Chapter 7 – Income effects of alternative cost accumulation systems
MULTIPLE CHOICE
1. The efficient level of activity performance is called
a.
activity capacity.
b.
practical capacity.
c.
unused capacity.
d.
acquired capacity.
2. Which of the following costs would NOT be included in calculating inventory values under the
absorption-costing basis?
a.
direct materials
b.
fixed overhead
c.
selling and administrative expenses
d.
direct labour
3. When production is less than sales volume, net income under absorption costing will be ____ profits
using variable costing procedures.
a.
greater than
b.
less than
c.
equal to
d.
randomly different than
4. What is the primary difference between variable and absorption costing?
a.
inclusion of fixed selling expenses in product costs
b.
inclusion of variable factory overhead in period costs
c.
inclusion of fixed selling expenses in period costs
d.
inclusion of fixed factory overhead in product costs
5. All of the following costs are included in inventory under absorption costing EXCEPT
a.
direct materials.
b.
direct labour.
c.
fixed selling expenses.
d.
fixed factory overhead.
6. Which of the following statements is TRUE?
a.
Absorption costing net income exceeds variable costing net income when units produced
and sold are equal.
b.
Variable costing net income exceeds absorption costing net income when units produced
exceed units sold.
c.
Absorption costing net income exceeds variable costing net income when units produced
are less than units sold.
d.
Absorption costing net income exceeds variable costing net income when units produced
are greater than units sold.
7. Inventory values calculated using variable costing as opposed to absorption costing will generally be
a.
equal.
b.
less.
c.
greater.
d.
twice as much.
8. The method of accounting for inventory that assigns all manufacturing costs to inventory is sometimes
referred to as:
a.
absorption costing.
b.
FIFO.
c.
the weighted average cost method.
d.
conversion costing.
9. Under which of the following conditions is net income higher under absorption costing (relative to
variable costing)?
a.
Current period production exceeds sales.
b.
Inventory is reduced during the current period.
c.
Sales prices are rising.
d.
Net income is higher under absorption costing under all conditions.
10. Which costing approach assumes fixed overhead costs only expire when product is sold?
a.
product costing
b.
backflush accounting
c.
absorption costing
d.
cash basis accounting
11. Assuming sales prices and cost behaviour remain unchanged, when variable costing is used, when
does net income change in response to changes in unit sales?
a.
only when number of units sold exceeds number of units produced
b.
only when number of units produced exceeds number of units sold
c.
only when number of units sold exactly equals number of units produced
d.
under all the above conditions
12. Assuming sales prices and cost behaviour remain unchanged, when absorption costing is used,
overproducing creates which of the following situations?
a.
a buildup of inventory levels
b.
higher net income
c.
less fixed costs on the income statement
d.
all of the above
13. Steele Ltd. has the following information for January, February, and March 2011:
January
February
March
Units produced
10,000
10,000
10,000
Units sold
7,000
8,500
10,500
Production costs per unit (based on 10,000 units) are as follows:
Direct materials
£12
Direct labour
8
Variable factory overhead
6
Fixed factory overhead
4
Variable selling and admin. expenses
10
Fixed selling and admin. expenses
4
There were no beginning inventories for January 2011, and all units were sold for £50. Costs are stable
over the three months.
What is the February ending inventory for Steele Ltd. using the absorption costing method?
a.
£39,000
b.
£45,000
c.
£135,000
d.
£300,000
Figure 7-1
The following information pertains to Mayberry Ltd.:
1,000 units
6,000 units
£40
20
10
30
6
14
14. Refer to Figure 7-1. What is the value of the ending inventory using the absorption costing method?
a.
£240,000
b.
£360,000
c.
£600,000
d.
£420,000
15. Refer to Figure 7-1. Absorption costing net income would be ____ variable costing net income.
a.
£150,000 greater than
b.
£150,000 less than
c.
£240,000 less than
d.
£240,000 greater than
16. Toshi Company incurred the following costs in manufacturing desk calculators:
Direct materials
£14
Indirect materials (variable)
4
Direct labour
8
Indirect labour (variable)
6
Other variable factory overhead
10
Fixed factory overhead
28
Variable selling expenses
20
Fixed selling expenses
14
During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using absorption costing?
a.
£104
b.
£70
c.
£84
d.
£32
17. Eastwood Company has the following information for 2011:
Selling price
£150 per unit
Variable production costs
£40 per unit produced
Variable selling and admin. expenses
£16 per unit sold
Fixed production costs
£200,000
Fixed selling and admin. expenses
£140,000
Units produced
10,000 units
Units sold
8,000 units
There were no beginning inventories.
Fixed overhead in beginning inventory
Fixed overhead in ending inventory
Difference
What is the net income for Eastwood using the absorption costing method?
a.
£452,000
b.
£480,000
c.
£1,200,000
d.
£600,000
18. Ramon Company reported the following units of production and sales for June and July 2011:
Units
Month
Produced
Sold
June 2011
100,000
90,000
July 2011
100,000
105,000
Net income under absorption costing for June was £40,000; net income under variable costing for July
was £50,000. Fixed manufacturing costs were £600,000 for each month.
How much was net income for July using absorption costing?
a.
£50,000
b.
£20,000
c.
£80,000
d.
£40,000
Figure 7-2
Steele Ltd. has the following information for January, February, and March 2011:
January
February
March
Units produced
10,000
10,000
10,000
Units sold
7,000
8,500
10,500
Production costs per unit (based on 10,000 units) are as follows:
Direct materials
£12
Direct labour
8
Variable factory overhead
6
Fixed factory overhead
4
Variable selling and admin. expenses
10
Fixed selling and admin. expenses
4
There were no beginning inventories for January 2011, and all units were sold for £50. Costs are stable
over the three months.
19. Refer to Figure 7-2. What is the January ending inventory for Steele Ltd. using the variable costing
method?
a.
£260,000
b.
£78,000
c.
£108,000
d.
£90,000
20. Refer to Figure 7-2. What is the March ending inventory for Steele Ltd. using the variable costing
method?
a.
£120,000
b.
£104,000
c.
£260,000
d.
£15,000
21. Refer to Figure 7-2. What is the February contribution margin for Steele Ltd. using the variable
costing method?
a.
£240,000
b.
£170,000
c.
£119,000
d.
£204,000
22. The following information pertains to Stark Ltd.:
Beginning inventory
0 units
Ending inventory
5,000 units
Direct labour per unit
£20
Direct materials per unit
16
Variable overhead per unit
4
Fixed overhead per unit
10
Variable selling costs per unit
12
Fixed selling costs per unit
16
What is the value of ending inventory using the variable costing method?
a.
£310,000
b.
£250,000
c.
£200,000
d.
£390,000
23. Toshi Company incurred the following costs in manufacturing desk calculators:
Direct materials
£14
Indirect materials (variable)
4
Direct labour
8
Indirect labour (variable
6
Other variable factory overhead
10
Fixed factory overhead
28
Variable selling expenses
20
Fixed selling expenses
14
During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using variable costing?
a.
£52
b.
£62
c.
£42
d.
£70
24. The following information pertains to Mayberry Ltd.:
Beginning inventory
1,000 units
Ending inventory
6,000 units
Direct labour per unit
£40
Direct materials per unit
20
Variable overhead per unit
10
Fixed overhead per unit
30
Variable selling and admin. costs per unit
6
Fixed selling and admin. costs per unit
14
What is the value of the ending inventory using the variable costing method?
a.
£240,000
b.
£360,000
c.
£350,000
d.
£420,000
25. Ramon Company reported the following units of production and sales for June and July 2011:
Units
Month
Produced
Sold
June 2011
100,000
90,000
July 2011
100,000
105,000
Net income under absorption costing for June was £40,000; net income under variable costing for July
was £50,000. Fixed manufacturing costs were £600,000 for each month.
How much was net income for June using variable costing?
a.
£40,000
b.
£20,000
c.
£(40,000)
d.
£(20,000)
Figure 7-3
Eastwood Company has the following information for 2011:
Selling price
£150 per unit
Variable production costs
£40 per unit produced
Variable selling and admin. expenses
£16 per unit sold
Fixed production costs
£200,000
Fixed selling and admin. expenses
£140,000
Units produced
10,000 units
Units sold
8,000 units
There were no beginning inventories.
26. Refer to Figure 7-3. What is the ending inventory for Eastwood using the variable costing method?
a.
£300,000
b.
£180,000
c.
£120,000
d.
£80,000
27. Refer to Figure 7-3. What is the net income for Eastwood using the variable costing method?
a.
£412,000
b.
£480,000
c.
£1,200,000
d.
£600,000
Figure 7-4
The following information pertains to Stark Ltd.:
Beginning inventory
0 units
Ending inventory
5,000 units
Direct labour per unit
£20
Direct materials per unit
16
Variable overhead per unit
4
Fixed overhead per unit
10
Variable selling costs per unit
12
Fixed selling costs per unit
16
28. Refer to Figure 7-4. What is the value of ending inventory using the absorption costing method?
a.
£310,000
b.
£250,000
c.
£200,000
d.
£390,000
29. Refer to Figure 7-4. Absorption costing net income would be ____ the variable costing net income.
a.
£50,000 greater than
b.
£70,000 greater than
c.
£70,000 less than
d.
£50,000 less than
30. In the month just ended, Aldebraun Industries produced 40,000 units and sold 37,000 units. There
were 2,000 units in finished goods inventory at the start of the month. Manufacturing costs are stable
from month to month. The fixed overhead rate was £8 per unit. Aldebraun uses absorption costing. If
Aldebraun used variable costing, the difference in net income would have been
a.
£24,000.
b.
£16,000.
c.
£40,000.
d.
£8,000.
31. Laguna Company had a net income of £25,000 using variable costing and a net income of £34,600
using absorption costing. The product cost using variable costing was £10.20 and using absorption
costing was £15. If 10,000 units were sold, how many units were produced during?
a.
2,000
b.
8,000
c.
12,000
d.
4,800
32. Focus Picture Company sold 5,600 units and produced 6,000 units this past year. Unit variable costs
were £15 (including variable selling costs of £3), and total fixed manufacturing costs totaled £16,500.
Which costing system (variable or absorption) will show a higher net income and by how much?
a.
absorption costing, £1,100
b.
variable costing, £1,100
c.
absorption costing £17,600
d.
This cannot be determined from the information given.
33. Stannel Company had 5,200 units in its ending inventory last year. The fixed manufacturing overhead
was £1.75 per unit in beginning inventory, and variable manufacturing cost is £5 per unit. Stannel’s net
income was £4,725 higher than variable costing. How many units did the company have in beginning
inventory?
a.
2,500
b.
7,900
c.
5,200
d.
5,000
34. During this past year, Bouncy Company experienced no change in inventory. Sales were 40,000 units
at a selling price of £3 per unit. Variable manufacturing costs were £1.25 per unit, and total
manufacturing costs were £55,000. Under absorption costing, net income was calculated at £53,000.
What was net income under variable costing?
a.
£65,000
b.
£55,000
c.
£53,000
d.
£2,000
35. What is the central theoretical issue in the variable costing debate?
a.
the issue of how to differentiate between manufacturing and non-manufacturing costs
b.
the issue of whether or not fixed manufacturing costs add value to products.
c.
the issue of identifying which units were sold out of inventory.
d.
the issue of identifying which costs vary with activities.
36. Proponents of variable costing argue that inventories have value only to the extent that they:
a.
avoid the necessity for incurring costs in the future.
b.
eliminate depreciation charges.
c.
can be sold for enough to cover costs and a reasonable profit.
d.
turn over in less than one year.
37. Proponents of ____ costing believe that fixed costs are incurred to provide the capacity to produce
during a given period, and these costs expire with the passage of time.
a.
variable
b.
absorption
c.
activity-based
d.
all of the above
38. Using absorption costing, a company can ____ net operating income by simply producing more than it
sells.
a.
decrease
b.
increase
c.
maintain
d.
none of the above