Chapter 07

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True/False Questions

1. Under variable costing, only variable production costs are treated as product costs. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

2. Under variable costing, variable selling and administrative costs are included in product costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

3. Absorption costing treats all manufacturing costs as product costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

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

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

5. Absorption costing treats fixed manufacturing overhead as a period cost.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

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

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,3 Level: Easy

7. Net operating income computed using absorption costing will always be greater than net operating income computed using variable costing.

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8. When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs released from inventory under absorption costing should be added to variable costing net operating income to arrive at the absorption costing net operating income.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

9. When production exceeds sales for the period, absorption costing net operating income will exceed variable costing net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

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

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

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

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

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

13. A basic concept of the contribution approach and variable costing is that fixed costs are not important in an organization.

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15. When lean production is introduced, the difference in net operating income computed under the absorption and variable costing methods is reduced.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy

Multiple Choice Questions

16. How would the following costs be classified (product or period) under variable costing at a retail clothing store?

Cost of purchasing clothing Sales commissions

A) Product Product

B) Product Period

C) Period Product

D) Period Period

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium

17. The principal difference between variable costing and absorption costing centers on: A) whether variable manufacturing costs should be included as product costs. B) whether fixed manufacturing costs should be included as product costs. C) whether fixed manufacturing costs and fixed selling and administrative costs

should be included as product costs. D) none of these.

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

18. Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method?

A) direct material cost

B) property taxes on the factory building C) sales manager's salary

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19. Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that:

A) variable costing treats only direct materials and direct labor as product cost while absorption costing treats direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

B) variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs while absorption costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

C) variable costing treats only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

D) variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs. Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Medium

20. The costing method that treats all fixed costs as period costs is: A) absorption costing.

B) job-order costing. C) variable costing. D) process costing.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

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21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.)

Variable costing Absorption costing A) Increase Increase B) Decrease Increase C) Decrease Decrease D) No effect Decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

22. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will:

A) fluctuate in direct proportion to changes in production. B) remain constant.

C) fluctuate inversely with changes in production.

D) be greater than net operating income under absorption costing. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium

23. Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?

A) fixed manufacturing overhead cost B) fixed selling and administrative expense C) variable selling and administrative expense D) all of the above

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

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24. Which of the following will usually be found on an income statement prepared using the absorption costing method?

Contribution Margin Gross Margin

A) Yes Yes

B) Yes No

C) No Yes

D) No No

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

25. Net operating income under variable and absorption costing will generally: A) always be equal.

B) never be equal.

C) be equal only when production and sales are equal. D) be equal only when production exceeds sales.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium

26. When production exceeds sales, net operating income reported under variable costing generally will be:

A) greater than net operating income reported under absorption costing. B) less than net operating income reported under absorption costing C) equal to net operating income reported under absorption costing. D) higher or lower because no generalization can be made.

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27. Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?

A) change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit.

B) number of units produced during the period times the fixed manufacturing overhead rate per unit.

C) change in the quantity of units in inventory times the variable manufacturing cost per unit.

D) number of units produced during the period times the variable manufacturing cost per unit.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Hard Source: CMA, adapted

28. When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will:

A) tend to fluctuate in the same direction as fluctuations in the level of production. B) tend to remain constant.

C) tend to fluctuate inversely with fluctuations in the level of production. D) none of these

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

29. A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:

A) they omit variable expenses entirely in computing net operating income. B) they shift portions of fixed manufacturing overhead from period to period

according to changing levels of inventories.

C) they include all fixed manufacturing overhead on the income statement each year as a period cost.

D) they ignore inventory levels in computing income charges. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium

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30. Under the theory of constraints (TOC), which of the following is treated as a period cost?

Direct labor Direct material

A) Yes Yes

B) Yes No

C) No Yes

D) No No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium

31. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing?

A) $800 decrease B) $200 decrease C) $0

D) $200 increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted Solution:

Change in inventory × Fixed manufacturing costs per unit = 100 × $2 = $200 decrease

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32. Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

Unit product cost under variable costing... $5.20 per unit Fixed manufacturing overhead cost for the year... $260,000 Fixed selling and administrative cost for the year... $180,000 Units (calculators) produced and sold... 400,000 What is Shun's unit product cost under absorption costing for last year? A) $4.10

B) $4.55 C) $5.85 D) $6.30

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit fixed manufacturing overhead = Fixed manufacturing overhead ÷ Units produced = $260,000 ÷ 400,000 units = $0.65 per unit

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33. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

Units in beginning inventory... 0

Units produced... 7,100 Units sold... 7,000 Units in ending inventory... 100

Variable costs per unit: Direct materials... $33

Direct labor... $53

Variable manufacturing overhead... $1

Variable selling and administrative... $7 Fixed costs:

Fixed manufacturing overhead...

$170,40 0 Fixed selling and administrative... $7,000

What is the unit product cost for the month under variable costing? A) $118

B) $94 C) $111 D) $87

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $33 + $53 + $1 = $87

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Direct labor... $32

What is the unit product cost for the month under absorption costing? A) $67

B) $105 C) $111 D) $73

Solution:

Unit fixed manufacturing overhead = $72,200 ÷ 1,900 = $38

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead cost + Fixed manufacturing overhead cost

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Selling price... $79

Direct labor... $30

Fixed manufacturing overhead... $46,200 Fixed selling and administrative...

$88,20 0

What is the total period cost for the month under the variable costing approach? A) $138,600

B) $134,400 C) $46,200 D) $184,800

Solution:

Total variable selling and administrative cost = $8 × 6,300 = $50,400

Period cost = Total variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

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Direct labor... $25

$37,80 0

What is the total period cost for the month under the absorption costing approach? A) $56,700

B) $65,500 C) $8,800 D) $37,800

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

Solution:

Total variable selling and administrative cost = $9 × 2,100 = $18,900 Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $18,900 + $37,800 = $56,700

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37. Mullee Corporation produces a single product and has the following cost structure: Number of units produced each year... 7,000

Variable costs per unit:

Direct materials... $51

Direct labor... $12

Variable selling and administrative expense... $5 Fixed costs per year:

$441,00 0 Fixed selling and administrative expense...

$112,00 0 The unit product cost under absorption costing is:

A) $149 B) $65 C) $63 D) $128

Solution:

Unit fixed manufacturing overhead = $441,000 ÷ 7,000 = $63 Unit product cost = $63 + $51 + $12 + $2 = $128

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38. Stoneberger Corporation produces a single product and has the following cost structure:

Number of units produced each year... 4,000 Variable costs per unit:

Direct labor... $72

Variable selling and administrative expense... $3 Fixed costs per year:

Fixed manufacturing overhead... $296,000 Fixed selling and administrative expense... $76,000 The unit product cost under variable costing is:

A) $128 B) $125 C) $202 D) $131

Solution:

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39. Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations:

Number of units produced... 8,000 Variable costs per unit:

Direct labor... $56

Variable selling and administrative expense... $2 Fixed costs:

Fixed manufacturing overhead... $312,000 Fixed selling and administrative expense...

$448,00 0

There were no beginning or ending inventories. The unit product cost under absorption costing was:

A) $93 B) $97 C) $136 D) $194

Solution:

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40. Kray Inc., which produces a single product, has provided the following data for its most recent month of operations:

Number of units produced... 3,000 Variable costs per unit:

Direct labor... $13

Variable selling and administrative expense... $6 Fixed costs:

Fixed manufacturing overhead... $237,000 Fixed selling and administrative expense...

$165,00 0

There were no beginning or ending inventories. The unit product cost under variable costing was:

A) $111 B) $190 C) $117 D) $110

Solution:

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41. The following data pertain to last year's operations at Clarkson, Incorporated, a company that produces a single product:

Units in beginning inventory... 0 Units produced... 100,000 Units sold... 98,000 Selling price per unit... $10.00 Variable costs per unit:

Direct materials... $1.50 Direct labor... $2.50 Variable manufacturing overhead... $1.00 Variable selling and administrative... $2.00 Fixed costs per year:

What was the absorption costing net operating income last year? A) $44,000

B) $48,000 C) $50,000 D) $49,000

Solution:

Unit fixed manufacturing overhead = $200,000 ÷ 100,000 = $2 Unit product cost = $1.50 + $2.50 + $1 + $2 = $7

Absorption costing income statement

Sales ($10 × 98,000)... $980,000 Cost of goods sold ($7 × 98,000)... 686,000 Gross margin... 294,000 Selling and administrative expenses expenses:

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Direct labor... $38

Fixed manufacturing overhead... $108,800 Fixed selling and administrative... $74,400

The total contribution margin for the month under the variable costing approach is: A) $155,000

B) $260,400 C) $192,200 D) $83,400

Solution:

Sales revenue ($135 × 6,200)... $837,000 Variable cost:...

Direct materials ($49 × 6,200)... $303,800 Direct labor ($38 × 6,200)... 235,000 Variable manufacturing overhead ($6 × 6,200). 37,200 Variable selling and administrative ($11 ×

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Units produced... 1,000 Units sold... 900

Units in ending inventory... 100

Direct labor... $26

$11,70 0

What is the net operating income for the month under variable costing? A) $12,700

B) $5,600 C) $1,700 D) $14,400

Solution:

Sales ($123 × 900)... $110,700 Variable cost of goods sold ($71 × 900)... 63,900 Less variable selling and administrative ($6 × 900) 5,400 Contribution margin... 41,400 Fixed cost:

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44. Swifton Company produces a single product. Last year, the company had net

operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing?

A) $15,000 B) $25,000 C) $40,000 D) $55,000

Solution:

Difference between absorption costing net income and variable costing net income = Change in inventory in units × Unit fixed manufacturing overhead = (27,000 − 22,000) × $3 = 5,000 × $3 = $15,000

Net income under absorption costing = $40,000 + $15,000 = $55,000

45. Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year?

A) 8,200 units B) 8,800 units C) 11,200 units D) 11,800 units

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Direct material + Direct labor + Variable manufacturing overhead = Variable unit product cost = $9 – $1 = $8

Unit fixed manufacturing overhead = $11 – $8 = $3

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46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:

Year 1 Year 2 Units (spice racks) produced... 40,000 40,000 Units (spice racks) sold... 37,000 41,000 Absorption costing net operating income...

$44,00 0

$52,00 0 Variable costing net operating income...

$38,00

0 ???

Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2?

A) $48,000 B) $50,000 C) $54,000 D) $56,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard

Solution:

Unit fixed manufacturing overhead = Difference in net income ÷ Change in inventory = ($44,000 – $38,000) ÷ (40,000 – 37,000) = $6,000 ÷ 3,000 = $2

Variable costing net operating income = Absorption costing net income − Difference in net operating income

= $52,000 − [(40,000 − 41,000) × $2)] = $52,000 − ($2,000) = $54,000

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47. Sipho Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $90,900. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $21,900. What was the absorption costing net operating income last year?

A) $69,000 B) $90,900 C) $21,900 D) $112,800

Solution:

Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory

= $90,900 – $21,900 = $69,000

48. Last year, Kirsten Corporation's variable costing net operating income was $63,400. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $10,700. What was the absorption costing net operating income last year? A) $10,700

B) $74,100 C) $63,400 D) $52,700

Solution:

Absorption costing net income = Variable costing net income – fixed manufacturing overhead costs released from inventory

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49. Bellue Inc. manufactures a variety of products. Variable costing net operating income was $96,300 last year and ending inventory decreased by 2,600 units. Fixed

manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year?

A) $2,600 B) $93,700 C) $96,300 D) $98,900

Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory

= $96,300 − [2,600 × $1] = $96,300 − $2,600 = $93,700

50. Last year, Tinklenberg Corporation's variable costing net operating income was $52,400 and its ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost was $8 per unit. What was the absorption costing net operating income last year?

A) $41,200 B) $11,200 C) $63,600 D) $52,400

Solution:

Absorption costing net income = Variable costing net income − fixed manufacturing overhead costs released from inventory

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Use the following to answer questions 51-53:

Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and sold 12,000 units. Production costs for the year were as follows:

Direct materials...

$150,00 0 Direct labor... $180,000 Variable manufacturing overhead...

$135,00 0 Fixed manufacturing overhead...

$210,00 0

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that direct labor is a variable cost.

51. The contribution margin per unit would be: A) $25

B) $39 C) $34 D) $35

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Unit selling price ($840,000 ÷ 12,000)... $70 Less direct materials ($150,000 ÷ 15,000)... $10

Less direct labor ($180,000 ÷ 15,000)... 12 Less variable manufacturing overhead ($135,000

÷ 15,000)... 9 Less variable selling and administrative ($60,000

÷ 12,000)... 5 36 Contribution margin... $34

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52. Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year would be:

A) $135,000 B) $93,000 C) $105,000 D) $0

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $10 + $12 + $9 + $14 = $45

Carrying value = Unit product cost × Ending inventory in units = $45 × (15,000 − 12,000) = $45 × 3,000 = $135,000

53. Under variable costing, the company's net operating income for the year would be: A) $42,000 higher than under absorption costing

B) $30,000 higher than under absorption costing C) $30,000 lower than under absorption costing D) $42,000 lower than under absorption costing

Solution:

Unit fixed manufacturing overhead × Change in inventory in units = $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000

Since the units produced are greater than the units sold (inventory increased), net income under absorption costing will be higher than net income under variable costing.

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Abdi Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price... $81 Units in beginning inventory... 0 Units produced... 7,300 Units sold... 7,000 Units in ending inventory... 300 Variable costs per unit:

Direct materials... $20 Direct labor... $30 Variable manufacturing overhead... $7 Variable selling and administrative... $11 Fixed costs:

$65,70 0 Fixed selling and administrative...

$21,00 0

54. What is the unit product cost for the month under variable costing? A) $77

B) $66 C) $68 D) $57

Solution:

Direct materials + Direct labor + Variable manufacturing overhead = $20 + $30 + $7 = $57

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55. What is the unit product cost for the month under absorption costing? A) $66

B) $77 C) $57 D) $68

Solution:

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66

56. The total contribution margin for the month under the variable costing approach is: A) $91,000

B) $168,000 C) $105,000 D) $25,300

Solution:

Unit selling price... $81 Less unit variable costs:

Direct materials... $20 Direct labor... 30 Variable manufacturing overhead... 7

Variable selling and administrative... 11 68 Contribution margin... $13 Total contribution margin = $13 × 7,000 = $91,000

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57. The total gross margin for the month under the absorption costing approach is: A) $105,000

B) $124,800 C) $7,000 D) $91,000

Solution:

Unit fixed manufacturing overhead = $9

Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66 Sales revenue ($81 × 7,000)...

$567,00 0 Cost of goods sold ($66 × 7,000)...

462,00 0 Gross margin... $105,000

58. What is the total period cost for the month under the variable costing approach? A) $65,700

B) $163,700 C) $98,000 D) $86,700

Solution:

Variable selling and administrative cost + Fixed costs = ($11 × 7,000) + ($65,700 + $21,000)

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59. What is the total period cost for the month under the absorption costing approach? A) $98,000

B) $65,700 C) $21,000 D) $163,700

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Variable selling and administrative cost + Fixed selling and administrative cost = $11 × 7,000 + $21,000

= $77,000 + $21,000 = $98,000

60. What is the net operating income for the month under variable costing? A) $2,700

B) $4,300 C) $7,000 D) $(12,800)

Solution: Sales revenue ($81 × 7,000)... $567,00 0 Variable costs: Product cost ($57 × 7,000)... $399,00 0 Variable selling and administrative ($11 ×

7,000)... 77,000 476,000 Contribution margin... 91,000 Fixed costs:

Fixed manufacturing overhead... $ 65,700

Fixed selling and administrative... 21,000 86,700 Contribution margin... $ 4,300

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61. What is the net operating income for the month under absorption costing? A) $7,000

B) $4,300 C) $(12,800) D) $2,700

Solution:

Sales revenue ($81 × 7,000)...

$567,00 0 Cost of goods sold ($66 × 7,000)... 462,000 Gross margin... 105,000 Selling and administrative expenses:

Variable selling and administrative ($11 ×

7,000)... $77,000

Fixed selling and administrative... 21,000 98,000 Net operating income... $ 7,000 Use the following to answer questions 62-65:

Hopkins Company manufactures a single product. The following data pertain to the company's operations last year:

Selling price per unit... $24 Variable costs per unit:

Production... $8 Selling and administration... $2 Fixed costs in total:

Production...

$48,00 0 Selling and administration...

$36,00 0

At the beginning of the year there were no units in inventory. A total of 12,000 units were produced during the year, and 10,000 units were sold.

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62. Under variable costing, the unit product cost is: A) $8.00

B) $10.00 C) $12.00 D) $14.00

Solution:

Production cost = $8

63. Under absorption costing, the unit product cost is: A) $8.00

B) $10.00 C) $12.00 D) $15.00

Solution:

Unit fixed manufacturing overhead = $48,000 ÷ 12,000 = $4 Unit product cost = $8 + $4 = $12

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64. The net operating income under variable costing would be: A) $64,000

B) $60,000 C) $56,000 D) $52,000

Solution:

Sales revenue ($24 × 10,000)...

$240,00 0 Variable costs:

Variable cost of goods sold ($8 × 10,000)... $80,000 Variable selling and administrative ($2 ×

Fixed manufacturing overhead... $48,000

Fixed selling and administrative... 36,000 84,000 Net operating income... $ 56,000 65. The net operating income under absorption costing would be:

A) the same as the income under variable costing.

B) $8,000 greater than the income under variable costing. C) $12,000 greater than the income under variable costing. D) $8,000 less than the income under variable costing.

Solution:

Unit fixed manufacturing overhead × Change in number of units in ending inventory = $4 × (12,000 − 10,000) = $4 × 2,000

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Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost structure: Variable cost per

parachute Total fixed cost for the year Manufacturing cost... $160 $342,000 Selling and administrative... $10 $171,000

In its first year of operations, Phearsum produced and sold 4,000 parachutes. The parachutes sold for $310 each.

66. If Phearsum would have sold only 3,800 parachutes in its first year, what total amount of cost would have been assigned to the 200 parachutes in finished goods inventory under the variable costing method?

A) $28,000 B) $32,000 C) $34,000 D) $49,100

Solution:

Unit product cost = $160

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67. Refer back to the original data. How would Phearsum's absorption costing net operating income been affected in its first year if only 3,800 parachutes were sold instead of 4,000?

A) net operating income would have been $2,350 lower B) net operating income would have been $10,900 lower C) net operating income would have been $12,900 lower D) net operating income would have been $28,000 lower Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Hard

Solution:

Unit fixed manufacturing overhead = $342,000 ÷ 4,000 = $85.50 Unit product cost under absorption costing = $160 + $85.50 = $245.50 Unit gross margin = $310 − $245.50 = $64.50

Cost savings ($10 × 200)... $ 2,000 Less: decrease in gross margin ($64.50 × 200)... 12,900 Net operating income increase (decrease)... ($10,900)

68. Refer back to the original data. How would Phearsum's variable costing net operating income been affected in its first year if 4,500 parachutes were produced instead of 4,000 and Phearsum still sold 4,000 parachutes?

A) net operating income would not have been affected B) net operating income would have been $38,000 higher C) net operating income would have been $57,000 higher D) net operating income would have been $75,000 lower Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium

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Feery Company, which has only one product, has provided the following data concerning its most recent month of operations:

$14,80 0

B) $90 C) $83 D) $101

Solution:

Direct materials + Direct labor + Variable manufacturing overhead = $32 + $34 + $6 = $72

(37)

B) $90 C) $72 D) $101

Solution:

B) $16,700 C) $9,500 D) $18,500

Solution:

Sales revenue ($110 × 3,700)...

Variable cost of goods sold ($72 × 3,700)...

$266,40 0 Variable selling and administrative ($11 ×

Fixed selling and administrative... 14,800 83,200 Net operating income... $ 16,700

(38)

B) $1,800 C) $9,500 D) $16,700

Solution:

Sales revenue ($110 × 3,700)...

$407,00 0 Cost of goods sold ($90 × 3,700)... 333,000 Gross margin... 74,000 Selling and administrative expenses costs:

3,700)... $40,700

(39)

Jarbo Company, which has only one product, has provided the following data concerning its most recent month of operations:

$64,60 0

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.

B) $103 C) $84 D) $111

(40)

B) $76 C) $103 D) $111

Solution:

B) $24,400 C) $9,200 D) $8,100

Solution:

Sales revenue ($129 × 3,800)...

Variable cost of goods sold ($76 × 3,800)...

$288,80 0 Variable selling and administrative ($8 ×

(41)

B) $9,200 C) $3,800 D) $24,400

Solution:

Sales revenue ($129 × 3,800)...

$490,20 0 Cost of goods sold ($103 × 3,800)... 391,400 Gross margin... 98,800 Selling and administrative expenses costs:

3,800)... $30,400

Fixed selling and administrative... 64,600 95,000 Net operating income... $ 3,800 Use the following to answer questions 77-79:

Beach Corporation, which produces a single product, budgeted the following costs for its first year of operations. These costs are based on a budgeted volume of 30,000 towels produced and sold:

Direct materials... $96,000 Direct labor...

$48,00 0 Variable manufacturing overhead...

$72,00 0 Fixed manufacturing overhead...

$60,00 0 Variable selling and administrative...

$12,00 0 $36,00

(42)

During the first year of operations, Beach Towel actually produced 30,000 towels but only sold 24,000 towels. Actual costs did not fluctuate from the cost behavior patterns described above. The 24,000 towels were sold for $16 per towel. Assume that direct labor is a variable cost.

(43)

77. What is the total cost that would be assigned to Beach Towel's finished goods inventory at the end of the first year of operations under the variable costing method? A) $43,200

B) $45,600 C) $55,200 D) $64,800

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 30,000 units = ($96,000 + $48,000 + $72,000) ÷ 30,000 = $7.20

Total cost of ending finished goods inventory = Unit product cost × Ending inventory = $7.20 × (30,000 − 24,000) = $7.20 × 6,000 = $43,200

78. Under the absorption costing method, what is Beach Towel's actual net operating income for its first year?

A) $60,000 B) $115,200 C) $117,600 D) $124,800

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead) ÷ 30,000 units

= ($96,000 + $48,000 + $72,000 + $60,000) ÷ 30,000 = $9.20

Unit variable selling and administrative cost = $12,000 ÷ 30,000 = $0.40 Sales revenue ($16 × 24,000)...

$384,00 0 Cost of goods sold ($9.20 × 24,000)... 220,800 Gross margin... 163,200 Selling and administrative expenses:

(44)

(45)

79. Assuming no change in cost structure, which of the following would have increased Beach Towel's net operating income under the variable costing method in its first year of operations?

A) an increase in sales volume with no increase in production volume B) an increase in production volume with no increase in sales volume C) both A and B above

D) none of the above

Blake Corporation, which produces a single product, has provided the following absorption costing income statement for the month of June:

Blake Corporation Income Statement For the month ended June 30

Sales (9,500 units)... $285,000 Cost of goods sold:

Beginning inventory... $ 16,000 Add cost of goods manufactured... 160,000 Goods available for sale... 176,000 Less ending Inventory... 24,000

Cost of goods sold... 152,000 Gross margin... 133,000 Selling and administrative expenses:

Fixed... $ 75,000

Variable... 19,000 94,000 Net operating income... $ 39,000

During June, the company's variable production costs were $10 per unit and its fixed

manufacturing overhead totaled $60,000. A total of 10,000 units were produced during June and the company had 1,000 units in the beginning inventory. The company uses the LIFO method to value inventories.

(46)

80. The contribution margin per unit during June was: A) $20

B) $18 C) $16 D) $14

Solution:

Selling price ($285,000 ÷ 9,500)... $30 Less variable product cost... 10 Less unit variable selling and administrative

($19,000 ÷ 9,500)... 2

Unit contribution margin $18

81. The carrying value on the balance sheet of the company's inventory on June 30 under the variable costing method would be:

A) $10,000 B) $12,000 C) $15,000 D) $24,000

Solution:

Ending inventory = Beginning inventory + Units produced − Units sold = 1,000 + 10,000 − 9,500 = 1,500

Carrying value = Ending inventory in units × Variable production cost = 1,500 × $10 = $15,000

(47)

82. Net operating income under the variable costing method for June would be: A) $36,000

B) $40,000 C) $53,000 D) $60,000

Solution:

Sales revenue (9,500 units)...

Variable cost of goods sold ($10 × 9,500)... $95,000

Variable selling and administrative... 19,000 114,000 Contribution margin... 171,000 Fixed costs:

Fixed manufacturing overhead... $60,000

Fixed selling and administrative... 75,000 135,000 Net operating income... $ 36,000 83. The break-even point in units for the month under variable costing would be:

A) 6,000 units B) 6,750 units C) 7,500 units D) 9,000 units

Solution:

Sales revenue (9,500 units)...

Variable cost of goods sold ($10 × 9,500)... $95,000

(48)

selling and administrative) ÷ Unit contribution margin = ($60,000 + $75,000) ÷ ($171,000 ÷ 9,500) = $135,000 ÷ $18 per unit = 7,500 units

(49)

Haaikon Company, which has only one product, has provided the following data concerning its most recent month of operations:

$23,10 0

B) $57 C) $69 D) $65

Solution:

Unit product cost = Direct materials + Direct Labor + Variable manufacturing overhead = $17 + $39 + $1 = $57

(50)

B) $28,500 C) $95,700 D) $69,300

Solution:

3,300)... 26,400 214,500 Contribution margin...

$ 69,300 86. What is the total period cost for the month under the variable costing approach?

A) $40,800 B) $90,300 C) $49,500 D) $63,900

Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= ($8 × 3,300) + $40,800 + $23,100 = $26,400 + $40,800 + $23,100 = $90,300

(51)

B) $(300) C) $5,400 D) $1,200

Solution:

(52)

Ibarra Company, which has only one product, has provided the following data concerning its most recent month of operations:

$66,00 0

B) $66 C) $56 D) $61

Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead = $22 + $28 + $6 = $56

(53)

89. What is the net operating income for the month under variable costing? A) $0

B) $(19,800) C) $(3,000) D) $3,000

Solution:

Fixed selling and administrative... 66,000 135,000 Net operating income... $ (3,000) Use the following to answer questions 90-92:

Yankee Company manufactures a single product. The company has the following cost structure:

Variable costs per unit:

Production... $4 Selling and administrative... $1 Fixed costs in total:

Production...

$12,00 0 Selling and administrative... $8,000

(54)

90. Under variable costing, the unit product cost would be: A) $4

B) $5 C) $7 D) $8

Solution:

Production cost = $4

91. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:

A) the same as under absorption costing B) $1,500 less than under absorption costing C) $2,000 higher than under absorption costing D) $2,000 less than under absorption costing

Solution:

Difference in carrying value of ending finished goods inventory = Unit fixed manufacturing overhead × Change in inventory in units

= $3 × (4,000 − 3,500)

(55)

92. Under absorption costing, the cost of goods sold for the year would be: A) $28,000

B) $24,500 C) $17,500 D) $14,000

Solution:

Unit fixed manufacturing overhead = $12,000 ÷ 4,000 = $3 Product cost = $4 + $3 = $7

Cost of goods sold = $7 × 3,500 = $24,500 Use the following to answer questions 93-94:

Peterson Company produces a single product. Data from the company's records for last year follow:

Units in beginning inventory... 0 Units produced... 70,000 Units sold... 60,000 Sales... $1,400,000 Manufacturing costs: Variable... $630,000 Fixed... $315,000 Selling and administrative expenses:

Variable... $98,000 Fixed... $140,000

(56)

93. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:

A) $90,000 B) $104,000 C) $105,000 D) $135,000

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted Solution:

Unit variable product cost = $630,000 ÷ 70,000 = $9 Change in inventory in units = 70,000 − 60,000 = 10,000 Carrying value of ending inventory = $9 × 10,000 = $90,000

94. Under the absorption costing method, Peterson's net operating income would be: A) $217,000

B) $307,000 C) $352,000 D) $374,500

Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted Solution:

Product cost = $9 + $4.50 = $13.50

Sales revenue... $1,400,000 Cost of goods sold ($13.50 × 60,000)... 810,000 Gross margin... 590,000 Selling and administrative expenses:

Variable selling and administrative... $ 98,000

(57)

McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost structure:

Variable cost

per monitor Total fixed cost for the year Manufacturing cost... $75.20 $912,000 Selling and administrative... $14.60 $456,000

In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000. McCoy's gross margin in this first year was $2,629,600. McCoy's contribution margin in this first year was $2,109,000.

95. Under the variable costing method, what is McCoy's net operating income for its first year?

A) $266,000 B) $741,000 C) $1,261,600 D) $2,173,600

Solution:

Contribution margin... $2,109,000 Fixed costs:

456,00 0

1,368,000 Net operating income... $ 741,000

(58)

96. Under the absorption costing method, what is McCoy's net operating income for its first year? A) $266,000 B) $786,600 C) $1,261,600 D) $2,173,600

Solution:

Gross margin... $2,629,600 Selling and administrative expenses:

Variable selling and administrative ($14.60 ×

95,000)... $1,387,000

Fixed selling and administrative... 456,000 1,843,000 Net operating income... $ 786,600 97. If McCoy produces 100,000 monitors and sells 100,000 monitors in the second year of

operations, which of the following statements will be true? (Assume no change in cost structure or selling price.)

A) McCoy's variable costing net operating income in its second year will be greater than its absorption costing net operating income

B) McCoy's absorption costing unit product cost will decrease in the second year C) McCoy's gross margin will be equal to its contribution margin in its second year D) Both A and B above

E) none of the above

Ans: E AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Hard

(59)

Mediocre Manufacturing Company produces a single product. Management budgeted the following costs for its first year of operations. These costs are based on a budgeted volume of 4,000 units produced and sold:

Direct materials... $28,00 0 Direct labor... $14,00 0 Manufacturing overhead: Variable... $56,00 0 Fixed... $63,00 0 Selling and administrative:

Variable... $7,000 Fixed... $42,000

During the first year of operations, Mediocre actually produced 4,000 units but only sold 3,500 units. Actual costs did not fluctuate from the cost behavior patterns described above. The 3,500 units were sold for $72 per unit. Assume that direct labor is a variable cost.

98. What is the total cost that would be assigned to Mediocre's finished goods inventory at the end of the first year of operations under the absorption costing method?

A) $12,250 B) $20,125 C) $23,000 D) $26,250

Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

(60)

99. Under the variable costing method, what is Mediocre's actual net operating income for its first year?

A) $42,000 B) $54,250 C) $55,125 D) $63,000

Solution:

Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 4,000 units = ($28,000 + $14,000 + $56,000) ÷ 4,000 = $24.50

Variable cost of goods sold ($24.50 × 3,500).... $85,750 Variable selling and administrative ($1.75 ×

Fixed manufacturing overhead... $63,000 Fixed selling and administrative... 42,000

105,00 0 Net operating income... 55,125$

100. Assuming no change in cost structure, which of the following would have increased Mediocre's net operating income under the absorption costing method in its first year of operations?

A) an increase in sales volume with no increase in production volume B) an increase in production volume with no increase in sales volume C) both A and B above

(61)

JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000 units were produced and 80,000 units were sold. There were no beginning inventories. The company has the following cost structure:

Fixed Costs Variable Costs Raw materials... -- $1.50 per unit produced Direct labor... -- $1.00 per unit produced Factory overhead... $150,000 $0.50 per unit produced Selling and administrative... $80,000 $0.50 per unit sold 101. The unit product cost under absorption costing is:

A) $2.50 B) $3.00 C) $3.50 D) $4.50

Ans: D AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted Solution:

Unit fixed overhead = $150,000 ÷ 100,000 = $1.50

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

(62)

102. The net operating income under variable costing is: A) $50,000

B) $80,000 C) $90,000 D) $120,000

AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted Solution:

Product cost = Direct materials + Direct labor + Variable manufacturing overhead = $1.50 + $1 + $0.50 = $3

Sales revenue ($7 × 80,000)... $560,000 Variable costs:

Variable cost of goods sold ($3 × 80,000)... $240,000 Variable selling and administrative ($0.50 ×

Fixed manufacturing overhead... 150,000 Fixed selling and administrative...

80,00 0

230,00 0 Net operating income... 50,000$

(63)

Gadepelli Company, which has only one product, has provided the following data concerning its most recent month of operations:

$23,80 0

B) $99,400 C) $93,800 D) $42,600

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Medium

Solution:

Unit product cost = $15 + $14 + $6 = $35

(64)

(65)

104. The total gross margin for the month under the absorption costing approach is: A) $25,200

B) $54,600 C) $68,000 D) $93,800

Solution:

Sales revenue ($106 × 1,400)... $148,400 Cost of goods sold ($67 × 1,400)... 93,800 Gross margin... $ 54,600

105. What is the total period cost for the month under the variable costing approach? A) $75,000

B) $80,600 C) $29,400 D) $51,200

Solution:

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= $4 × 1,400 + $51,200 + $23,800 = $5,600 + $51,200 + $23,800 = $80,600

(66)

106. What is the total period cost for the month under the absorption costing approach? A) $29,400

B) $80,600 C) $23,800 D) $51,200

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Hard

Solution:

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 1,400 + $23,800 = $29,400

During its first year of operations, Carlos Manufacturing Company incurred the following costs to produce 8,000 units of its product:

Direct materials... $7 per unit Direct labor... $3 per unit Variable manufacturing overhead... $18 per unit Fixed manufacturing overhead... $450,000 in total

The company also incurred the following costs in the sale of 7,500 units of product during its first year:

Variable selling and administrative... $2 per unit Fixed selling and administrative... $60,000 in total Assume that direct labor is a variable cost.

(67)

107. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the absorption costing method?

A) $15,000 B) $42,125 C) $44,000 D) $47,125

Solution:

Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $84.25 × (8,000 − 7,500) = $84.25 × 500 = $42,125

108. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the variable costing method?

A) $15,000 B) $42,125 C) $44,000 D) $14,000

Solution:

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000

(68)

109. If Carlos' absorption costing net operating income for this first year is $118,125, what would its variable costing net operating income be for this first year?

A) $86,000 B) $90,000 C) $104,125 D) $146,250

Solution:

Variable costing net income = Absorption costing net income – (Unit fixed manufacturing overhead × Change in inventory in units)

= $118,125 − ($56.25 × 500) = $118,125 − $28,125 = $90,000 Use the following to answer questions 110-111:

Kern Company produces a single product. Selected information concerning the operations of the company follow:

Units in beginning inventory... 0 Units produced... 10,000 Units sold... 9,000 Direct materials... $40,00 0 Direct labor $20,000

Variable factory overhead...

$12,00 0 Fixed factory overhead...

$25,00 0 Variable selling and administrative expenses... $4,500 Fixed selling and administrative expenses... $30,000 Assume that direct labor is a variable cost.