Chapter 8 – Absorption and Variable Costing, and Inventory Management
1. Variable costing and absorption costing income statements may differ because of their treatment of fixed factory
overhead.
a.
True
b.
False
True
2. Inventory costs under variable costing include only direct materials, direct labor, and variable factory overhead.
a.
True
b.
False
True
3. Inventory under absorption costing includes only direct materials and direct labor.
a.
True
b.
False
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.
a.
True
b.
False
True
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.
a.
True
b.
False
False
6. Product cost includes all costs of the company.
a.
True
b.
False
False
7. On a segmented income statement, fixed costs are broken down into direct fixed costs and common fixed costs.
a.
True
b.
False
True
8. The costs of not having a product available when demanded by a customer are called stockout costs.
a.
True
b.
False
True
9. Total inventory-related costs consist of ordering costs and carrying costs.
a.
True
Chapter 8 – Absorption and Variable Costing, and Inventory Management
b.
False
True
10. JIT relies on a push system to control finished good inventory.
a.
True
b.
False
False
JIT relies on a pull system to control finished good inventory.
11. A major drawback to the JIT inventory approach is that it increases carrying costs.
a.
True
b.
False
False
12. _______________ assigns all manufacturing costs to the product.
13. When using _______________ a company only assigns variable manufacturing costs to the product.
14. Generally accepted accounting principles require ______________ for external reporting.
15. The ___________________ income statement groups expenses according to function.
absorption-costing
16. The _______________ income statement groups expenses according to cost behavior.
variable-costing
17. Absorption costing treats fixed factory overhead as a ____________.
18. Variable costing treats fixed factory overhead as a ______________.
19. For internal reporting ________________ is an important managerial tool because it provides vital cost information
for decision making and control.
20. Expenses that persist even if one of the segments to which they relate is eliminated are known as ________________.
21. A ____________ is a subunit of a company of sufficient importance to warrant the production of performance reports.
segment
22. On a segmented income statement, fixed expenses are broken down into _____________ and ______________.
Chapter 8 – Absorption and Variable Costing, and Inventory Management
23. The profit contribution each segment makes toward covering a company’s common fixed costs is called
______________.
segment margin
24. All ______________ expenses will vanish if a particular segment is eliminated.
direct fixed
25. Inventory taxes, obsolescence, and insurance are examples of _______________.
carrying costs.
26. Lost sales and costs of expediting shipments of goods are examples of _______________.
stockout costs.
27. The _______________________ is the number of units in the optimal size order quantity.
economic order quantity
28. ________________ is the time required to receive the economic order quantity once an order is placed.
Lead time
29. When a company needs to place a new order for goods, they have reached the ___________.
reorder point
30. ______________ is computed by multiplying the lead time by the difference between the maximum rate of usage and
the average rate of usage.
Safety stock
31. 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.
just-in-time
32. 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
c
33. 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
c
34. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for external
Chapter 8 – Absorption and Variable Costing, and Inventory Management
reporting?
a.
absorption costing.
b.
variable costing.
c.
transfer price costing.
d.
responsibility costing.
e.
all of these are acceptable for GAAP.
a
35. 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.
36. 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.
a
37. Gross margin is to absorption costing as ____ is to variable costing.
a.
gross profit
b.
contribution margin
c.
income
d.
territory margin
38. 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.
39. 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
Chapter 8 – Absorption and Variable Costing, and Inventory Management
40. Inventory values calculated using variable costing as opposed to absorption costing will generally be
a.
equal.
b.
less.
c.
greater.
d.
twice as much.
41. 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.
42. 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.
c
43. 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.
44. 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
Chapter 8 – Absorption and Variable Costing, and Inventory Management
e.
$5,750
45. 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
46. 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
$12)
117,900
Less:
16,500
15,500
85,900
47. 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
216,000
$3.60)
9,000
Chapter 8 – Absorption and Variable Costing, and Inventory Management
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
0.40
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.
48. 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
Direct materials
Direct labor
3.20
Variable overhead
1.00
Fixed overhead
2.00
Total
49. 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
Sales (2,100 × $14)
Contribution margin
4,000
3,600
Operating income
(18,000 × $0.50)
Contribution margin
142,200
Less fixed expenses:
Fixed factory overhead
37,000
Fixed selling expense
7,500
Fixed admin. Expense
15,500
Operating income
82,200
Chapter 8 – Absorption and Variable Costing, and Inventory Management
50. 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
Direct materials
Direct labor
Variable overhead
Total
51. 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 (2,100 × $14)
Gross margin
840
Operating income
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
52. 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
53. Refer to Figure 8-4. Absorption costing income would be ____ variable costing income.
Chapter 8 – Absorption and Variable Costing, and Inventory Management
a.
$150,000 greater than
b.
$150,000 less than
c.
$240,000 less than
d.
$240,000 greater than
Fixed overhead in beginning inventory ($30 × 1,000)
Fixed overhead in ending inventory ($30 × 6,000)
Difference
54. 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.
55. 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
[$52 + ($240,000 / 12,000)] × (12,000 – 7,000) = $360,000
56. 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
Chapter 8 – Absorption and Variable Costing, and Inventory Management
57. 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
$52 × 5,000 = $260,000
58. 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.
59. Refer to Figure 8-6. What is the inventory cost per unit using absorption costing?
a.
$104
b.
$77
c.
$84
d.
$32
60. Refer to Figure 8-6. What is the inventory cost per unit using variable costing?
a.
$52
b.
$66
c.
$72
d.
$50
Chapter 8 – Absorption and Variable Costing, and Inventory Management
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.
61. 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
62. 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
SUPPORTING CALCULATIONS:
Chapter 8 – Absorption and Variable Costing, and Inventory Management
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.
63. 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
4,500 × ($12 + $8 + $6 + $4) = $135,000
64. Refer to Figure 8-8. What is the January ending inventory for Steele Corporation using the variable costing method?
a.
$260,000
b.
$78,000
c.
$108,000
d.
$90,000
65. Refer to Figure 8-8. What is the March ending inventory for Steele Corporation using the variable costing method?
a.
$120,000
b.
$104,000
c.
$260,000
d.
$15,000
Units of beginning inventory
0
Units produced
Units sold
Units of ending inventory
66. Refer to Figure 8-8. What is the February contribution margin for Steele Corporation using the variable costing
method?
a.
$240,000
b.
$170,000
c.
$119,000
d.
$204,000
8,500 × ($50 − $36) = $119,000
Chapter 8 – Absorption and Variable Costing, and Inventory Management
Figure 8-9.
The following information pertains to Stark Corporation:
Beginning inventory
0 units
Ending inventory
5,000 units
Direct labor 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
67. Refer to Figure 8-9. What is the value of ending inventory using the variable costing method?
a.
$310,000
b.
$250,000
c.
$200,000
d.
$390,000
68. Refer to Figure 8-9. Absorption costing income would be ____ the variable costing income.
a.
$50,000 greater than
b.
$70,000 greater than
c.
$70,000 less than
d.
$50,000 less than
69. Refer to Figure 8-9. What is the value of ending inventory using the absorption costing method?
a.
$310,000
b.
$250,000
c.
$200,000
d.
$390,000
70. Redding Company has two divisions with the following segment margins for the current year: Northern, $200,000;
Southern, $400,000. Common expenses of the company are $50,000. What is Redding Company’s income?
a.
$150,000
b.
$550,000
c.
$600,000
d.
$650,000
Chapter 8 – Absorption and Variable Costing, and Inventory Management
71. Segment margin is equal to segment sales revenue minus
a.
variable cost of goods sold, variable selling expense, and direct fixed costs.
b.
variable cost of goods sold, variable selling expense, and common fixed costs.
c.
variable cost of goods sold, total selling expense, and direct fixed costs.
d.
variable cost of goods sold, variable selling expense, administrative expense, and direct fixed costs.
e.
cost of goods sold, variable selling expense, and fixed factory overhead.
a
72. Which of the following could be considered a segment?
a.
division
b.
product-line
c.
sales territory
d.
All of these.
73. Consider the following portion of a segmented income statement for the year just ended. Assume fixed expenses of
Division X include $30,000 of direct expenses and that the discontinuance of the department will not affect the sales of
the other departments nor reduce the common expenses.
Division X
Sales
$100,000
Variable costs
60,000
Gross profit
$ 40,000
Fixed expenses (direct and selling and administrative)
50,000
Operating income (loss)
$ (10,000)
What is X’s divisional segment margin?
a.
($10,000)
b.
$40,000
c.
$10,000
d.
$100,000
74. Grass Valley Mining mines three products. Gold ore sells for $1,000 per ton, variable costs are $400 per ton, and fixed
mining costs are $250,000. Last year the segment margin was $(100,000).
How many tons of gold ore did Grass Valley Mining sell last year?
a.
375 tons
b.
1,000 tons
c.
250 tons
d.
200 tons