Direct and Absorption Costing 2014.docx

BALIUAG UNIVERSITY CPA REVIEW 2014-15 MANAGEMENT ADVISORY SERVICES

JACF __________________ ___________________________ __________________ _________________ __________________ __________________ _________________ __________________ _________________ __________________ __________ DIRECT AND ABSORPTION COSTING THEORY

1. When using full absorption costing, what cost attendant to an element of production (material, labor or overhead) is used in order to compute variances from standard amounts? a. Controllable costs; b. Variable costs; c. Total costs; d. Fixed costs 2. An income statement is prepared as an internal report. Under which of the following methods would the term contribution margin appear? Absorption Costing Direct Costing a. No No b. No Yes c. Yes No d. Yes Yes 3. The direct costing method includes in inventory: a. Direct material cost, direct labor cost, but not all factory overhead cost. b. Direct material cost, direct labor cost, and variable factory overhead cost. c. Prime cost but not conversation cost. d. Prime cost and all conversion cost. 4. What factor, related to manufacturing costs, causes the difference in net earnings computed using absorption costing and net earnings computed under direct costing? a. Absorption costing considers all costs in the determination of net earnings, whereas direct costing considers only direct costs. b. Absorption costing allocates fixed costs between cost of goods sold and inventories and direct costing considers all fixed costs to be period cost. c. Absorption costing “inventories’ all fixed costs for the period in ending finished goods inventory, but direct costing expensed all fixed costs. d. Absorption costing “inventories” all direct costs, but costing considers direct costs to be period costs 5. Which of the following must be known about a production process in order to institute a direct costing system? a. The variable and fixed components of all costs related to production; b. The controllable and uncontrollable components of all costs related to production; c. Standard production rates and times for all elements of productions; d. Contribution margin and breakeven point for all goods in production 6. A basic tenet of direct costing is that period costs should be currently expenses. What is the basic rationale behind this procedure? a. Period costs are incontrollable and should not be charged to a specific product. b. Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits. c. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by management. d. Period costs will occur whether or not production occurs and so it is improper to allocate t hese costs to production and defer a current cost of doing business. _____________ ___________________ _____________ ______________ _____________ _____________ _____________ _____________ ______________ _____________ _____________ ______________ _________ __ Page 1 of 15 Learn the rules like a pro, so you can break them like an artist.


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7. Why is direct costing not in compliance with generally accepted accounting principles? a. Fixed manufacturing costs are assumed to be period costs. b. Direct costing procedures are not well known in industry. c. Net earnings are always overstated when using direct costing procedures. d. Direct costing ignores the concept of lower of cost or market when valuing inventory. 8. What is the basic difference between direct costing and absorption costing? a. Direct costing always produces less taxable income than absorption. b. Direct coating recognizes fixed costs as a period cost and absorption costing recognizes fixed costs as product cost. c. Direct costing cannot use standards, whereas standards may be used with absorption costing d. Direct costing may be used only in situation where production is essentially homogenous but e. Absorption costing may be used under any manufacturing condition. 9. What will be the difference in net earnings computed using direct costing as opposed to absorption costing if the ending inventory increases with respect to the beginning inventories in terms of units? a. There will be no difference in net earnings b. Net earnings computed using direct costing will be higher. c. The difference in net earnings cannot be determined from the information given. d. Net earnings computed using direct costing will be lower 10. Net earnings determined using absorption costing can be reconciled to net earnings determined using direct costing by computing the difference between: a. Inventoried fixed costs in the beginning and ending inventories and any deferred over or under applied fixed factory overhead b. Inventoried discretionary costs in the beginning and ending inventories: c. Gross margin (absorption costing method) and contribution margin (direct costing method); d. Sales as recorded under the direct costing method and sales as recorded under the absorption costing method 11. The basic assumption made in direct costing system with respect to fixed cost is that fixed costs are: a. A sunk cost b. Product cost c. Fixed as to the total cost d. A period cost 12. When using direct costing system, the contribution margin discloses the excess of a. Revenue over fixed over fixed costs b. Projected revenues over the breakeven point c. Revenue over variable costs d. Variable costs over fixed costs. 13. The operating earnings computed using variable (direct) costing would exceed operating earnings computed using absorption costing if: a. Units sold exceed units produced b. Units sold are less than units produced c. Units sold equal units produced d. The unit fixed cost is zero

________________________________________________________________________________________ Page 2 of 15 Learn the rules like a pro, so you can break them like an artist.


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14. The net income reported under absorption costing will exceed net income reported under direct costing for a period if: a. Production equals sales for the period b. Production exceeds sales for that period c. Sales exceed production for the period d. The variable overhead exceed the fixed overhead 15. Net income reported under variable costing will exceed net income reported under absorption costing for the period if: a. Production equals sales for that period b. Production is greater than sales for the period c. Sales is greater than production for the period d. The variable costs exceeds the fixed costs 16. Net profit under absorption costing may differ from net profit determined under direct costing. How is the difference calculated? a. Change in the quantity of all units in inventory times the relevant fixed cost per unit. b. Change in the quantity of all units produced times the relevant fixed cost per unit c. Change in the quantity of all units in inventory times the relevant variable cost per unit d. Change in the quantity of all units produced times the relevant variable cost per unit 17. If the net earnings were higher using standard direct costing than using standard absorption costing, when can be said about sales during the period if inventory is priced using the LIFO method? a. Sales increased b. Sales exceeded production c. Sales were less than production d. Sales decreased 18. Which of the following cost accounting terminology is commonly referred to as direct costing? a. Absorption costing b. Prime costing c. Variable costing d. Relevant costing 19. Direct costing is used for internal purposes only which included the following except: a. Inventory valuation b. Income measurement c. Relevant cost analysis d. Capital investment decision 20. Prime costs mean: a. The first costs incurred on a job b. Indispensable as distinguished from avoidable cost c. Direct materials and direct labor d. Cost incurred on joint products before split-off point 21. Which of the following costs is a product cost under absorption costing but not under direct costing a. Variable factory overhead b. Fixed factory overhead c. Direct materials d. Direct labor ________________________________________________________________________________________ Page 3 of 15 Learn the rules like a pro, so you can break them like an artist.


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22. Operating using direct costing as compared to absorption costing would be higher a. When quantity of beginning inventory equals the quantity of ending inventory b. When quantity of beginning inventory is more than the quantity of ending inventory c. When the quantity of beginning inventory is less than the quantity of ending inventory d. Under no circumstances 23. A concept of costing under which costs are classified as fixed or variable a. Absorption costing b. Direct costing c. Imputed costing d. None of these 24. The following statements about the adoption of variable costing are true, except: a. All fixed manufacturing costs are recognized as period cost b. A direct may not become a product cost c. It is an accepted method for general reporting purposes d. An indirect cost may be assigned as part of product cost e. All of the above 25. If companies A and B manufacture similar products that require negligible distribution costs, and if their assets, operations and accounting are similar in all respects except that A uses direct costing and B uses absorption costing a. A would report a higher inventory value than B for the year in which production exceeds sales b. A would report a higher inventory value than B for the years in which production exceeds the normal or practical capacity c. B would report a higher inventory value than A for the years in which production exceeds sales d. B would report a higher net income than A for the years in which production equals sales 26. Under direct costing procedure a. An increase in inventory decreases marginal income b. No overhead costs are charged to the product c. Inventory values tend to be overstated d. Fixed costs are treated as period costs 27. Other things being equal, net income computed by the direct costing method would exceed net income computed by an absorption costs if a. Units sold were to exceed units produced b. Fixed manufacturing costs were to increase c. Units produced were to exceed units sold d. Variable manufacturing costs were to increase 28. Absorption costing differs from direct costing in the a. Amount of costs assigned to individual units of product b. Amount of net income that will be reported when there is no change inventory c. Amount of fixed costs that will be incurred d. Kinds of activities for which they may be used to report 29. Reporting under the direct costing concept is accomplished by a. Including only direct costs in the income statement b. Matching variable costs against revenues and treating fixed costs are periods costs c. Treating all costs as period costs d. Eliminating the work in process inventory account ________________________________________________________________________________________ Page 4 of 15 Learn the rules like a pro, so you can break them like an artist.


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30. The contribution margin decreases when sales volume remains the same and a. Fixed costs increase b. Fixed costs decrease c. Variable cost per units increases d. Variable cost per units decrease 31. The absorption costing method includes in inventory Fixed Factory Overhead a. No b. No c. Yes d. Yes

Variable Factory Overhead No Yes Yes No

32. Which of the following is not the excess of net sales over related variable costs? a. Contribution margin b. Gross margin c. Marginal income d. Profit contribution 33. What costs are treated as period costs under direct costing? a. Only direct costs b. All variable production costs c. All fixed costs d. All variable and fixed costs 34. What costs are treated as product costs under variable 9direct costing) a. Only direct costs b. All variable and fixed manufacturing costs c. All variable costs d. None of the above 35. In an income statement prepared as an internal report, operating income would normally be measured under:

a. b. c. d.

Absorption Costing No No Yes Yes

Variable Costing Yes No No Yes

36. If an income statement is prepared as an internal report, under which of the following methods would the term gross profit most likely to appear? a. Both absorption costing and direct costing b. Absorption costing but not direct costing c. Direct costing but not absorption costing d. Neither direct costing nor absorption costing



JACF __________________________________________________________________________________________________

37. In an income statement prepared as an internal report using the variable costing method, fixed factory overhead would. a. Not be used b. Be used in the computation of operating income but not in the computation of contribution margin c. Be used in the computation of contribution margin d. Be treated the same as variable factory overhead 38. In an income statement prepared as an internal report using the variable costing method, variable selling and administrative expenses would a. Not be used b. Be used in the computation of contribution margin c. To be used in the computation of operating income but not in the computation of contribution margin d. Be treated the same as fixed selling and administrative expenses 39. The alternative that would decrease the contribution margin per unit, the most is a. Decrease in variable expenses b. Increase in selling price c. Decrease in fixed expenses d. Decrease in selling price 40. Absorption costing is similar to direct costing in the a. Amount of costs assigned to individual units of products b. Kinds of activities for which they may be used to report c. Treatment for fixed selling and administrative expenses d. Conformity with generally accepted accounting principle 41. Which of the following statements is true for accompany that uses variable costing? a. The cost of a unit of product changes because of changes in number of units manufactured b. Profits fluctuate with sales c. An idle facility variation is calculated d. Product costs include variable administrative cost 42. When company prepares financial reports by using absorption costing a. Profits will always increase with increase in sales b. Profits will always decrease with decreases in sales c. Profits may decrease with increased sales even if there is no change in selling prices and costs d. Decreased output and constant sales result in increased profits 43. Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs both variable and fixed, as inventories costs? a. Direct costing b. Variable costing c. Absorption costing d. Conversion costing 44. Which of the following statements is correct regarding absorption costing and variable costing a. Overhead costs are treated in the same manner under both costing methods b. If finished goods inventory increases, absorption costing results in higher income c. Variable manufacturing costs are lower under variable costing d. Gross margin are the same under both costing methods ________________________________________________________________________________________ Page 6 of 15 Learn the rules like a pro, so you can break them like an artist.


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45. The costing method that is properly classified for both external and internal reporting purpose is External Reporting Internal Reporting a. Activity-based costing No Yes b. Job-order costing No Yes c. Variable costing No Yes d. Process costing No No 46. Absorption costing and variable costing are two different methods of assigning costs to units produced. Of the cost items listed below indentify the one that is not correctly accounted for as a product cost

a. b. c. d.

Manufacturing supplies Insurance on factory Direct labor cost Packaging and shipping costs

Part of Product Cost under Absorption Cost Variable Cost Yes Yes Yes No Yes Yes Yes Yes

47. Jaysen, 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, Jaysen’s managers may do all of the following except. a. Produce those products requiring the most direct labor. b. Defer expenses such as maintenance to a future period c. Increase production schedules independent of customer demands d. Decrease production of those items requiring the most direct labor 48. The breakeven point in units increases when unit costs a. Increase and sale price remains unchanged b. Decrease and sales price remains unchanged c. Remain unchanged and sales price increases d. Decrease and sales price increases 49. For a profitable company, the amount by which sales can decline before losses occur is known as t he a. Sales volume variance b. Hurdle rate c. Variable sales ratio d. Margin of safety 50. Which one of the following is correct regarding a relevant range? a. Total variable costs will not change b. Total fixed costs will not change c. Actual fixed costs usually full outside the relevant d. The relevant range cannot be changed after being established



JACF __________________________________________________________________________________________________

PROBLEMS:

1.

Carla Company produces and sells iPon. Assume for 3 years the following are the manufacturing costs:  Materials per unit P 3.00  Labor per unit 2.00  Variable overhead per unit 1.00  Total fixed overhead 2,000.00  Variable selling and administrative costs 1.50  Fixed selling and administrative costs 800.00 Carla sells its product at P15.00 per unit, and the following are its sales and production records for 3 years: Year 1 Year 2 Year 3 Units of production 1,000 1,000 1,000 Units sold 1,000 800 1,100 Required: Compute the net income for each year using absorption and variable costing.

2. The following data were obtained from APEOPLE Inc.: Selling price per unit Standard costs per unit of product  Materials  Labor  Variable overhead  Fixed overhead at normal capacity of 1,000 units Total standard cost per unit The following are the actual costs incurred for the month: Production Sales at standard selling price Selling and administrative expenses:  Variable, per unit  Total fixed cost The following variances were noted:  Unfavorable price variance  Favorable quantity variance  Favorable time variance  Favorable rate variance  Unfavorable controllable variance Required: Income statements using absorption and variable costing.

P50.00 P 7.00 8.00 5.00 3.00 P23.00

900 units 850 units P 2.50 3,000.00 P500.00 300.00 450.00 100.00 600.00

3. Alma Inc. manufactured 700 units of product A, a new product, in 2012 , Product A’s variable and fixed manufacturing costs per unit were P6 and P2 respectively. The inventory of Product A on December 31, 2012 consisted of 100 units. There was n inventory on January 1, 2012. What would be the changed in the peso amount of inventory on December 31, 2012 if the direct costing method was used instead of the absorption costing method was used instead of the absorption costing method? a. 800 decrease b. 200 decrease c. P0 d. P200 decrease ________________________________________________________________________________________ Page 8 of 15 Learn the rules like a pro, so you can break them like an artist.


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Items 4 and 5 are based on the following information: Of the 6,000 units produced by the Sta. Teresita Company during September, 5000 units were sold at P45 per unit. Production costs during the month were: Materials, P40,000;Direct labor, P50,000; Factory Overhead-fixed, P30,000; factory overhead variable,P36,000; General and administrative expenses, all fixed, total P60,000.

4. The net operating income for September under absorption costing was: a.

P25,000

b. P30,000 c. P35,000 d. P26,000 5. The net operating income for September under variable costing was a. P25,000 b. P30,000 c. P35,000 d. P21,000 Items 6 to 9 are based on the following information: available for Nhecy Corp.’s product line: Selling price per unit, P15; Variable manufacturing costs per unit of production, P8; Total annual fixed manufacturing costs, P25,000; Variable administrative costs per unit of production, P3. Total annual fixed selling and administrative expenses, P15000. There was n inventory at the beginning of the year: During the year 12,500 units are produced and 10,000 units were sold.

6. The ending inventory, assuming Nhecy used direct costing, would be a. 25,000 b. 32,500 c. 27,500 d. 20,000 7. The ending inventory, assuming Nhecy used absorption costing, would be a. 23,500 b. 27,500 c. 20,000 d. 25,000 8. The total variable costs charged the expenses for the year, assuming, Nhecy uses direct costing would be a. 110,000 b. 100,000 c. 117,500 d. 80,000 9. The total fixed cost charged against the current year’s operations, assuming Nhecy uses absorption costing is a. 35,000 b. 40,000 c. 25,000 d. 15,000 ________________________________________________________________________________________ Page 9 of 15 Learn the rules like a pro, so you can break them like an artist.


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Items 10 and 11 are based on the following information: Gerlie Company began its operations on January 1, 2012 and produces a single product that sells for P10 per unit. Gerlie uses an actual cost system. In 2012, 100,000 units were produced and P80,000 units were sold. There were no works in process inventory at December 31, 2012. Manufacturing costs and selling administrative expenses for 2012 were as follows: Fixed Costs Variable Costs Raw materials -P2.00 per unit produced Direct labor -P1.25 per unit produced Factory overhead P120,000 P0.75 per unit produced Selling & administrative P70,000 P1.00 per unit produced 10. What would be Gerlie’s operating income for 2012 under variable (direct) costing method? a. P114,000 b. P210,000 c. P234,000 d. P330,000 11. What would be Gerlie’s finished goods inventory at December 31, 2012 under absorption costing method a. P80,000 b. 104,000 c. 110,000 d. 124,000 Items 12 and 13 are based on the selected information concerning the operations of Elma Company for the year ended December 31, 2012:

Units produced Units sold Direct material used Direct labor incurred Fixed factory overhead Variable factory overhead

10,000 9,000 P40, 000 20,000 25,000 12,000

Filled selling adm. Expenses Variable selling and adm. Expenses Finished goods inventory, Jan. 1 Work in process inventory, Jan. 1

30,000 4,500 none none

12. What would be Elma’s finished goods inventory at December 31, 2012 under the direct costing method? a. P7,200 b. P7,650 c. P8,000 d. P9,700 13. Which costing method, absorption or variable costing, would show a higher operating income for 2012 and by what amount? a. Absorption costing P2,500 b. Variable costing P2,500 c. Absorption costing P5,500 d. Variable costing P5,500



JACF __________________________________________________________________________________________________

Items 14 and 15 based in the following information from Peter Company’s records for the year ended December 31, 2012:

Net sales P1,400,000 Costs of goods manufactured: Variable P630,000 Fixed P315,000 Operating Expenses: Variable P98,000 Fixed P140,000

Units manufactured Units sold Finished goods inventory, Jan 1

70,000 60,000 none

14. What would be Peter’s finished goods inventory at December 31, 2012 under the variable (direct) costing method? a. P90,000 b. P140,000 c. P105,000 d. P135,000 15. Under the absorption costing method, Peter’s operating i ncome for 2012 would be a. P217,000 b. P307,000 c. P352,000 d. P374,000 16. During January 2012, Gabby Inc., produced 10,000 units of Product F with costs as follows: Direct materials P40,000 Direct labor 22,000 Variable overhead 13,000 Fixed overhead 10,000 P85,000 What is Gabby’s unit cost of Product F for January, 2012 calculated on the direct costing method? a. P6.20 b. P7.20 c. P7.50 d. P8.50

17. Brooks Corp. began operation on January 1, 2012, and products a single product that sells for P9 a unit Brooks uses an actual cost system. 100,000 units were produced and 90,000 units were sold in 1999, there were no work-in-process inventory at December 31, 2012. Manufacturing cost and selling and administrative expenses for 2012 were as follows:

Raw materials Direct labor Factory overhead Selling & administrative

Fixed Costs --P150,000 P 80,000

Variable Costs P1.50 per unit produced P1.00 per unit produced P0.50 per unit produced P0.50 per unit sold

There were no variances from the standard variable costs. Any under or overapplied overhead is written off directly at the year end as an adjustment to cost of goods sold. ________________________________________________________________________________________ Page 11 of 15 Learn the rules like a pro, so you can break them like an artist.


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18. In presenting inventory on the balance sheet a December 31, 2012, the unit cost under absorption costing is a. P2.50 b. P3.00 c. P3.50 d. P4.50 19. What is the net income for 2012 under direct costing? a. P50,000 b. P80,000 c. P90,000 d. P120,000 20. Keller Company, a manufacturer of rivets, uses absorption costing. Keller’s 2012 manufacturing costs were as follows: Direct materials and direct labor Depreciation of machines Rent for factory building Electricity to run machines

P800,000 P100,000 60,000 35,000

How much of this cost should be inventoried? a. P800,000 b. P835,000 c. P935,000 d. P995,000 Items 21 and 22 are based on the following data: Bates Company incurred the following costs:

Direct materials and direct labor Variable factory overhead Straight-line depreciation: Production machinery Factory building

P600,000 80,000 70,000 50,000

21. Under absorption costing, the inventoriable costs are a. P680,000 b. P730,000 c. P750,000 d. P800,000 22. Under variable (direct) costing, the inventoriable costs are a. P600,000 b. P680,000 c. P720,000 d. P750,000



JACF __________________________________________________________________________________________________

Items 23 and 24 are based on the following data: Lina Co. produced 100,000 units of Product Zee during the month of June. Costs incurred during June were as follows:

Direct material used Direct labor used Variable manufacturing overhead Fixed manufacturing overhead Variable selling and general expenses Fixed selling and general expenses

P100,000 80,000 40,000 50,000 12,000 45,000 P327,000

23. What was the Product Zee’s unit cost under absorption costing? a. P3.27 b. P2.70 c. P2.20 d. P1.80 24. What was Product Zee’s unit under variable costing? a. P2.82 b. P2.70 c. P2.32 d. P2.20 25. Luna Company’s 2012 manufacturing costs were as follows: Direct materials and direct labor Depreciation of manufacturing equipment Depreciation of factory building Janitor’s wages for cleaning factory premises

P500,000 70,000 40,000 15,000

How much of these costs should be inventoried for external reporting purposes? a. P625,000 b. P610,000 c. P585,000 d. P500,000 26. West Co.’s 2012 manufacturing costs was as follows: Direct materials and direct labor Other variable manufacturing costs Depreciation of factory building and manufacturing equipment Other fixed manufacturing overhead

P700,000 100,000 80,000 18,000

What amount should be considered product costs for external reporting purposes? a. P700,000 b. P800,000 c. P880,000 d. P898,000



JACF __________________________________________________________________________________________________

Items 27 and 28 are based on the following information: Direct material used P350,000 Direct labor 550,000 Variable manufacturing overhead 375,000 Fixed manufacturing overhead 325,000

27. The value to be assigned to the finished goods inventory at the end of he period under the direct costing is: a. P255,000 b. P300,000 c. P320,000 d. P400,000 e. None of these 28. The value to be assigned to the finished goods inventory at the end of he period under the absorption costing is: a. P255,000 b. P300,000 c. P320,000 d. P400,000 e. None of these 29. Cost data for a special product manufactured by Coronado, Inc. are given below: Selling price per unit Unit costs: Direct materials Direct labor Order cost per unit: Manufacturing Distribution

P60.00 P12.00

Variable P5.00 9.00

Fixed P12.00 7.00

Coronado, Inc. sells, on the average, 300,00o units a year. Using the direct costing method, The unit cost of the special product for inventory purposes is a. P22 b. P24 c. P27 d. P36 e. None of these



JACF __________________________________________________________________________________________________

Items 30, 31 and 32 are based on the following data: The Yellow Co. has the capacity to manufacture 20,000 units per month. However, present plans call for monthly production and sales of P15,000 units of P21.00 each.

Costs per unit are as follows: Direct material Direct labor Variable factory overhead Fixed factory overhead Variable marketing expense Fixed administrative expense

P7.00 4.20 1.05 2.10 .35 1.40 P16.10

30. Assume the Yellow Co. accepted a special order of 5,000 units at P15.00 per unit, the increase or decrease in contribution margin shall amount to a.P5,500 decrease b.P12,000 decrease c.P12,000 increase d.P13,750 increase e. none of these 31. The unit cost figure the company would use in costing inventory using direct costing is a. 12.25 b. 12.60 c. 14.70 d. 16.70 e. None of these 32. Assuming that the regular sales price of the company is reduced to P19.00 resulting in a 10% increase in sales volume, the effect in the monthly contribution margin will be a. b. c. d. e.

P20,400 decrease P20,400 decrease P30,000 increase P33,000 increase None of these

END


Direct and Absorption Costing 2014.docx

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