Multiple Choice
Questions
1. Under variable costing, fixed manufacturing
overhead is:
A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process
Inventory.
E. treated in the same manner as variable
manufacturing overhead.
Answer:
A LO: 1 Type: RC
2. All of the following are inventoried under
variable costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. items "C" and "D" above.
Answer:
D LO: 1 Type: RC
3. All of the following are expensed under
variable costing except:
A. variable manufacturing overhead.
B. fixed manufacturing overhead.
C. variable selling and administrative costs.
D. fixed selling and administrative costs.
E. items "C" and "D" above.
Answer:
A LO: 1 Type: RC
4. All of the following costs are inventoried
under absorption costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.
Answer:
E LO: 1 Type: RC
5. All of the following are inventoried under
absorption costing except:
A. direct labor.
B. raw materials used in production.
C. utilities cost consumed in manufacturing.
D. sales commissions.
E. machine lubricant used in production.
Answer:
D LO: 1 Type: N
6. The underlying difference between absorption
costing and variable costing lies in the treatment of:
A. direct labor.
B. variable manufacturing overhead.
C. fixed manufacturing overhead.
D. variable selling and administrative expenses.
E. fixed selling and administrative expenses.
Answer:
C LO: 1 Type: RC
7. Which of the following costs would be treated
differently under absorption costing and variable costing?
|
|
Direct
Labor
|
|
Variable
Manufacturing
Overhead
|
|
Fixed
Administrative
Expenses
|
|
A.
|
Yes
|
|
No
|
|
Yes
|
|
B.
|
Yes
|
|
Yes
|
|
Yes
|
|
C.
|
No
|
|
Yes
|
|
No
|
|
D.
|
No
|
|
No
|
|
Yes
|
|
E.
|
No
|
|
No
|
|
No
|
Answer:
E LO: 1 Type: RC
8. Lone Star has computed the following unit
costs for the year just ended:
|
Direct material used
|
$12
|
|
Direct labor
|
18
|
|
Variable manufacturing
overhead
|
25
|
|
Fixed manufacturing
overhead
|
29
|
|
Variable selling and
administrative cost
|
10
|
|
Fixed selling and
administrative cost
|
17
|
Under
variable costing, each unit of the company's inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. some other amount.
Answer:
B LO: 1 Type: A
9. Prescott Corporation has computed the
following unit costs for the year just ended:
|
Direct material used
|
$18
|
|
Direct labor
|
27
|
|
Variable manufacturing
overhead
|
30
|
|
Fixed manufacturing
overhead
|
32
|
|
Variable selling and
administrative cost
|
9
|
|
Fixed selling and
administrative cost
|
17
|
Under
absorption costing, each unit of the company's inventory would be carried at:
A. $75.
B. $107.
C. $116.
D. $133.
E. some other amount.
Answer:
B LO: 1 Type: A
10. Santa Fe Corporation has computed the
following unit costs for the year just ended:
|
Direct material used
|
$25
|
|
Direct labor
|
19
|
|
Variable manufacturing
overhead
|
35
|
|
Fixed manufacturing
overhead
|
40
|
|
Variable selling and
administrative cost
|
17
|
|
Fixed selling and
administrative cost
|
32
|
Which
of the following choices correctly depicts the per-unit cost of inventory under
variable costing and absorption costing?
|
|
Variable
Costing
|
|
Absorption
Costing
|
|
|
A.
|
$79
|
|
$119
|
|
|
B.
|
$79
|
|
$151
|
|
|
C.
|
$96
|
|
$119
|
|
|
D.
|
$96
|
|
$151
|
|
|
E.
|
Some other combination of
figures not listed above.
|
|||
Answer:
A LO: 1 Type: A
11.
Delaware has
computed the following unit costs for the year just ended:
|
Variable manufacturing cost
|
$85
|
|
Fixed manufacturing cost
|
20
|
|
Variable selling and
administrative cost
|
18
|
|
Fixed selling and
administrative cost
|
11
|
Which
of the following choices correctly depicts the per-unit cost of inventory under
variable costing and absorption costing?
A.
Variable, $85;
absorption, $105.
B.
Variable, $85;
absorption, $116.
C.
Variable, $103;
absorption, $105.
D.
Variable, $103;
absorption, $116.
E.
Some other
combination of figures not listed above.
Answer:
A LO: 1 Type: A
Use the
following to answer questions 12-13:
Indiana Company
incurred the following costs during the past year when planned production and
actual production each totaled 20,000 units:
|
Direct
materials used
|
$280,000
|
|
Direct labor
|
120,000
|
|
Variable
manufacturing overhead
|
160,000
|
|
Fixed
manufacturing overhead
|
100,000
|
|
Variable
selling and administrative costs
|
60,000
|
|
Fixed selling
and administrative costs
|
90,000
|
12. If Indiana uses variable costing, the total
inventoriable costs for the year would be:
A. $400,000.
B. $460,000.
C. $560,000.
D. $620,000.
E. $660,000.
Answer:
C LO: 1 Type: A
13. The per-unit inventoriable cost under
absorption costing is:
A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.
Answer:
D LO: 1 Type: A
14. Consider the following comments about
absorption- and variable-costing income statements:
I.
A
variable-costing income statement discloses a firm's contribution margin.
II.
Cost
of goods sold on an absorption-costing income statement includes fixed costs.
III.
The
amount of variable selling and administrative cost is the same on absorption-
and variable-costing income statements.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
Answer:
E LO: 2, 3 Type: N
15. Roberts, which began business at the start of
the current year, had the following data:
|
Planned and actual
production: 40,000 units
|
|
Sales: 37,000 units at $15
per unit
|
|
Production costs:
|
|
Variable:
$4 per unit
|
|
Fixed:
$260,000
|
|
Selling and administrative
costs:
|
|
Variable:
$1 per unit
|
|
Fixed:
$32,000
|
The
gross margin that the company would disclose on an absorption-costing income
statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
Answer:
C LO: 2 Type: A
16. McAfee, which began business at the start of
the current year, had the following data:
|
Planned and actual
production: 40,000 units
|
|
Sales: 37,000 units at $15
per unit
|
|
Production costs:
|
|
Variable:
$4 per unit
|
|
Fixed:
$260,000
|
|
Selling and administrative
costs:
|
|
Variable:
$1 per unit
|
|
Fixed:
$32,000
|
The
contribution margin that the company would disclose on an absorption-costing
income statement is:
A. $0.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
Answer:
A LO: 2 Type: A
17. Chicago began business at the start of the
current year. The company planned to
produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were:
|
Fixed manufacturing
overhead
|
$150,000
|
|
Fixed selling and
administrative cost
|
100,000
|
|
Variable manufacturing cost
per unit
|
8
|
|
Variable selling and
administrative cost per unit
|
2
|
If
there were no variances, the company's absorption-costing net income would be:
A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
E. some other amount.
Answer:
C LO: 2 Type: A
18. Norton, which began business at the start of
the current year, had the following data:
|
Planned and actual
production: 40,000 units
|
|
|
Sales: 37,000 units at $15
per unit
|
|
|
Production costs:
|
|
|
Variable:
$4 per unit
|
|
|
Fixed:
$260,000
|
|
|
Selling and administrative
costs:
|
|
|
Variable:
$1 per unit
|
|
|
Fixed:
$32,000
|
|
The
contribution margin that the company would disclose on a variable-costing
income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
Answer:
D LO: 3 Type: A
19. Madison began business at the start of the
current year. The company planned to
produce 30,000 units, and actual production conformed to expectations. Sales totaled 28,000 units at $32 each. Costs incurred were:
|
Fixed manufacturing
overhead
|
$150,000
|
|
Fixed selling and
administrative cost
|
90,000
|
|
Variable manufacturing cost
per unit
|
11
|
|
Variable selling and
administrative cost per unit
|
2
|
If
there were no variances, the company's variable-costing net income would be:
A. $270,000.
B. $292,000.
C. $308,000.
D. $532,000.
E. some other amount.
Answer:
B LO: 3 Type: A
20.
The following
data relate to Lobo Corporation for the year just ended:
|
Sales revenue
|
$750,000
|
|
Cost of goods sold:
|
|
|
Variable
portion
|
370,000
|
|
Fixed
portion
|
110,000
|
|
Variable selling and
administrative cost
|
50,000
|
|
Fixed selling and
administrative cost
|
75,000
|
Which of the following statements is correct?
A.
Lobo’s
variable-costing income statement would reveal a gross margin of $270,000.
B. Lobo’s variable costing income statement would reveal
a contribution margin of $330,000.
C. Lobo’s absorption-costing income statement would
reveal a contribution margin of $330,000.
D.
Lobo’s absorption
costing income statement would reveal a gross margin of $330,000.
E.
Lobo’s
absorption-costing income statement would reveal a gross margin of $145,000.
Answer:
B LO: 2, 3 Type: A
Use the
following to answer questions 21-22:
Franz began
business at the start of this year and had the following costs: variable
manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable
selling and administrative costs per unit, $2; and fixed selling and
administrative costs, $220,000. The
company sells its units for $45 each.
Additional data follow.
|
Planned
production in units
|
10,000
|
|
Actual
production in units
|
10,000
|
|
Number of
units sold
|
8,500
|
There were
no variances.
21. The net income (loss) under absorption
costing is:
A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.
Answer:
D LO: 2 Type: A
22. The net income (loss) under variable costing
is:
A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.
Answer:
B LO: 3 Type: A
23. Income reported under absorption costing and
variable costing is:
A. always the same.
B. typically different.
C. always higher under absorption costing.
D. always higher under variable costing.
E. always the same or higher under absorption
costing.
Answer:
B LO: 4 Type: RC
24. Gomez's inventory increased during the
year. On the basis of this information,
income reported under absorption costing:
A. will be the same as that reported under
variable costing.
B. will be higher than that reported under
variable costing.
C. will be lower than that reported under
variable costing.
D. will differ from that reported under variable
costing, the direction of which cannot be determined from the information
given.
E. will be less than that reported in the
previous period.
Answer:
B LO: 4 Type: N
25. Which of the following conditions would cause
absorption-costing net income to be lower than variable-costing net income?
A. Units sold exceeded units produced.
B. Units sold equaled units produced.
C. Units sold were less than units produced.
D. Sales prices decreased.
E. Selling expenses increased.
Answer:
A LO: 4 Type: N
26. Which of the following situations would cause
variable-costing net income to be lower than absorption-costing net income?
A. Units sold equaled 39,000 and units produced
equaled 42,000.
B. Units sold and units produced were both
42,000.
C. Units sold equaled 55,000 and units produced
equaled 49,000.
D. Sales prices decreased by $7 per unit during
the accounting period.
E. Selling expenses increased by 10% during the
accounting period.
Answer:
A LO: 4 Type: N
27. Consider the following statements about
absorption- and variable-costing net income:
I.
Yearly
income reported under absorption costing will differ from income reported under
variable costing if production and sales volumes differ.
II.
Long-run,
total income reported under absorption costing will often be close to that
reported under variable costing.
III.
Differences
in income under absorption and variable costing can often be reconciled by
multiplying the change in inventory (in units) by the variable manufacturing
overhead cost per unit.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
Answer:
D LO: 4 Type: RC
28. Which of the following formulas can often
reconcile the difference between absorption- and variable-costing net income?
A. Change in inventory units x predetermined
variable-overhead rate per unit.
B. Change in inventory units ÷ predetermined
variable-overhead rate per unit.
C. Change in inventory units x predetermined
fixed-overhead rate per unit.
D. Change in inventory units ÷ predetermined
fixed-overhead rate per unit.
E. (Absorption-costing net income -
variable-costing net income) x fixed-overhead rate per unit.
Answer:
C LO: 4 Type: RC
29. Monex reported $65,000 of net income for the
year by using absorption costing. The
company had no beginning inventory, planned and actual production of 20,000
units, and sales of 18,000 units.
Standard variable manufacturing costs were $20 per unit, and total
budgeted fixed manufacturing overhead was $100,000. If there were no variances, net income under
variable costing would be:
A. $15,000.
B. $55,000.
C. $65,000.
D. $75,000.
E. $115,000.
Answer:
B LO: 4 Type: A
30. Canyon reported $106,000 of net income for
the year by using variable costing. The
company had no beginning inventory, planned and actual production of 50,000
units, and sales of 47,000 units.
Standard variable manufacturing costs were $15 per unit, and total
budgeted fixed manufacturing overhead was $150,000. If there were no variances, net income under
absorption costing would be:
A. $52,000.
B. $97,000.
C. $106,000.
D. $115,000.
E. $160,000.
Answer:
D LO: 4 Type: A
31. Consider the following statements about
absorption costing and variable costing:
I.
Variable
costing is consistent with contribution reporting and cost-volume-profit
analysis.
II.
Absorption
costing must be used for external financial reporting.
III.
A
number of companies use both absorption costing and variable costing.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.
Answer:
E LO: 5, 6 Type: RC
32. Consider the following statements about
absorption costing and variable costing:
I.
Variable
costing is consistent with contribution reporting and cost-volume-profit analysis.
II.
Variable
costing must be used for external financial reporting.
III.
A
number of companies use both absorption costing and variable costing.
Which
of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.
Answer:
E LO: 5, 6 Type: RC
33. For external-reporting purposes, generally
accepted accounting principles require that net income be based on:
A. absorption costing.
B. variable costing.
C. direct costing.
D. semivariable costing.
E. activity-based costing.
Answer:
A LO: 6 Type: RC
34. Under throughput costing, the cost of a unit
typically includes:
A. selling costs.
B. fixed manufacturing overhead.
C. the direct costs incurred whenever a unit is
manufactured.
D. administrative costs.
E. all of the above.
Answer:
C LO: 7 Type: RC
35. Which of the following methods defines
product cost as the unit-level cost incurred each time a unit is manufactured?
A. Throughput costing.
B. Indirect costing.
C. Process costing.
D. Absorption costing.
E. Back-flush costing.
Answer:
A LO: 7 Type: RC
36. Orion's management recently committed to
incurring direct labor and all manufacturing overhead charges regardless of the
number of units produced. Under
throughput costing, the company's cost of goods sold would include charges for:
A. selling and administrative costs.
B. direct materials.
C. direct labor and manufacturing overhead.
D. direct materials, direct labor, and
manufacturing overhead.
E. direct materials, direct labor,
manufacturing overhead, and selling and administrative costs.
Answer:
B LO: 8 Type: N
37. Highline Company reported the following costs
for the year just ended:
|
Throughput manufacturing
costs
|
$180,000
|
|
Non-throughput
manufacturing costs
|
600,000
|
|
Selling and administrative
costs
|
125,000
|
If
Highline uses throughput costing and had sales revenues for the period of $950,000,
which of the following choices correctly depicts the company's cost of goods
sold and net income?
|
|
Cost of
Goods
Sold
|
|
Net
Income
|
|
|
A.
|
$180,000
|
|
$45,000
|
|
|
B.
|
$180,000
|
|
$645,000
|
|
|
C.
|
$305,000
|
|
$45,000
|
|
|
D.
|
$305,000
|
|
$645,000
|
|
|
E.
|
Some other combination of
figures not listed above.
|
|||
Answer:
A LO: 8 Type: A
38. The fixed-overhead volume variance under
variable costing:
A. coincides with the fixed manufacturing
overhead that was applied to production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget
variance.
E. must be unfavorable.
Answer:
C LO: 9 Type: RC
39. Which of the following differs between
absorption costing and variable costing?
A. The number of units produced.
B. The fixed-overhead volume variance.
C. Sales revenues.
D. The treatment of variable manufacturing
overhead.
E. Income tax rates.
Answer:
B LO: 9 Type: RC
EXERCISES
Characteristics of
Absorption Costing and Variable Costing
40.
Consider the
statements that follow.
1. Variable
selling costs are expensed when incurred.
2. The income
statement discloses a company’s contribution margin.
3. Fixed
manufacturing overhead is attached to each unit produced.
4. Direct labor
becomes part of a unit’s cost.
5. Sales
revenue minus cost of goods sold equals contribution margin.
6. This method
must be used for external financial reporting.
7. Fixed
selling and administrative expenses are treated in the same manner as fixed
manufacturing overhead.
8. This method
is sometimes called full costing.
9. This method
requires the calculation of a fixed manufacturing cost per unit.
Required:
Determine which of the nine statements:
A.
Relate only to
absorption costing.
B.
Relate only to
variable costing.
C.
Relate to both
absorption costing and variable costing.
D.
Relate to neither
absorption costing nor variable costing.
LO: 1, 2, 3, 6
Type: RC, N
Answer:
A. 3, 6, 8, 9
B. 2, 7
C. 1, 4
D. 5
Miscellaneous
Calculations: Variable and Absorption Costing
41. Information taken from Grille Corporation's
May accounting records follows.
|
Direct
materials used
|
$150,000
|
|
Direct labor
|
80,000
|
|
Variable
manufacturing overhead
|
30,000
|
|
Fixed
manufacturing overhead
|
100,000
|
|
Variable
selling and administrative costs
|
51,000
|
|
Fixed selling
and administrative costs
|
60,000
|
|
Sales
revenues
|
625,000
|
Required:
A. Assuming the use of variable costing,
compute the inventoriable costs for the month.
B. Compute the month's inventoriable costs by
using absorption costing.
C. Assume that anticipated and actual
production totaled 20,000 units, and that 18,000 units were sold during May. Determine the amount of fixed manufacturing
overhead and fixed selling and administrative costs that would be expensed for
the month under (1) variable costing and (2) absorption costing.
D. Assume the same data as in requirement "C." Compute the contribution margin that would be
reported on a variable-costing income statement.
LO: 1, 2,
3 Type: A
Answer:
|
A.
|
Direct
materials used
|
$150,000
|
||
|
|
Direct labor
|
80,000
|
||
|
|
Variable
manufacturing overhead
|
30,000
|
||
|
|
Total
|
$260,000
|
||
|
B.
|
Direct
materials used
|
$150,000
|
||
|
|
Direct labor
|
80,000
|
||
|
|
Variable
manufacturing overhead
|
30,000
|
||
|
|
Fixed
manufacturing overhead
|
100,000
|
||
|
|
Total
|
$360,000
|
||
|
C.
|
1.
|
Fixed
manufacturing overhead: $100,000
Fixed selling
and administrative costs: $60,000
|
||
|
|
2.
|
Fixed
manufacturing overhead: ($100,000 ÷ 20,000 units) x 18,000 units = $90,000
Fixed selling
and administrative costs: $60,000
|
||
|
D.
|
Variable
manufacturing costs: $150,000 + $80,000 + $30,000 = $260,000
Variable
manufacturing costs per unit: $260,000 ÷ 20,000 units = $13
Contribution
margin: $625,000 - [(18,000 x $13) + $51,000]
= $340,000
|
|||
Miscellaneous Calculations:
Variable and Absorption Costing
42. Sosa, Inc., began operations at the start of
the current year, having a production target of 60,000 units. Actual production totaled 60,000 units, and
the company sold 90% of its manufacturing output at $55 per unit. The following costs were incurred:
|
Manufacturing:
|
|
|
Direct
materials used
|
$300,000
|
|
Direct
labor
|
420,000
|
|
Variable
manufacturing overhead
|
360,000
|
|
Fixed
manufacturing overhead
|
600,000
|
|
Selling and administrative:
|
|
|
Variable
|
120,000
|
|
Fixed
|
630,000
|
Required:
A.
Assuming
the use of variable costing, compute the cost of Sosa's ending finished-goods
inventory.
B.
Compute
the company's contribution margin. Would
Sosa disclose the contribution margin on a variable-costing income statement or
an absorption-costing income statement?
C.
Assuming
the use of absorption costing, how much fixed selling and administrative cost
would Sosa include in the ending finished-goods inventory?
D.
Compute
the company's gross margin.
LO: 1, 2,
3 Type: RC, A
Answer:
|
A.
|
Variable production costs
total $1,080,000 ($300,000 + $420,000 + $360,000), or $18 per unit
($1,080,000 ÷ 60,000 units). Since
6,000 units remain in inventory [0 + 60,000 - (60,000 x 90%)], the ending
finished goods totals $108,000 (6,000 x $18).
|
|||||
|
B.
|
Sales revenue (60,000 units
x 90% x $55)
|
|
$2,970,000
|
|||
|
|
Less: Variable cost of
goods sold
|
|
|
|||
|
|
(60,000
units x 90% x $18)
|
$972,000
|
|
|||
|
|
Variable
selling and administrative
|
120,000
|
1,092,000
|
|||
|
|
Contribution margin
|
|
$1,878,000
|
|||
|
|
The contribution margin is
disclosed on a variable-costing income statement.
|
|||||
|
C.
|
None. All fixed selling and administrative cost
is treated as a period cost and expensed against revenue.
|
|||||
|
D.
|
The cost of a unit would
increase by $10 ($600,000 ÷ 60,000 units) because of the addition of fixed
manufacturing overhead. Thus:
|
|||||
|
|
Sales
revenue
|
$2,970,000
|
||||
|
|
Cost
of goods sold (60,000 units x 90% x $28)
|
1,512,000
|
||||
|
|
Gross
margin
|
$1,458,000
|
||||
Absorption-
and Variable-Costing Income Calculations
43. The following data relate to Venture Company,
a new corporation, during a period when the firm produced and sold 100,000
units and 90,000 units, respectively:
|
Direct
materials used
|
$400,000
|
|
Direct labor
|
200,000
|
|
Fixed
manufacturing overhead
|
250,000
|
|
Variable
manufacturing overhead
|
120,000
|
|
Fixed selling
and administrative expenses
|
300,000
|
|
Variable
selling and administrative expenses
|
45,000
|
The
company met its original planned production target of 100,000 units. There were no variances during the period,
and the firm's selling price is $15 per unit.
Required:
A.
What
is the cost of Venture's end-of-period finished-goods inventory under the
variable-costing method?
B.
Calculate
the company's variable-costing net income.
C.
Calculate
the company's absorption-costing net income.
LO: 1, 2,
3 Type: A
Answer:
|
A.
|
Ending
finished-goods inventory (units): 0 + 100,000 - 90,000 = 10,000
Inventoriable
costs under variable costing:
|
||||||||
|
|
Direct
materials used
|
$400,000
|
|||||||
|
|
Direct
labor
|
200,000
|
|||||||
|
|
Variable
manufacturing overhead
|
120,000
|
|||||||
|
|
Total
|
$720,000
|
|||||||
|
|
Variable cost per unit produced: $720,000 ÷ 100,000
units = $7.20 per unit
Ending
inventory: 10,000 units x $7.20 = $72,000
|
||||||||
|
B.
|
Sales revenue
(90,000 units x $15)
|
$1,350,000
|
|||||||
|
|
Less:
Variable costs [(90,000 units x $7.20) + $45,000]
|
693,000
|
|||||||
|
|
Contribution
margin
|
$ 657,000
|
|||||||
|
|
Less: Fixed
costs ($250,000 + $300,000)
|
550,000
|
|||||||
|
|
Net income
|
$ 107,000
|
|||||||
|
C.
|
Predetermined
fixed overhead rate: $250,000 ÷ 100,000 units = $2.50
Absorption
cost per unit: $7.20 + $2.50 = $9.70
|
||||||||
|
|
Sales
revenue (90,000 units x $15)
|
$1,350,000
|
|||||||
|
|
Less:
Cost of goods sold (90,000 units x $9.70)
|
873,000
|
|||||||
|
|
Gross
margin
|
$
477,000
|
|||||||
|
|
Less: Operating costs ($300,000 + $45,000)
|
345,000
|
|||||||
|
|
Net income
|
$ 132,000
|
|||||||
Absorption-
and Variable-Costing Inventory/Income Calculations
44. The following data relate to Hunter, Inc., a
new company:
|
Planned and actual
production
|
200,000 units
|
|
Sales at $48 per unit
|
170,000 units
|
|
Manufacturing costs:
|
|
|
Variable
|
$18 per unit
|
|
Fixed
|
$840,000
|
|
Selling and administrative
costs:
|
|
|
Variable
|
$7 per unit
|
|
Fixed
|
$925,000
|
There
were no variances during the period.
Required:
A.
Determine
the number of units in the ending finished-goods inventory.
B.
Calculate
the cost of the ending finished-goods inventory under (1) variable costing and
(2) absorption costing.
C.
Determine
the company's variable-costing net income.
D.
Determine
the company's absorption-costing net income.
LO: 1, 2,
3 Type: A
Answer:
|
A.
|
Ending
finished-goods inventory: 0 + 200,000 - 170,000 = 30,000 units
|
|||
|
B.
|
Variable
costing: 30,000 units x $18 = $540,000
Absorption
costing:
|
|
||
|
|
Predetermined
fixed overhead rate: $840,000 ÷ 200,000 units = $4.20;
30,000
units x ($18.00 + $4.20) = $666,000
|
|||
|
C.
|
Sales revenue (170,000
units x $48)
|
$8,160,000
|
||
|
|
Less: Variable costs [170,000
units x ($18 + $7)]
|
4,250,000
|
||
|
|
Contribution margin
|
$3,910,000
|
||
|
|
Less: Fixed costs ($840,000
+ $925,000)
|
1,765,000
|
||
|
|
Net income
|
$2,145,000
|
||
|
D.
|
Sales revenue (170,000
units x $48)
|
$8,160,000
|
||
|
|
Less: Cost of goods sold [170,000
units x ($18.00 + $4.20)]
|
3,774,000
|
||
|
|
Gross margin
|
$4,386,000
|
||
|
|
Less: Operating costs [(170,000
units x $7) + $925,000]
|
2,115,000
|
||
|
|
Net income
|
$2,271,000
|
||
Conversion
of Absorption-Cost Data to Variable-Cost Data; Working Backwards
45. Kim, Inc., began business at the start of the
current year and maintains its accounting records on an absorption-cost
basis. The following selected
information appeared on the company's income statement and end-of-year balance
sheet:
|
Income-statement data:
|
||
|
Sales
revenues (35,000 units x $22)
|
$770,000
|
|
|
Gross
margin
|
210,000
|
|
|
Total
sales and administrative expenses
|
160,000
|
|
|
Balance-sheet data:
|
||
|
Ending
finished-goods inventory (12,000 units)
|
192,000
|
|
Kim
achieved its planned production level for the year. The company's fixed manufacturing overhead
totaled $141,000, and the firm paid a 10% commission based on gross sales
dollars to its sales force.
Required:
A.
How
many units did Kim plan to produce during the year.
B.
How
much fixed manufacturing overhead did the company apply to each unit produced?
C.
Compute
Kim's cost of goods sold.
D.
How
much variable cost did the company attach to each unit manufactured?
LO: 1, 2,
3 Type: A, N
Answer:
|
A.
|
Sales (35,000 units) +
ending finished-goods inventory (12,000 units) = production (47,000
units). Note: There is no beginning
finished-goods inventory.
|
|||||
|
B.
|
Since planned and actual
production figures are the same, Kim applied $3 to each unit ($141,000 ÷
47,000 units).
|
|||||
|
C.
|
Sales revenue
|
$770,000
|
||||
|
|
Gross margin
|
210,000
|
||||
|
|
Cost of goods sold
|
$560,000
|
||||
|
D.
|
Kim attached $13 to each
unit. This figure can be derived by
analyzing cost of goods sold:
|
|||||
|
|
Cost
of goods sold
|
$560,000
|
||||
|
|
Fixed
cost in cost of goods sold (35,000 units x $3)
|
105,000
|
||||
|
|
Variable
cost of goods sold
|
$455,000
|
||||
|
|
$455,000
÷ 35,000 units = $13
|
|
||||
|
|
The same $13 figure can be
obtained by studying the ending finished-good inventory:
|
|||||
|
|
Ending
finished-goods inventory
|
$192,000
|
||||
|
|
Fixed
cost (12,000 units x $3)
|
36,000
|
||||
|
|
Variable
cost
|
$156,000
|
||||
|
|
$156,000
÷ 12,000 units = $13
|
|||||
Reconciliation
of Absorption- and Variable-Costing Income
46. Houston Company has per-unit fixed and
variable manufacturing costs of $40 and $15, respectively. Variable selling and administrative costs are
$9 per unit. Consider the two cases that
follow for the firm.
Case A: Variable-costing net income, $110,000; sales, 6,000 units;
production, 6,000 units
Case B:
Variable-costing net income, $178,000; sales, 7,500 units; production, 7,100
units
Required:
A.
From
a product-costing perspective, what is the basic difference between absorption
costing and variable costing?
B.
Compute
Houston's absorption-costing net income in Case A.
C.
Compute
Houston's absorption-costing net income in Case B.
LO: 1,
4 Type: RC, A
Answer:
A.
The
difference between absorption costing and variable costing lies in the
treatment of fixed manufacturing overhead.
Under absorption costing, fixed manufacturing overhead is a product cost
and attached to each unit produced. In
contrast, under variable costing, it is written off (expensed) as a period
cost.
B.
Since
the number of units sold equals the number of units produced, variable- and
absorption-income figures are the same: $110,000.
C.
With
sales of 7,500 units and production of 7,100 units, income computed under
absorption costing includes $16,000 (400 units x $40) of prior-period fixed
manufacturing overhead. Absorption
income is therefore $162,000 ($178,000 - $16,000).
Reconciliation of
Absorption- and Variable-Costing Income
47.
Beachcraft
Corporation has fixed manufacturing cost of $12 per unit. Consider the three independent cases that
follow.
Case A:
Absorption- and variable costing net income each totaled $240,000 in a period
when the firm produced 18,000 units.
Case B: Absorption-costing
net income totaled $320,000 in a period when finished-goods inventory levels
rose by 7,000 units.
Case C: Absorption-costing net income
and variable-costing net income respectively totaled $220,000 and $250,000 in a
period when the beginning finished-goods inventory was 14,000 units.
Required:
A.
In Case A, how
many units were sold during the period?
B.
In Case B, how
much income would Beachcraft report under variable costing?
C.
In Case C, how
many units were in the ending finished-goods inventory?
LO: 4 Type: A
Answer:
A.
Absorption- and
variable costing income will be the same amount when inventory levels are
unchanged. Thus, sales totaled 18,000
units.
B.
The difference
between absorption-costing income and variable-costing income is $84,000 (7,000
units x $12). Given that inventories are
rising, variable-costing net income will amount to $236,000 ($320,000 -
$84,000).
C.
The $30,000
difference in income ($250,000 - $220,000) is explained by the change in
inventory units, multiplied by the fixed overhead per unit. Thus, the inventory changed by 2,500 units
($30,000 ÷ $12). Given that absorption
income is less than income computed by the variable-costing method, inventory
levels must have decreased, resulting in an ending inventory level of 11,500
units (14,000 - 2,500).
Throughput
Costing, Absorption Costing, Variable Costing
48. Coastal Corporation, which uses throughput
costing, began operations at the start of the current year. Planned and actual production equaled 20,000
units, and sales totaled 17,500 units at $95 per unit. Cost data for the year were as follows:
Direct materials (per unit)
|
$ 18
|
|
Conversion cost:
|
|
|
Direct labor
|
160,000
|
|
Variable manufacturing overhead
|
280,000
|
|
Fixed manufacturing overhead
|
340,000
|
|
Selling and administrative
costs (total)
|
430,000
|
The
company classifies direct materials as a throughput cost.
Required:
A.
Compute
the company's total cost for the year.
B.
How
much of this cost would be held in year-end inventory under (1) absorption
costing, (2) variable costing, and (3) throughput costing?
C.
How
much of the company's total cost for the year would appear on the period's
income statement under (1) absorption costing, (2) variable costing, and (3)
throughput costing?
D.
Compute
the year's throughput-costing net income.
LO: 1, 2,
3, 7 Type: A, N
Answer:
|
A.
|
Direct materials (20,000 units x $18)
|
$ 360,000
|
||
|
|
Direct labor
|
160,000
|
||
|
|
Variable manufacturing overhead
|
280,000
|
||
|
|
Fixed manufacturing overhead
|
340,000
|
||
|
|
Selling and administrative costs
|
430,000
|
||
|
|
Total
|
$1,570,000
|
||
|
B.
|
The year-end inventory of 2,500 units (20,000 -
17,500) is costed as follows:
|
|||
|
|
|
Absorption
Costing
|
Variable
Costing
|
Throughput
Costing
|
|
|
Direct materials
|
$ 360,000
|
$360,000
|
$360,000
|
|
|
Direct labor
|
160,000
|
160,000
|
|
|
|
Variable manufacturing overhead
|
280,000
|
280,000
|
|
|
|
Fixed manufacturing overhead
|
340,000
|
|
|
|
|
Total
product cost
|
$1,140,000
|
$800,000
|
$360,000
|
|
|
Cost per unit (Total ÷ 20,000 units)
|
$57
|
$40
|
$18
|
|
|
Year-end inventory (2,500 units x cost per unit)
|
$142,500
|
$100,000
|
$45,000
|
|
C.
|
The total
costs would be allocated between the current period's income statement and
the year-end inventory on the balance sheet.
Thus:
|
|
|
|
Absorption costing: $1,570,000 - $142,500 = $1,427,500
|
|
|
|
Variable costing: $1,570,000 - $100,000 = $1,470,000
|
|
|
|
Throughput costing: $1,570,000 - $45,000 = $1,525,000
|
|
|
D.
|
Throughput
income: Sales revenue (17,500 units x $95) - $1,525,000 = $137,500
|
|
Throughput
Costing
49. Krell Corporation, which uses throughput
costing, began operations at the start of the current year (20x1). Planned and actual production equaled 40,000
units, and sales totaled 35,000 units at $80 per unit. Cost data for 20x1 were as follows:
Direct materials (per unit)
|
$ 20
|
|
Conversion cost:
|
|
|
Direct
labor
|
215,000
|
|
Variable
manufacturing overhead
|
340,000
|
|
Fixed
manufacturing overhead
|
528,000
|
|
Selling and administrative
costs:
|
|
|
Variable
(per unit)
|
8
|
|
Fixed
|
220,000
|
The
company classifies direct materials as a throughput cost.
Required:
A.
What
is meant by the term "throughput costing"?
B.
Compute
the cost of the company's year-end inventory.
C.
Prepare
Krell's income statement for the year.
LO: 1, 7 Type: RC, A
Answer:
|
A.
|
Throughput
costing is a technique that assigns only the unit-level spending amounts for
direct costs as the cost of products or services. In this case, direct materials is the only
item that qualifies as a throughput cost.
|
||
|
B.
|
Ending
inventory: 0 + 40,000 units - 35,000 units = 5,000 units; 5,000 units x $20 =
$100,000
|
||
|
C.
|
Krell
Corporation
Throughput-Costing
Income Statement
For the Year Ended December
31, 20x1
|
||
|
|
Sales revenue (35,000 units x $80)
|
$2,800,000
|
|
|
|
Less: Cost of goods sold (35,000 units x $20)
|
700,000
|
|
|
|
Gross margin
|
$2,100,000
|
|
|
|
Less: Operating costs
|
|
|
|
|
Direct labor
|
$ 215,000
|
|
|
|
Variable manufacturing overhead
|
340,000
|
|
|
|
Fixed manufacturing overhead
|
528,000
|
|
|
|
Variable selling and administrative costs (35,000
units x $8)
|
280,000
|
|
|
|
Fixed selling and administrative costs
|
220,000
|
|
|
|
Total
operating costs
|
$1,583,000
|
|
|
|
Net income
|
$ 517,000
|
|
Variable-
and Absorption-Costing Income Statements, Volume Variance
50. Outdoors Company manufactures sleeping bags
that sell for $30 each. The variable
standard costs of production are $19.50.
Budgeted fixed manufacturing overhead is $100,000, and budgeted
production is 10,000 sleeping bags. The
company actually manufactured 12,500 bags, of which 11,000 were sold. There were no variances during the year
except for the fixed-overhead volume variance.
Variable selling and administrative costs are $0.50 per sleeping bag
sold; fixed selling and administrative costs are $5,000.
Required:
A.
Calculate
the standard product cost per sleeping bag under absorption costing and
variable costing.
B.
Compute
the fixed-overhead volume variance.
C.
Prepare
income statements for the year by using absorption costing and variable
costing.
LO: 2, 3,
9 Type: A
Answer:
|
A.
|
The
absorption cost is $29.50 [$19.50 + ($100,000 ¸ 10,000 units)], and the variable cost
is $19.50.
|
||||||
|
B.
|
Volume
variance = budgeted fixed overhead - fixed overhead applied
|
||||||
|
|
= $100,000 - (12,500 units x $10)
|
||||||
|
|
= $(25,000) or $25,000F
|
||||||
|
C.
|
Outdoors Company
Absorption-Costing Income Statement
For the Year Ended December 31, 20xx
|
||||||
|
|
Sales revenue
(11,000 units x $30)
|
$330,000
|
|||||
|
|
Less: Cost of
goods sold (11,000 units x $29.50)
|
324,500
|
|||||
|
|
Gross margin
(at standard)
|
$ 5,500
|
|||||
|
|
Add:
Fixed-overhead volume variance
|
25,000
|
|||||
|
|
Gross margin
(at actual)
|
$ 30,500
|
|||||
|
|
Less:
Operating expenses [(11,000 units x $0.50) + $5,000]
|
10,500
|
|||||
|
|
Net income
|
$ 20,000
|
|||||
|
|
Outdoors
Company
Variable-Costing
Income Statement
For the Year Ended December 31, 20xx
|
||||||
|
|
Sales revenue
(11,000 units x $30)
|
|
|
$330,000
|
|||
|
|
Less:
Var. cost of goods sold (11,000 units x $19.50)
|
$214,500
|
|
|
|||
|
|
Var. operating expenses (11,000 units
x $0.50)
|
5,500
|
|
220,000
|
|||
|
|
Contribution
margin
|
|
|
$110,000
|
|||
|
|
Less: Fixed
costs ($100,000 + $5,000)
|
|
|
105,000
|
|||
|
|
Net income
|
|
|
$ 5,000
|
|||
DISCUSSION
QUESTIONS
Absorption
Costing, Variable Costing, and Terminology
51. Absorption and variable costing are two
different methods of measuring income and costing inventory.
Required:
A.
Product
costs are defined as costs associated with the manufacturing process. How does the operational definition of
product cost differ between absorption costing and variable costing?
B.
An
absorption-costing income statement will report gross profit or gross margin
whereas a variable-costing income statement will report contribution
margin. What is the difference between
these terms?
C.
BoSan,
Inc., has greatly modified its manufacturing process to reduce non-value-added
activities and has also adopted the just-in-time philosophy. As a result, the average finished-goods
inventory has dropped from six weeks' supply to eight business days'
supply. In view of these changes, will
the difference in operating income between variable costing and absorption
costing be greater or less than in the past?
Explain.
LO: 1, 2,
3, 6 Type: RC, N
Answer:
A.
The
sole difference between the two methods is that fixed manufacturing overhead
costs are defined as a product cost under absorption costing and as a period
cost under variable costing.
B. Gross profit (gross margin) is the
difference between sales and cost of goods sold. Cost of goods sold includes variable and
fixed manufacturing costs. Contribution
margin, on the other hand, is the difference between sales and variable
expenses, namely, variable cost of goods sold and variable operating
expenses. Fixed costs are ignored when
calculating the contribution margin.
C. These changes should reduce the
differences in operating income between absorption costing and variable costing. Inventories of work-in-process and finished
goods are much smaller than previously; thus, changes in inventories will be
much less significant, which reduces differences in income.
Reconciliation of
Absorption- and Variable-Costing Income
52. The difference in net income between
absorption and variable costing can be explained by the change in
finished-goods inventory (in units) multiplied by the standard fixed
manufacturing overhead rate.
Required:
Explain
why this calculation accounts for the difference noted.
LO: 4 Type: RC
Answer:
The only
difference between the two methods is the treatment of fixed manufacturing
overhead. Such amounts are expensed
under variable costing whereas with absorption costing, a predetermined amount
is attached to each unit manufactured.
This applied overhead moves back and forth between the balance sheet and
the income statement depending on what happens to inventory during the period
(i.e., increase or decrease). Because of
this situation, the change in inventory multiplied by the fixed manufacturing
overhead per unit corresponds with the difference in reported income between
absorption costing and variable costing.
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