MANUEL L.

QUEZON UNIVERSITY
Integrated Review 2
Management Advisory Services
Rogienel L. Reyes, CPA
_____________________________________________________________________________________________
Module 4: Absorption and Variable Costing R. L. REYES

1. Which one of the following is an advantage of using variable costing?

A. Variable costing complies with the Internal Revenue Code.
B. Variable costing complies with generally accepted accounting principles.
C. Variable costing makes cost-volume relationships more easily apparent.
D. Variable costing is most relevant to long-run pricing strategies.
2. In its first year of operations, Magna Manufacturers had the following costs when it produced 100,000
and sold 80,000 units of its only product: manufacturing costs of P180,000 fixed and P160,000 variable,
selling and administrative costs of P90,000 fixed and P40,000 variable. How much lower would Magna’s
net income be if it used variable costing instead of full absorption costing?
A. 36,000 C. 68,000
B. 54,000 D. 94,000
3. Using the variable costing method, which of the following costs are assigned to inventory, (1) variable
selling and administrative costs or (2) Variable factory overhead costs?
A. Yes Yes C. No No
B. Yes No D. No Yes
4. At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable and
fixed manufacturing costs per unit were P90 and P20, respectively. If Killo uses absorption costing rather
than variable (direct) costing, the result would be a higher pretax income of
A. 0 C. 70,000
B. 20,000 D. 90,000
5. A manufacturing company prepares income statements using both absorption and variable costing
methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin
approximated budgeted figures, whereas net income was substantially greater than the budgeted
amount. There were no beginning or ending inventories. The most likely explanation of the net income
increase is that, compared to budget, actual
A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had decreased.
C. Sales prices and variable costs had increased proportionately.
D. Sales prices had declined proportionately less than variable costs.
6. A single-product company prepares income statements using both absorption and variable costing
methods. Manufacturing overhead cost applied per unit produced in Year 2 was the same as in Year 1.
The Year 2 variable costing statement reported a profit whereas the Year 2 absorption costing statement
reported a loss. The difference in reported income could be explained by units produced in Year 2 being
A. Less than units sold in Year 2.
B. Less than the activity level used for allocating overhead to the product.
C. In excess of the activity level used for allocating overhead to the product.
D. In excess of units sold in Year 2.
7. Which of the following statements is correct regarding the difference between the absorption costing and
variable costing methods?
A. When production equals sales, absorption costing income is greater than variable costing income.
B. When production equals sales, absorption costing income is less than variable costing income.
C. When production is greater than sales, absorption costing income is greater than variable costing
income.
D. When production is less than sales, absorption costing income is greater than variable costing income.
8. Merlene Company uses a standard cost accounting system. Data for the last fiscal year are as follows.
Units
Beginning inventory of finished goods 100
Production during the year 700
Sales 750
Ending inventory of finished goods 50

Per Unit
Product selling price P200
Standard variable manufacturing cost 90
Standard fixed manufacturing cost 20*
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Module 4: Absorption and Variable Costing R. L. REYES

Budgeted selling and administrative costs (all fixed) P45,000

*Denominator level of activity is 750 units for the year.
There were no price, efficiency, or spending variances for the year, and actual selling and administrative
expenses equaled the budget amount. Any volume variance is written off to cost of goods sold in the year
incurred. There are no work-in-process inventories.
The amount of operating income earned by Merlene for the last fiscal year using variable costing was
A. 21,500 C. 28,000
B. 22,500 D. 31,000
9. Refer no no. 8. The amount of operating income earned by Merlene for the last fiscal year using
absorption costing was
A. 21,500 C. 28,000
B. 22,500 D. 31,000
10. Chassen Company, a cracker and cookie manufacturer, has the following unit costs for the month of June.
Variable Variable Fixed Fixed
manufacturing cost marketing cost manufacturing cost marketing cost
P5.00 P3.50 P2.00 P4.00
A total of 100,000 units were manufactured during June of which 10,000 remain in ending inventory.
Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units are the only finished
goods inventory at month-end. Using the full absorption costing method, Chassen's finished goods
inventory value would be
A. 50,000 C. 85,000
B. 70,000 D. 145,000
11. Consider the following situation for Weisman Corporation for the prior year.
o The company produced 1,000 units and sold 900 units, both as budgeted.
o There were no beginning or ending work-in-process inventories and no beginning finished goods
inventory.
o Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume
of production only, and all variable selling costs are affected by sales volume only.
o Budgeted per unit revenues and costs were as follows.
Per Unit
Sales price P100
Direct materials 30
Direct labor 20
Variable manufacturing costs 10
Fixed manufacturing costs 5
Variable selling costs 12
Fixed selling costs (P3,600 total) 4
Fixed administrative costs (P1,800 total) 2
The operating income for Weisman for the prior year using absorption costing was
A. 13,600 C. 15,300
B. 14,200 D. 15,840
12. Refer to no. 11. The operating income for Weisman for the prior year using variable costing was
A. 13,600 C. 14,800
B. 14,200 D. 15,300
13. When comparing absorption costing with variable costing, the difference in operating income can be
explained by the difference between the
A. Units sold and the units produced, multiplied by the unit sales price.
B. Ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed
manufacturing cost per unit.
C. Ending inventory in units and the beginning inventory in units, multiplied by the unit sales price.
D. Units sold and the units produced, multiplied by the budgeted variable manufacturing cost per unit.
14. Mill Corporation had the following unit costs for the recently concluded calendar year.
Variable Fixed
Manufacturing P8.00 P3.00
Nonmanufacturing P2.00 P5.50
Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on December 31. When
compared to variable costing income, Mill’s absorption costing income is
A. 2,400 lower C. 6,800 lower
B. 2,400 higher D. 6,800 higher

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Module 4: Absorption and Variable Costing R. L. REYES
15. Which of the following correctly shows the treatment of (1) factory insurance, (2) direct labor, and (3)
finished goods shipping costs under absorption costing and variable costing?
Absorption Costing Variable Costing
Product Cost Period Cost Product Cost Period Cost
A. 1, 2 3 2 1, 3
B. 2 1, 3 1, 2 3
C. 1, 2 3 1 2, 3
D. 1 2, 3 2, 3 1
16. If a manufacturing company uses variable costing to cost inventories, which of the following costs are
considered inventoriable costs?
A. Only raw material, direct labor, and variable manufacturing overhead costs.
B. Only raw material, direct labor, variable and fixed manufacturing overhead costs.
C. Only raw material, direct labor, variable manufacturing overhead and variable selling and
administrative costs.
D. Only raw material and direct labor costs.
17. Xylon Company uses direct (variable) costing for internal reporting and absorption costing for the external
financial statements. A review of the firm’s internal and external disclosures will likely find
A. A difference in the treatment of fixed selling and administrative costs.
B. A higher inventoriable unit cost reported to management than to the shareholders.
C. A contribution margin rather than gross margin in the reports released to shareholders.
D. Internal income figures that vary closely with sales and external income figures that are influenced by
both units sold and productive output.
18. Bethany Company has just completed the first month of producing a new product but has not yet shipped
any of this product. The product incurred variable manufacturing costs of P5,000,000, fixed manufacturing
costs of P2,000,000, variable marketing costs of P1,000,000, and fixed marketing costs of P3,000,000.
If Bethany uses the variable cost method to value inventory, the inventory value of the new product
would be
A. 5,000,000 C. 8,000,000
B. 6,000,000 D. 11,000,000
19. During the month of May, Robinson Corporation sold 1,000 units. The cost per unit for May was as
follows.
Cost Per Unit
Direct materials P 5.50
Direct labor 3.00
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 1.50
Variable administrative costs 0.50
Fixed administrative costs 3.50
Total P15.00
May’s income using absorption costing was P9,500. The income for May, if variable costing had been
used, would have been P9,125. The number of units Robinson produced during May was
A. 750 units C. 1,075 units
B. 925 units D. 1,250 units
20. Which one of the following is the best reason for using variable costing?
A. Fixed overhead is more closely related to the capacity to produce than to the production of specific
units.
B. All costs are variable in the long term.
C. Variable costing is acceptable for income tax reporting purposes.
D. Variable costing usually results in higher operating income than if a company uses absorption costing.
21. Dawn Company has significant fixed overhead costs in the manufacturing of its sole product, auto
mufflers. For internal reporting purposes, in which one of the following situations would ending finished
goods inventory be higher under direct (variable) costing rather than under absorption costing?
A. If more units were produced than were sold during a given year.
B. If more units were sold than were produced during a given year.
C. In all cases when ending finished goods inventory exists.
D. None of these situations.
22. Troughton Company manufactures radio-controlled toy dogs. Summary budget financial data for
Troughton for the current year are as follows:
Sales (5,000 units at P150 each) P750,000
Variable manufacturing cost 400,000

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Module 4: Absorption and Variable Costing R. L. REYES
Fixed manufacturing cost 100,000
Variable selling and administrative cost 80,000
Fixed selling and administrative cost 150,000
Troughton uses an absorption costing system with overhead applied based on the number of units
produced, with a denominator level of activity of 5,000 units. Underapplied or overapplied manufacturing
overhead is written off to cost of goods sold in the year incurred. The P20,000 budgeted operating income
from producing and selling 5,000 toy dogs planned for this year is of concern to Trudy George,
Troughton’s president. She believes she could increase operating income to P50,000 (her bonus
threshold) if Troughton produces more units than it sells, thus building up the finished goods inventory.
How much of an increase in the number of units in the finished goods inventory would be needed to
generate the P50,000 budgeted operating income?
A. 556 units C. 1,500 units
B. 600 units D. 7,500 units
23. Which of the following statements is true for a firm that uses variable costing?
A. The cost of a unit of product changes because of changes in the number of manufactured units.
B. Profits fluctuate with sales.
C. An idle facility variation is calculated.
D. Product costs include "direct" (variable) administrative costs.
24. The following information is for the next two questions:
Product sales: 1,000 units at P10 each
Variable manufacturing costs: P5.50 per unit
Fixed manufacturing overhead (planned and actual): P1,200
Variable selling and administrative costs: P0.50 per unit sold
Fixed selling and administrative costs: P1,000
Units produced (planned and actual): 1,200
Beginning inventory 0 units
Operating income under variable (direct) costing is:
A. 600 C. 1,800
B. 700 D. 2,300
25. Refer to no. 24. Assuming operating income under variable costing is P1,800, operating income under
absorption costing is:
A. 1,800 C. 2,000
B. 1,967 D. 2,167
26. When a firm prepares financial reports using absorption costing:
A. Profits will always increase with increases in sales.
B. Profits will always decrease with decreases in sales.
C. Profits may decrease with increased sales even if there is no change in selling prices and costs.
D. Decreased output and constant sales result in increased profits.
27. Nance Corp began operations in January. The company produced 50,000 units and sold 45,000 units in its
first year of operations. Costs for the year were as follows:
Fixed Manufacturing Costs P250,000
Variable Manufacturing Costs 180,000
Fixed General and Selling Costs 75,000
Variable General and Selling Costs 80,000
How would the net income of Nance compare between the variable method and full absorption costing
methods?
A. Variable would be P25,000 higher C. Variable would be P32,500 higher
B. Absorption would be P25,000 higher D. ) Absorption would be P32,500 higher
28. Jansen, Inc. pays bonuses to its managers based on operating income. The company uses absorption
costing, and overhead is applied on the basis of direct labor hours. To increase bonuses, Jansen's
managers may do all of the following except:
A. Produce those products requiring the most direct labor.
B. Defer expenses such as maintenance to a future period.
C. Increase production schedules independent of customer demands.
D. Decrease production of those items requiring the most direct labor.
29. Osawa planned to produce and actually manufactured 200,000 units of its single product in its first year of
operations. Variable manufacturing costs were P30 per unit of product. Planned and actual fixed
manufacturing costs were P600,000, and the selling and administrative costs totaled P400,000. Osawa
sold 120,000 units of product at a selling price of P40 per unit. Osawa’s operating income using
absorption costing is:

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Module 4: Absorption and Variable Costing R. L. REYES
A. 200,000 C. 600,000
B. 440,000 D. 840,000
30. Refer to no. 29. Osawa’s operating income using variable costing is:
A. 200,000 C. 800,000
B. 440,000 D. 600,000
31. Valyn Corporation employs an absorption costing system for internal reporting; however, the company is
considering using variable costing. Data regarding Valyn's planned and actual operations for the year is:
Planned Activity Actual Activity
Beginning finished goods inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000
The planned per unit cost figures shown in the next schedule were based on the estimated production
and sale of 140,000 units for the year. Valyn uses a predetermined manufacturing overhead rate for
applying manufacturing overhead to its product; therefore, a combined manufacturing overhead rate of
P9.00 per unit was employed for absorption costing purposes. Any over- or under-applied manufacturing
overhead is closed to the cost of goods sold account at the end of the reporting year.
Planned Costs Per Unit Planned Total Costs Incurred Costs
Direct materials P12.00 P1,680,000
P1,560,000
Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing overhead 4.00 560,000 520,000
Fixed manufacturing overhead 5.00 700,000 715,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Variable administrative expenses 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000
Total P50.00 P7,000,000 P6,620,000
The beginning finished goods inventory for absorption costing purposes was valued at the previous year's
planned unit manufacturing cost, which was the same as the current year's planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned
and actual selling price per unit for the current year was P70.00 per unit. The value of Valyn Corporation's
current year actual ending finished goods inventory under the absorption-costing basis was:
A. 900,000 C. 1,220,000
B. 1,200,000 D. 1,350,000
32. Refer to no. 31. The value of Valyn Corporation's actual ending finished goods inventory on the variable
costing basis was:
A. 1,400,000 C. 1,000,000
B. 1,125,000 D. 750,000
33. Refer to no. 31. Valyn Corporation's total fixed costs expensed under the absorption costing basis were:
A. 2,095,000 C. 2,055,000
B. 2,120,000 D. 2,030,000
34. Refer to no. 31. Valyn Corporation's actual manufacturing contribution margin calculated under the
variable costing basis was:
A. 4,375,000 C. 4,910,000
B. 4,935,000 D. 5,625,000
35. Refer to no. 31. The total variable cost currently expensed by Valyn Corporation under the variable
costing basis was:
A. 4,375,000 C. 4,325,000
B. 4,500,000 D. 4,550,000
36. Refer to no. 31. The difference between Valyn Corporation's operating income calculated on the
absorption costing basis and calculated on the variable costing basis was:
A. 65,000 C. 40,000
B. 25,000 D. 90,000
37. In an income statement prepared as an internal report using the direct (variable) costing method, fixed
selling and administrative expenses would:
A. Not be used.
B. Be treated the same as variable selling and administrative expenses.
C. Be used in the computation of operating income but not in the computation of the contribution
margin.
D. Be used in the computation of the contribution margin.
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Module 4: Absorption and Variable Costing R. L. REYES
38. Lynn Manufacturing Co. prepares income statements using both standard absorption and standard
variable costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only
beginning and ending inventories were finished goods of 5,000 units. How would Lynn's ratios using
absorption costing compare with those using variable costing in Year 2?
Current ratio Return on stockholders' equity
A. Same Same
B. Same Smaller
C. Greater Same
D. Greater Smaller
39. Using the variable costing method, which of the following costs are assigned to inventory?
Variable selling and Variable factory
administrative costs overhead costs
A. Yes Yes
B. Yes No
C. No No
D. No Yes
40. Waldo Company, which produces only one product, provides its most current month's data as follows:
Selling price per unit P80
Variable costs per unit:
Direct materials 21
Direct labor 10
Variable manufacturing overhead 3
Variable selling and administrative 6
Fixed costs:
Manufacturing overhead P76,000
Selling and administrative 58,000
Units:
Beginning inventory 0
Month's production 5,000
Number sold 4,500
Ending inventory 500
Based upon the above information, what is the manufacturing contribution margin for the month under
the variable costing approach?
A. 46,000 C. 207,000
B. 180,000 D. 226,000
41. At the end of a company's first year of operations, 2,000 units of inventory are on hand. Variable costs
are P100 per unit, and fixed manufacturing costs are P30 per unit. The use of absorption costing, rather
than variable costing, would result in a higher net income of what amount?
A. 60,000 C. 200,000
B. 140,000 D. 260,000
42. Which of the following costing methods provide(s) the added benefit of usefulness for external reporting
purposes? I. Variable II. Absorption
A. I only C. Both I and II
B. II only D. Neither I nor II
43. Which of the following costs are included in product or inventoriable costs in an absorption costing
system?
A. Direct material, direct labor and variable overhead.
B. Direct material, direct labor and all overhead.
C. Direct material, direct labor, all overhead, and selling expenses.
D. Direct material, direct labor, all overhead, and all period expenses.
44. The method of inventory costing in which direct manufacturing costs and manufacturing overhead costs,
both variable and fixed, are considered as inventoriable costs is best described as:
A. Direct costing C. Absorption costing
B. Variable costing D. Conversion costing
45. Many firms have made significant strides in reducing their inventories. Which of the following would be
least likely to encourage managers to reduce inventory?
A. Using variable costing.
B. Using absorption costing.
C. Using throughput costing.
D. Instituting a charge against the budget for managers based on the size of the inventory.

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Module 4: Absorption and Variable Costing R. L. REYES
46. Absorption costing and variable costing are two different methods of assigning costs to units produced. Of
the five cost items listed below, identify the one that is not correctly accounted for as part of product cost
under
Absorption Costing Variable Costing
A. Manufacturing supplies Yes Yes
B. Insurance on factory Yes No
C. Direct labor cost Yes Yes
D. Packaging and shipping costs Yes Yes
47. Which one of the following considers the impact of fixed overhead costs?
A. Full absorption costing C. Direct costing
B. Marginal costing D. Variable costing
48. The management of a company computes net income using both the absorption and variable costing
approaches to product costing. This year, the net income under the variable costing approach was greater
than the net income under the absorption costing approach. This difference is most likely the result of
A. Inflationary effects on overhead costs. C. Sales volume exceeding production volume.
B. An increase in the finished goods inventory. D. A decrease in the variable marketing
expenses.
49. When comparing absorption costing with variable costing, which of the following statements is not true?
A. Absorption costing enables managers to increase operating profits in the short run by increasing
inventories.
B. When sales volume is more than production volume, variable costing will result in higher operating
profit.
C. A manager who is evaluated based on variable costing operating profit would be tempted to increase
production at the end of a period in order to get a more favorable review.
D. Under absorption costing, operating profit is a function of both sales volume and production volume.
50. In the application of direct costing as a cost-allocation process in manufacturing,
A. Variable direct costs are treated as period costs.
B. Nonvariable indirect costs are treated as product costs.
C. Variable indirect costs are treated as product costs.
D. Nonvariable direct costs are treated as product costs.
51. Under variable (direct) costing, fixed manufacturing overhead costs are classified as
A. Administrative costs C. Inventoriable costs
B. Selling costs D. Period costs
52. Which of the following is an argument against the use of direct (variable) costing?
A. Absorption costing overstates the balance sheet value of inventories.
B. Variable factory overhead is a period cost.
C. Fixed factory overhead is difficult to allocate properly.
D. Fixed factory overhead is necessary for the production of a product.
53. Assuming absorption costing, which of the following columns includes only period costs?
A B C D
Direct labor X X
Direct materials X X
Sales materials X X X
Advertising costs X X
Indirect factory materials X
Indirect labor X
Sales commissions X X X
Factory utilities X X
Administrative supplies expense X X X
Administrative labor X X X X
Depreciation on administration building X X X X
Cost of research on customer demographics X X X
A. A C. C
B. B D. D

54. During its first year of operations, a company produced 275,000 units and sold 250,000 units. The
following costs were incurred during the year:
Variable costs per unit:
Direct materials P15.00
Direct labor 10.00

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Module 4: Absorption and Variable Costing R. L. REYES
Manufacturing overhead 12.50
Selling and administrative 2.50
Total fixed costs:
Manufacturing overhead P2,200,000
Selling and administrative 1,375,000
What is the difference between operating income calculated on the absorption-costing basis and on the
variable-costing basis?
A. Absorption-costing operating income is greater than variable-costing operating income by P200,000.
B. Absorption-costing operating income is greater than variable-costing operating income by P220,000.
C. Absorption-costing operating income is greater than variable-costing operating income by P325,000.
D. Variable-costing operating income is greater than absorption-costing operating income by P62,500.
55. Presented are Valenz Company's records for the current fiscal year ended November 30:
Direct materials used P 300,000
Direct labor 100,000
Variable factory overhead 50,000
Fixed factory overhead 80,000
Selling and admin. costs-variable 40,000
Selling and admin. costs-fixed 20,000
If Valenz Company uses variable costing, the inventoriable costs for the fiscal year are
A. 400,000 C. 490,000
B. 450,000 D. 530,000
56. Refer to no. 55. Using absorption (full) costing, inventoriable costs are
A. 400,000 C. 530,000
B. 450,000 D. 590,000
57. Which one of the following statements is correct regarding absorption costing and variable costing?
A. Overhead costs are treated in the same manner under both costing methods.
B. If finished goods inventory increases, absorption costing results in higher income.
C. Variable manufacturing costs are lower unde variable costing.
D. Gross margins are the same under both costing methods.
58. A manufacturer at the end of its fiscal year recorded the data below:
Prime cost P800,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000
If the manufacturer uses variable costing, the inventoriable costs for the fiscal year are
A. 800,000 C. 980,000
B. 900,000 D. 1,060,000
59. Refer to no. 58. Using absorption (full) costing, inventoriable costs are
A. 800,000 C. 1,060,000
B. 900,000 D. 1,080,000
60. The change in period-to-period operating income when using variable costing can be explained by the
change in the
A. Unit sales level multiplied by the unit sales price.
B. Unit sales level multiplied by a constant unit contribution margin.
C. Finished goods inventory level multiplied by the unit sales price.
D. Finished goods inventory level multiplied by a constant unit contribution margin.

“Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.”
Henry Ford

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