Multiple choices with explanations and discussion absorption and variable costing PDF

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multiple choices about absorption and variable costing with explanations and discussions...

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1. A. All the elements of fixed and variable manufacturing overhead. All manufacturing costs, whether variable or fixed, are included in the determination of product costing using the absorption costing method. 2. A. Only variable production costs. Under the direct costing model, only variable production costs such as direct materials, direct labor, and factory overhead are include in the determination of the product costs. Fixed factory overhead is classified as a period costs, that is automatically deducted from sales as an expense regardless of sales volume level. 3. A. Full absorption costing Full absorption costing treats fixed factory overhead costs as product costs. Thus, inventory and cost of goods sold include (absorb) fixed factory overhead. 4. B. Absorption costing Absorption costing includes all manufacturing costs, whether direct or indirect, foxed or variable, controllable or not as part of product costs. 5. B. The same as process costing system except that materials are allocated on the basis of batches of production. Operation costing is used in a situation in which a company produces similar items that differ mostly in the materials that are used. 6. A. greater than direct costing net income. The unit product cost of absorption costing (AC) which includes the fixed factory overhead is greater than that of the variable costing (VC). Therefore, if production is greater than sales, the cost of ending inventory under absorption costing method shall be much higher. Because of this, the net income under absorption costing shall also be much higher. 7. B. If all the products manufactured during the period are sold in that period, variable costing net income is equal to absorption costing net income. If production and sales are equal, the net income under the absorption costing and variable costing methods are also equal, under the assumption that the unit cost remains constant. 8. D. Fixed factory overhead is necessary for the production of a product. Fixed factory overhead is necessary part for the production of a product.

9. B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable. Variable cost per unit cost always fixed, total variable cost will change according to unit of products total fixed cost will remain constant, per unit fixed cost will change according to units of products. 10. D. Statement 1 – True; Statement 2 – False Technically, direct costing and variable costing mean differently. Direct costing deals with the process of underlining the importance of segment of margin (direct margin) while variable costing emphasizes the contribution margin in its analysis. In practice, however, some accountants interchange direct costing to variable costing as having the same meaning. Hence, statement 1 is true. Statement 2 is false because the sales revenue under absorption costing method are the same under the variable costing method. 11. D. Decrease production of those items requiring the most direct labor. Under an absorption costing system, income can be manipulated by producing more products than are sold because more fixed manufacturing overhead will be allocated to the ending inventory. When inventory increases, some fixed costs are capitalized rather than expensed. Decreasing production, however, will result in lower income because more of the fixed manufacturing overhead will be expensed. 12. C. Sales volume exceeding production volume When sales exceed production, this means that inventory decreased. When inventory decreases, the income under the variable method is greater than under the absorption method. This is because under the absorption method, some of the prior period’s fixed costs are being expensed as part of cost of goods sold this period. 13. 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 more favourable review. Absorption (full) costing is the accounting method that considers all manufacturing costs as product costs. These costs include variable and fixed manufacturing costs whether direct or indirect. Variable (direct) costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are considered period costs and are expensed as incurred. If production is increased without increasing sales, inventories will rise. However, all fixed costs associated with production will be an expense of the period under variable costing. Thus, this action will not artificially increase profits and improve the manager’s review.

14. C. Variable manufacturing costs are lower under variable costing. Under variable costing, inventories are charged only with the variable costs of production. Fixed manufacturing costs are expensed as period costs. Absorption costing charges to inventory all costs of production. If finished goods inventory increases, absorption costing results in higher income because it capitalizes some fixed costs that would have been expensed under variable costing. When inventory declines, variable costing results in higher income because some fixed costs capitalized under the absorption method in prior periods are expensed in the current period. 15. 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 more favourable review. Absorption (full) costing is the accounting method that considers all manufacturing costs as product costs. These costs include variable and fixed manufacturing costs whether direct or indirect. Variable (direct) costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are considered period costs and are expensed as incurred. If production is increased without increasing sales, inventories will rise. However, all fixed costs associated with production will be an expense of the period under variable costing. Thus, this action will not artificially increase profits and improve the manager’s review. 16. D. Fixed factory overhead is necessary part for the production of a product. Fixed manufacturing costs are necessary part of the production. 17. B. P2.70 Direct materials (P 100,000/100,000 units) Direct labor (P 80,000/100,000 units) Variable overhead (P 40,000/100,000 units) Fixed overhead (P 50,000/100,000 units) Unit product cost – absorption costing (P 270,000/100,000 units)

18. D. P2.20 Direct materials Direct labor Variable overhead Unit product cost – variable costing

P 1.00 0.80 0.40 P 2.20

P 1.00 0.80 0.40 0.50 P 2.70

19. B. P500 Direct materials Direct labor Variable overhead Unit product cost – variable costing

P 400 75 25 P 500

20. A. P625 Direct materials Direct labor Variable overhead Fixed overhead (P 12,500,000/100,000) Unit product cost – absorption costing

P 400 75 25 125 P 625

21. B. P11.00 Direct materials P 6.00 Direct labor 3.00 Variable overhead 2.00 Unit product cost – variable costing P 11.00 Indirect labor is not included because it is a fixed cost and is not a product cost under the direct costing method. 22. C. Fixed overhead – Yes; Variable factory overhead – Yes The following items are included in the inventory cost using the absorption costing method: Direct material, direct labor, variable overhead, and fixed overhead. 23. C. Be used in the operating income but not in the computation of the contribution margin. Under direct (variable) costing, fixed selling and administrative expenses are treated as period costs (or expenses) and are charged against revenues in computing operating income. Contribution margin s sales less variable costs and expenses and does not include in fixed costs and expenses in the computation thereof. 24. B. Be used in the computation of the contribution margin. Under variable costing method, variable selling and administrative expenses, are treated as period cost and are included in the computation of contribution margin.

25. D. Period cost – P 180,000; Product cost – P 0 Manufacturing overhead cost P 100,000 Variable selling costs 80,000 Total period cost P 180,000 Using direct costing method, fixed manufacturing overhead is a period cost, and variable selling costs are also period costs. Period costs are those charged against sales in the period incurred. 26. B. P2.50 Direct materials (200,000/200,000 units) Direct labor (135,000/200,000 units) Variable overhead (75,000/200,000 units) Fixed overhead (90,000/200,000 units) Unit product cost – absorption costing

P 1.000 0.675 0.375 0.450 P2.500

27. C. Equal to Year 1 Gross margin is calculated as sales minus cost of goods sold. Since all of the costs have remained the same over the period and there has been no change in inventory for any period (since sales have been equal to production each year), the gross margin for Year 3 will be equal to the gross margin from the year in which sales were the same level, and this is Year 1. Because this is a new company and for every year since its beginning, sales have been equal to production, inventory at year end for each year has been zero. Because of this, we do not need to know whether the company closes out under- and over-applied overhead to cost of goods sold only, or whether the company prorates it between cost of goods sold and inventory. Since inventory is zero, all under- or over-applied overhead will have been closed to cost of goods sold only. And for each year since its beginning, the company has had under-applied fixed overhead, because actual production has been lower than planned production. Unless fixed overhead has been very different in Year 3 than it was in Year 1, the gross margin for the two years should be substantially the same. 28. A. P 2,100,000 The total unit variable costs and expenses is P50 (P20+12.50+7.50+10.00). Sales (P80,000 x P100) Variable costs and expenses (P80,000 x P50) Fixed costs and expenses Operating Income

P8,000,000 (4,000,000) (1,900,000) P2,100,000

29. B. P 210,000 The total unit variable costs and expenses is P5 (2.00+1.25+0.75+1.00) and the unit contribution margin is P5 (P10.00-P5.00). Contribution margin (P80,000 x P5) Fixed costs and expenses Operating Income

P400,000 190,000 P210,000

30. B. Sales exceed production. The difference in operating income between variable (direct) costing and absorption costing is in the treatment of fixed overhead, not in the type of costing method used in the valuation on inventory (as if in this case, FIFO method). If variable costing income is higher than the absorption costing income, then sales exceeds production. Remember, variable costing follows the pattern of sales....