Chapter 8—Absorption and Variable Costing, and Inventory Management
TRUE/FALSE
1. Variable costing and absorption costing income statements may differ because of their treatment of
fixed factory overhead.
2. Inventory costs under variable costing include only direct materials, direct labor, and variable factory
overhead.
3. Inventory under absorption costing includes only direct materials and direct labor.
4. If the number of units produced in a period is larger than the number of units sold in a period,
absorption costing income will be higher than variable costing income.
5. If the number of units produced in a period is smaller than the number of units sold in period,
absorption costing income will be higher than variable costing income.
6. Product cost includes all costs of the company.
7. On a segmented income statement, fixed costs are broken down into direct fixed costs and common
fixed costs.
8. The costs of not having a product available when demanded by a customer are called stockout costs.
9. Total inventory-related cost consists of ordering cost and carrying cost.
10. JIT relies on a push system to control finished good inventory.
11. A major drawback to the JIT inventory approach is that it increases carrying costs.
MATCHING
Match the type of income statement to the costs it includes.
a.
Variable costing income statement
b.
Absorption costing income statement
c.
Both types of income statements
1. Direct materials for units sold
2. Direct labor for units sold
3. Variable overhead for units sold
4. Fixed factory overhead for the period
5. Only fixed factory overhead for units sold
6. Variable selling expense
7. Fixed selling expense
8. Administrative expense
NOT: 1 min.
Match each statement with the correct item below.
a.
the costs of not having a product available when demanded by a customer
b.
the costs of carrying inventory
c.
approach that maintains goods should be pulled through the system by present demand
d.
the number of units in the order quantity that minimizes the total cost
e.
the costs of placing and receiving an order
9. Carrying costs
10. Economic order quantity
11. Just-in-time
12. Ordering costs
13. Stockout costs
COMPLETION
1. _______________ assigns all manufacturing costs to the product.
2. When using _______________ a company only assigns variable manufacturing costs to the product.
3. Generally accepted accounting principles require ______________ for external reporting.
4. The ___________________ income statement groups expenses according to function.
5. The _______________ income statement groups expenses according to cost behavior.
6. Absorption costing treats fixed factory overhead as a ____________.
7. Variable costing treats fixed factory overhead as a ______________.
8. For internal reporting ________________ is an important managerial tool because it provides vital
cost information for decision making and control.
9. Expenses that persist even if one of the segments to which they relate is eliminated are known as
________________.
10. A ____________ is a subunit of a company of sufficient importance to warrant the production of
performance reports.
11. On a segmented income statement, fixed expenses are broken down into _____________ and
______________.
12. The profit contribution each segment makes toward covering a company’s common fixed costs is
called ______________.
13. All ______________ expenses will vanish if a particular segment is eliminated.
14. Inventory taxes, obsolescence, and insurance are examples of _______________.
15. Lost sales and costs of expediting shipments of goods are examples of _______________.
16. The _______________________ is the number of units in the optimal size order quantity.
17. ________________ is the time required to receive the economic order quantity once an order is
placed.
18. When a company needs to place a new order for goods, they have reached the ___________.
19. ______________ is computed by multiplying the lead time by the difference between the maximum
rate of usage and the average rate of usage.
20. The ______________ approach maintains that goods should be pulled through the system by present
demand rather than being pushed through on a fixed schedule based on anticipated demand.
MULTIPLE CHOICE
1. Which of the following types of costs is a product cost for absorption costing but a period cost for
variable costing?
a.
direct materials
b.
direct labor
c.
fixed factory overhead per unit sold
d.
variable selling expense
e.
total administrative expense
2. Which of the following is never included in product cost?
a.
overhead
b.
direct materials
c.
variable selling expense
d.
fixed factory overhead
e.
direct labor
3. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for
external reporting?
a.
absorption costing.
b.
variable costing.
c.
transfer price costing.
d.
responsibility costing.
e.
all of these are acceptable for GAAP.
4. Variable costing is
a.
a good way to value inventories for the balance sheet.
b.
used for external reporting purposes.
c.
not useful for companies with multiple segments.
d.
a useful tool for management decision making.
e.
can only be used by start-up companies.
5. A disadvantage of absorption costing is
a.
that it is not a useful format for decision making.
b.
that it assigns only manufacturing costs to the product.
c.
All of these.
d.
None of these.
6. Gross margin is to absorption costing as ____ is to variable costing.
a.
gross profit
b.
contribution margin
c.
income
d.
territory margin
7. When monthly production volume is constant and sales volume is less than production, income
determined with variable costing procedures will
a.
always be greater than income determined using absorption costing.
b.
always be less than income determined using absorption costing.
c.
be equal to income determined using absorption costing.
d.
be equal to contribution margin per unit times units sold.
8. When production is less than sales volume, income under absorption costing will be ____ income
using variable costing procedures.
a.
greater than
b.
less than
c.
equal to
d.
randomly different than
9. Inventory values calculated using variable costing as opposed to absorption costing will generally be
a.
equal.
b.
less.
c.
greater.
d.
twice as much.
10. Which of the following statements is true?
a.
Absorption costing income exceeds variable costing income when units produced and sold
are equal.
b.
Variable costing income exceeds absorption costing income when units produced exceed
units sold.
c.
Absorption costing income exceeds variable costing income when units produced are less
than units sold.
d.
Absorption costing income exceeds variable costing income when units produced are
greater than units sold.
11. All of the following costs are included in inventory under absorption costing except
a.
direct materials.
b.
direct labor.
c.
fixed selling expenses.
d.
fixed factory overhead.
12. 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
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last
year were as follows:
Direct materials
$25,000
Direct labor
35,000
Variable factory overhead
12,000
Fixed factory overhead
37,000
Variable selling expense
9,000
Fixed selling expense
7,500
Fixed administrative expense
15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce
20,000 units.
13. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under absorption costing?
a.
$5,480
b.
$4,500
c.
$10,900
d.
$12,600
e.
$5,750
14. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under variable costing?
a.
$3,300
b.
$2,500
c.
$5,000
d.
$3,720
e.
$7,200
15. Refer to Figure 8-1. What is operating income for last year under absorption costing?
a.
$41,000
b.
$67,520
c.
$85,900
d.
$111,300
e.
$45,000
16. Refer to Figure 8-1. What is operating income for last year under variable costing?
a.
$111,800
b.
$91,780
c.
$82,200
d.
$78,400
e.
$66,350
Figure 8-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
$4.00
Direct labor
3.20
Variable overhead
1.00
Variable selling expenses
.40
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000
units. During the month, 2,000 units were produced. Loring started the month with 300 units in
beginning inventory, with unit product cost equal to this month’s unit product cost. A total of 2,100
units were sold during the month at price of $14. Selling and administrative expense for the month, all
fixed, totaled $3,600.
17. Refer to Figure 8-2. What is the unit product cost under absorption costing?
a.
$8.60
b.
$10.60
c.
$8.20
d.
$10.20
e.
$7.20
18. Refer to Figure 8-2. What is operating income under variable costing?
a.
$3,540
b.
$7,980
c.
$11,340
d.
−$540
e.
$3,740
19. Refer to Figure 8-2. What is the unit product cost under variable costing?
a.
$8.60
b.
$10.60
c.
$8.20
d.
$10.20
e.
$7.20
20. Refer to Figure 8-2. What is operating income under absorption costing?
a.
$3,540
b.
$7,980
c.
$11,340
d.
−$540
e.
$3,740
Sales
Gross margin
Operating income
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
Figure 8-4.
The following information pertains to Mayberry Corporation:
Beginning inventory
1,000 units
Ending inventory
6,000 units
Direct labor 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
Direct labor
Variable overhead
Total
21. Refer to Figure 8-4. 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
22. Refer to Figure 8-4. Absorption costing income would be ____ variable costing income.
a.
$150,000 greater than
b.
$150,000 less than
c.
$240,000 less than
d.
$240,000 greater than
23. Refer to Figure 8-4. 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
Figure 8-5.
Sanders Company has the following information for last year:
Selling price
$190 per unit
Variable production costs
$52 per unit produced
Variable selling and admin. expenses
$18 per unit sold
Fixed production costs
$240,000
Fixed selling and admin. expenses
$180,000
Units produced
12,000
Units sold
7,000
There were no beginning inventories.
24. Refer to Figure 8-5. What is the value of ending inventory for Sanders using the absorption costing
method?
a.
$360,000
b.
$280,000
c.
$220,000
d.
$380,000
25. Refer to Figure 8-5. What is the income for Sanders using the absorption costing method?
a.
$520,000
b.
$480,000
c.
$1,200,000
d.
$500,000
26. Refer to Figure 8-5. What is the cost of ending inventory for Sanders using the variable costing
method?
a.
$300,000
b.
$280,000
c.
$120,000
d.
$260,000
27. Refer to Figure 8-5. What is the income for Sanders using the variable costing method?
a.
$420,000
b.
$480,000
c.
$520,000
d.
$500,000
Figure 8-6.
Bailey Company incurred the following costs in manufacturing desk calculators:
Direct materials
$18
Indirect materials (variable)
3
Direct labor
9
Indirect labor (variable)
7
Other variable factory overhead
13
Fixed factory overhead
34
Variable selling expenses
26
Fixed selling expenses
12
During the period, the company produced and sold 2,000 units.
28. Refer to Figure 8-6. What is the inventory cost per unit using absorption costing?
a.
$104
b.
$77
c.
$84
d.
$32
29. Refer to Figure 8-6. What is the inventory cost per unit using variable costing?
a.
$52
b.
$66
c.
$72
d.
$50
Figure 8-7.
Ramon Company reported the following units of production and sales for June and July:
Units
Month
Produced
Sold
June
100,000
90,000
July
100,000
105,000
Income under absorption costing for June was $40,000; income under variable costing for July was
$50,000. Fixed costs were $600,000 for each month.
30. Refer to Figure 8-7. How much was income for July using absorption costing?
a.
$50,000
b.
$20,000
c.
$80,000
d.
$40,000
31. Refer to Figure 8-7. How much was income for June using variable costing?
a.
$40,000
b.
$20,000
c.
$(40,000)
d.
$(20,000)
Figure 8-8.
Steele Corporation has the following information for January, February, and March:
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 labor
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, and all units were sold for $50. Costs are stable over
the three months.
32. Refer to Figure 8-8. What is the February ending inventory for Steele Corporation using the absorption
costing method?
a.
$39,000
b.
$45,000
c.
$135,000
d.
$300,000