $180,000 $100,000 $80,000 $0

19. D Easy

a. b. c. d. 20. A Easy

Which of the following are considered to be product costs under variable costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses. a. I.

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b. I and II. c. I and III. d. I, II, and III. 21. B Medium CPA adapted What factor is the cause of the difference between net income as computed under absorption costing and net income as computed under variable costing? a. Absorption costing considers all manufacturing costs in the determination of net income, whereas variable costing considers only prime costs. b. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed manufacturing costs as period costs. c. Absorption costing includes all variable manufacturing costs in product costs, but variable costing considers variable manufacturing costs to be period costs. d. Absorption costing includes all fixed manufacturing costs in product costs, but variable costing expenses all fixed manufacturing costs. Under variable costing, costs which are treated as period costs include: a. only fixed manufacturing costs. b. both variable and fixed manufacturing costs. c. all fixed costs. d. only fixed selling and administrative costs.

22. C Easy

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23. C Medium

Which of the following statements is true for a firm that uses variable costing? a. The unit product cost changes as a result of changes in the number of units manufactured. b. Both variable selling costs and variable production costs are included in the unit product cost. c. Net income moves in the same direction as sales. d. Net income is greatest in periods when production is highest. Which of the following are considered to be product costs under absorption costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses. a. b. c. d. I, II, and III. I and II. I and III. I.

24. B Easy

25. C Easy

The term "gross margin" for a manufacturing company refers to the excess of sales over a. cost of goods sold, excluding fixed manufacturing overhead. b. all variable costs, including variable selling and administrative expenses. c. cost of goods sold, including fixed manufacturing overhead. d. variable costs, excluding variable selling and administrative expenses. Net income determined using full absorption costing can be reconciled to net income determined using variable costing by computing the difference between: a. Fixed manufacturing overhead costs deferred in or released from inventories. b. Inventoried discretionary costs in the beginning and ending inventories. c. Gross margin (absorption costing method) and contribution margin (variable costing method). d. Sales as recorded under the variable costing method and sales as recorded under the absorption costing method. Net income reported under absorption costing will exceed net income reported under variable costing for a given period if: a. production equals sales for that period. b. production exceeds sales for that period. c. sales exceed production for that period. d. the variable manufacturing overhead exceeds the fixed manufacturing overhead.

26. A Medium CPA adapted

27. B Medium CMA adapted

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28. D Medium CPA adapted

What will be the difference in net income between variable costing and absorption costing if the number of units in work in process and finished goods inventories increase? a. There will be no difference in net income. b. Net income computed using variable costing will be higher. c. The difference in net income cannot be determined from the information given. d. Net income computed using variable costing will be lower. The costing method that can be used most easily with break-even analysis and other cost-volume-profit techniques is: a. variable costing. b. absorption costing. c. process costing. d. job-order costing. For the most recent year, Atlantic Company's net income computed by the absorption costing method was $7,400, and its net income computed by the variable costing method was $10,100. The company's unit product cost was $17 under variable costing and $22 under absorption costing. If the ending inventory consisted of 1,460 units, the beginning inventory must have been: a. 920 units. b. 1,460 units. c. 2,000 units. d. 12,700 units. During the most recent year, Evans Company had a net income of $90,000 using absorption costing and $84,000 using variable costing. The fixed overhead application rate was $6 per unit. There were no beginning inventories. If 22,000 units were produced last year, then sales for last year were: a. 15,000 units. b. 21,000 units. c. 23,000 units. d. 28,000 units. During the year just ended, Roberts Company' income under absorption costing was $3,000 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $9 per unit, of which $3 was variable selling expense. If production cost is $11 per unit under absorption costing every year, then how many units did the company produce during the year? a. 8,000. b. 10,000. c. 9,600. d. 8,400.

29. A Easy

30. C Hard

31. B Hard

32. D Hard

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36. C Medium

Last year, fixed manufacturing overhead was $30,000, variable production costs were $48,000, fixed selling and administration costs were $20,000, and variable selling administrative expenses were $9,600. There was no beginning inventory. During the year, 3,000 units were produced and 2,400 units were sold at a price of $40 per unit. Under variable costing, net income would be: a. a profit of $6,000. b. a profit of $4,000. c. a loss of $2,000. d. a loss of $4,400. West Co.'s manufacturing costs are as follows: Direct materials and direct labor ....... $700,000 Other variable manufacturing costs ...... 100,000 Depreciation of factory building and manufacturing equipment ............. 80,000 Other fixed manufacturing overhead ...... 18,000 What amount should be considered product costs for external reporting purposes? a. $700,000. b. $800,000. c. $880,000. d. $898,000.

37. D Easy CPA adapted

39. B Medium

During the last year, Moore Company's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which of the following statements is true? a. The net income under absorption costing for the year will be $800 higher than net income under variable costing. b. The net income under absorption costing for the year will be $544 higher than net income under variable costing. c. The net income under absorption costing for the year will be $544 lower than net income under variable costing. d. The net income under absorption costing for the year will be $800 lower than net income under variable costing.

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Reference: 7-1 Aaker Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price ............................ Units Units Units Units in beginning inventory ............. produced ........................... sold ............................... in ending inventory ................ $99 0 6,300 6,000 300

Variable costs per unit: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Variable selling and administrative .... Fixed costs: Fixed manufacturing overhead ........... Fixed selling and administrative ....... 42. D Easy Refer To: 7-1

$12 42 6 6

$170,100 24,000

What is the unit product cost for the month under variable costing? a. $66 b. $93 c. $87 d. $60 What is the unit product cost for the month under absorption costing? a. $87 b. $60 c. $66 d. $93 The total contribution margin for the month under the variable costing approach is: a. $72,000. b. $27,900. c. $234,000. d. $198,000. The total gross margin for the month under the absorption costing approach is: a. $98,100. b. $198,000. c. $72,000. d. $12,000.

43. A Easy Refer To: 7-1

44. D Medium Refer To: 7-1

45. C Medium Refer To: 7-1

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111. Hard

Lee Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price ............................ Units Units Units Units in beginning inventory ............. produced ........................... sold ............................... in ending inventory ................ $95 100 6,200 5,900 400

Variable costs per unit: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Variable selling and administrative .... Fixed costs: Fixed manufacturing overhead ........... Fixed selling and administrative .......

$42 28 1 5

$62,000 35,400

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. Required: a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare an income statement for the month using the contribution format and the variable costing method. d. Prepare an income statement for the month using the absorption costing method. e. Reconcile the variable costing and absorption costing net incomes for the month.

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Answer: a. & b. Unit product costs Variable costing: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Unit product cost ...................... Absorption costing: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Fixed manufacturing overhead ........... Unit product cost ...................... c. & d. Income statements Variable costing income statement Sales ...................................... Less variable expenses: Variable cost of goods sold: Beginning inventory .................... $ 7,100 Add variable manufacturing costs ....... 440,200 Goods available for sale ............... 447,300 Less ending inventory .................. 28,400 Variable cost of goods sold ............ 418,900 Variable selling and administrative .... 29,500 Contribution margin ........................ Less fixed expenses: Fixed manufacturing overhead ........... 62,000 Fixed selling and administrative ....... 35,400 Net income ................................. Absorption costing income statement Sales ...................................... Cost of goods sold: Beginning inventory ...................... $ 8,100 Add cost of goods manufactured ........... 502,200 Goods available for sale ................. 510,300 Less ending inventory .................... 32,400 Gross margin ............................... Less selling and administrative expenses: Variable selling and administrative ...... Fixed selling and administrative ......... Net income ................................. $42 28 1 $71

$42 28 1 10 $81

$560,500

448,400 112,100

97,400 $ 14,700

$560,500

477,900 82,600

29,500 35,400

64,900 $ 17,700

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e. Reconciliation Variable costing net income ................ Add fixed manufacturing overhead costs deferred in inventory under absorption costing .................................. Deduct fixed manufacturing overhead costs released from inventory under absorption costing .................................. Absorption costing net income .............. 112. Medium

$14,700

3,000

0 $17,700

Mahugh Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling Units Units Units Units price .............................. in beginning inventory ............. produced ........................... sold ............................... in ending inventory ................ $122 0 8,300 8,200 100

Variable costs per unit: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Variable selling and administrative .... Fixed costs: Fixed manufacturing overhead ........... Fixed selling and administrative ....... Required:

$27 46 4 7

$199,200 106,600

a. What is the unit product cost for the month under variable costing? b. What is the unit product cost for the month under absorption costing? c. Prepare an income statement for the month using the contribution format and the variable costing method. d. Prepare an income statement for the month using the absorption costing method. e. Reconcile the variable costing and absorption costing net incomes for the month.

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Answer: a. & b. Unit product costs Variable costing: Direct materials ..................... Direct labor ......................... Variable manufacturing overhead ...... Unit product cost .................... Absorption costing: Direct materials ..................... Direct labor ......................... Variable manufacturing overhead ...... Fixed manufacturing overhead ......... Unit product cost .................... c. & d. Income statements Variable costing income statement Sales .................................... Less variable expenses: Variable cost of goods sold: Beginning inventory .................. Add variable manufacturing costs ..... Goods available for sale ............. Less ending inventory ................ Variable cost of goods sold .......... Variable selling and administrative .. Contribution margin ...................... Less fixed expenses: Fixed manufacturing overhead ......... Fixed selling and administrative ..... Net income ...............................

$27 46 4 $77

$ 27 46 4 24 $101

$1,000,400

$ 0 639,100 639,100 7,700 631,400 57,400

688,800 311,600

199,200 106,600 $

305,800 5,800

Absorption costing income statement Sales .................................... Cost of goods sold: Beginning inventory .................... $ 0 Add cost of goods manufactured ......... 838,300 Goods available for sale ............... 838,300 Less ending inventory .................. 10,100 Gross margin ............................. Less selling and administrative expenses: Variable selling and administrative .... 57,400 Fixed selling and administrative ....... 106,600 Net income ...............................

$1,000,400

828,200 172,200

164,000 8,200

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e. Reconciliation Variable costing net income ................ Add fixed manufacturing overhead costs deferred in inventory under absorption costing .................................. Deduct fixed manufacturing overhead costs released from inventory under absorption costing .................................. Absorption costing net income .............. 113. Medium

$5,800

2,400

0 $8,200

The EG Company produces and sells one product--a microwave oven. The following data refer to the year just completed: Beginning inventory ....................... $0 Units produced ............................ 25,000 Units sold ................................ 20,000 Sales price per unit ...................... $400 Selling and administrative expenses: Variable per unit ...................... $15 Fixed (total) .......................... $275,000 Manufacturing costs: Direct materials cost per unit ......... $200 Direct labor cost per unit ............. $50 Variable overhead cost per unit ........ $30 Fixed overhead (total) ................. $300,000 Assume that direct labor is a variable cost. Required: a. Compute the cost of a single unit of product under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net income figures in (b) and (c) above. Answer: a. Cost per unit under absorption costing: Direct materials.................... $200 Direct labor........................ 50 Variable overhead................... 30 Fixed overhead ($300,000 25,000).. 12 Total cost per unit................. $292 Cost per unit under variable costing: Direct materials.................... $200 Direct labor........................ 50 Variable overhead................... 30 Total cost per unit................. $280

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b. Absorption costing income statement: Sales............................... Cost of goods sold: Beginning inventory................. $ 0 Cost of goods manufactured (25,000 @ $292) 7,300,000 Cost of goods available............. 7,300,000 Less ending inventory (5,000 units @ $292) ............. 1,460,000 Gross profit........................ Less selling and administrative expenses: [($15 x 20,000) + $275,000]....... Net income.......................... c. Variable costing income statement: Sales............................... Cost of goods sold: Beginning inventory................. $ 0 Cost of goods manufactured (25,000 @ $280) 7,000,000 Cost of goods available............. 7,000,000 Less ending inventory (5,000 units @ $280) 1,400,000 Variable cost of goods sold......... 5,600,000 Variable selling and admin. expenses: (20,000 x $15)................. 300,000 Contribution margin................. Less fixed expenses: Manufacturing overhead.............. 300,000 Selling and administrative.......... 275,000 Net income.......................... d. Net income under variable costing... $1,525,000 Add fixed manufacturing overhead costs deferred in inventory under absorption costing (5,000 units X $12) .............. 60,000 Net income under absorption costing $1,585,000 $8,000,000 $8,000,000

5,840,000 2,160,000 575,000 $1,585,000

5,900,000 2,100,000

575,000 $1,525,000

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