Variable Absorption Costing MCQs by Hilario Tan PDF

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THEORY Variable costing 1. To apply direct costing method it is necessary that you know A. Variable and fixed cost related to production B. Controllable and uncontrollable cost of production C. Contribution margin and break even point in production D. Standard production rate and times of production elements 2. The following statements about the adoption of variable costing are true, except: A. A direct cost may not become a product cost. B. An indirect cost may be assigned as part of product cost. C. It is an acceptable method for general reporting purposes. D. All fixed manufacturing costs are recognized as period costs. 3. Which of the following is NOT an advantage of using variable costing for internal reporting purposes? A. The impact of fixed costs on profits is emphasized. B. Total costs may be overlooked when evaluating profits. C. Profits are directly influenced by changes in sales volume. D. Fixed costs are reported at incurred values, not absorbed values, thus improving control over those costs. 4. A criticism of variable costing for managerial accounting purposes is that it A. overstates inventories. B. does not reflect cost-volume-profit relationships. C. is not acceptable for product line segmented reporting. D. might encourage managers to emphasize the short term at the expense of the long term. 5. Under variable costing, A. all product costs are fixed. B. all period costs are variable. C. all product costs are variable. D. product costs are both fixed and variable. 6. 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 $180,000 $100,000 $ 80,000 $0 Costs 7. Under the variable-costing concept, unit product cost would most likely be increased by A. A decrease in the number of units produced. B. An increase in the commission paid to salesman for each unit sold. C. A decrease in the remaining useful life of factory machinery depreciated on the units-of-production method. D. An increase in the remaining useful life of factory machinery depreciated on the

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sum-of-the-year’s digits method. 8. Calculating income under variable costing does NOT require knowing A. selling price. C. unit sales. B. unit production. D. unit variable manufacturing costs. 9. Which of the following statements is true for a firm that uses variable costing? A. Profits fluctuate with sales. B. An idle facility variation is calculated. C. Product costs include variable administrative costs. D. The cost of a unit of product changes because of changes in number of units manufactured. 10. 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. Unit sales level multiplied by a constant unit contribution margin. C. Finished goods inventory level multiplied by the unit sales price. D. Finished goods inventory level multiplied by a constant unit contribution margin. Absorption costing 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. Which of the following is not associated with absorption costing? A. contribution margin C. gross margin B. functional format D. Period costs 13. Under absorption costing, fixed manufacturing overhead could be found in all of the following except the A. Cost of Goods Sold. C. period costs. B. finished goods inventory account. D. work-in-process account. 14. 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. Decrease production of those items requiring the most direct labor. D. Increase production schedules independent of customer demands. 15. Unabsorbed fixed overhead costs in an absorption costing system are A. costs that cannot be controlled. B. excess variable overhead costs. C. variable overhead costs not allocated to units produced. D. fixed manufacturing costs not allocated to units produced.

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16. When a firm prepares financial reports by using absorption costing A. Profits will always increase with increases in sales. B. Profits will always decrease with decreases in sales. C. Decreased output and constant sales result in increased profits. D. Profits may decrease with increased sales even if there is no change in selling prices and costs. 17. 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 1 production exceeds period 2 production. B. period 2 production exceeds period 1 production. C. fixed production costs are larger in period 2 than period 1. D. variable production costs are larger in period 2 than period 1. Variable & absorption costing 18. A cost that is included as part of product costs under both absorption costing and direct costing is: A. insurance D. variable marketing expenses. B. managerial staff costs E. variable materials handling labor C. taxes on factory building 19. 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 variable costing method. B. Decrease under the variable costing method. C. Increase under the absorption costing method. D. Decrease under the absorption costing method. 20. When comparing absorption costing with variable costing, which of the following statements is not true? A. When sales volume is more than production volume, variable costing will result in higher operating profit. B. Under absorption costing, operating profit is a function of both sales volume and production volume. C. Absorption costing enables managers to increase operating profits in the short run by increasing inventories. D. 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. 21. A firm presently has total sales of $100,000. If its sales rise, its A. fixed costs will also rise. B. per unit variable costs will rise. C. net income based on absorption costing will go up more than its net income based on variable costing. D. net income based on variable costing will go up more than its net income based on absorption costing.

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22. 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. Z would report a higher net income than Co. Y for the years in which production equals sales B. Co. Y would report a higher inventory value than Co. Z for the years in which production exceeds sales C. Co. Z would report a higher inventory value than Co. Y for the years in which production exceeds sales D. Co. Y would report a higher inventory value than Co. Z for the years in which production exceeds the normal or practical capacity 23. 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. Direct labor cost Yes Yes B. Insurance on factory Yes No C. Manufacturing supplies Yes Yes D. Packaging and shipping Yes Yes costs 24. 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. Standard direct costing. B. Direct costing. D. Variable costing. 25. Variable costing and absorption costing will show the same incomes when there are no A. beginning and ending inventories. B. beginning inventories. C. ending inventories. D. variable costs. 26. Absorption costing differs from variable costing in that A. absorption costing inventories are more correctly valued. B. companies using absorption costing have lower fixed costs. C. standards can be used with absorption costing, but not with variable costing. D. production influences income under absorption costing, but not under variable costing. 27. 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. standard costing. B. direct costing. D. variable costing.

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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. Units produced were to exceed units sold. C. Fixed manufacturing costs were to increase. D. Variable manufacturing costs were to increase.

29. Net income is lower under variable costing than under absorption costing when A. Production equals sales. B. Production exceeds sales. C. Production is less than sales. D. Production increases from the previous period. 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 attributable to the variable costs in the inventory. B. Is attributable to the fixed costs in ending inventory. C. Is equal to the fixed costs per unit times the number of units sold. D. Is none if there is no change in the fixed costs in the beginning and ending inventories. 31. If inventory quantities increase during a period, A. Variable costing profits will equal absorption costing profits. B. Absorption costing profits will exceed variable costing profits. C. Variable costing profits will exceed 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 variable-costing 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. Manufacturing fixed costs had increased. B. Selling and administrative fixed expenses had increased. C. Sales price and variable costs had declined proportionately. D. Sales prices had declined proportionately more than variable costs.

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 equal. C. Be greater. D. Be substantially greater or less depending upon external factors

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34. How will a favorable volume variance affect net income under each of the following methods? A. B. C. D. Absorption Increase Increase Reduce Reduce Variable No effect Reduce Increase No effect 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. In excess of units sold in 2001. C. Less than the activity level used for allocating overhead to the product. D. In excess of the activity level used for allocating overhead to the product. PROBLEMS Variable costing 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. P2,250,000 C. P2,640,000 B. P2,400,000 D. P2,750,000 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 Fixed Costs Unit 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 C. P3,040,000 B. P2,480,000 D. P4,000,000c. 3. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest market for these cookies are as gifts that college students buy for their business teachers. There are 100 cookies per box. The following income statement shows the result of the first year of operations. This statement was the one included in the company’s annual report to the stockholders. Sales (400 boxes at P12.50 a box) P5,000.00 6

Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00 Gross margin 1,800.00 Less: Selling and administrative expenses 800.00 Net income 1,000.00 Variable selling and administrative expenses are P0.90 per box sold. The company produced 500 boxes during the year. Variable manufacturing costs are P5.25 per box and fixed manufacturing overhead costs total P1,375 for the year. What is the company’s direct costing net income? A. P 725 C. P2,265 B. P1,000 D. P2,540 Absorption costing 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 C. P0.84 B. P0.68 D. P0.93 5. 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 equipment80,000 Other fixed manufacturing overhead 18,000 What amount should be considered product cost for external reporting purposes? A. $700,000 C. $880,000 B. $800,000 D. $898,000 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 C. $253,000 B. $149,500 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 5,000 units.

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B. Z Corp. had a very profitable year. C. Z Corp. sold all 10,000 units that it produced. D. From the information given, one cannot tell whether Z Corp.'s financial statements were prepared based on variable or absorption costing. 8. A company manufactures a single product for its customers by contracting in advance of production. Thus, the company produces only units that will be sold by the end of each period. For the last period, the following data were available: Sales $40,000 Direct materials 9,050 Direct labor 6,050 Rent (9/10 factory, 1/10 office) 3,000 Depreciation on factory equipment 2,000 Supervision (2/3 factory, 1/3 office) 1,500 Salespeople’s salaries 1,300 Insurance (2/3 factory, 1/3 office) 1,200 Office supplies 750 Advertising 700 Depreciation on office equipment 500 Interest on loan 300 The gross profit margin percentage (rounded) was A. 34% C. 44% B. 41% D. 46% 9. 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. Equal to Year 1. C. Greater than Year 1. B. Equal to Year 2. D. Greater than Year 2. 10. 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 C. P960,000

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B. P950,000

D. P970,000

Variable costing & absorption costing 11. 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. P260,000. C. P332,000. B. P308,000. D. P380,000. 12. A company has the following cost data: Fixed manufacturing costs Fixed selling, general, and administrative costs Variable selling costs per unit sold Variable manufacturing costs per unit

$2,000 1,000 1 2

Beginning inventory 0 units Production 100 units Sales 90 units at $40 per unit Variable and absorption-cost net incomes are: A. $320 variable, $520 absorption C. $520 variable, $320 absorption B. $330 variable, $530 absorption D. $530 variable, $330 absorption 13. 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 C. P60,000 B. P50,000 D. P70,000 14. 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. P88,000 C. P100,000. B. P93,000 D. P107,000 15. 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. $0 C. $200 increase. B. $200 decrease. D. $800 decrease.

16. 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,

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respectively. If Killo uses absorption costing rather than direct (variable) costing, the result would be a higher pretax income of A. $0. C. $70,000. B. $20,000. D. $90,000. 17. A company manufactures 50,000 units of a pro...