CPA Review MAS / Cost Accounting PDF

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CPA REVIEW SCHOOL OF THE PHILIPPINESManilaMANAGEMENT ADVISORY SERVICES VARIABLE COSTING & ABSORPTION COSTINGTHEORY 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...

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES VARIABLE COSTING & ABSORPTION COSTING

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. Cay Co.’s 1995 fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should those costs be classified? A. B. C. D. Period Costs $0 $ 80,000 $100,000 $180,000 Product Costs $180,000 $100,000 $ 80,000 $0 6. A cost that is included as part of product costs under both absorption costing and direct costing is: A. managerial staff costs D. taxes on factory building B. insurance E. variable materials handling labor C. variable marketing expenses. 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. C. selling price. B. unit variable manufacturing costs. D. unit production.

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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 C. direct costing B. conventional 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-ofproduction method. B. A decrease in the number of units produced. C. An increase in the remaining useful life of factory machinery depreciated on the sum-ofthe-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. C. Cost of Goods Sold. B. finished goods inventory account. 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.

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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. Absorption costing and variable costing are two different methods of assigning costs to units produced. Of the following five cost items listed, identify the one that is not correctly accounted for as a product cost. Part of Product Cost under Absorption Cost Variable Cost A. Manufacturing supplies Yes Yes B. Insurance on factory Yes No C. Direct labor cost Yes Yes D. Packaging and shipping costs Yes Yes 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. C. Variable costing. B. Direct 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 no A. beginning inventories. C. variable costs. B. ending inventories. 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.

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26. In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and deducted $30,000 of fixed manufacturing overhead. Marvel Co. must be using A. absorption costing. C. direct costing. B. variable costing. D. standard costing. 27. Under absorption costing, if sales remain constant from period 1 to period 2, the company will report a larger income in period 2 when A. period 2 production exceeds period 1 production. B. period 1 production exceeds period 2 production. C. variable production costs are larger in period 2 than period 1. D. fixed production costs are larger in period 2 than period 1. 28. Other things being equal, net income computed by direct costing method would exceed net income computed by absorption costing method if A. Units sold were to exceed units produced. B. Fixed manufacturing costs were to increase. C. Units produced were to exceed units sold. D. Variable manufacturing costs were to increase. 29. Net income is lower under variable costing than under absorption costing when A. Production increases from the previous period. B. Production exceeds sales. C. Production equals sales. D. Production is less than sales. 30. President X of WXY Corporation requested you to explain the difference of net income between the variable costing income statements presentation and the absorption costing method. You would say that the difference A. Is none if there is no change in the fixed costs in the beginning and ending inventories. B. Is equal to the fixed costs per unit times the number of units sold. C. Is attributable to the variable costs in the inventory. D. Is attributable to the fixed costs in ending inventory. 31. If inventory quantities increase during a period, A. Variable costing profits will exceed absorption costing profits. B. Absorption costing profits will exceed variable costing profits. C. Variable costing profits will equal absorption costing profits. D. Variable costing will show a higher inventory value than absorption costing. 32. A manufacturing company prepares income statements using both absorption- and variablecosting methods. At the end of the period, actual sales revenues, total gross margin, and total contribution margin approximated budgeted figures, whereas net income was substantially below the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income shortfall is that, compared to budget, actual A. Sales price and variable costs had declined proportionately. B. Sales prices had declined proportionately more than variable costs. C. Manufacturing fixed costs had increased. D. Selling and administrative fixed expenses had increased. 33. As compared with total absorption costing profit over the entire life of a company, total variable costing profit will A. Be less. B. Be greater. C. Be equal. D. Be substantially greater or less depending upon external factors 3 4 .Ho wwi l l af a v o r a b l ev o l u mev a r i a n c ea ff e c t n e t i n c o meu n d e re a c ho f t h ef o l l o wi n gme t h o d s ?

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Absorption Variable

A. Reduce No effect

B. Reduce Increase

C. Increase No effect

D. Increase Reduce

35. A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in 2001 was the same as in 2000. The 2001 variable costing statement reported a profit whereas the 2001 absorption costing statement reported a loss. The difference in reported income could be explained by units produced in 2001 being A. Less than units sold in 2001. 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 2001. PROBLEMS 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 2. LY & Company completed its first year of operations during which time the following information were generated: Total units produced 100,000 Total units sold @ P100 per unit 80,000 Work in process ending inventory 20,000 Costs Variable Cost per Unit Fixed Costs Raw materials P20.00 Direct labor 12.50 Factory overhead 7.50 P1.2 million Selling and administrative 10.00 0.7 million If the company used variable (direct) costing method, the operating income would be A. P2,100,000 B. P4,000,000c. C. P2,480,000 D. P3,040,000 3. 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 building and manufacturing equipment 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 4. The total production cost for 20,000 units was P21,000 and the total production cost for making 50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed costs of P4,000 were incurred. The full production cost per unit for making 30,000 units is: A. P0.30 B. P0.68 C. P0.84 D. P0.93 5. At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable and fixed manufacturing cost 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.

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6. 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 be A. $115,000 B. $149,500 C. $253,000 D. $264,500 7. Z Corp. incurred the following costs in 2001 (its first year of operations) based on production of 10,000 units: Direct material $5 per unit Direct labor $3 per unit Variable product costs $2 per unit Fixed product costs (in total) $100,000 When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at $100,000. Based on this information, which of the following statements must be true: A. Z Corp. sold all 10,000 units that it produced. B. Z Corp. sold 5,000 units. C. Z Corp. had a very profitable year. D. From the information given, one cannot tell whether Z Corp.'s financial statements were prepared based on variable or absorption costing. 8. The Blue Company has failed to reach its planned activity level during its first 2 years of operation. The following table shows the relationship among units produced, sales, and normal activity for these years and the projected relationship for Year 3. All prices and costs have remained the same for the last 2 years and are expected to do so in Year 3. Income has been positive in both Year 1 and Year 2. Units Produced Sales Planned Activity Year 1 90,000 90,000 100,000 Year 2 95,000 95,000 100,000 Year 3 90,000 90,000 100,000 Because Blue Company uses an absorption-costing system, gross margin for year 3 should be A. Greater than Year 1. C. Equal to Year 1. B. Greater than Year 2. D. Equal to Year 2. 9. 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. 10. 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 11. Don Juan Ltd. Manufactures a single product for which the costs and selling prices are: Variable production costs P 50 per unit Selling price¶ P125 per unit Fixed production overhead P200,000 per quarter Fixed selling and administrative overhead P80,000 per quarter Normal capacity 20,000 units per quarter Production in first quarter was 19,000 units and sales volume was 16,000 units. No opening inventory for the quarter. The absorption costing profit for the quarter was A. P920,000 B. P950,000 C. P960,000 D. P970,000

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