Chapter 8 – Variable Costing and the Costs of Quality and Sustainability
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Chapter 8
Variable Costing and the Costs of Quality and Sustainability
Answer Key
True / False Questions
1. Fixed manufacturing overhead is not inventoried under absorption costing.
2. Absorption costing is required for tax purposes.
3. Variable manufacturing overhead becomes part of a unit’s cost when variable costing is
used.
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4. On an absorption-costing income statement, fixed overhead costs are period costs.
5. On a variable-costing income statement, fixed overhead is not treated as a period cost.
6. On a variable-costing income statement, the cost of goods sold is measured at variable cost,
which includes direct material, direct labor, and variable manufacturing overhead.
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7. Income reported under absorption and variable costing can be reconciled by focusing on
the effects of the five places where the two statements differ.
8. When units sold exceed units produced, absorption-costing income will be lower than
variable-costing income.
9. Absorption costing is inconsistent with CVP analysis.
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10. Cost-volume-profit analysis and break-even calculations account for fixed manufacturing
overhead as a lump sum.
11. For external-reporting purposes, generally accepted accounting principles require that net
income be based on variable costing.
12. Many managers prefer to use absorption-costing data in cost-based pricing decisions.
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13. The quality of conformance refers to how well a product is conceived or designed for its
intended use.
14. When discussing the costs of quality, the costs of determining whether defects exist are
known as appraisal costs.
15. An analytical method that aims at achieving near-perfect results in a production process is
known as the zero-defect perspective.
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16. Total quality management or TQM refers to the broad set of management and control
processes designed to focus the entire organization and all of its employees on providing
products or services that do the best possible job of satisfying the customer.
17. On a global scale, there are four primary environmental agreements addressing the
atmosphere, hazardous substances, the marine environment, nature conservation, and nuclear
power issues.
18. Hidden private environmental costs are those that are caused by environmental issues but
have not been so identified by the accounting system.
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Multiple Choice Questions
19. Under variable costing, fixed manufacturing overhead is:
20. All of the following are inventoried under variable costing except:
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21. All of the following are expensed under variable costing except:
22. All of the following costs are inventoried under absorption costing except:
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23. All of the following are inventoried under absorption costing except:
24. The underlying difference between absorption costing and variable costing lies in the
treatment of:
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25. Which of the following costs would be treated differently under absorption costing and
variable costing?
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Use the following information to answer Questions 26 and 27.
Vega Enterprises has computed the following unit costs for the year just ended:
Direct material used $12
Direct labor 18
Variable manufacturing overhead 25
Fixed manufacturing overhead 29
Variable selling and administrative cost 10
Fixed selling and administrative cost 17
26. Under variable costing, each unit of the company’s inventory would be carried at:
27. Under absorption costing, each unit of the company’s inventory would be carried at:
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Use the following information to answer Questions 28 and 29.
Romano Corporation has computed the following unit costs for the year just ended:
Direct material used $11
Direct labor 17
Variable manufacturing overhead 21
Fixed manufacturing overhead 23
Variable selling and administrative cost 5
Fixed selling and administrative cost 27
28. Under absorption costing, each unit of the company’s inventory would be carried at:
29. Under variable costing, each unit of the company’s inventory would be carried at:
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30. Falisari Corporation has computed the following unit costs for the year just ended:
Direct material used $25
Direct labor 19
Variable manufacturing overhead 35
Fixed manufacturing overhead 40
Variable selling and administrative cost 17
Fixed selling and administrative cost 32
Which of the following choices correctly depicts the per-unit cost of inventory under variable
costing and absorption costing?
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31. Montana Industries has computed the following unit costs for the year just ended:
Variable manufacturing overhead $85
Fixed manufacturing overhead 20
Variable selling and administrative cost 18
Fixed selling and administrative cost 11
Which of the following choices correctly depict amounts included in the per-unit cost of
inventory under variable costing and absorption costing?
Chapter 8 – Variable Costing and the Costs of Quality and Sustainability
Use the following information to answer Questions 32 through 35.
Fort Smith Technologies incurred the following costs during the past year when planned
production and actual production each totaled 20,000 units:
Direct material used $280,000
Direct labor 120,000
Variable manufacturing overhead 160,000
Fixed manufacturing overhead 100,000
Variable selling and administrative cost 60,000
Fixed selling and administrative cost 90,000
32. If Fort Smith uses variable costing, the total inventoriable costs for the year would be:
33. Fort Smith’s per-unit inventoriable cost under variable costing is:
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34. If Fort Smith uses absorption costing, the total inventoriable costs for the year would be:
35. Fort Smith’s per-unit inventoriable cost under absorption costing is:
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36. Consider the following comments about absorption- and variable-costing income
statements:
I. A variable-costing income statement discloses a firm’s contribution margin.
II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
III. The amount of variable selling and administrative cost is the same on absorption- and
variable-costing income statements.
Which of the above statements is (are) true?
37. Consider the following comments about absorption- and variable-costing income
statements:
I. A variable-costing income statement discloses a firm’s gross margin.
II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
III. The amount of variable selling and administrative cost is the same on absorption- and
variable-costing income statements.
Which of the above statements is (are) true?
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Use the following information to answer Questions 38 and 39.
Riverton Corp., which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
38. The gross margin that the company would disclose on an absorption-costing income
statement is:
39. The contribution margin that the company would disclose on a variable-costing income
statement is:
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Use the following information to answer Questions 40 and 41.
Callaway Corp., which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 38,000 units at $15 per unit
Production costs:
Variable: $5 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
40. The gross margin that the company would disclose on an absorption-costing income
statement is:
41. The contribution margin that the company would disclose on a variable-costing income
statement is:
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42. Sawyer Industries began business at the start of the current year. The company planned to
produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000
units at $30 each. Costs incurred were:
Variable manufacturing overhead per unit $8
Fixed manufacturing overhead 150,000
Variable selling and administrative cost per unit 2
Fixed selling and administrative cost 100,000
If there were no variances, the company’s absorption-costing income would be:
43. Which of the following statements pertain to variable costing?