Variable Costing - Practice Problems PDF

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Summary

Practice problems for Variable Costing and absorption costing....

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Chapt er7 Var i abl eCost i ng:AToolf orManagement

True/False 1. T Easy

In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost.

2. F Hard

Direct labor is always considered to be a product cost under variable costing.

3. F Medium

Under variable costing, the unit product cost contains some fixed manufacturing overhead cost.

4. F Medium

Under variable costing it may be possible to report a profit even if the company sells less than the break-even volume of sales.

5. T Easy

Under variable costing, the impact of fixed cost is emphasized because the total amount of such cost for the period appears in the income statement.

6. F Easy

Absorption costing treats fixed manufacturing overhead as a period cost, rather than as a product cost.

7. F Medium

The unit product cost under absorption costing contains no element of fixed manufacturing overhead cost.

8. T Easy

Absorption costing treats all manufacturing costs as product costs.

9. T Easy

When the number of units in work in process and finished goods inventories increase, absorption costing net income will typically be greater than variable costing net income.

10. F Easy

When sales exceeds production for a period, absorption costing net income will generally be greater than variable costing net income.

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11. F Medium

Absorption costing net income is closer to the net cash flow of a period than is variable costing net income.

12. F Medium

Variable costing is not permitted for income tax purposes, but it is widely accepted for external financial reports.

13. F Medium

Net income is not affected by changes in production when absorption costing is used.

14. T Easy

When JIT methods are introduced, the difference in net income computed under the absorption and variable costing methods is reduced.

15. T Easy

Since variable costing emphasizes costs by behavior, it works well with cost-volume-profit analysis.

Multiple Choice 16. C Easy

A cost that would be included in product costs under both absorption costing and variable costing would be: a. supervisory salaries. b. equipment depreciation. c. variable manufacturing costs. d. variable selling expenses.

17. C Easy CPA adapted

An allocated portion of fixed manufacturing overhead is included in product costs under:

18. B Medium CPA adapted

The variable costing method ordinarily includes in product costs the following: a. Direct materials cost, direct labor cost, but no manufacturing overhead cost. b. Direct materials cost, direct labor cost, and variable manufacturing overhead cost. c. Prime cost but not conversion cost. d. Prime cost and all conversion cost.

a. b. c. d.

Absorption costing No No Yes Yes

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Variable costing No Yes No Yes

19. D Easy

Cay Company's fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should these costs be classified?

a. b. c. d.

20. A Easy

Period costs $0 $80,000 $100,000 $180,000

Product costs $180,000 $100,000 $80,000 $0

Which of the following are considered to be product costs under variable costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses. a. b. c. d.

I. I and II. I and III. I, II, and III.

21. B Medium CPA adapted

What factor is the cause of the difference between net income as computed under absorption costing and net income as computed under variable costing? a. Absorption costing considers all manufacturing costs in the determination of net income, whereas variable costing considers only prime costs. b. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed manufacturing costs as period costs. c. Absorption costing includes all variable manufacturing costs in product costs, but variable costing considers variable manufacturing costs to be period costs. d. Absorption costing includes all fixed manufacturing costs in product costs, but variable costing expenses all fixed manufacturing costs.

22. C Easy

Under variable costing, costs which are treated as period costs include: a. only fixed manufacturing costs. b. both variable and fixed manufacturing costs. c. all fixed costs. d. only fixed selling and administrative costs.

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23. C Medium

Which of the following statements is true for a firm that uses variable costing? a. The unit product cost changes as a result of changes in the number of units manufactured. b. Both variable selling costs and variable production costs are included in the unit product cost. c. Net income moves in the same direction as sales. d. Net income is greatest in periods when production is highest.

24. B Easy

Which of the following are considered to be product costs under absorption costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses. a. b. c. d.

I, II, and III. I and II. I and III. I.

25. C Easy

The term "gross margin" for a manufacturing company refers to the excess of sales over a. cost of goods sold, excluding fixed manufacturing overhead. b. all variable costs, including variable selling and administrative expenses. c. cost of goods sold, including fixed manufacturing overhead. d. variable costs, excluding variable selling and administrative expenses.

26. A Medium CPA adapted

Net income determined using full absorption costing can be reconciled to net income determined using variable costing by computing the difference between: a. Fixed manufacturing overhead costs deferred in or released from inventories. b. Inventoried discretionary costs in the beginning and ending inventories. c. Gross margin (absorption costing method) and contribution margin (variable costing method). d. Sales as recorded under the variable costing method and sales as recorded under the absorption costing method.

27. B Medium CMA adapted

Net income reported under absorption costing will exceed net income reported under variable costing for a given period if: a. production equals sales for that period. b. production exceeds sales for that period. c. sales exceed production for that period. d. the variable manufacturing overhead exceeds the fixed manufacturing overhead.

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28. D Medium CPA adapted

What will be the difference in net income between variable costing and absorption costing if the number of units in work in process and finished goods inventories increase? a. There will be no difference in net income. b. Net income computed using variable costing will be higher. c. The difference in net income cannot be determined from the information given. d. Net income computed using variable costing will be lower.

29. A Easy

The costing method that can be used most easily with break-even analysis and other cost-volume-profit techniques is: a. variable costing. b. absorption costing. c. process costing. d. job-order costing.

30. C Hard

For the most recent year, Atlantic Company's net income computed by the absorption costing method was $7,400, and its net income computed by the variable costing method was $10,100. The company's unit product cost was $17 under variable costing and $22 under absorption costing. If the ending inventory consisted of 1,460 units, the beginning inventory must have been: a. 920 units. b. 1,460 units. c. 2,000 units. d. 12,700 units.

31. B Hard

During the most recent year, Evans Company using absorption costing and $84,000 using overhead application rate was $6 per unit. inventories. If 22,000 units were produced last year were: a. 15,000 units. b. 21,000 units. c. 23,000 units. d. 28,000 units.

32. D Hard

During the year just ended, Roberts Company' income under absorption costing was $3,000 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $9 per unit, of which $3 was variable selling expense. If production cost is $11 per unit under absorption costing every year, then how many units did the company produce during the year? a. 8,000. b. 10,000. c. 9,600. d. 8,400.

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had a net income of $90,000 variable costing. The fixed There were no beginning last year, then sales for

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33. C Hard

Last year, Silver Company's variable production costs totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company produced 3,000 units during the year and sold 2,400 units. There were no units in the beginning inventory. Which of the following statements is true? a. Under variable costing, the units in the ending inventory will be costed at $4 each. b. The net income under absorption costing for the year will be $900 lower than the net income under variable costing. c. The ending inventory under variable costing will be $900 lower than the ending inventory under absorption costing. d. Under absorption costing, the units in ending inventory will be costed at $2.50 each.

34. D Hard

During the last year, Hansen Company had net income under absorption costing that was $5,500 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $10 per unit, of which $6 was variable selling expense. If fixed production cost is $5 per unit under absorption costing every year, then how many units did the company produce during the year? a. 7,625 units. b. 8,450 units. c. 10,100 units. d. 7,900 units.

35. B Medium CMA adapted

Indiana Corporation produces a single product that it sells for $9 per unit. During the first year of operations, 100,000 units were produced and 90,000 units were sold. Manufacturing costs and selling and administrative expenses for the year were as follows: Fixed Costs Raw materials ............ -Direct labor ............. -Factory overhead ......... $100,000 Selling and administrative 70,000

Variable Costs $1.75 per unit produced 1.25 per unit produced 0.50 per unit produced 0.60 per unit sold

What was Indiana Corporation's net income for the year using variable costing? a. $181,000. b. $271,000. c. $281,000. d. $371,000.

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36. C Medium

Last year, fixed manufacturing overhead was $30,000, variable production costs were $48,000, fixed selling and administration costs were $20,000, and variable selling administrative expenses were $9,600. There was no beginning inventory. During the year, 3,000 units were produced and 2,400 units were sold at a price of $40 per unit. Under variable costing, net income would be: a. a profit of $6,000. b. a profit of $4,000. c. a loss of $2,000. d. a loss of $4,400.

37. D Easy CPA adapted

West Co.'s manufacturing costs are 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 costs for external reporting purposes? a. $700,000. b. $800,000. c. $880,000. d. $898,000.

38. C Hard

At the end of last year, Lee Company had 30,000 units in its ending inventory. Lee's variable production costs are $10 per unit and its fixed manufacturing overhead costs are $5 per unit every year. The company's net income for the year was $12,000 higher under variable costing than under absorption costing. Given these facts, the number of units of product in inventory at the beginning of the year must have been: a. 28,800 units. b. 27,600 units. c. 32,400 units. d. 42,000 units.

39. B Medium

During the last year, Moore Company's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which the following statements is true? a. The net income under absorption costing for the year will be higher than net income under variable costing. b. The net income under absorption costing for the year will be higher than net income under variable costing. c. The net income under absorption costing for the year will be lower than net income under variable costing. d. The net income under absorption costing for the year will be lower than net income under variable costing.

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of $800 $544 $544 $800

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40. B Hard

Last year, Ben Company's income under absorption costing was $4,400 lower than its income under variable costing. The company sold 8,000 units during the year, and its variable costs were $8 per unit, of which $3 was variable selling expense. Fixed manufacturing overhead was $1 per unit in beginning inventory under absorption costing. How many units did the company produce during the year? a. 12,400 units. b. 3,600 units. c. 7,120 units. d. 7,450 units.

41. C Hard

Last year, Stephen Company had 20,000 units in its ending inventory. During the year, Stephen's variable production costs were $12 per unit. The fixed manufacturing overhead cost was $8 per unit in the beginning inventory. The company's net income for the year was $9,600 higher under variable costing than it was under absorption costing. Given these facts, the number of units of product in the beginning inventory last year must have been: a. 21,200. b. 19,200. c. 18,800. d. 19,520.

Reference: 7-1 Aaker Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price ............................ Units Units Units Units

$99

in beginning inventory ............. produced ........................... sold ............................... in ending inventory ................

0 6,300 6,000 300

Variable costs per unit: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Variable selling and administrative ....

$12 42 6 6

Fixed costs: Fixed manufacturing overhead ........... Fixed selling and administrative .......

$170,100 24,000

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42. D Easy Refer To: 7-1

What is the unit product cost for the month under variable costing? a. $66 b. $93 c. $87 d. $60

43. A Easy Refer To: 7-1

What is the unit product cost for the month under absorption costing? a. $87 b. $60 c. $66 d. $93

44. D Medium Refer To: 7-1

The total contribution margin for the month under the variable costing approach is: a. $72,000. b. $27,900. c. $234,000. d. $198,000.

45. C Medium Refer To: 7-1

The total gross margin for the month under the absorption costing approach is: a. $98,100. b. $198,000. c. $72,000. d. $12,000.

46. A Hard Refer To: 7-1

What is the total period cost for the month under the variable costing approach? a. $230,100 b. $194,100 c. $170,100 d. $60,000

47. B Hard Refer To: 7-1

What is the total period cost for the month under the absorption costing approach? a. $170,100 b. $60,000 c. $230,100 d. $24,000

48. B Medium Refer To: 7-1

What is the net income for the month under variable costing? a. $8,100 b. $3,900 c. $12,000 d. ($14,100)

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49. C Medium Refer To: 7-1

What is the net income for the month under absorption costing? a. $3,900 b. ($14,100) c. $12,000 d. $8,100

Reference: 7-2 Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows: Direct material .................. $100,000 Direct labor ..................... 75,000 Variable manufacturing overhead .. 50,000 Fixed manufacturing overhead ..... 75,000 Sales totaled $440,000, variable selling and administrative expenses were $110,000, and fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labor is a variable cost. 50. B Easy Refer To: 7-2

Under absorption costing, the unit product cost would be: a. $9.00. b. $12.00. c. $13.40. d. $14.00.

51. A Medium Refer To: 7-2

Under absorption costing, the gross margin would be: a. $176,000. b. $242,000. c. $ 66,000. d. $ 21,000.

52. D Medium Refer To: 7-2

The contribution margin per unit would be: a. $15.00. b. $11.00. c. $ 8.00. d. $ 6.00.

53. A Easy Refer To: 7-2

Under variable costing, the total amount of fixed manufacturing cost in the ending inventory would be: a. $ 0. b. $ 9,000. c. $14,400. d. $27,000.

54. C Medium Refer To: 7-2

The net income under variable costing would be: a. $ 2,000. b. $21,000. c. $12,000. d. $ 9,000.

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55. D Medium Refer To: 7-2

The net income under absorption costing would be: a. $ 9,000. b. $12,000. c. $ 2,000. d. $21,000.

Reference: 7-3 Farron Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price ............................ Units Units Units Units

$92

in beginning inventory ............. produced ........................... sold ............................... in ending inventory ................

0 8,700 8,300 400

Variable costs per unit: Direct materials ....................... Direct labor ........................... Variable manufacturing overhead ........ Variable selling and administrative ....

$13 55 1 5

Fixed costs: Fixed manufacturing overhead ........... Fixed selling and administrative .......

$130,500 8,300

56. A Easy Refer To: 7-3

What is the unit product cost for the month under variable costing? a. $69 b. $84 c. $89 d. $74

57. D Easy Refer To: 7-3

What is the unit product cost for the month under absorption costing? a. $74 b. $89 c. $69 d. $84

58. A Medium Refer To: 7-3

What is the net income for the month under variable costing? a. $10,600 b. ($17,000) c. $16,600 d. $6,000

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59. B Medium Refer To: 7-3

What is the net income for the month under absorption costing? a. ($17,000) b. $16,600 c. $6,000 d. $10,600

Reference: 7-4 Jarvix Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price ............................ Units Units Units Units

$111

in beginning inventory ............. produced ........................... sold ............................... in ending inventory ................

400 8,800 8,900 300

Variable costs per unit: Direct materials ..................