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THEORY To apply direct costing method it is necessary that you know a. Standard production rate and times of production elements b. Contribution margin and break-even point in production c. Variable and fixed cost related to production d. Controllable and uncontrollable cost of production The follow...

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THEORY 1. To apply direct costing method it is necessary that you know a. Standard production rate and times of production elements b. Contribution margin and break-even point in production c. Variable and fixed cost related to production d. Controllable and uncontrollable cost of production 2. The following statements about the adoption of variable costing are true, except: a. All fixed manufacturing costs are recognized as period costs b. A direct cost may not become a product cost c. It is an acceptable method for general reporting purposes d. An indirect cost may be assigned as part of product cost 3. 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. Finished goods inventory level multiplied by the unit sales price. c. Unit sales level multiplied by a constant unit contribution margin. d. Finished goods inventory level multiplied by a constant unit contribution margin. 4. Which of the following is NOT an advantage of using variable costing for internal reporting purposes? a. Fixed costs are reported at incurred values, not absorbed values, thus improving control over those costs. b. Profits are directly influenced by changes in sales volume. c. The impact of fixed costs on profits is emphasized. d. Total costs may be overlooked when evaluating profits. 5. 6. A cost that is included as part of product costs under both absorption costing and direct costing is: a. Managerial staff costs b. Insurance c. Variable marketing expenses d. Taxes on factory building e. Variable materials handling labor 7. Under variable costing, a. All product costs are variable. b. All period costs are variable c. All product costs are fixed d. Product costs are both fixed and variable. 8. Which of the following is not associated with absorption costing? a. Functional format b. Gross margin c. Period costs d. Contribution margin 9. Calculating income under variable costing does NOT require knowing

a. Unit sales b. Selling price c. Unit variable manufacturing costs d. Unit production (because it is unit sold) 10. A criticism of variable costing for managerial accounting purposes is that it a. Is not acceptable for product line segmented reporting b. Does not reflect cost-volume-profit relationships c. Overstates inventories d. Might encourage managers to emphasize the short term at the expense of the long term 11. All of the following are names for the product costing method in which both fixed and variable costs are included in overhead rates, except: a. Absorption costing b. Conventional costing c. Direct costing d. Full costing 12. Under the variable-costing concept, unit product cost would most likely be increased by a. A decrease in the remaining useful life of factory machinery depreciated on the units-of-production method (the production decreases because of the old machines so that the unit product cost will increase) b. A decrease in the number of units produced c. An increase in the remaining useful life of factory machinery depreciated on the sumof-the-year’s digits method d. An increase in the commission paid to salesman for each unit sold. 13. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the a. Work-in-process account b. Finished goods inventory account c. Cost of Goods Sold d. Period costs 14. If unit costs remain unchanged and sales volume and sales price per unit both increase from the preceding period when operating profits were earned, operating profits must a. Increase under the absorption costing method b. Increase under the variable costing method c. Decrease under the absorption costing method d. Decrease under the variable costing method 15. 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 16. 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 17. A firm presently has total sales of $100,000. If its sales rise, its A. Net income based on variable costing will go up more than its net income based on absorption costing B. Net income based on absorption costing will go up more than its net income based on variable costing C. Fixed costs will also rise D. Per unit variable costs will rise 18. Both Company Y and Company Z produce similar products that need negligible distribution costs. Their assets operation and accounting are very similar in all respects except that Company Y uses direct costing and Company Z uses absorption costing. a. Co. Y would report a higher inventory value than Co. Z for the years in which production exceeds sales b. Co. Y would report a higher inventory value than Co. Z for the years in which production exceeds the normal or practical capacity c. Co. Z would report a higher inventory value than Co. Y for the years in which production exceeds sales d. Co. Z would report a higher net income than Co. Y for the years in which production equals sales 19. 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 number of units manufactured b. Profits fluctuate with sales c. An idle facility variation is calculated d. Product costs include variable administrative costs 20. 21. A company’s net income recently increased by 30% while its inventory increased to equal a full year’s sales requirements. Which of the following accounting methods would be most likely to produce the favorable income results? a. Absorption costing b. Direct costing c. Variable costing d. Standard direct costing

22. Unabsorbed fixed overhead costs in an absorption costing system are a. Fixed manufacturing costs not allocated to units produced b. Variable overhead costs not allocated to units produced c. Excess variable overhead costs d. Costs that cannot be controlled 23. When a firm prepares financial reports by using absorption costing a. Profits will always increase with increases in sales b. Profits may decrease with increased sales even if there is no change in selling prices and costs c. Decreased output and constant sales result in increased profits d. Profits will always decrease with decreases in sales 24. Variable costing and absorption costing will show the same incomes when there are a. Beginning inventories b. Ending inventories c. Variable costs d. Beginning and ending inventories 25. Absorption costing differs from variable costing in that a. Standards can be used with absorption costing, but not with variable costing b. Absorption costing inventories are more correctly valued c. Production influences income under absorption costing, but not under variable costing d. Companies using absorption costing have lower fixed costs.

PROBLEM 1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single product in 2000, its first year of operations. Variable manufacturing costs were P30 per unit of product. Planned and actual fixed manufacturing costs were P600,000, and marketing and administrative costs totaled P400,000 in 2000. MNO sold 120,000 units of product in 2000 at a selling price of P40 per unit. What is the cost of the ending inventory assuming variable costing is used? a. P2,400,000 b. P2,750,000 c. P2,250,000 d. P2,640,000 Solution: Units Produced Less: Units Sold Ending Inventory Multiply: Unit Product Cost Cost of Ending Inventory

$

200,000 120,000 $ 80,000 30 $ 2,400,000

2. West Co.’s 1988 manufacturing costs were as follows: Direct materials and direct labor $700,000 Other variable manufacturing costs 100,000 Depreciation of factory bldg and mfg equip 80,000 Other fixed manufacturing overhead 18,000 What amount should be considered product cost for external reporting purposes? a. $700,000 b. $800,000 c. $880,000 d. $898,000 3. 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 $90 and $20, respectively. If Killo uses absorption costing rather than direct (variable) costing, the result would be a higher pretax income of a. $20,000 b. $70,000 c. $0 d. $90,000 Solution:

Multiply: Fixed Manufacturing Cost per Unit Inventory on hand Absorption Costing > Variable Costing

$

20 1,000 $ 20,000

4. Coomber Industries manufactures a single product using standard costing. Variable production costs are $13 and fixed production costs are $125,000. Coomber uses a normal activity of 12,500 units to set its standard costs. Coomber began the year with 1,000 units in inventory, produced 11,000 units, and sold 11,500 units. The standard cost of goods sold under absorption costing would a. $115,000 b. $149,500 c. $253,000 d. $264,500 Solution: Fixed Production Costs Divide: Units Produced Fixed Cost per Unit Add Variable Cost per Unit Unit Product Cost Multiply: Beginning Inventory and Units Produced

$ 125,000 12,500 $ 10 13 $ 23 12,000

Total Goods Available for Sale Less: Finished Goods, Ending ($23 x 500 units) Cost of Goods Sold

$ 276,000 11,500 $ 264,500

5. Fleet, Inc. manufactured 700 units of Product A, a new product, during the year. Product A’s variable and fixed manufacturing costs per unit were $6.00 and $2.00 respectively. The inventory of Product A on December 31, consisted of 100 units. There was no inventory of Product A on January 1. What would be the change in the dollar amount of inventory on December 31 if variable costing were used instead of absorption costing? a. $800 decrease b. $200 decrease c. $0 d. $200 increase 6. GHI Company had P100,000 income using absorption costing. GHI has no variable manufacturing costs. Beginning inventory was P5,000 and ending inventory was P12,000. What is the income under variable costing? a. P100,000 b. P107,000 c. P88,000 d. P93,000 7. A company has the following cost data: Fixed manufacturing costs $ 2,000 Fixed selling, general, and admin costs 1,000 Variable selling costs per unit sold 1 Variable manufacturing costs per unit 2 Beginning inventory Production Sales

0 units 100 units 90 units at $40 per unit

Variable and absorption-cost net incomes are: a. b. c. d.

$320 variable, $520 absorption $520 variable, $320 absorption $330 variable, $530 absorption $530 variable, $330 absorption Solution:

ABSORPTION COSTING Sales ($40 x 90 units) Less: Cost of Sales Finished Goods Inventory, beginning Cost of Goods Manufactured ($22 x 100 units)

$ 2,200

3,600

Total Goods Available for Sale Less: Finished Goods Inventory, Ending ($22 x 10 units) Gross Profit Less: Variable Selling Costs per Unit Sold Fixed Selling, General, and Admin Costs Net Income

To compute $22: Fixed Manufacturing Costs Divide: Units Produced Unit Product Cost of Fixed Manufacturing Costs Add: Variable Manufacturing Cost per Unit Total Unit Product Cost

$

2,200 220

$

$ $ $

$

1,980 1,620

$

1,090 530

90 1,000

2,000 100 20 2 22

VARIABLE COSTING Sales ($40 x 90 units) $ Less: Variable Manufacturing Cost ($2 x 90 units) Manufacturing Contribution Margin $ Less: Variable Selling and Administrative Expenses Contribution Margin $ Less: Fixed Manufacturing Costs $ 2,000 Fixed Selling and Administrative Expenses 1,000 $ Net Income

3,600 180 3,420 90 3,330 3,000 330

8. A company manufactures 50,000 units of a product and sells 40,000 units. Total manufacturing cost per unit is $50 (variable manufacturing cost, $10; fixed manufacturing cost, $40). Assuming no beginning inventory, the effect on net income if absorption costing is used instead of variable costing is that: a. Net income is $400,000 lower b. Net income is the same c. Net income is $400,000 higher d. Net income is $200,000 higher 9. A company had an income of P50,000 using direct costing for a given month. Beginning and ending inventories for the month are 13,000 units and 18,000 units, respectively. Ignoring income tax, if the fixed overhead application rate was P2 per unit, what was the income using absorption costing? a. P40,000 b. P50,000 c. P60,000 d. P70,000 10 In the ABC Company, sales are P800,000, cost of goods under absorption costing is P600,000, and total operating expenses are P120,000. If cost of goods sold is 70%

variable and total operating expenses are 60% fixed, what is the contribution margin under variable costing? a. P332,000 b. P308,000 c. P260,000 d. P380,000....