CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES VARIABLE COSTING & ABSORPTION COSTING
THEORY 1. To apply direct direct costin costing g method it is necessary necessary that that you know know A. Standard Standard production production rate rate and times times of production production element elementss B. Contributi Contribution on margin margin and break break even point point in in production production C. Variable ariable and fied fied cost related related to producti production on !. Controllab Controllable le and uncontroll uncontrollable able cost of production production
". The following following stateme statements nts about the the adoption adoption of variable variable costing costing are true# true# ecept$ ecept$ A. All fied fied manufacturi manufacturing ng costs are recogni% recogni%ed ed as period costs. costs. B. A direct direct cost may not become a product product cost. cost. C. &t is an acceptab acceptable le method method for general general reporting reporting purposes purposes.. !. An indirect indirect cost may may be assigned assigned as part part of product product cost. cost. '. The The chang changee in peri period od(t (to( o(per perio iod d oper operat atin ing g inco income me when when usin using g vari variab able le cost costin ing g can can be eplained by the change in the A. )nit sales level multiplied by the unit sales price. B. *inished goods inventory level multiplied by the unit sales price. C. )nit sales level multiplied by a constant unit contribution margin. !. *inished goods inventory level multiplied by a constant unit contribution margin. +. ,hich of the the following following is -T -T an advantage advantage of using using variable variable costing costing for intern internal al reporting reporting purposes/ A. *ied costs are reported at incurred values# not absorbed values# thus thus improving control over those costs. B. 0rofits are are directly influenced by changes in sales volume. C. The impact of fied costs on profits is is emphasi%ed. !. Total costs may be overlooked when evaluating profits. . Cay Co.2s Co.2s 133 fied fied manufa manufactu cturin ring g overhead overhead costs costs totale totaled d 4155#555 4155#555## and variabl variablee sellin selling g costs totaled 465#555. )nder variable costing# how should those costs be classified/ classified/ A. B. C. !. 0eriod Costs 45 4 65 #55 5 4155#555 4165#555 0roduct Costs 4165#555 4 155 #555 4 65#555 45 7. A cost cost that is included included as part of product product costs under under both absorpti absorption on costing costing and direct direct costing is$ A. managerial staff costs !. taes on factory building B. insurance 8. variable materials handling labor C. variab variable le marke marketi ting ng epens epenses. es. 9. )nder )nder vari variab able le cos costi ting# ng# A. all product costs are variable. B. all period co costs are variable.
C. all product costs are fied !. product costs are both fi fied and va variable.
6. ,hic ,hich h of the the foll follow owin ing g is is not associated with absorption costing/ A. functional fo format B. gross margin C. 0eriod co costs !. contribution ma margin 3. Calculating Calculating income income under under variable variable costing costing does does -T re:uire re:uire knowing knowing A. unit sales. C. selling price. B. uni unit vari variab able le manu manufa fact ctur uriing cos costs. !. unit unit prod produc ucttion. ion.
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15. A criticism of variable costing for managerial accounting purposes is that it A. is not acceptable for product line segmented reporting. B. does not reflect cost(volume(profit relationships. C. overstates inventories. !. might encourage managers to emphasi%e the short term at the epense of the long term. 11. All of the following are names for the product costing method in which both fied and variable costs are included in overhead rates# except: A. absorption costing C. direct costing B. conventional costing !. full costing 1". )nder the variable(costing concept# unit product cost would most likely be increased by A. A decrease in the remaining useful life of factory machinery depreciated on the units(of( production method. B. A decrease in the number of units produced. C. An increase in the remaining useful life of factory machinery depreciated on the sum(of( the(year2s digits method. !. An increase in the commission paid to salesman for each unit sold. 1'. )nder absorption costing# fied manufacturing overhead could be found in all of the following excet the A. work(in(process account. C. Cost of =oods Sold. B. finished goods inventory account. !. period costs. 1+. &f unit costs remain unchanged and sales volume and sales price per unit both increase from the preceding period when operating profits were earned# operating profits must A. &ncrease under the absorption costing method. B. &ncrease under the variable costing method. C. !ecrease under the absorption costing method. !. !ecrease under the variable costing method. 1. ,hen comparing absorption costing with variable costing# which of the following statements is not true/ A. Absorption costing enables managers to increase operating profits in the short run by increasing inventories. B. ,hen sales volume is more than production volume# variable costing will result in higher operating profit. C. A manager who is evaluated based on variable costing operating profit would be tempted to increase production at the end of a period in order to get a more favorable review. !. )nder absorption costing# operating profit is a function of both sales volume and production volume. 17. >ansen# &nc. 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# >ansen2s managers may do all of the following ecept A. 0roduce those products re:uiring the most direct labor. B. !efer epenses such as maintenance to a future period. C. &ncrease production schedules independent of customer demands. !. !ecrease production of those items re:uiring the most direct labor. 19. A firm presently has total sales of 4155#555. &f its sales rise# its A. net income based on variable costing will go up more than its net income based on absorption costing. B. net income based on absorption costing will go up more than its net income based on variable costing. C. fied costs will also rise. !. per unit variable costs will rise.
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16. Both Company ? and Company @ produce similar products that need negligible distribution costs. Their assets operation and accounting are very similar in all respects ecept that Company ? uses direct costing and Company @ uses absorption costing. A. Co. ? would report a higher inventory value than Co. @ for the years in which production eceeds sales B. Co. ? would report a higher inventory value than Co. @ for the years in which production eceeds the normal or practical capacity C. Co. @ would report a higher inventory value than Co. ? for the years in which production eceeds sales !. Co. @ would report a higher net income than Co. ? for the years in which production e:uals sales 13. ,hich of the following statements is true for a firm that uses variable costing/ A. The cost of a unit of product changes because of changes in number of units manufactured. B. 0rofits fluctuate with sales. C. An idle facility variation is calculated. !. 0roduct costs include variable administrative costs. "5. Absorption costing and variable costing are two different methods of assigning costs to units produced. f the following five cost items listed# identify the one that is not correctly accounted for as a product cost. 0art of 0roduct Cost under Absorption Cost Variable Cost A. ;anufacturing supplies ?es ?es B. &nsurance on factory ?es -o C. !irect labor cost ?es ?es !. 0ackaging and shipping costs ?es ?es "1. A company2s net income recently increased by '5 while its inventory increased to e:ual a full year2s sales re:uirements. ,hich of the following accounting methods would be most likely to produce the favorable income results/ A. Absorption costing. C. Variable costing. B. !irect costing. !. Standard direct costing. "". )nabsorbed fied overhead costs in an absorption costing system are A. fied manufacturing costs not allocated to units produced. B. variable overhead costs not allocated to units produced. C. ecess variable overhead costs. !. costs that cannot be controlled. "'. ,hen a firm prepares financial reports by using absorption costing A. 0rofits will always increase with increases in sales. B. 0rofits may decrease with increased sales even if there is no change in selling prices and costs. C. !ecreased output and constant sales result in increased profits. !. 0rofits will always decrease with decreases in sales. "+. Variable costing and absorption costing will show the same incomes when there are no A. beginning inventories. C. variable costs. B. ending inventories. !. beginning and ending inventories. ". Absorption costing differs from variable costing in that A. standards can be used with absorption costing# but not with variable costing. B. absorption costing inventories are more correctly valued. C. production influences income under absorption costing# but not under variable costing. !. companies using absorption costing have lower fied costs.
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"7. &n a recent period# ;arvel Co. incurred 4"5#555 of fied manufacturing overhead and deducted 4'5#555 of fied manufacturing overhead. ;arvel Co. must be using A. absorption costing. C. direct costing. B. variable costing. !. standard costing. "9. )nder absorption costing# if sales remain constant from period 1 to period "# the company will report a larger income in period " when A. period " production eceeds period 1 production. B. period 1 production eceeds period " production. C. variable production costs are larger in period " than period 1. !. fied production costs are larger in period " than period 1. "6. ther things being e:ual# net income computed by direct costing method would eceed net income computed by absorption costing method if A. )nits sold were to eceed units produced. B. *ied manufacturing costs were to increase. C. )nits produced were to eceed units sold. !. Variable manufacturing costs were to increase. "3. -et income is lower under variable costing than under absorption costing when A. 0roduction increases from the previous period. B. 0roduction eceeds sales. C. 0roduction e:uals sales. !. 0roduction is less than sales. '5. 0resident of ,? Corporation re:uested you to eplain the difference of net income between the variable costing income statements presentation and the absorption costing method. ?ou would say that the difference A. &s none if there is no change in the fied costs in the beginning and ending inventories. B. &s e:ual to the fied costs per unit times the number of units sold. C. &s attributable to the variable costs in the inventory. !. &s attributable to the fied costs in ending inventory. '1. &f inventory :uantities increase during a period# A. Variable costing profits will eceed absorption costing profits. B. Absorption costing profits will eceed variable costing profits. C. Variable costing profits will e:ual absorption costing profits. !. Variable costing will show a higher inventory value than absorption costing. '". A manufacturing company prepares income statements using both absorption( and variable( costing methods. At the end of the period# actual sales revenues# total gross margin# and total contribution margin approimated budgeted figures# whereas net income was substantially below the budgeted amount. There were no beginning or ending inventories. The most likely eplanation of the net income shortfall is that# compared to budget# actual A. Sales price and variable costs had declined proportionately. B. Sales prices had declined proportionately more than variable costs. C. ;anufacturing fied costs had increased. !. Selling and administrative fied epenses had increased. ''. As compared with total absorption costing profit over the entire life of a company# total variable costing profit will A. Be less. B. Be greater. C. Be e:ual. !. Be substantially greater or less depending upon eternal factors 34. How will a favorable volume variance affect net income under each of the following methods?
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Absorption Variable
A. educe -o effect
B. educe &ncrease
C. &ncrease -o effect
!. &ncrease educe
'. A single(product company prepares income statements using both absorption and variable costing methods. ;anufacturing overhead cost applied per unit produced in "551 was the same as in "555. The "551 variable costing statement reported a profit whereas the "551 absorption costing statement reported a loss. The difference in reported income could be eplained by units produced in "551 being A. Dess than units sold in "551. B. Dess than the activity level used for allocating overhead to the product. C. &n ecess of the activity level used for allocating overhead to the product. !. &n ecess of units sold in "551. PROBLEMS 1. ;- 0roducts# &nc. planned and actually manufactured "55#555 units of its single product in "555# its first year of operations. Variable manufacturing costs were 0'5 per unit of product. 0lanned and actual fied manufacturing costs were 0755#555# and marketing and administrative costs totaled 0+55#555 in "555. ;- sold 1"5#555 units of product in "555 at a selling price of 0+5 per unit. ,hat is the cost of the ending inventory assuming variable costing is used/ A. 0"#+55#555 B. 0"#95#555 C. 0"#"5#555 !. 0"#7+5#555
". D? E Company completed its first year of operations during which time the following information were generated$ Total units produced 155#555 Total units sold F 0155 per unit 65#555 ,ork in process ending inventory "5#555 Costs Variable Cost per )nit *ied Costs aw materials 0"5.55 !irect labor 1".5 *actory overhead 9.5 01." million Selling and administrative 15.55 5.9 million &f the company used variable GdirectH costing method# the operating income would be A. 0"#155#555 B. 0+#555#555c. C. 0"#+65#555 !. 0'#5+5#555 '. ,est Co.2s 1366 manufacturing costs were as follows$ !irect materials and direct labor 4955#555 ther variable manufacturing costs 155#555 !epreciation of factory building and manufacturing e:uipment 65#555 ther fied manufacturing overhead 16#555 ,hat amount should be considered product cost for eternal reporting purposes/ A. 4955#555 B. 4655#555 C. 4665#555 !. 4636#555 +. The total production cost for "5#555 units was 0"1#555 and the total production cost for making 5#555 units was 0'+#555. nce production eceeds "#555 units# additional fied costs of 0+#555 were incurred. The full production cost per unit for making '5#555 units is$ A. 05.'5 B. 05.76 C. 05.6+ !. 05.3' . At the end of Iillo Co.2s first year of operations# 1#555 units of inventory remained on hand. Variable and fied manufacturing cost per unit were 435 and 4"5# respectively. &f Iillo uses absorption costing rather than direct GvariableH costing# the result would be a higher preta income of A. 4"5#555. B. 495#555. C. 45. !. 435#555.
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7. Coomber &ndustries manufactures a single product using standard costing. Variable production costs are 41' and fied production costs are 41"#555. Coomber uses a normal activity of 1"#55 units to set its standard costs. Coomber began the year with 1#555 units in inventory# produced 11#555 units# and sold 11#55 units. The standard cost of goods sold under absorption costing would be A. 411#555 B. 41+3#55 C. 4"'#555 !. 4"7+#55 9. @ Corp. incurred the following costs in "551 Gits first year of operationsH based on production of 15#555 units$ !irect material 4 per unit !irect labor 4' per unit Variable product costs 4" per unit *ied product costs Gin totalH 4155#555 ,hen @ Corp. prepared its "551 financial statements# its Cost of =oods Sold was listed at 4155#555. Based on this information# which of the following statements must be t!"e$ A. @ Corp. sold all 15#555 units that it produced. B. @ Corp. sold #555 units. C. @ Corp. had a very profitable year. !. *rom the information given# one cannot tell whether @ Corp.Js financial statements were prepared based on variable or absorption costing. 6. The Blue Company has failed to reach its planned activity level during its first " years of operation. The following table shows the relationship among units produced# sales# and normal activity for these years and the proKected relationship for ?ear '. All prices and costs have remained the same for the last " years and are epected to do so in ?ear '. &ncome has been positive in both ?ear 1 and ?ear ". )nits 0roduced Sales 0lanned Activity ?ear 1 35#555 35#555 155#555 ?ear " 3#555 3#555 155#555 ?ear ' 35#555 35#555 155#555 Because Blue Company uses an absorption(costing system# gross margin for year ' should be A. =reater than ?ear 1. C. 8:ual to ?ear 1. B. =reater than ?ear ". !. 8:ual to ?ear ". 3. *leet# &nc. manufactured 955 units of 0roduct A# a new product# during the year. 0roduct A2s variable and fied manufacturing costs per unit were 47.55 and 4".55 respectively. The inventory of 0roduct A on !ecember '1# consisted of 155 units. There was no inventory of 0roduct A on >anuary 1. ,hat would be the change in the dollar amount of inventory on !ecember '1 if variable costing were used instead of absorption costing/ A. 4655 decrease. B. 4"55 decrease. C. 45 !. 4"55 increase. 15. =L& Company had 0155#555 income using absorption costing. =L& has no variable manufacturing costs. Beginning inventory was 0#555 and ending inventory was 01"#555. ,hat is the income under variable costing/ A. 0155#555. B. 0159#555 C. 066#555 !. 03'#555 11. !on >uan Dtd. ;anufactures a single product for which the costs and selling prices are$ Variable production costs 0 5 per unit Selling priceM 01" per unit *ied production overhead 0"55#555 per :uarter *ied selling and administrative overhead 065#555 per :uarter -ormal capacity "5#555 units per :uarter 0roduction in first :uarter was 13#555 units and sales volume was 17#555 units. -o opening inventory for the :uarter. The absorption costing profit for the :uarter was A. 03"5#555 B. 035#555 C. 0375#555 !. 0395#555
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1". ?outhful Biscuits manufactures and sells boed coconut cookies. The biggest market for these cookies are as gifts that college students buy for their business teachers. There are 155 cookies per bo. The following income statement shows the result of the first year of operations. This statement was the one included in the company2s annual report to the stockholders. Sales G+55 boes at 01".5 a boH 0#555.55 Dess$ Cost of goods sold G+55 boes at 06 per boH '#"55.55 =ross margin 1#655.55 Dess$ Selling and administrative epenses 655.55 -et income 1#555.55 Variable selling and administrative epenses are 05.35 per bo sold. The company produced 55 boes during the year. Variable manufacturing costs are 0." per bo and fied manufacturing overhead costs total 01#'9 for the year. ,hat is the company2s direct costing net income/ A. 0"#+5 B. 0"#"7 C. 01#555 !. 0 9" 1'. !uring its first year of operations# a company produced "9#555 units and sold "5#555 units. The following costs were incurred during the year$ Variable Cost per )nit *ied Costs !irect materials 41.55 !irect labor 15.55 ;anufacturing overhead 1".5 4"#"55#555 Selling and administrative ".5 1#'9#555 The difference between operating income calculated on the absorption(costing basis and on the variable costing basis is that absorption(costing operating income is A. 4"55#555 greater. B. 4""5#555 greater. C. 4'"#555 greater. !. 47"#55 lesser. 1+. A company has the following cost data$ *ied manufacturing costs *ied selling# general# and administrative costs Variable selling costs per unit sold Variable manufacturing costs per unit
4"#555 1#555 1 "
Beginning inventory 5 units 0roduction 155 units Sales 35units at 4+5 per unit Variable and absorption(cost net incomes are$ A. 4'"5 variable# 4"5 absorption C. 4"5 variable# 4'"5 absorption B. 4''5 variable# 4'5 absorption !. 4'5 variable# 4''5 absorption 1. A company manufactures 5#555 units of a product and sells +5#555 units. Total manufacturing cost per unit is 45 Gvariable manufacturing cost# 415N fied manufacturing cost# 4+5H. Assuming no beginning inventory# the effect on net income if absorption costing is used instead of variable costing is that$ A. net income is 4+55#555 lower C. net income is the same B. net income is 4+55#555 higher !. net income is 4"55#555 higher 17. A company had an income of 05#555 using direct costing for a given month. Beginning and ending inventories for the month are 1'#555 units and 16#555 units# respectively. &gnoring income ta# if the fied overhead application rate was 0" per unit# what was the income using absorption costing/ A. 0+5#555 B. 05#555 C. 075#555 !. 095#555
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#555 6#555 4' per unit per unit 1 per unit 4155#555 4'5#555 4+5
19. ,hat would Co. have reported as its income before income taes if it had used variable costing/ A. 4'5#555 B. G49#55H C. 479#55 !. G4'5#555H 16. ,hat was the total amount of S=EA epense incurred by Co./ A. 4'5#555 B. 47"#55 C. 47#555 !. 4'7#555 13. Based on variable costing# what would Co. show as the value of its ending inventory/ A. 41"5#555 B. 47+#55 C. 4"9#555 !. 4"+#555
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"1. eported net income Gor lossH for the first 7 months under absorption costing is A. 4175#555 B. 45 C. 4+5#555 !. 4G+5#555H "". eported net income Gor lossH for the first 7 months under variable costing is A. 4165#555 B. 4+5#555 C. 45 !. 4G165#555H "'. Assuming that 35#555 units of 0roduct were sold during the first 7 months and that this is to be used as a basis# the revised budget estimate for the total number of units to be sold during this year is A. '75#555 B. "+5#555 C. "55#555 !. -one of the above
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A. 4+#'9#555
B. 4+#55#555
C. 4+#'"#555
!. 4+#5#555
"3. The difference between Valyn Corporation2s 133 operating income calculated on the absorption costing basis and calculated on the variable costing basis was A. 47#555 B. 4"#555 C. 4+5#555 !. 435#555
!. 4"5#555
'1. 8nding inventory under absorption costing would be A. 415#555 B. 41#555 C. 419#55
!. 4"5#555
'". The volume variance under variable costing would be A. 45 B. 415#555 C. 41#555
!. Some other number.
''. The volume variance under absorption costing would be A. 45 B. 415#555 C. 41#555
!. Some other number.
'+. The standard cost of goods sold under variable costing would be A. 4"55#555 B. 4"15#555 C. 4'79#55
!. Some other number.
'. The standard cost of goods sold under absorption costing would be A. 4"55#555 B. 4"15#555 C. 4'79#55 !. Some other number. '7. &n the ABC Company# sales are 0655#555# cost of goods under absorption costing is 0755#555# and total operating epenses are 01"5#555. &f cost of goods sold is 95 variable and total operating epenses are 75 fied# what is the contribution margin under variable costing/ A. 0''"#555. B. 0'56#555. C. 0"75#555. !. 0'65#555. '9. A company manufactures a single product for its customers by contracting in advance of production. Thus# the company produces only units that will be sold by the end of each period. *or the last period# the following data were available$ Sales 4+5#555 !irect materials 3#55 !irect labor 7#55 ent G3O15 factory# 1O15 officeH '#555 !epreciation on factory e:uipment "#555 Supervision G"O' factory# 1O' officeH 1#55 Salespeople2s salaries 1#'55 &nsurance G"O' factory# 1O' officeH 1#"55 ffice supplies 95 Advertising 955 !epreciation on office e:uipment 55 &nterest on loan '55 The gross profit margin percentage GroundedH was A. '+ C. ++ +. 4" . 4-
When the going gets tough, the tough gets going.
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)/012 1 T#eo!$ 1. ! ". C '. C +. ! . ! 7. 8 9. A 6. ! 3. ! 15. ! 11. C 1". A 1'. ! 1+. B 1. C 17. ! 19. A 16. C 13. B "5. !
