Financial and Managerial Accounting, 8e (Wild)
Chapter 19 Variable Costing and Analysis
1) Under variable costing, product costs consist of direct labor, direct materials, and variable
overhead.
2) Under variable costing, product costs consist of direct labor, direct materials, and fixed
overhead.
3) The absorption costing approach assigns all manufacturing costs to products.
4) Absorption costing is required under GAAP.
5) The use of absorption costing can result in misleading product cost information.
6) Variable costing treats fixed overhead cost as a period cost.
7) The biggest problems with producing too much are lost sales and customer dissatisfaction.
8) Many companies link manager bonuses to income computed under absorption costing because
this is how income is reported to shareholders.
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.
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.
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.
12) When there are zero units in beginning Finished Goods Inventory and more units are
produced than sold, the income will be lower under variable costing than under absorption
costing.
13) Variable costing is required by Generally Accepted Accounting Principles (GAAP) for
financial statement purposes.
14) Since fixed costs remain constant in the short run, special orders should be accepted as long
as the order price is greater than the variable costs.
15) For short-term pricing decisions, absorption costing is an appropriate costing method to use.
16) When setting long-term sales prices for products, the sales price must cover all costs,
including fixed costs.
17) Evaluating and rewarding managers based on absorption costing income can lead to
overproduction.
18) Cost information from both absorption costing and variable costing can aid managers in
pricing.
19) Managers should accept special orders provided the special order price exceeds the product
cost per unit under absorption costing.
20) Absorption costing is useful because it reflects the full costs that sales must exceed for the
company to be profitable.
21) The traditional income statement format used for financial reporting is called the
contribution margin format.
22) If a company has excess capacity, increases in production level will increase variable
production costs but not fixed production costs.
23) Fixed costs change in the short run depending upon management’s decision to accept or
reject special orders.
24) Variable costing separates variable costs from fixed costs and therefore makes it easier to
identify and assign control over costs.
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 fixed 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.
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 fixed 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.
27) Absorption costing is usually used for internal management purposes, and variable costing is
usually used for external reporting purposes.
28) Assuming fixed 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.
29) Assuming fixed costs remain constant, and a company produces more units than it sells, then
income under absorption costing is less than income under variable costing.
30) Assuming fixed costs remain constant, and a company sells more units than it produces, then
income under absorption costing is less than income under variable costing.
31) The data needed for cost-volume-profit analysis is readily available if the income statement
is prepared under absorption costing.
32) The data needed for cost-volume-profit analysis is readily available if the income statement
is prepared using a contribution format.
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 fixed overhead
$
90,000
Expected units to be produced
40,000
units
34) Given the following data, total product cost per unit under variable costing is $7.09.
$
2.50
per unit
$
1.75
per unit
$
42,600
$
160,000
15,000
units
35) Given the following data, total product cost per unit under variable costing will be greater
than total product cost under absorption costing.
$
2
per unit
$
8
per unit
$
37,500
$
249,000
15,000
units
36) Given the following data, total product cost per unit under absorption costing is $9.14.
$
0.72
per unit
$
0.80
per unit
$
202,500
$
140,400
45,000
units
37) Given the following data, total product cost per unit under absorption costing is $11.40.
$
5
per unit
$
6
per unit
$
32,800
$
164,000
82,000
units
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 fixed overhead
$
27,000
Expected units to be produced
9,000
units
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 fixed overhead
$
1,200,000
Expected units to be produced
3,000
units
40) The variable costing income statement classifies costs based on cost behavior rather than
function.
41) Contribution margin is also known as gross margin.
42) Under an income statement prepared using absorption costing, expenses are grouped
according to cost behavior.
43) A variable costing income statement focuses attention on the relationship between costs and
sales that is not evident from the absorption costing format.
44) When units produced equal units sold, reported income is identical under absorption costing
and variable costing.
45) Sales less total variable costs equals manufacturing margin.
46) When units produced exceed the units sold, income under absorption costing is higher than
income under variable costing.
47) When units produced are less than units sold, income under absorption costing is higher than
income under variable costing.
48) Income under absorption costing will always be different than income under variable costing.
49) Reporting contribution margin by market segment is useful in assessing the profitability of
each segment.
50) Contribution margin is the excess of sales over total variable costs.
51) Variable costing is the only acceptable basis for both external reporting and tax reporting.
52) The bottom line of a contribution margin report is net income.
53) Under variable costing, fixed manufacturing overhead is expensed at the time the units are
produced. Under absorption costing, fixed manufacturing overhead is expensed at the time the
units are sold.
54) Under absorption costing, fixed manufacturing overhead is expensed at the time the units are
produced. Under variable costing, fixed manufacturing overhead is expensed at the time the units
are sold.
55) When the number of units produced exceeds the number of units sold, absorption costing
defers some of the fixed costs incurred.
56) Information presented in a variable costing format can assist management when making
short-term pricing decisions.
57) It is not possible to convert reports prepared using variable costing to absorption costing
reports.
58) To convert variable costing income to absorption costing income, management will need to
add fixed overhead cost deferred in ending inventory and subtract fixed overhead cost
recognized from beginning inventory.
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
E) Period costing
60) Which of the following is not a product cost under variable costing?
A) Direct materials.
B) Fixed manufacturing overhead.
C) Direct labor.
D) Variable manufacturing overhead.
E) All variable manufacturing costs.
61) Using absorption costing, 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 fixed manufacturing
overhead.
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.
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.
64) Which of the following statements is true?
A) Variable costing treats fixed overhead as a period cost.
B) Absorption costing treats fixed 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.
65) Which of the following would be reported on 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