Ch7- Variable costing and Absorption costing-extra exercises

Q1: True or false

1.The inventory value shown on the balance sheet is generally higher under absorption
costing than under variable costing.

2. Under variable costing, an increase in the fixed factory overhead will have no
effect on the unit product cost.

3. Under the absorption costing method, a portion of fixed manufacturing overhead

cost is allocated to each unit of product.

4. Contribution margin and gross margin mean the same thing.

2- Choose:
1. Under absorption costing, fixed manufacturing overhead is:
A) carried in a liability account.
B) carried in an asset account.
C) ignored.
D) immediately expensed as a period cost.

3. Gyro Gear Company produces a single product, a special gear used in automatic
transmissions. Each gear sells for $28, and the company produced 540,000 and sells
500,000 gears each year. Unit cost data are presented below:
Variabl Fixe
e d
Direct material........................... $6.00
Direct labor................................ $5.00
 Manufacturing overhead........... $2.00 $7.00
Selling & administrative........... $4.00 $3.00

1- The unit product cost of gears under variable costing is:

A) $13
B) $20
C) $17
D) $27

2- The unit product cost of gears under absorption costing is:

A) $13
B) $20
C) $17
D) $27

3- Calculate the cost of goods sold under variable and absorption costing?
4- Calculate the cost of inventory under variable and absorption costing?

5-Calculate the profit under variable and absorption costing?

4. A company produces a single product. Variable production costs are $12 per unit
and variable selling and administrative expenses are $3 per unit. Fixed
manufacturing overhead totals $36,000 and fixed selling and administration
expenses total $40,000. Assuming a beginning inventory of zero, production of
4,000 units and sales of 3,600 units, the dollar value of the ending inventory under
variable costing would be:
A) $4,800
B) $8,400
C) $6,000
D) $3,600
Answer: A

5. A manufacturing company that produces a single product has provided the

following data concerning its most recent month of operations:

Units in beginning inventory................................. 0

Units produced....................................................... 7,700
Units sold............................................................... 7,500
Units in ending inventory....................................... 200
 Variable costs per unit:
Direct materials................................................... $40
Direct labor......................................................... $34
Variable manufacturing overhead....................... $3
Variable selling and administrative.................... $10

Fixed costs:
$146,30
Fixed manufacturing overhead........................... 0
Fixed selling and administrative......................... $60,000

1-What is the unit product cost for the month under variable costing?
A) $106
B) $87
C) $96
D) $77

Answer: D

2. Recalculate income under both absorption and variable costing systems if units
sold became 9000 units.
3. Reconcile income between the two systems
6. A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:

Selling price............................................... $123

Units in beginning inventory..................... 0

Units produced........................................... 5,900
Units sold................................................... 5,700
Units in ending inventory.......................... 200

Variable costs per unit:

Direct materials...................................... $40
Direct labor............................................. $32
Variable manufacturing overhead..........
Total V.manufacturing= 75 $3
Variable selling and administrative........ $5

Fixed costs:
Fixed manufacturing overhead............... $135,70
Per unit produced= 135700/5900= 23 0
$108,30
Fixed selling and administrative............. 0

Absorption Costing
 Sales (5700 × $123)
Less cost of goods sold:
Beginning inventory
Add COGM (5900 × $75+23)
Goods available for sale
Ending inventory (200 ×
$75+23)
Gross margin
Less selling & admin. exp.
Variable (5700 × $)
Fixed
Net operating income $

Variable Costing
Sales (5900× $123)
Less variable expenses:
Beginning inventory $ -
Add COGM (5900× $75)
Goods available for sale
Less ending inventory (200 ×
$75)
Variable cost of goods sold
Variable selling & administrative
expenses (5700× $5)
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative
expenses
Net operating income

The total gross margin for the month under the absorption costing approach is:
A) $245,100
B) $162,100
C) $142,500
D) $5,700

Answer: C

7. Reconcile income between the two systems.

Reconciliation:
8. Recalculate income under both absorption and variable costing systems if units
sold became 7000 units.
37. A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:

Selling price........................................................... $78

Units in beginning inventory................................. 0

Units produced....................................................... 5,300
Units sold............................................................... 4,900
Units in ending inventory...................................... 400

Variable costs per unit:

Direct materials.................................................. $31
Direct labor......................................................... $14
Variable manufacturing overhead...................... $2
Variable selling and administrative.................... $5

Fixed costs:
Fixed manufacturing overhead........................... $68,900
Fixed selling and administrative......................... $58,800

What is the total period cost for the month under the absorption costing approach?
A) $152,200
B) $83,300
C) $68,900
D) $58,800

Answer: B Level: Easy LO: 1

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

Selling price........................................................... $100

Units in beginning inventory................................. 0

Units produced....................................................... 2,400
Units sold............................................................... 2,100
Units in ending inventory...................................... 300

Variable costs per unit:

Direct materials.................................................. $31
Direct labor......................................................... $11
Variable manufacturing overhead...................... $1
Variable selling and administrative.................... $8

Fixed costs:
Fixed manufacturing overhead........................... $79,200
 Fixed selling and administrative......................... $8,400

What is the total period cost for the month under the absorption costing approach?
A) $79,200
B) $8,400
C) $104,400
D) $25,200