978-0078025761 Chapter 19 Part 1

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Chapter 19

Variable Costing and Analysis

True / False Questions

1. Product costs consist of direct labor, direct materials, and overhead.

TRUE

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difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

2. Manufacturing overhead costs are those that can be traced directly to the

product.

FALSE

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difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

3. The traditional costing approach assigns all manufacturing costs to products.

TRUE

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difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

19-1

McGraw-Hill Education.

4. Absorption costing is required under GAAP.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

5. The use of absorption costing can result in misleading product cost information.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

6. Variable costing treats ‘xed overhead cost as a period cost.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

7. The biggest problems with producing too much are lost sales and customer

dissatisfaction.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Production levels

19-2

McGraw-Hill Education.

8. Many companies link manager bonuses to income computed under absorption

costing because this is how income is reported to shareholders.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

9. Under absorption costing, a company had the following unit costs when 10,000

units were produced:

Direct labor $2 per unit

Direct material $3 per unit

Variable overhead $4 per unit

Total variable $9 per unit

Fixed overhead ($50,000/10,000 units) $5 per unit

Total production cost $14 per unit

The total product cost per unit under absorption costing if 25,000 units had been

produced would be $11.

TRUE

$2 DL + $3 DM + $4 VOH + ($50,000/25,000) FOH = $11

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difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-3

McGraw-Hill Education.

10. Assume a company had the following production costs:

Direct labor $2 per unit

Direct material $3 per unit

Variable overhead $4 per unit

Total variable $9 per unit

Fixed overhead ($50,000/10,000 units) $5 per unit

Total production cost $14 per unit

Under absorption costing, the total product cost per unit when 4,000 units are

produced would be $22.50.

FALSE

($20,000 + $30,000 + $40,000 + $50,000)/4,000 = $35 per unit

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difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

11. When the number of units produced is equal to the number of units sold, net

income reported under variable costing is identical to net income reported under

absorption costing.

TRUE

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difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Comparing Variable Costing and Absorption Costing

12. When there are zero units in Beginning Finished Goods Inventory and the units

produced are more than the units sold, the income will be lower under variable

costing than under absorption costing.

TRUE

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difficulty: 1 Easy

19-4

McGraw-Hill Education.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Comparing Variable Costing and Absorption Costing

13. Variable costing is required by Generally Accepted Accounting Principles (GAAP) for

financial statement purposes.

FALSE

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difficulty: 1 Easy

Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.

Topic: Variable Costing

14. Since ‘xed costs remain constant in the short run, special orders should be

accepted as long as the order price is greater than the variable costs.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P4 Determine product selling price based on absorption costing.

Topic: Pricing Special Orders

15. For short-term pricing decisions, absorption costing is an appropriate costing

method to use.

FALSE

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Learning Objective: 19-P4 Determine product selling price based on absorption costing.

Topic: Pricing Special Orders

16. When setting long-term sales prices for products, the sales price must cover all

costs, including ‘xed costs.

TRUE

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Learning Objective: 19-P4 Determine product selling price based on absorption costing.

19-5

McGraw-Hill Education.

Topic: Determine product selling prices

17. Evaluating and rewarding managers based on absorption basis income can lead to

overproduction.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Production levels

18. Cost information from both absorption costing and variable costing can aid

managers in pricing.

TRUE

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difficulty: 1 Easy

Learning Objective: 19-P4 Determine product selling price based on absorption costing.

Topic: Determine product selling prices

19. Managers should accept special orders provided the special order price exceeds

the product cost per unit under absorption costing.

FALSE

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Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

20. Absorption costing is useful because it reBects the full costs that sales must

exceed for the company to be profitable.

TRUE

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Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Absorption Costing

19-6

McGraw-Hill Education.

21. The traditional income statement format used for financial reporting is called the

contribution margin format.

FALSE

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difficulty: 1 Easy

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

22. If a company has excess capacity, increases in production level will increase

variable production costs but not ‘xed production costs.

TRUE

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Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Production levels

23. Fixed costs change in the short run depending upon management’s decision to

accept or reject special orders.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Pricing Special Orders

24. Variable costing separates the variable costs from ‘xed costs and therefore makes

it easier to identify and assign control over costs.

TRUE

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Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-7

McGraw-Hill Education.

25. A company normally sells a product for $20 per unit. Variable per unit costs for this

product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The

company is currently operating at 70% of capacity producing 14,000 units per

year. Total ‘xed costs are $42,000 per year. The company should not accept a

special order for 2,000 units which would be sold for $10 per unit because there

would be an incremental loss on the order.

FALSE

14,000/.7 – 14,000 = 6,000 unit capacity remaining

Per unit variable costs = $2 DM + $4 DL + $1.50 VOH = $7.50

Per unit incremental income = $10.00 – $7.50 = $2.50

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difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

26. A company normally sells a product for $25 per unit. Variable per unit costs for this

product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The

company is currently operating at 100% of capacity producing 30,000 units per

year. Total ‘xed costs are $75,000 per year. The company should accept a special

order for 1,000 units which would be sold for $13 per unit because the special

order price exceeds variable costs.

FALSE

When a company is operating at full capacity, any special order whose selling price

is less than the existing business should be rejected.

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difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

27. Absorption costing is usually used for internal management purposes, and variable

costing is usually used for external reporting purposes.

FALSE

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19-8

McGraw-Hill Education.

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

28. Assuming ‘xed costs remain constant, and a company produces and sells the

same number of units, then income under absorption costing is less than income

under variable costing.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Production levels

29. Assuming ‘xed costs remain constant, and a company produces more units than it

sells, then income under absorption costing is less than income under variable

30. Assuming ‘xed costs remain constant, and a company sells more units than it

produces, then income under absorption costing is less than income under

variable costing

TRUE

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Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Production levels

19-9

McGraw-Hill Education.

31. The data needed for cost-volume-pro’t analysis is readily available if the income

statement is prepared under absorption costing.

FALSE

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Learning Objective: 19-A1 Use variable costing in pricing special orders.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

32. The data needed for cost-volume-pro’t analysis is readily available if the income

statement is prepared using a contribution format.

TRUE

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Learning Objective: 19-A1 Use variable costing in pricing special orders.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

33. Given the following data, total product cost per unit under variable costing is

$10.75.

Direct labor $7 per unit

Direct materials $1 per unit

Overhead

Total variable overhead $20,000

Total ‘xed overhead $90,000

Expected units to be produced 40,000 units

FALSE

$7 DL + $1 DM + ($20,000/40,000 units) VOH = $8.50

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difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-10

McGraw-Hill Education.

34. Given the following data, total product cost per unit under variable costing is

$7.09.

Direct labor $2.50 per

unit

Direct materials $1.75 per

unit

Overhead

Total variable overhead $42,600

Total ‘xed overhead $160,000

Expected units to be produced 15,000 units

TRUE

$2.50 DL + $1.75 DM + ($42,600/15,000 units) VOH = $7.09

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difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

35. Given the following data, total product cost per unit under variable costing will be

greater than total product cost under absorption costing.

Direct labor $2 per unit

Direct materials $8 per unit

Overhead

Total variable overhead $37,500

Total ‘xed overhead $249,000

Expected units to be produced 15,000 units

FALSE

Variable costing:

$2 DL + $8 DM + ($37,500/15,000 units) VOH = $12.50

Absorption costing:

$2 DL + $8 DM + ($37,500/15,000 units) VOH + ($249,000/15,000 units) FOH =

$29.10

AACSB: Analytical Thinking

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19-11

McGraw-Hill Education.

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

36. Given the following data, total product cost per unit under absorption costing is

$9.14.

Direct labor $0.72 per

unit

Direct materials $0.80 per

unit

Overhead

Total variable overhead $202,500

Total ‘xed overhead $140,400

Expected units to be produced 45,000 units

TRUE

$0.72 DL + $0.80 DM + [($202,500 + 140,400)/45,000 units)] MOH = $9.14

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difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

37. Given the following data, total product cost per unit under absorption costing is

$11.40.

Direct labor $5 per unit

Direct materials $6 per unit

Overhead

Total variable overhead $32,800

Total ‘xed overhead $164,000

Expected units to be produced 82,000 units

FALSE

$5 DL + $6 DM + [($32,800 + 164,000)/82,000 units)] MOH = $13.40

AACSB: Analytical Thinking

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Blooms: Apply

difficulty: 3 Hard

19-12

McGraw-Hill Education.

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

38. Given the following data, total product cost per unit under absorption costing will

be greater than total product cost per unit under variable costing.

Direct labor $9 per unit

Direct materials $7 per unit

Overhead

Total variable

overhead

$45,000

Total ‘xed overhead $27,000

Expected units to be

produced

9,000 units

TRUE

Variable costing: $9 DL + $7 DM + ($45,000/9,000 units) VOH = $21

Absorption costing: $9 DL + $7 DM + ($45,000/9,000 units) VOH + ($27,000/9,000

units) FOH = $24

AACSB: Analytical Thinking

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Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

39. Given the following data, total product cost per unit under absorption costing will

be $400 greater than total product cost per unit under variable costing.

Direct labor $1.50 per

unit

Direct materials $1.50 per

unit

Overhead

Total variable overhead $900,000

Total ‘xed overhead $1,200,000

Expected units to be produced 3,000 units

TRUE

$1,200,000/3,000 = $400 per unit more because of ‘xed overhead.

AACSB: Analytical Thinking

19-13

McGraw-Hill Education.

AICPA: BB Industry

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Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Comparing Variable Costing and Absorption Costing

40. The variable costing income statement classi’es costs based on cost behavior

rather than function.

TRUE

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difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

41. Contribution margin is another way to refer to gross margin.

FALSE

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difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

42. Under a traditional income statement format, prepared using absorption costing,

expenses are grouped according to cost behavior.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

43. A variable costing income statement focuses attention on the relationship between

costs and sales that is not evident from the absorption costing format.

TRUE

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19-14

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Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

44. When units produced equal units sold, reported income is identical under

absorption costing and variable costing.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

Topic: Variable Costing

45. Sales less total variable costs equals manufacturing margin.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

46. When units produced exceed the units sold, income under absorption costing is

higher than income under variable costing.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

19-15

McGraw-Hill Education.

47. When units produced are less than units sold, income under absorption costing is

higher than income under variable costing.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

48. Income under absorption costing will always be diHerent than income under

variable costing.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

49. Reporting contribution margin by market segment is useful in assessing the

pro‘tability of each segment.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

50. Contribution margin is the excess of sales over total variable costs.

TRUE

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difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

19-16

McGraw-Hill Education.

Topic: Variable Costing

51. Variable costing is the only acceptable basis for both external reporting and tax

reporting.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

52. The bottom line of a contribution margin report is net income.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

53. Variable costing results in expensing of ‘xed manufacturing overhead based on

the number of units produced.

TRUE

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Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

54. Absorption costing results in expensing of ‘xed manufacturing overhead based on

the number of units produced, rather than units sold.

FALSE

AACSB: Analytical Thinking

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Blooms: Understand

difficulty: 2 Medium

19-17

McGraw-Hill Education.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

55. When the number of units produced exceeds the number of units sold, absorption

costing defers some of the ‘xed costs incurred.

TRUE

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difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Absorption Costing

56. Information presented in a variable costing format can assist management when

making short-term pricing decisions.

TRUE

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difficulty: 2 Medium

Learning Objective: 19-P4 Determine product selling price based on absorption costing.

Topic: Variable Costing

57. It is not possible to convert reports prepared using variable costing to absorption

costing reports.

FALSE

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difficulty: 2 Medium

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

58. To convert variable costing income to absorption costing income, management will

need to add ‘xed overhead cost deferred in ending inventory and subtract ‘xed

overhead cost recognized from beginning inventory.

TRUE

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19-18

McGraw-Hill Education.

Blooms: Understand

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

Multiple Choice Questions

59. Which of the following costing methods charges all manufacturing costs to its

products?

A. Direct

costing

B. ABC

costing

C. Variable

costing

D. Absorption

costing

AACSB: Analytical Thinking

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Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

60. Which of the following is not considered a product cost?

A. Direct

materials.

B. Research and development

costs.

C. Direct

labor.

D. Inventoriable

costs.

E. Indirect manufacturing

costs.

AACSB: Analytical Thinking

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Blooms: Apply

difficulty: 2 Medium

19-19

McGraw-Hill Education.

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

61. Using a traditional costing approach, which of the following manufacturing costs

are assigned to products?

A. Direct materials and direct

labor.

B. Direct labor and variable manufacturing

overhead.

C. Fixed manufacturing overhead, direct materials, and

direct labor.

D. Variable manufacturing overhead, direct materials, and

direct labor.

E. Variable manufacturing overhead, direct materials, direct labor, and ‘xed

manufacturing overhead.

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difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

62. Which of the following statements is true regarding absorption costing?

A. It is not the traditional costing

approach.

B. It is not permitted to be used for financial

reporting.

C. It is not permitted to be used for tax

reporting.

D. It assigns all manufacturing costs to

products.

E. It requires only variable costs to be treated as

product costs.

AACSB: Analytical Thinking

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Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-20

McGraw-Hill Education.

63. Which of the following statements is true regarding variable costing?

A. It is a traditional costing

approach.

B. Only manufacturing costs that change in total with changes in production level

are included in product costs.

C. It is not permitted to be used for managerial

reporting.

D. It treats overhead in the same manner as absorption

costing.

E. It makes it easier to manipulate earnings with changes in

production levels.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

64. Which of the following statements is true?

A. Variable costing treats ‘xed overhead as a

period cost.

B. Absorption costing treats ‘xed overhead as a

period cost.

C. Absorption costing treats fixed overhead as an expense in the period it

is incurred.

D. Variable costing excludes all overhead from

product costs.

E. Managers can manipulate earnings more easily under variable costing by

varying the production level.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Comparing Variable Costing and Absorption Costing

19-21

McGraw-Hill Education.

65. Which of the following would be a line item for a variable costing income

statement?

A. Gross

margin

B. Cost of goods available for

sale

C. Total cost of goods

sold

D. Contribution

margin

E. Work-in-process

inventory

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

66. Which of the following statements is true?

A. Under variable costing, direct materials and direct labor are expensed as

period expenses.

B. Under variable costing, ‘xed manufacturing overhead is expensed as period

expenses.

C. Fixed manufacturing overhead costs are treated the same under both

absorption costing and variable costing.

D. Reported income under absorption costing is not aHected by production

level changes.

E. Under absorption costing, fixed manufacturing overhead is expensed as period

expenses.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

19-22

McGraw-Hill Education.

67. Under absorption costing, which of the following statements is not true?

A. Over production and inventory buildup can occur because of how managers are

evaluated and rewarded.

B. The ‘xed costs per unit decline as more units are

produced.

C. Variable inventory costs are treated in the same manner as they are under

variable costing.

D. Fixed inventory costs are treated in the same manner as they are under

variable costing.

E. All manufacturing costs are assigned to

products.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

68. When the number of units sold exceed the number of units produced, income

reported under absorption costing will be lower under absorption than under

variable costing. Which of the following gives the best justification of the above

statement?

A. Income under absorption costing is always less than income reported using

variable costing, regardless of the number of units produced.

B. Income under absorption costing is always more than income reported using

variable costing, regardless of the number of units produced.

C. The ‘xed overhead cost deferred in ending inventory is greater than the ‘xed

overhead cost recognized from beginning inventory.

D. The fixed overhead cost deferred in ending inventory is less than the fixed

overhead cost recognized from beginning inventory.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-23

McGraw-Hill Education.

69. Mentor Corp. has provided the following information for the current year:

Units produced 3,500 units

Sale price $200 per unit

Direct materials $70 per unit

Direct labor $55 per unit

Variable manufacturing

overhead $20 per unit

Fixed manufacturing

overhead

$350,000 per

year

Variable selling and

administrative costs $30 per unit

Fixed selling and

administrative costs

$150,000 per

year

Calculate the unit product cost using absorption costing.

A. $24

B. $27

C. $5

D. $14

Absorption

Costing

Direct materials 70

Direct labor 55

Variable manufacturing overhead 20

Fixed manufacturing overhead ($350,000 ÷

3,500 units) 100

Total unit product cost $245

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-24

McGraw-Hill Education.

70. Mentor Corp. has provided the following information for the current year:

Units produced 3,500 units

Sale price $200 per unit

Direct materials $70 per unit

Direct labor $55 per unit

Variable manufacturing overhead $20 per unit

Fixed manufacturing overhead $350,000 per year

Variable selling and administrative costs $30 per unit

Fixed selling and administrative costs $150,000 per year

Calculate the unit product cost using variable costing.

A. $24

B. $27

C. $5

D. $14

Variable Costing

Direct materials 70

Direct labor 55

Variable manufacturing overhead 20

Total unit product cost $145

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-25

McGraw-Hill Education.

71. Under absorption costing, a company had the following unit costs when 9,000

units were produced.

Direct labor $7.25 per unit

Direct material $8.00 per unit

Variable overhead $5.50 per unit

Fixed overhead ($67,500/9,000 units) $7.50 per unit

Total production cost $28.25 per unit

Compute the total production cost per unit under absorption costing if 25,000

units had been produced.

A. $28.2

B. $23.4

C. $26.2

D. $20.7

E. $15.2

$7.25 DL + $8 DM + $5.50 VOH + ($67,500/25,000) FOH = $23.45

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-26

McGraw-Hill Education.

72. Under absorption costing, a company had the following unit costs when 9,000

units were produced.

Direct labor $7.25 per unit

Direct material $8.00 per unit

Variable overhead $5.50 per unit

Fixed overhead ($67,500/9,000 units) $7.50 per unit

Total production cost $28.25 per unit

Compute the total production cost per unit under variable costing if 30,000 units

had been produced.

A. $31.7

B. $28.2

C. $23.4

D. $15.2

E. $20.7

$7.25 DL + $8 DM + $5.50 VOH = $20.75

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-27

McGraw-Hill Education.

73. Under absorption costing, a company had the following unit costs when 8,000

units were produced.

Direct labor $8.50 per unit

Direct material $9.00 per unit

Variable overhead $6.75 per unit

Fixed overhead ($60,000/8,000 units) $7.50 per unit

Total production cost $31.75 per unit

Compute the total production cost per unit under variable costing if 25,000 units

had been produced.

A. $31.7

B. $27.2

C. $26.2

D. $24.2

E. $17.5

$8.50 DL + $9 DM + $6.75 VOH = $24.25

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

74. When evaluating a special order, management should:

A. Only accept the order if the incremental revenue exceeds all

product costs.

B. Only accept the order if the incremental revenue exceeds ‘xed

product costs.

C. Only accept the order if the incremental revenue exceeds total variable

product costs.

D. Only accept the order if the incremental revenue exceeds full absorption

product costs.

E. Only accept the order if the incremental revenue exceeds regular

sales revenue.

AACSB: Analytical Thinking

19-28

McGraw-Hill Education.

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

75. A company is currently operating at 80% capacity producing 5,000 units. Current

cost information relating to this production is shown in the table below:

Per Unit

Sales price $34

Direct material $2

Direct labor $3

Variable overhead $4

Fixed overhead $5

The company has been approached by a customer with a request for a 100-unit

special order. What is the minimum per unit sales price that management would

accept for this order if the company wishes to increase current profit?

A. Any amount over $34 per

unit.

B. Any amount over $20 per

unit.

C. Any amount over $14 per

unit.

D. Any amount over $9 per

unit.

E. Any amount over $5 per

unit.

5,000/.80 – 5,000 = 1,250 unit capacity available

$2 + $3 + $4 = $9 incremental costs

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

19-29

McGraw-Hill Education.

76. A company is currently operating at 75% capacity and producing 3,000 units.

Current cost information relating to this production is shown in the table below:

Per Unit

Sales price $43

Direct material $7

Direct labor $6

Variable overhead $4

Fixed overhead $4

The company has been approached by a customer with a request for a 200-unit

special. What is the minimum per unit sales price that management would accept

for this order if the company wishes to increase current pro’ts?

A. Any amount over $43 per

unit.

B. Any amount over $17 per

unit.

C. Any amount over $21 per

unit.

D. Any amount over $13 per

unit.

E. Any amount over $22 per

unit.

3,000/.75 – 3,000 = 1,000 unit capacity remaining

$7 + $6 + $4 = $17 incremental costs

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

19-30

McGraw-Hill Education.

77. Geneva Company manufactures dolls that are sold to various customers. The

companyworks at full capacity for half the year to meet peak demand, and

operates at 80% capacity for the other half of the year. The following information is

provided:

Units produced and sold 600,000 units

Selling price $35/unit

Variable manufacturing costs $20/unit

Fixed manufacturing costs $1,200,000/yr.

Variable selling and administrative costs $6/unit

Fixed selling and administrative costs $950,000/yr

Geneva receives a purchase order to make 5,000 dolls as a one-time event. The

good news is that this order is during a period when Geneva does have excess

capacity. What is the lowest selling price Geneva should accept for this purchase

order?

A. $35.0

B. $26.0

C. $29.5

D. $23.5

Variable manufacturing costs per unit + Variable selling and administrative costs

per unit = $20 + $6 = $26.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 2 Medium

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

19-31

McGraw-Hill Education.

78. Which of the following best describes costs assigned to the product under the

absorption costing method?

Direct labor (DL)

Direct materials (DM)

Variable selling and administrative

Variable manufacturing overhead

Fixed selling and administrative

Fixed manufacturing overhead

A. DL, DM, variable selling and administrative costs, and variable

manufacturing overhead.

B. DL, DM, and variable manufacturing

overhead.

C. DL, DM, variable manufacturing overhead, and fixed manufacturing

overhead.

D. DL and

DM.

E. DL, DM, ‘xed selling and administrative, and ‘xed manufacturing

overhead.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-32

McGraw-Hill Education.

79. Which of the following best describes costs assigned to the product under the

variable costing method?

Direct labor (DL)

Direct materials (DM)

Variable selling and administrative

Variable manufacturing overhead

Fixed selling and administrative

Fixed manufacturing overhead

A. DL, DM, variable selling and administrative costs, and variable

manufacturing overhead.

B. DL, DM, and variable manufacturing

overhead.

C. DL, DM, variable manufacturing overhead, and ‘xed manufacturing

overhead.

D. DL and

DM.

E. DL, DM, ‘xed selling and administrative, and ‘xed manufacturing

overhead.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

80. Income __________ when there is zero beginning inventory and all inventory units

produced are sold.

A. Will be lower under variable costing than absorption

costing

B. Will be the same under both variable and absorption

costing

C. Will be higher under variable costing than absorption

costing

D. Will be higher than gross margin under variable

costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-33

McGraw-Hill Education.

81. During its first year of operations, the McCormick Company incurred the following

manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit,

Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company

produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at

year-end. What is the value of ending inventory under absorption costing?

A. $60,00

B. $110,00

C. $50,00

D. $250,00

$$5 + $3 + $4 + ($250,000/25,000 units) = $22 per unit × 5,000 units =

$110,000.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

82. During its first year of operations, the McCormick Company incurred the following

manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit,

Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company

produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at

year-end. What is the value of ending inventory under variable costing?

A. $60,00

B. $110,00

C. $50,00

D. $250,00

$5 + $3 + $4 = $12 per unit × 5,000 units = $60,000.

AACSB: Analytical Thinking

AICPA: BB Industry

19-34

McGraw-Hill Education.

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

83. During its first year of operations, the McCormick Company incurred the following

manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit,

Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company

produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at

year-end. Income calculated under variable costing is determined to be $315,000.

How much income is reported under absorption costing?

A. $315,00

B. $265,00

C. $565,00

D. $365,00

Income under absorption costing = Income under variable costing + Fixed

overhead cost in ending inventory – Fixed overhead cost in beginning inventory.

$315,000 + $50,000 – $0 = $365,000.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

84. Special order decisions should be made using variable costing because:

A. Special order decisions usually focus on ‘xed

costs

B. Variable costing includes all overhead costs in the calculation of

product costs.

C. Only variable costs will increase as a result of the

special order.

D. All costs, including variable and fixed costs, must be covered by the special

order pricing.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

19-35

McGraw-Hill Education.

Accessibility: Keyboard Navigation

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

85. Shore Company reports the following information regarding its production cost.

Units produced 28,000 units

Direct labor $23 per unit

Direct materials $24 per unit

Variable overhead $280,000 in total

Fixed overhead $94,920 in total

Compute production cost per unit under absorption costing.

A. $57.0

B. $60.3

C. $47.0

D. $23.0

E. $24.0

$23 DL + $24 DM + ($280,000/28,000) VOH + ($94,920/28,000) FOH = $60.39

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-36

McGraw-Hill Education.

86. Urban Company reports the following information regarding its production cost:

Units produced 20,000 units

Direct labor $13 per unit

Direct materials $18 per unit

Variable overhead $220,000 per unit

Fixed overhead $110,000 in total

Compute production cost per unit under variable costing.

A. $18.0

B. $36.5

C. $42.0

D. $13.0

E. $31.0

$13 DL + $18 DM + ($220,000/20,000) VOH = $42.00

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-37

McGraw-Hill Education.

87. Hayes Inc. provided the following information for the year 2015:

Beginning inventory 100 units

Units produced 750 units

Units sold 800 units

Selling price $150/unit

Direct materials $35/unit

Direct labor $16/unit

Variable manufacturing overhead $15/unit

Fixed manufacturing overhead $24,000/yr

Variable selling/administrative costs $8/unit

Fixed selling/administrative costs $15,500/yr

What is the unit product cost for the year using absorption costing?

A. $9

B. $6

C. $7

D. $9

Direct materials $35

Direct labor 16

Fixed manufacturing overhead 32 ($24,000/750 units)

Variable manufacturing overhead 15

Total unit product cost $98

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-38

McGraw-Hill Education.

88. Hayes Inc. provided the following information for the year 2015:

Beginning inventory 100 units

Units produced 750 units

Units sold 800 units

Selling price $150/unit

Direct materials $35/unit

Direct labor $16/unit

Variable manufacturing overhead $15/unit

Fixed manufacturing overhead $24,000/yr

Variable selling/administrative costs $8/unit

Fixed selling/administrative costs $15,500/yr

What is the unit product cost for the year using variable costing?

A. $9

B. $6

C. $7

D. $9

Direct materials $35

Direct labor 16

Variable manufacturing overhead 15

Total unit product cost $66

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-39

McGraw-Hill Education.

89. Sea Company reports the following information regarding its production cost.

Units produced 42,000 units

Direct labor $35 per unit

Direct materials $28 per unit

Variable overhead $17 per unit

Fixed overhead $105,000 in total

Compute the product cost per unit under variable costing.

A. $28.0

B. $82.5

C. $80.0

D. $63.0

E. $35.0

$35 DL + $28 DM + $17 VOH = $80

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-40

McGraw-Hill Education.

90. Sea Company reports the following information regarding its production costs:

Units produced 42,000 units

Direct labor $35 per unit

Direct materials $28 per unit

Variable overhead $17 per unit

Fixed overhead $105,000 in total

Compute the product cost per unit under absorption costing.

A. $28.0

B. $82.5

C. $80.0

D. $63.0

E. $35.0

$35 DL + $28 DM + $17 VOH + ($105,000/42,000) FOH = $82.50

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-41

McGraw-Hill Education.

Advanced Company reports the following information for the current year. All

beginning inventory amounts equaled $0 this year.

Units produced this year 25,000 units

Units sold this year 15,000 units

Direct materials $9 per unit

Direct labor $11 per unit

Variable overhead $75,000 in total

Fixed overhead $137,500 in total

91. Given Advanced Company’s data, compute cost per unit of finished goods under

variable costing.

A. $20.0

B. $25.0

C. $21.8

D. $23.0

E. $28.5

$9 DM + $11 DL + ($75,000/25,000) VOH = $23

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-42

McGraw-Hill Education.

92. Given Advanced Company’s data, compute cost per unit of finished goods under

absorption costing.

A. $20.0

B. $34.1

C. $25.3

D. $23.0

E. $28.5

$9 DM + $11 DL + ($75,000/25,000) VOH + ($137,500/25,000) FOH = $28.50

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

93. Given Advanced Company’s data, compute cost of finished goods in inventory

under absorption costing.

A. $285,00

B. $712,50

C. $427,50

D. $230,00

E. $345,00

$9 DM + $11 DL + ($75,000/25,000) VOH + ($137,500/25,000) FOH = $28.50 per

unit cost

25,000 units -15,000 units = 10,000 units in ending inventory

10,000 units × $28.50 = $285,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

19-43

McGraw-Hill Education.

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

94. Given Advanced Company’s data, compute cost of finished goods in inventory

under variable costing.

A. $285,00

B. $712,50

C. $427,50

D. $230,00

E. $345,00

$9 DM + $11 DL + ($75,000/25,000) VOH = $23

25,000 units -15,000 units = 10,000 units in ending inventory

10,000 units × $23 = $230,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

95. Given Advanced Company’s data, and the knowledge that the product is sold for

$50 per unit and operating expenses are $200,000, compute the net income under

absorption costing.

A. $55,00

B. $67,50

C. $80,50

D. $122,50

E. $205,00

NI = ($50 – $28.50)(15,000 units) – $200,000 = $122,500

AACSB: Analytical Thinking

19-44

McGraw-Hill Education.

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

96. Given Advanced Company’s data, and the knowledge that the product is sold for

$50 per unit and operating expenses are $200,000, compute the net income under

variable costing.

A. $55,00

B. $67,50

C. $80,50

D. $122,50

E. $205,00

NI = ($50 – $23.00)(15,000 units) – $200,000 – $137,500 = $67,500

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-45

McGraw-Hill Education.

97. Clear Company reports the following information for its first year of operations:

Units produced this year 50,000 units

Units sold this year 49,000 units

Direct materials $7 per unit

Direct labor $3 per unit

Variable overhead $210,000 in total

Fixed overhead ? in total

If the company’s cost per unit of finished goods using absorption costing is

$19.30, what is total ‘xed overhead?

A. $350,00

B. $255,00

C. $150,00

D. $249,90

E. $147,00

$19.30 = DM + DL + VOH + FOH

$19.30 = $7 + $3 + ($210,000/50,000) + FOH

$19.30 = $14.20 + FOH

FOH = $5.10 per unit

$5.10 per unit × 50,000 units = $255,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-46

McGraw-Hill Education.

98. Milton Company reports the following information for the current year:

Units produced this year 45,000 units

Units sold this year 53,000 units

Direct materials $5 per unit

Direct labor $2 per unit

Variable overhead $270,000 in total

Fixed overhead ? in total

If the company’s cost per unit of finished goods using absorption costing is $18,

what is total ‘xed overhead?

A. $225,00

B. $180,00

C. $270,00

D. $315,00

E. $720,00

$18 = DM + DL + VOH + FOH

$18 = $5 + $2 + ($270,000/45,000) + FOH

$18 = $13 + FOH

FOH = $5 per unit

$5 per unit × 45,000 units = $225,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-47

McGraw-Hill Education.

99. Gage Company reports the following information for its first year of operations:

Units produced this year 7,000 units

Units sold this year 6,500 units

Direct materials $22 per unit

Direct labor $30 per unit

Variable overhead ? in total

Fixed overhead $56,000 in total

If the company’s cost per unit of finished goods using variable costing is $63,

what is total variable overhead?

A. $21,00

B. $71,50

C. $77,00

D. $19,50

E. $16,59

$63 = DM + DL + VOH

$63 = $22 + $30 + VOH

VOH = $11 per unit

$11 per unit × 7,000 units = $77,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-48

McGraw-Hill Education.

100. A company reports the following information for its first year of operations:

Units produced this year 650 units

Units sold this year 500 units

Direct materials $750 per unit

Direct labor $1,000 per unit

Variable overhead ? in total

Fixed overhead $308,750 in total

If the company’s cost per unit of finished goods using variable costing is $2,375,

what is total variable overhead?

A. $237,50

B. $75,00

C. $312,50

D. $406,25

E. $97,50

$2,375 = DM + DL + VOH

$2,375 = $750 + $1,000 + VOH

VOH = $625 per unit

$625 per unit × 650 units = $406,250

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-49

McGraw-Hill Education.

101. Magenta Inc. reports the following information for the current year, which is its first

year of operations:

Units produced this year 750,000 units

Units sold this year 740,000 units

Direct materials $18.30 per unit

Direct labor $14.20 per unit

Variable overhead ? in total

Fixed overhead $4,500,000 in total

If the company’s cost per unit of finished goods using absorption costing is

$39.75, what is total variable overhead?

A. $925,00

B. $877,50

C. $937,50

D. $865,80

E. $5,437,5

$39.75 = DM + DL + VOH + FOH

$39.75 = $18.30 + $14.20 + VOH + ($4,500,000/750,000)

$39.75 = $38.50 + VOH

VOH = $1.25 per unit

$1.25 per unit × 750,000 units = $937,500

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-50

McGraw-Hill Education.

102. A company reports the following information for its first year of operations:

Units produced this year 43,000 units

Units sold this year 39,000 units

Direct materials $0.57 per unit

Direct labor $0.83 per unit

Variable overhead $26,660 in total

Fixed overhead ? in total

If the company’s cost per unit of finished goods using variable costing is $2.02,

what is the amount of total ‘xed overhead?

A. $26,66

B. $35,69

C. $24,51

D. Some other

amount

E. Cannot be determined from the given

data.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-51

McGraw-Hill Education.

103. A company reports the following information for its first year of operations:

Units produced this year ? units

Units sold this year 1,500 units

Direct materials $9 per unit

Direct labor $5 per unit

Variable overhead $7 per unit

Fixed overhead $24,000 in total

If the company’s cost per unit of finished goods using absorption costing is $27,

how many units were produced?

A. 4,000

units.

B. 3,600

units.

C. 1,846

units.

D. 2,667

units.

E. 2,000

units.

$27 = DM + DL + VOH + FOH

$27 = $9 + $5 + $7 + FOH

FOH = $6 per unit

$6 per unit × units produced = $24,000

Units produced = 4,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-52

McGraw-Hill Education.

104. Accurate Metal Company sold 32,000 units of its product at a price of $250 per

unit. Total variable cost per unit is $155, consisting of $145 in variable production

cost and $5 in variable selling and administrative cost. Compute the

manufacturing margin for the company under variable costing.

A. $8,000,0

B. $4,960,0

C. $4,800,0

D. $3,360,0

E. $3,200,0

($250 – $145 × 32,000 units = $$3,360,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

105. Chance, Inc. sold 3,000 units of its product at a price of $72 per unit. Total variable

cost per unit is $51, consisting of $32 in variable production cost and $19 in

variable selling and administrative cost. Compute the manufacturing margin for

the company under variable costing.

A. $96,00

B. $63,00

C. $120,00

D. $216,00

E. ($90,00

($72 – $32) × 3,000 units = $120,000

AACSB: Analytical Thinking

19-53

McGraw-Hill Education.

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

106. Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1

of the current year. During this time, the company produced 900,000 units and

sold 800,000 units at a sales price of $12 per unit. Cost information for this year is

shown in the following table:

Production costs

Direct materials $0.80 per unit

Direct labor $0.70 per unit

Variable overhead $500,000 in

total

Fixed overhead $450,000 in

total

Non-production costs

Variable selling and

administrative

$30,000 in

total

Fixed selling and

administrative

$490,000 in

total

Given this information, which of the following is true?

A. Net income under variable costing will exceed net income under absorption

costing by $50,000.

B. Net income under absorption costing will exceed net income under variable

costing by $50,000.

C. Net income will be the same under both absorption and

variable costing.

D. Net income under variable costing will exceed net income under absorption

costing by $60,000.

E. Net income under absorption costing will exceed net income under variable

costing by $60,000.

100,000 units × ($450,000/900,000 FOH) = $50,000 inventoried under absorption

and expensed under variable costing.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P4 Determine product selling price based on absorption costing.

19-54

McGraw-Hill Education.

Topic: Converting Income under Variable Costing to Absorption Costing

Galaxy, Inc., a manufacturer of telescopes, began operations on June 1 of the

current year. During this time, the company produced 60,000units and sold 40,000

units at a sales price of $600 per unit. Cost information for this year is shown in

the following table:

Production costs

Direct materials $90 per unit

Direct labor $75 per unit

Variable overhead $240,000 in

total

Fixed overhead $420,000 in

total

Non-production costs

Variable selling and

administrative

$80,000 in

total

Fixed selling and

administrative

$520,000 in

total

107. Given the Galaxy, Inc. data, what is net income using absorption costing?

A. $11,275,0

B. $17,400,0

C. $16,360,0

D. $16,800,0

E. $16,220,0

Sales = $600 × 40,000 = $24,000,000

Cost of goods sold = $90 + $75 + ($240,000/60,000) + ($420,000/60,000) = $176

× 40,000 units = $7,040,000

Nonproduction costs = $80,000 + $520,000 = $600,000

Net income using absorption costing = $24,000,000 – $176(40,000) – $600,000 =

$16,360,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

19-55

McGraw-Hill Education.

108. Given the Galaxy Inc. data, what is net income using variable costing?

A. $16,220,0

B. $17,400,0

C. $16,360,0

D. $11,275,0

E. $16,800,0

Sales = $600 × 40,000 = $24,000,000

Cost of goods sold = $90 + $75 + ($240,000/60,000) = $169 × 40,000 units =

$6,760,000Other variable costs (nonproduction) = $80,000

Total ‘xed costs = $420,000 (production overhead) + $520,000 (nonproduction) =

$940,000

Net income using variable costing = $24,000,000 – $169(40,000) – $80,000 –

$940,000 = $$16,220,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-56

McGraw-Hill Education.

Scavenger Company, a manufacturer of recycling bins, began operations on

January 1 of the current year. During this time, the company produced 60,000

units and sold 55,000 units at a sales price of $15 per unit. Cost information for

this year is shown in the following table:

Production costs

Direct materials $2.50 per unit

Direct labor $3.00 per unit

Variable overhead $45,000 in

total

Fixed overhead $240,000 in

total

Non-production costs

Variable selling and

administrative

$10,000 in

total

Fixed selling and

administrative

$50,000 in

total

109. Given the Scavenger Company data, what is net income using absorption costing?

A. $201,25

B. $181,25

C. $150,00

D. $177,60

E. $276,25

Sales = $15(55,000) = $825,000

COGS = DM + DL + VOH + FOH

Variable overhead production costs per unit = $45,000/60,000 units = $0.75 per

unit

Fixed overhead production costs per unit = $240,000/60,000 units = $4.00 per

unit

[($2.50 + $3.00 + $0.75 + $4.00) × 55,000 units] = $563,750

Sales – COGS – non-production costs = Net Income

$825,000 – $563,750 – $10,000 – $50,000 = $201,250

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

19-57

McGraw-Hill Education.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

110. Given the Scavenger Company data, what is net income using variable costing?

A. $201,25

B. $181,25

C. $150,00

D. $177,60

E. $276,25

Sales: $15(55,000) = $825,000

Variable COGS = DM + DL + VOH

Variable overhead production costs per unit = $45,000/60,000 units = $0.75 per

unit

[($2.50 + $3.00 + $0.75) × 55,000 units] = $343,750

Other variable costs (nonproduction) = $10,000

Total ‘xed costs = $240,000 + $50,000 = $290,000

Sales – Variable COGS – Variable nonproduction cost – Fixed costs = Net income

$825,000 – $343,750 – $10,000 – $290,000 = $181,250

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-58

McGraw-Hill Education.

111. Brush Industries reports the following information for May:

Sales $900,00

Fixed cost of goods sold 100,000

Variable cost of goods sold 250,000

Fixed selling and administrative

costs 100,000

Variable selling and administrative

costs 125,000

Calculate the operating income for May under absorption costing?

A. $650,00

B. $325,00

C. $525,00

D. $550,00

Sales $900,000 – Cost of goods sold $350,000 = Gross margin $550,000 – Selling

and administrative costs $225,000 = $325,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

19-59

McGraw-Hill Education.

Cool Pools, a manufacturer of above ground pools, began operations on January 1

of the current year. During this time, the company produced 45,000 units and sold

44,000 units at a sales price of $60 per unit. Cost information for this year is

shown in the following table:

Production costs

Direct materials $11.25 per

unit

Direct labor $3.20 per unit

Variable overhead $315,000 in

total

Fixed overhead $39,600 in

total

Non-production costs

Variable selling and

administrative

$2,000 in

total

Fixed selling and

administrative

$6,000 in

total

112. Given the Cool Pools Company data, what is net income using absorption costing?

A. $1,649,4

B. $1,648,6

C. $1,627,1

D. $1,709,4

E. $1,708,6

Sales = $60(44,000) = $2,640,000

Variable overhead production costs per unit = $315,000/45,000 units = $7 per unit

Fixed overhead production costs per unit = $39,600/45,000 units = $0.88 per unit

COGS = DM + DL + VOH + FOH

[($11.25 + $3.20 + $7.00 + $0.88) × 44,000 units] = $982,520

Sales – COGS – Nonproduction costs = Net income

$2,640,000 – $982,520 – $2,000 – $6,000 = $1,649,480

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

19-60

McGraw-Hill Education.

113. Given the Cool Pools Company data, what is net income using variable costing?

A. $1,649,4

B. $1,648,6

C. $1,627,1

D. $1,709,4

E. $1,708,6

Sales = $60(44,000) = $2,640,000

Variable overhead production costs per unit = $315,000/45,000 units = $7 per unit

COGS = DM + DL + VOH

[($11.25 + $3.20 + $7.00) × 44,000 units] = $943,800

Other variable cost (non-production) = $2,000

Total ‘xed costs = $39,600 + $6,000 = $45,600

Sales – Variable COGS – Fixed costs = Net income

$2,640,000 – $943,800 – $2,000 – $45,600 = $1,648,600

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-61

McGraw-Hill Education.

114. Brush Industries reports the following information for May:

Sales $900,00

Fixed cost of goods sold 100,000

Variable cost of goods sold 250,000

Fixed selling and administrative

costs 100,000

Variable selling and administrative

costs 125,000

Calculate the gross margin for May under absorption costing?

A. $650,00

B. $325,00

C. $525,00

D. $550,00

Sales $900,000 – Cost of goods sold $350,000 = Gross margin $550,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

19-62

McGraw-Hill Education.

115. Reliance Corporation sold 4,000 units of its product at a price of $15 per unit. Total

variable cost per unit is $8.50, consisting of $7.75 in variable production cost

and.75 in variable selling and administrative cost. Compute contribution margin for

the company.

A. $26,00

B. $34,00

C. $60,00

D. $31,00

E. $36,90

$15.00 – $8.50 = $6.50 × 4,000 units = $26,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

116. Quaker Corporation sold 6,600 units of its product at a price of $42.40 per unit.

Total variable cost per unit is $19.25, consisting of $10.15 in variable production

cost and $9.10 in variable selling and administrative cost. Compute contribution

margin for the company.

A. $279,84

B. $119,13

C. $66,99

D. $152,79

E. $60,06

$42.40 – $19.25 = $23.15 × 6,600 units = $152,790

AACSB: Analytical Thinking

19-63

McGraw-Hill Education.

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

117. Geneva Co. reports the following information for July:

Sales $750,000

Variable costs 225,000

Fixed costs 100,000

Calculate the contribution margin for July.

A. $525,00

B. $425,00

C. $650,00

D. $750,00

Sales $750,000 – VC $225,000 = $525,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-64

McGraw-Hill Education.

118. Alexis Co. reported the following information for May:

Part

Units sold 5,000 unit

Selling price per unit $800

Variable manufacturing cost per

unit 520

Sales commission per unit – Part

A80

What is the manufacturing margin for Part A?

A. $1,000,0

B. $1,400,0

C. $3,600,0

D. $2,600,0

Sales (5,000 units × $800/unit) $4,000,0

Variable costs:

Variable manufacturing costs

(5,000 × $520/unit)

2,600,0

Manufacturing margin $1,400,0

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

19-65

McGraw-Hill Education.

119. Alexis Co. reported the following information for May:

Part

Units sold 5,000 unit

Selling price per unit $800

Variable manufacturing cost per

unit 520

Sales commission per unit – Part

A80

What is the contribution margin for Part A?

A. $1,000,0

B. $1,400,0

C. $3,600,0

D. $2,600,000

Sales (5,000 units × $800/unit) $4,000,000

Variable costs:

Variable manufacturing costs (5,000 ×

$520/unit) 2,600,000

Manufacturing margin $1,400,00

Variable selling expenses (5,000 units x $80

per unit)

400,00

Contribution margin $1,000,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-66

McGraw-Hill Education.

120. Swisher, Incorporated reports the following annual cost data for its single product:

Normal production level 30,000 units

Direct materials $6.40 per unit

Direct labor $3.93 per unit

Variable overhead $5.80 per unit

Fixed overhead $150,000 in total

This product is normally sold for $48 per unit. If Swisher increases its production

to 50,000 units, while sales remain at the current 30,000 unit level, by how much

would the company’s income increase or decrease under absorption costing?

A. $60,000

decrease.

B. $90,000

decrease.

C. There is no change in

income.

D. $90,000

increase.

E. $60,000

increase.

$150,000/30,000 units = $5 FOH per unit at 30,000 unit level

$150,000/50,000 units = $3 FOH per unit at 50,000 unit level

$5 – 3 = $2 less FOH cost in each unit sold

$2 × 30,000 = $60,000 increase

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Production levels

19-67

McGraw-Hill Education.

121. Swisher, Incorporated reports the following annual cost data for its single product:

Normal production level 30,000 units

Direct materials $6.40 per unit

Direct labor $3.93 per unit

Variable overhead $5.80 per unit

Fixed overhead $150,000 in total

This product is normally sold for $48 per unit. If Swisher increases its production

to 50,000 units, while sales remain at the current 30,000 unit level, by how much

would the company’s income increase or decrease under variable costing?

A. $60,000

decrease.

B. $90,000

decrease.

C. There is no change in gross

margin.

D. $90,000

increase.

E. $60,000

increase.

There would be no change because ‘xed costs are expensed in the period in which

they are incurred, regardless of the number of units sold.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-68

McGraw-Hill Education.

122. Swola Company reports the following annual cost data for its single product.

Normal production level 75,000 units

Direct materials $1.25 per unit

Direct labor $2.50 per unit

Variable overhead $3.75 per unit

Fixed overhead $300,000 in total

This product is normally sold for $25 per unit. If Swola increases its production to

200,000 units, while sales remain at the current 75,000 unit level, by how much

would the company’s gross margin increase or decrease under absorption costing?

A. $187,500

increase.

B. $112,500

increase.

C. There will be no change in gross

margin.

D. $112,500

decrease.

E. $187,500

decrease.

$300,000/75,000 units = $4 FOH per unit at 75,000 unit level

$300,000/200,000 units = $1.50 FOH per unit at 200,000 unit level

$4 – 1.50 = $2.50 less FOH cost in each unit sold

$2.50 × 75,000 = $187,500 gross margin increase

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Absorption Costing

19-69

McGraw-Hill Education.

123. Swola Company reports the following annual cost data for its single product.

Normal production level 75,000 units

Direct materials $1.25 per unit

Direct labor $2.50 per unit

Variable overhead $3.75 per unit

Fixed overhead $300,000 in total

This product is normally sold for $25 per unit. If Swola increases its production to

200,000 units, while sales remain at the current 75,000 unit level, by how much

would the company’s income increase or decrease under variable costing?

A. $187,500

increase.

B. $112,500

increase.

C. There will be no change in gross

income.

D. $112,500

decrease.

E. $187,500

decrease.

There would be no change because ‘xed costs are expensed in the period in which

they are incurred, regardless of the number of units sold.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

19-70

McGraw-Hill Education.

Red and White Company reported the following monthly data:

Units produced 2,000 units

Sales price $25 per unit

Direct materials $1 per unit

Direct labor $2 per unit

Variable overhead $3 per unit

Fixed overhead $8,000 in total

124. What is the Red and White’s contribution margin for this month if 980 units were

sold?

A. $38,00

B. $18,62

C. $24,50

D. $50,00

E. $21,56

($25 – $1 – $2 – $3) = $19 × 980 units = $18,620

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Absorption Costing

19-71

McGraw-Hill Education.

125. What is Red and White’s net income under absorption costing if 980 units are sold

and operating expenses are $12,000?

A. $(1,38

B. $(2,00

C. $2,70

D. $6,62

E. $10,62

CM = ($25 – $1 – $2 – $3) = $19 × 980 units = $18,620

NI = $18,620 – (980 units)($8,000/2000 units) FC – $12,000 = $2,700

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Absorption Costing

126. What is Red and White’s net income under variable costing if 980 units are sold

and operating expenses are $12,000?

A. $(1,38

B. $(2,00

C. $2,70

D. $6,62

E. $10,62

CM = ($25 – $1 – $2 – $3) = $19 × 980 units = $18,620

NI = $18,620 – $8,000 FC – $12,000 = $(1,380)

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

19-72

McGraw-Hill Education.

Topic: Variable Costing

127. Decko Industries reported the following monthly data:

Units produced 52,000 units

Sales price $33 per unit

Direct materials $1.50 per unit

Direct labor $2.50 per unit

Variable overhead $3.50 per unit

Fixed overhead $234,000 in total

What is the company’s contribution margin for this month if 50,000 units were

sold?

A. $1,326,0

B. $1,716,0

C. $1,275,0

D. $1,650,0

E. $1,450,0

($33 – $1.50 – $2.50 – $3.50) = $25.50 × 50,000 units = $1,275,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Variable Costing

19-73

McGraw-Hill Education.

128. Tim’s Tools, a manufacturer of cordless drills, began operations this year. During

this year, the company produced 20,000 units and sold 18,000 units. At year–end

the company reported the following income statement using absorption costing:

Sales (18,000 × $30) $540,000

Cost of goods sold (18,000 × $14) 252,000

Gross margin $288,000

Selling and administrative expenses 90,000

Net income $198,000

Production costs per unit total $14, which consists of $12.90 in variable

production costs and $1.10 in ‘xed production costs (based on the 20,000 units

produced). 60% of total selling and administrative expenses are variable. Compute

net income under variable costing.

A. $307,80

B. $198,00

C. $195,80

D. $288,00

E. $220,00

$198,000 – (2,000 units × FOH $1.10) = $195,800

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-74

McGraw-Hill Education.

129. Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and

sold 23,000 units during the current year. Beginning inventory under absorption

costing consisted of 3,000 units valued at $66,000 (Direct materials $12 per unit;

Direct labor, $3 per unit; Variable Overhead, $2 per unit, and Fixed overhead, $5

per unit.) All manufacturing costs have remained constant over the 2-year period.

At year-end the company reported the following income statement using

absorption costing:

Sales (23,000 × $45) $1,035,000

Cost of goods sold (23,000 × $22) 506,,000

Gross margin $529,000

Selling and administrative expenses 115,000000

Net income $414,000

60% of total selling and administrative expenses are variable. Compute net

income under variable costing.

A. $414,00

B. $399,00

C. $529,00

D. $429,00

E. $644,00

$414,000 + (3,000 units × FOH $5) = $429,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-75

McGraw-Hill Education.

130. Wind Fall, a manufacturer of leaf blowers, began operations this year. During this

year, the company produced 10,000 leaf blowers and sold 8,500. At year-end the

company reported the following income statement using absorption costing:

Sales (8,500 × $45) $382,50

Cost of goods sold (8,500 × $20) 170,000

Gross margin $212,50

Selling and administrative

expenses 60,000

Net income $152,50

Production costs per leaf blower total $20, which consists of $16 in variable

production costs and $4 in ‘xed production costs (based on the 10,000 units

produced). Fifteen percent of total selling and administrative expenses are

variable. Compute net income under variable costing.

A. $146,50

B. $158,50

C. $237,50

D. $206,50

E. $246,50

$152,500 – ($4 × 1,500 units) = $146,500

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-76

McGraw-Hill Education.

131. Aces, Inc., a manufacturer of tennis rackets, began operations this year. The

company produced 6,000 rackets and sold 4,900. At year–end, the company

reported the following income statement using absorption costing.

Sales (4,900 × $90) $441,00

Cost of goods sold (4,900 × $38) 186,200

Gross margin $254,80

Selling and administrative

expenses 75,000

Net Income $179,80

Production costs per tennis racket total $38, which consists of $25 in variable

production costs and $13 in ‘xed production costs (based on the 6,000 units

produced). Ten percent of total selling and administrative expenses are variable.

Compute net income under variable costing.

A. $194,10

B. $165,50

C. $311,00

D. $240,50

E. $233,00

$179,800 – ($13 × 1,100 units) = $165,500

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-77

McGraw-Hill Education.

132. Jeter Corporation had net income of $212,000 based on variable costing.

Beginning and ending inventories were 6,000 units and 10,000 units, respectively.

Assume the ‘xed overhead per unit was $4 for both the beginning and ending

inventory. What is net income under absorption costing?

A. $252,00

B. $228,00

C. $244,00

D. $276,00

E. $212,00

$212,000 + (10,000 units × $4) – (6,000 × $4) = $228,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

133. Kluber, Inc. had net income of $900,000 based on variable costing. Beginning and

ending inventories were 55,000 units and 52,000 units, respectively. Assume the

‘xed overhead per unit was $1.25 for both the beginning and ending inventory.

What is net income under absorption costing?

A. $833,12

B. $903,75

C. $966,87

D. $896,25

E. $900,00

$900,000 + (52,000 units × $1.25) – (55,000 × $1.25) = $896,250

AACSB: Analytical Thinking

AICPA: BB Industry

19-78

McGraw-Hill Education.

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

134. Pact Company had net income of $972,000 based on variable costing. Beginning

and ending inventories were 7,800 units and 5,200 units, respectively. Assume the

‘xed overhead per unit was $3.61 for both the beginning and ending inventory.

What is net income under absorption costing?

A. $962,61

B. $1,018,9

C. $925,07

D. $969,40

E. $981,37

$972,000 + (5,200 units × $3.61) – (7,800 × $3.61) = $962,614

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-79

McGraw-Hill Education.

135. Front Company had net income of $72,500 based on variable costing. Beginning

and ending inventories were 800 units and 1,200 units, respectively. Assume the

‘xed overhead per unit was $7.90 for both the beginning and ending inventory.

What is net income under absorption costing?

A. $69,34

B. $75,66

C. $88,30

D. $56,70

E. $72,90

$72,500 + (1,200 units × $7.90) – (800 × $7.90) = $75,660

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-80

McGraw-Hill Education.

136. Given the following data, calculate product cost per unit under variable costing.

Direct labor $8 per unit

Direct materials $3 per unit

Overhead

Total variable overhead $30,000

Total fixed overhead $85,000

Expected units to be produced 50,000 units

A. $7 per

unit

B. $13.30 per

unit

C. $11.00 per

unit

D. $11.60 per

unit

E. $16.50 per

unit

$8 DL + $3 DM + ($30,000/50,000 units) VOH = $11.60

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-81

McGraw-Hill Education.

137. Given the following data, calculate product cost per unit under absorption costing.

Direct labor $7 per unit

Direct materials $1 per unit

Overhead

Total variable overhead $20,000

Total fixed overhead $90,000

Expected units to be produced 40,000 units

A. $8 per

unit

B. $8.50 per

unit

C. $10.25 per

unit

D. $10.75 per

unit

E. $12 per

unit

$7 DL + $1 DM + ($20,000/40,000 units) VOH + ($90,000/40,000 units) = $10.75

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

19-82

McGraw-Hill Education.

138. Given the following data, calculate the total product cost per unit under variable

costing.

Direct labor $3.50 per

unit

Direct materials $1.25 per

unit

Overhead

Total variable overhead $41,400

Total fixed overhead $150,000

Expected units to be produced 18,000 units

A. $4.75 per

unit

B. $7.05 per

unit

C. $15.38 per

unit

D. $13.08 per

unit

E. $16 per

unit

$3.50 DL + $1.25 DM + ($41,400/18,000 units) VOH = $7.05

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

19-83

McGraw-Hill Education.

139. Given the following data, calculate the total product cost per unit under absorption

costing.

Direct labor $3.50 per

unit

Direct materials $1.25 per

unit

Overhead

Total variable overhead $41,400

Total fixed overhead $150,000

Expected units to be produced 18,000 units

A. $4.75 per

unit

B. $7.05 per

unit

C. $13.08 per

unit

D. $15.38 per

unit

E. $16 per

unit

$3.50 DL + $1.25 DM + ($41,400/18,000 units) VOH + ($150,000/18,000 units)

FOH = $15.38

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

Matching Questions

19-84

McGraw-Hill Education.

140. Match the following

1. Direct labor, direct materials, and

manufacturing overhead. Gross margin 7

2. Costs that are expensed in the

period they are incurred.

Operating

capacity 4

3. Sales less variable expenses.

Manufacturing

margin

4. Maximum number of units that

can be produced in the period.

Absorption

costing 8

5. A costing method that includes

only variable manufacturing costs. Period costs 2

6. An income statement format that

focuses on cost behavior.

Contribution

margin 3

7. Sales less cost of goods sold. Variable costing 5

8. A costing method that includes all

manufacturing costs. Product costs 1

9. Contribution margin divided by

sales.

Contribution

format 6

10. Sales less variable production

costs.

Contribution

margin ratio 9

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

Topic: Manufacturing Margin

Topic: Product Costs

Topic: Variable Costing

Essay Questions

19-85

McGraw-Hill Education.

141. Identify the treatment of each of the following costs under variable costing and

absorption costing:

Variable Costing Absorption Costing

Product

Cost

Period

Cost

Product

Cost

Period

Cost

1. Direct materials

2. Direct labor

3. Variable manufacturing

overhead

4. Fixed manufacturing

overhead

5. Variable selling

6. Fixed selling

7. Variable administrative

8. Fixed administrative

Variable Costing Absorption Costing

Product

Cost

Period

Cost

Product

Cost

Period

Cost

1. Direct materials X X

2. Direct labor X X

3. Variable manufacturing

overhead X X

4. Fixed manufacturing

overhead X X

5. Variable selling X X

6. Fixed selling X X

7. Variable administrative X X

8. Fixed administrative X X

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

Topic: Variable Costing

19-86

McGraw-Hill Education.

142. What costs are treated as product costs under the absorption costing method?

Under absorption costing, direct labor, direct materials, and all manufacturing

overhead costs, both ‘xed and variable, are treated as product costs.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

143. What costs are treated as product costs under the variable costing method?

Under variable costing, direct labor, direct materials, and variable manufacturing

overhead costs are treated as product costs. Fixed manufacturing overhead is

treated as a period cost.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

144. How can the use of absorption costing result in overproduction?

Absorption costing treats ‘xed manufacturing overhead as a product cost. As a

‘xed cost, the amount per unit goes down as the total number of units produced is

increased. If these excess units produced are not sold, the ‘xed overhead cost

allocated to the units is not currently expensed. This reduction in cost per unit will

decrease cost of goods sold and increase net income. Therefore, companies must

guard against increasing production merely for the sake of increasing the current

period net income.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.

Topic: Absorption Costing

19-87

McGraw-Hill Education.

145. When excess capacity exists, what is the minimum special order price a manager

should accept to increase net income?

With excess capacity, increases in production level would increase variable

production costs, but not ‘xed costs. Therefore, managers should accept special

orders provided the special order price exceeds total variable cost.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

146. What are the benefit of using variable costing when striving to control costs? Are

these benefit available under absorption costing?

Under absorption costing, both variable production costs and ‘xed production

costs are combined. This makes it diTcult to evaluate the eHectiveness of cost

controls by diHerent levels of managers. Variable costing separates the variable

costs from the ‘xed costs and, therefore, makes it easier to identify and assign

control over costs.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Comparing Variable Costing and Absorption Costing

147. What is the formula to compute manufacturing margin?

Manufacturing margin equals sales minus variable manufacturing costs.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

19-88

McGraw-Hill Education.

148. How does contribution margin diHer from gross margin?

Contribution margin equals sales less variable expenses. This is a subtotal used in

variable costing where costs are grouped according to cost behavior. Gross margin

equals sales less cost of goods sold. This is a subtotal used in absorption costing

where expenses are grouped according to function.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

149. How will net income under variable costing compare to net income under

absorption costing in the following three situations? Explain brieBy the cause of

any diHerences.

(a) Units produced equal units sold

(b) Units produced exceed units sold

(a) Income is identical under variable costing and absorption costing when the

units produced equal the units sold.

(b) When units produced exceed units sold, income under variable costing is less

than income under absorption costing. This is because some of ‘xed overhead was

allocated to ending inventory under absorption costing, but all of fixed overhead

was expensed under variable costing.

greater than income under absorption costing. This is because absorption costing

is expensing some of a prior period‘s ‘xed overhead in addition to the current

period’s ‘xed overhead, while variable costing is only expensing the current

period’s ‘xed overhead.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-89

McGraw-Hill Education.

150. What is a contribution margin report?

A contribution margin report presents cost data in a manner that emphasizes the

company’s contribution margin and contribution margin ratio. The basic format is

to present sales less variable costs equaling contribution margin.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

151. What are the limitations of using variable costing?

Variable costing is not an acceptable basis for either external reporting or tax

reporting.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

152. What is the general procedure for converting variable costing net income to

absorption costing net income?

The general formula is variable costing net income plus ‘xed production cost in

ending inventory less ‘xed production cost in beginning inventory.

AACSB: Communication

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-90

McGraw-Hill Education.

Short Answer Questions

153. A company is currently operating at 60% capacity producing 10,000 units. Cost

information relating to this current production is shown in the following table:

Per Unit

Sales price $21

Direct material $6

Direct labor $4.12

Variable overhead $2.23

Fixed overhead $0.80

The company has been approached by a customer with a request for a special

order for 5,000 units. What is the minimum per unit sales price that management

would accept for this order if the company wishes to increase current profit?

10,000/.6 – 10,000 = 6,666 unit remaining capacity

$6 + $4.12 + $2.23 = $12.35 incremental costs

Any sales price that exceeds the $12.35 incremental costs will increase current

pro‘ts.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

19-91

McGraw-Hill Education.

154. A company is currently operating at 65% capacity producing 12,000 units. Cost

information relating to this current production is shown in the following table:

Per Unit

Sales price $6

Direct material $2.30

Direct labor $0.87

Variable overhead $0.91

Fixed overhead $0.70

The company has been approached by a customer with a request for a special

order for 2,000 units. What is the minimum per unit sales price that management

would accept for this order if the company wishes to increase current profit?

12,000/.65 – 12,000 = 6,461 unit remaining capacity

$2.30 + $0.87 + $0.91 = $4.08 incremental costs

Any sales price that exceeds the $4.08 incremental costs will increase current

pro‘ts.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

19-92

McGraw-Hill Education.

155. A company is currently operating at 70% capacity producing 8,000 units. Cost

information relating to this current production is shown in the following table:

Per Unit

Sales price $15

Direct material $3.20

Direct labor $7.10

Variable overhead $0.05

Fixed overhead $0.60

The company has been approached by a customer with a request for a special

order for 1,500 units. The sales price per unit for this special order is $10. Should

the company accept the special order?

8,000/.7 – 8,000 = 3,428 unit remaining capacity

The company should not accept this special order. Incremental costs exceed

incremental income.

$3.20 + $7.10 + $0.05 = $10.35 incremental costs

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

156. Assume a company sells a given product for $33.28 per unit. How many units must

the company sell to break-even if variable selling costs are $1.40 per unit, variable

production costs are $23.56 per unit, and total fixed costs are $2,080,000?

$2,080,000/($33.28 – $1.40 – $23.56) = 250,000 units

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Variable Costing

19-93

McGraw-Hill Education.

157. Assume a company sells a given product for $95 per unit. Variable selling costs are

$24.25 per unit and variable production costs are $53.50 per unit. If the company

breaks even when selling 260,000 units, what are total ‘xed costs?

$95 – $24.25 – $53.50 = $17.25 contribution margin per unit

$17.25 × 260,000 units = $4,485,000 total ‘xed costs

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Variable Costing

158. Assume a company sells a given product for $18 per unit. Variable selling costs are

$0.70 per unit and variable production costs are $5.30 per unit. If the company

breaks even when selling 4,000,000 units, what are total ‘xed costs?

$18 – $0.70 – $5.30 = $12 contribution margin per unit

$12 × 4,000,000 units = $48,000,000 total ‘xed costs

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Variable Costing

19-94

McGraw-Hill Education.

159. Blackbird, Incorporated reports the following information regarding its production

cost:

Units produced 39,000 units

Direct labor $13 per unit

Direct materials $17 per unit

Variable overhead $7,800,000 in total

Fixed overhead $9,750,000 in total

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

a. $13 DL + $17 DM + ($7,800,000/39,000) VOH = $230 per unit under variable

costing

b. $230 + ($9,750,000/39,000) FOH = $480 per unit under absorption costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

Topic: Variable Costing

160. Triton Industries reports the following information regarding its production cost:

Units produced 77,000 units

Direct labor $27 per unit

Direct materials $12 per unit

Variable overhead $2,541,000 in total

Fixed overhead $3,311,000 in total

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

a. $27 DL + $12 DM + ($2,541,000/77,000) VOH = $72 per unit under variable

costing

b. $72 + ($3,311,000/77,000) FOH = $115 per unit under absorption costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

19-95

McGraw-Hill Education.

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Comparing Variable Costing and Absorption Costing

161. Home Base, Inc. reports the following production cost information:

Beginning inventory 10,000 units

Units produced 97,000 units

Units sold 92,000 units

Direct labor $17 per unit

Direct materials $34 per unit

Variable overhead $2,522,000 in total

Fixed overhead $1,940,000 in total

Operating costs $2,000,000 in total

Assume that productions costs have remained the same since the previous period

and all units are sold for $137.00 per unit.

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

c. Determine net income using variable costing.

d. Determine net income using absorption costing.

a. $17 DL + $34 DM + ($2,522,000/97,000) VOH = $77 per unit under variable

costing

b. $77 + ($1,940,000/97,000) FOH = $97 per unit under absorption costing

c. NI = ($137 – $77)(92,000 units) – $1,940,000 – $2,000,000 = $1,580,000

d. NI = ($137 – $97)(92,000 units) – $2,000,000 = $1,680,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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162. Home Base, Inc. reports the following production cost information:

Units produced 97,000 units

Units sold 92,000 units

Direct labor $17 per unit

Direct materials $34 per unit

Variable overhead $2,522,000 in total

Fixed overhead $1,940,000 in total

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

c. Determine the cost of ending inventory using variable costing.

d. Determine the cost of ending inventory using absorption costing.

a. $17 DL + $34 DM + ($2,522,000/97,000) VOH = $77 per unit under variable

costing

b. $77 + ($1,940,000/97,000) FOH = $97 per unit under absorption costing

c. (97,000 units – 92,000 units) × $77 per unit = $385,000 ending inventory under

variable costing

d. (97,000 units – 92,000 units) × $97 per unit = $485,000 ending inventory under

absorption costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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163. Lukin Corporation reports the following first year production cost information.

Units produced 62,000 units

Units sold 59,000 units

Direct labor $41 per unit

Direct materials $15 per unit

Variable overhead $9,300,000 in total

Fixed overhead $4,340,000 in total

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

c. Determine the cost of ending inventory using variable costing.

d. Determine the cost of ending inventory using absorption costing.

a. $41 DL + $15 DM + ($9,300,000/62,000) VOH = $206 per unit under variable

costing

b. $206 + ($4,340,000/62,000) FOH = $276 per unit under absorption costing

c. (62,000 units – 59,000 units) × $206 per unit = $618,000 ending inventory

under variable costing

d. (62,000 units – 59,000 units) × $276 per unit = $828,000 ending inventory

under absorption costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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164. Lukin Corporation reports the following first year production cost information:

Units produced 62,000 units

Units sold 59,000 units

Sales price $350 per unit

Direct labor $41 per unit

Direct materials $15 per unit

Variable overhead $9,300,000 in total

Fixed overhead $4,340,000 in total

Operating expenses $1,000,000

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

c. Determine the net income using variable costing.

d. Determine the net income using absorption costing.

a. $41 DL + $15 DM + ($9,300,000/62,000) VOH = $206 per unit under variable

costing

b. $206 + ($4,340,000/62,000) FOH = $276 per unit under absorption costing

c. NI = ($350 – $206)(59,000 units) – $4,340,000 – $1,000,000 = $3,156,000

d. NI = ($350 – $276)(59,000 units) – $1,000,000 = $3,366,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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165. Castaway Company reports the following first year production cost information:

Units produced 53,000 units

Units sold 51,000 units

Direct labor $8 per unit

Direct materials $4 per unit

Variable overhead $2,173,000 in total

Fixed overhead $3,339,000 in total

a. Compute production cost per unit under variable costing.

b. Compute production cost per unit under absorption costing.

c. Determine the cost of ending inventory using variable costing.

d. Determine the cost of ending inventory using absorption costing.

a. $8 DL + $4 DM + ($2,173,000/53,000) VOH = $53 per unit under variable

costing

b. $53 + ($3,339,000/53,000) FOH = $116 per unit under absorption costing

c. (53,000 units – 51,000 units) × $53 per unit = $106,000 ending inv. under

variable costing

d. (53,000 units – 51,000 units) × $116 per unit = $232,000 ending inv. under

absorption costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

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166. Castaway Company reports the following first year production cost information:

Units produced 53,000 units

Units sold 51,000 units

Sales price $150 per unit

Direct labor $8 per unit

Direct materials $4 per unit

Variable overhead $2,173,000 in total

Fixed overhead $3,339,000 in total

Operating expenses $1,000,000 in total

a. Determine the net income using variable costing.

b. Determine the net income using absorption costing.

a. Product cost: $8 DL + $4 DM + ($2,173,000/53,000) VOH = $53 per unit under

variable costing

NI = ($150 – $53)(51,000 units) – $3,339,000 – $1,000,000 = $608,000

b. Product cost: $53 + ($3,339,000/53,000) FOH = $116 per unit under absorption

costing

NI = ($150 – $116)(51,000 units) – $1,000,000 = $734,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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167. A company reports the following information regarding its production cost:

Units produced 14,000 units

Direct labor $13 per unit

Direct materials $3 per unit

Variable overhead ? in total

Fixed overhead $56,000 in total

Required: Perform the following independent calculations.

a. Compute total variable overhead cost if the production cost per unit under

variable costing is $73.

b. Compute total variable overhead cost if the production cost per unit under

absorption costing is $73.

a. $13 DL + $3 DM + (VOH/14,000) = $73

VOH/14,000 = $57

Total VOH = ($57 × 14,000) = $798,000

b. $13 DL + $3 DM + (VOH/14,000) + ($56,000/14,000) FOH = $73

VOH/14,000 = $53

Total variable overhead = ($53 × 14,000) = $742,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

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168. A company reports the following information regarding its production cost:

Units produced 22,000 units

Direct labor $31 per unit

Direct materials $27 per unit

Variable overhead ? in total

Fixed overhead $2,750,000 in total

Required: Perform the following independent calculations.

a. Compute total variable overhead cost if the production cost per unit under

variable costing is $240.

b. Compute total variable overhead cost if the production cost per unit under

absorption costing is $240.

a. $31 DL + $27 DM + (VOH/22,000) VOH = $240

VOH/22,000 = $182

Total variable overhead = ($182 × 22,000) = $4,004,000

b. $31 DL + $27 DM + (VOH/22,000) + ($2,750,000/22,000) FOH = $240

VOH/22,000 = $57

Total variable overhead = ($57 × 22,000) $1,254,000 total variable overhead

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Converting Income under Variable Costing to Absorption Costing

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169. Digby Company manufactured and sold 37,000 units of its product at a price of

$93 per unit. Total variable cost per unit is $60, consisting of $58 in variable

production cost and $2 in variable selling and administrative cost. Fixed costs of

manufacturing are $350,000.

a. Compute the manufacturing margin for the company under variable costing.

b. Compute the contribution margin based on this data.

c. Compute the gross margin under absorption costing.

a. ($93 – $58) × 37,000 units = $1,295,000

b. ($93 – $60)(37,000 units) = $1,221,000

c. ($93 – $58)(37,000 units) – $350,000 = $945,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

170. Cavalier Corporation sold 26,000 units of its product at a price of $225 per unit.

Total variable cost per unit is $188, consisting of $103 in variable production cost

and $85 in variable selling and administrative cost. Compute the manufacturing

margin for the company under variable costing.

($225 – $103) × 26,000 units = $3,172,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

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171. Stonehenge Inc., a manufacturer of landscaping blocks, began operations on April

1 of the current year. During this time, the company produced 750,000 units and

sold 720,000 units at a sales price of $9 per unit. Cost information for this period is

shown in the following table:

Production costs

Direct materials $1.80 per unit

Direct labor $.30 per unit

Variable overhead $495,000 in total

Fixed overhead $450,000 in total

Non production costs

Variable selling and administrative $18,000 in total

Fixed selling and administrative $53,000 in total

a. Prepare Stonehenge’s December 31st income statement for the current year

under absorption costing.

b. Prepare Stonehenge’s December 31st income statement for the current year

under variable costing.

STONEHENGE, INC.

Income Statement (Absorption Costing)

For the nine months ended December 31, xx

Sales (720,000 × $9) $6,480,0

Cost of goods sold (720,000 × $3.36*) 2,419,2

Gross margin 4,060,80

Selling and administrative expenses ($18,000 +

$53,000)

71,00

Net income $3,989,8

*$1.80 + $.30 + ($495,000/750,000) + ($450,000/750,000)

= $3.36

STONEHENGE, INC.

Income Statement (Variable Costing)

For the nine months ended December 31, xx

Sales (720,000 × $9) $6,480,00

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Variable expenses

Variable production costs (720,000 ×

$2.76*)

1,987,2

Variable selling and administrative 18,000

Contribution margin 4,474,800

Fixed expenses

Fixed overhead 450,000

Fixed selling and administrative

expenses 53,000

Net income $3,971,80

*$1.80 + $.30 + ($495,000/750,000) = $2.76

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Reporting

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

19-107

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19-108

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172. Blatt Company, a manufacturer of slippers, began operations on June 1 of the

current year. During this time, the company produced 210,000 units and sold

185,000 units at a sales price of $40 per unit. Cost information for this period is

shown in the following table:

Production costs

Direct materials $5.00 per unit

Direct labor $4.75 per unit

Variable overhead $302,000 in total

Fixed overhead $405,000 in total

Non-production costs

Variable selling and administrative $9,000 in total

Fixed selling and administrative $25,000 in total

a. Prepare Blatt’s December 31st income statement for the current year under

absorption costing.

b. Prepare Blatt’s December 31st income statement for the current year under

variable costing.

Blatt COMPANY

Income Statement (Absorption Costing)

For the seven months ended December 31, xx

Sales (185,000 × $40) $7,400,0

Cost of goods sold (185,000 × $13.12*) 2,427,2

Gross margin 4,972,8

Selling and administrative expenses ($9,000 +

$25,000)

34,00

Net income $4,938,8

*$5 + $4.75 + ($302,000/210,000) + ($405,000/210,000)

= $13.12

Blatt COMPANY

Income Statement (Variable Costing)

For the seven months ended December 31, xx

Sales (185,000 × $40) $7,400,0

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Variable expenses

Variable production costs (185,000 ×

$11.19*)

2,070,15

Variable selling and administrative 9,00

Contribution margin 5,320,85

Fixed expenses

Fixed overhead 405,000

Fixed selling and administrative

expenses

25,00

Net income $4,890,8

*$5 + $4.75 + ($302,000/210,000) = $11.19

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Reporting

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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173. Wrap-It Company, a manufacturer of wrapping paper, began operations on June 1

of the current year. During this time, the company produced 370,000 units and

sold 310,000 units at a sales price of $50 per unit. Cost information for this period

is shown in the following table:

Production costs

Direct materials $2.00 per unit

Direct labor $.80 per unit

Variable overhead $814,000 in total

Fixed overhead $481,000 in total

Non production costs

Variable selling and administrative $78,000 in total

Fixed selling and administrative $210,000 in total

a. Prepare Wrap-It’s December 31st income statement for the current year under

absorption costing.

b. Prepare Wrap-It’s December 31st income statement for the current year under

variable costing.

WRAP-IT COMPANY

Income Statement (Absorption Costing)

For the seven months ended December 31, xx

Sales (310,000 × $50) $15,500,0

Cost of goods sold (310,000 × $6.30*) 1,953,00

Gross margin 13,547,00

Selling and administrative expenses ($78,000 +

$210,000)

288,00

Net income $13,259,0

*$2 + $.80 + ($814,000/370,000) + ($481,000/370,000) =

$6.30

WRAP-IT COMPANY

Income Statement (Variable Costing)

For the seven months ended December 31, xx

Sales (310,000 × $50) $15,500,0

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Variable expenses

Variable production costs (310,000 ×

$5.00*)

1,550,00

Variable selling and administrative 78,00

Contribution margin 13,872,00

Fixed expenses

Fixed overhead 481,000

Fixed selling and administrative

expenses

210,00

Net income $13,181,0

*$2 + $.80 + ($814,000/370,000) = $5.00

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Reporting

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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174. 32 Degrees, Inc., a manufacturer of frozen food, began operations on July 1 of the

current year. During this time, the company produced 140,000 units and sold

140,000 units at a sales price of $125 per unit. Cost information for this period is

shown in the following table:

Production costs

Direct materials $13.00 per unit

Direct labor $6.00 per unit

Variable overhead $2,100,000 in total

Fixed overhead $3,220,000 in total

Non production costs

Variable selling and administrative $91,000 in total

Fixed selling and administrative $458,000 in total

a. Prepare 32 Degree’s December 31st income statement for the current year

under absorption costing.

b. Prepare 32 Degree’s December 31st income statement for the current year

under variable costing.

32 DEGREES, INC

Income Statement (Absorption Costing)

For the six months ended December 31, xx

Sales (140,000 × $125) $17,500,0

Cost of goods sold (140,000 × $57*) 7,980,00

Gross margin 9,520,000

Selling and administrative expenses ($91,000 +

$458,000)

549,00

Net income $8,971,0

*$13 + $6 + ($2,100,000/140,000) + ($3,220,000/140,000) =

$57

32 DEGREES, INC

Income Statement (Variable Costing)

For the six months ended December 31, xx

Sales (140,000 × $125) $17,500,0

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Variable expenses

Variable production costs (140,000 ×

$34*)

4,760,00

Variable selling and administrative 91,000

Contribution margin 12,649,00

Fixed expenses

Fixed overhead 3,220,000

Fixed selling and administrative

expenses

458,00

Net income $8,971,00

*$13 + $6 + ($2,100,000/140,000) = $34

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Reporting

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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175. State Industries has the following information for 2015:

Units produced and sold 3,000 units

Selling Price $260/unit

Direct materials $20/unit

Direct labor $40/unit

Fixed manufacturing overhead $120,000/yr

Fixed selling and administrative costs $160,000/yr

Variable manufacturing overhead $35/unit

Variable selling and administrative costs $25/unit

There are no beginning inventories. Prepare an income statement for the year

under absorption costing.

State Industries

Income Statement

Year Ended December 31, 2015

Sales (3,000 units × $260) $780,000

– Cost of Goods Sold 405,000

Gross Margin 375,000

– Selling and Administrative Costs 235,000

Operating Income 140,000

Feedback: Cost of goods sold = {Total variable manufacturing costs (x units sold)}

+ Fixed manufacturing overhead.

Cost of goods sold = [($20 + $40 + $35)(Total variable manufacturing costs) ×

3,000 units] + $120,000 (Fixed manufacturing overhead). Cost of goods sold =

$405,000.

Selling and administrative Costs = ($25 × 3,000 units) + $160,000 = $235,000.

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Reporting

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

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176. Maloney Co. provided the following information for the year 2015:

Units produced and sold 4,400 units

Selling Price $400/unit

Direct materials $85/unit

Direct labor $55/unit

Fixed manufacturing overhead $130,000/yr

Fixed selling and administrative costs $165,000/yr

Variable manufacturing overhead $40/unit

There are no beginning inventories. Prepare an income statement using the

variable costing format.

Maloney Co.

Income Statement

Year Ended December

31, 2015

Sales 1,760,00

– Variable Costs 792,000

Contribution

Margin 968,000

– Fixed Costs 295,000

Operating Income 673,000

Feedback: Variable costs = 4,400 units × ($85 + $55 + $40) = $792,000

Fixed costs = $130,000 + $165,000 = $295,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Reporting

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

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177. Materials Corporation sold 12,000 units of its product at a price of $67 per unit.

Total variable cost per unit is $54.94, consisting of $45.05 in variable production

cost and $9.89 in variable selling and administrative cost. Compute the

contribution margin for the company.

$67.00 – $54.94 = $12.06 × 12,000 units = $144,720

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

178. Countdown Inc. sold 17,000 units of its product at a price of $81 per unit. Total

variable cost per unit is $72.09, consisting of $69.05 in variable production cost

and $3.04 in variable selling and administrative cost. Compute the contribution

margin for the company.

$81.00 – $72.09 = $8.91 × 17,000 units = $151,470

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

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179. Heather, Incorporated reports the following annual cost data for its single product:

Normal production and sales level 60,000 units

Direct materials $9.00 per unit

Direct labor $6.50 per unit

Variable overhead $11.00 per unit

Fixed overhead $720,000 in total

This product is normally sold for $56 per unit. If Heather increases its production

to 80,000 units while sales remain at the current 60,000 unit level, by how much

would the company’s gross margin increase or decrease under absorption costing?

Assume the company has idle capacity to double current production.

$720,000/60,000 units = $12 FOH per unit at 60,000 unit level

$720,000/80,000 units = $9 FOH per unit at 80,000 unit level

$12 – 9 = $3 less FOH cost in each unit sold

$3 × 60,000 = $180,000 gross margin increase

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

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180. Dataport Company reports the following annual cost data for its single product:

Normal production and sales level 89,000 units

Direct materials $14.00 per unit

Direct labor $21.00 per unit

Variable overhead $27.00 per unit

Fixed overhead $3,738,000 in total

This product is normally sold for $230 per unit. If Dataport increases its production

to 100,000 units, while sales remain at the current 89,000 unit level, by how much

would the company’s gross margin increase or decrease under absorption costing?

Assume the company has idle capacity to double current production.

$3,738,000/89,000 units = $42 FOH per unit at 89,000 unit level

$3,738,000/100,000 units = $37.38 FOH per unit at 100,000 unit level

$42 – 37.38 = $4.62 less FOH cost in each unit sold

$4.62 × 89,000 = $411,180 gross margin increase

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

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181. Chilly Chips, Inc., a producer of ice cream, began operations this year. During this

year, the company produced 160,000 cartons of ice cream and sold 145,000. At

year-end, the company reported the following income statement using absorption

costing:

Sales (145,000 × $6.50) $942,500

Cost of goods sold (145,000 × $3.50) 507,000

Gross margin $435,000

Selling and administrative expenses 252,000

Net income $183,000

Production costs per carton total $3.50, which consists of $2.30 in variable

production costs and $1.20 in ‘xed production costs (based on the 16,000 units

produced). Sixty percent of total selling and administrative expenses are variable.

Compute net income under variable costing.

$183,000 – ($1.20 × 15,000 units) = $165,000

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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182. Anchovy, Inc., a producer of frozen pizzas, began operations this year. During this

year, the company produced 16,000 cases of pizza and sold 15,000. At year-end,

the company reported the following income statement using absorption costing:

Sales (15,000 × $48) $720,000

Cost of goods sold (15,000 × $19) 285,000

Gross margin $435,000

Selling and administrative expenses 79,000

Net income $356,000

Production costs per case total $19, which consists of $15.50 in variable

production costs and $3.50 in ‘xed production costs (based on the 16,000 units

produced). Eight percent of total selling and administrative expenses are variable.

Compute net income under variable costing.

$356,000 – ($3.50 × 1,000 units) = $352,500

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

183. Toth, Inc. had net income of $950,000 based on variable costing. Beginning and

ending inventories were 60,000 units and 56,000 units, respectively. Assume the

‘xed overhead cost per unit was $.85 for both the beginning and ending inventory.

What is net income under absorption costing?

$950,000 + (56,000 units × $.85) – (60,000 × $.85) = $946,600

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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184. Fanelli Company had net income of $678,000 based on variable costing. Beginning

and ending inventories were 5,000 units and 4,200 units, respectively. Assume the

‘xed overhead cost per unit was $.50 for both the beginning and ending inventory.

What is net income under absorption costing?

$678,000 + (4,200 units × $.50) – (5,000 × $.50) = $677,600

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

Fill in the Blank Questions

185. Product costs consist of direct labor, direct materials, and _________________.

manufacturing overhead

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

186. _______________ and _______________ are product costs that can be directly traced to

the product.

Direct labor; direct materials (either order)

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Product Costs

187. A traditional product costing approach is referred to as ______________.

absorption costing or full costing

AACSB: Analytical Thinking

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AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

188. Absorption costing is also called ________________________ costing.

full

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

189. ________________________ costing treats ‘xed overhead as a period cost.

Variable

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

190. ________________________ is a costing method that includes all manufacturing costs

in unit product costs.

Absorption costing

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

191. A per unit cost that is constant at all production levels is a ________________________

cost per unit.

variable

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.

Topic: Variable Costing

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192. When excess capacity exists, managers should accept a special order if the special

order price exceeds the ________________________.

total variable costs

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-A1 Use variable costing in pricing special orders.

Topic: Pricing Special Orders

193. ________________________ is equal to Sales minus Variable manufacturing costs.

Manufacturing margin

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

194. Under variable costing, the product unit cost consists of

_______________________,direct materials, and variable overhead.

direct labor

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Variable Costing

195. Under absorption costing, the product unit cost consists of direct labor, direct

materials, variable overhead, and _______________________.

@xed overhead

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.

Topic: Absorption Costing

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196. On a contribution margin income statement, expenses are grouped according to

_______________.

cost behavior

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

197. _______________________ is the amount remaining from sales revenues after all

variable expenses have been deducted.

Contribution margin

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Variable Costing

198. ________________ is the amount remaining from sales revenues after cost of goods

sold has been deducted.

Gross margin

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Remember

difficulty: 1 Easy

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

199. Reported income is identical under absorption costing and variable costing when

the units produced _______________ the units sold.

equal

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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200. _______________________ is the amount remaining from manufacturing margin after

all variable selling, general and administrative expenses have been deducted.

Contribution margin

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Manufacturing Margin

201. _______________________ costing is the only acceptable basis for both external

reporting and tax reporting.

Absorption

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Understand

difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using

variable costing.

Topic: Absorption Costing

202. To convert variable costing net income to absorption costing net income,

____________________ the ‘xed production cost in ending inventory and

_______________________ the ‘xed production cost in beginning inventory.

add; subtract

AACSB: Analytical Thinking

AICPA: BB Industry

AICPA: FN Measurement

Blooms: Apply

difficulty: 3 Hard

Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.

Topic: Converting Income under Variable Costing to Absorption Costing

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