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43) The following information pertains to ABC Corporation:
Beginning fixed manufacturing overhead in inventory
$40,000
Ending fixed manufacturing overhead in inventory
$30,000
Beginning variable manufacturing overhead in inventory
$20,000
Ending variable manufacturing overhead in inventory
$9,500
Selling price per unit
$41
Standard fixed manufacturing costs per unit
$20
Variable selling and administrative cost per unit
$4
Fixed selling and administrative costs
$16,000
Units produced
10,000
Units sold
9,600
What is the difference between absorption costing operating income and variable costing operating
income?
A) $500
B) $5,000
C) $10,000
D) $20,500
E) $21,000
44) There is not an output-level variance for variable costing, because
A) the inventory level decreased during the period.
B) the inventory level increased during the period.
C) fixed manufacturing overhead is allocated to work–in-process.
D) fixed manufacturing overhead is not allocated to work–in-process.
E) variable manufacturing overhead is not allocated to work–in-process.
45) Which of the following concepts is most compatible with absorption costing in a manufacturing
environment?
A) “the whole world is the market and the whole world is the competitor”
B) niche marketing
C) flexible manufacturing
D) continuous improvement
E) matching revenue to expense for financial reporting
46) The costing method that has been labelled as a “black hole” because fixed costs are inventoried is
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commonly known as
A) absorption costing.
B) direct costing.
C) break-even point costing.
D) variable costing.
E) standard costing.
47) When comparing the operating incomes between absorption costing and variable costing, and
beginning finished inventory exceeds ending finished inventory, it may be assumed that
A) sales increased during the period.
B) variable cost per unit is less than fixed cost per unit.
C) absorption costing income exceeds variable costing income.
D) variable costing income exceeds absorption costing income.
E) variable costing income equals absorption costing income.
48) Which of the following is true concerning operating income calculated under variable costing as
compared to absorption costing?
A) Operating income is lower under variable costing when production exceeds sales.
B) Operating income is higher under variable costing when production exceeds sales.
C) Operating income is lower under variable costing when sales exceeds production only if there is a
production-volume variance.
D) operating income is higher under variable costing when production exceeds sales only if there is a
production-volume variance.
E) The relationship between production and sales has no bearing on the differences in operating income
between the two methods.
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49) A possible criticism of ________ costing is that fixed manufacturing overhead is treated as a/an
________.
A) variable; asset
B) absorption; period cost
C) absorption; asset
D) variable; liability
E) absorption; variable cost in the long run
Use the information below to answer the following question(s).
Balloon Arrangements produces balloon bouquets. The following information has been provided by
management:
Budgeted production
100,000 bouquets
Direct manufacturing costs
$2.50/bouquet
Fixed manufacturing overhead
$1.00/bouquet
Variable manufacturing overhead
$0.75/bouquet
Variable administrative costs
$1.25/bouquet
50) What is the total cost per bouquet if absorption costing is used?
A) $5.50
B) $4.75
C) $3.75
D) $2.50
E) $1.98
51) Which of the following criteria should be used to evaluate management according to critics of
absorption costing?
A) the extent to which inventory production matches demand
B) the extent to which financial performance measures are used
C) the extent to which operating income is increased in the short run
D) the extent to which production quotas are exceeded
E) We should rely only on financial criteria to measure performance.
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52) Which denominator level is required by Canada Revenue Agency for income tax reporting?
A) master-budget capacity without full proration of variances between inventories and cost of goods sold
B) practical capacity without full proration of variances between inventories and cost of goods sold
C) normal capacity with full proration of variances between inventories and cost of goods sold
D) practical capacity with full proration of variances between inventories and cost of goods sold
E) master-budget capacity with full proration of variances between inventories and cost of goods sold
Answer the following question(s) using the information below.
Marie’s Decorating produces and sells a mantel clock for $100 per unit. In 2012, 100,000 clocks were
produced and 80,000 were sold. Other information for the year includes:
Direct materials
$30.00 per unit
Direct manufacturing labour
$2.00 per unit
Variable manufacturing costs
$3.00 per unit
Sales commissions
$5.00 per part
Fixed manufacturing costs
$25.00 per unit
Administrative expenses, all fixed
$15.00 per unit
53) What is the inventoriable cost per unit using variable costing?
A) $32
B) $35
C) $40
D) $60
E) $75
54) What is the inventoriable cost per unit using absorption costing?
A) $32
B) $35
C) $40
D) $60
E) $75
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Answer the following question(s) using the information below.
Gabe’s Auto produces and sells an auto part for $30.00 per unit. In 2012, 100,000 parts were produced and
75,000 units were sold. Other information for the year includes:
Direct materials
$12.00 per unit
Direct manufacturing labour
$2.25 per unit
Variable manufacturing costs
$0.75 per unit
Sales commissions
$3.00 per part
Fixed manufacturing costs
$375,000 per year
Administrative expenses, all fixed
$135,000 per year
55) What is the inventoriable cost per unit using variable costing?
A) $14.25
B) $15.00
C) $18.75
D) $20.10
E) $20.00
56) What is the inventoriable cost per unit using absorption costing?
A) $14.25
B) $15.00
C) $18.75
D) $20.10
E) $20.00
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Answer the following question(s) using the information below.
Peggy’s Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation,
2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount
budgeted for the month. Other information for the month includes:
Variable manufacturing costs
$20.00 per unit
Variable marketing costs
$3.00 per unit
Fixed manufacturing costs
$7.00 per unit
Administrative expenses, all fixed
$15.00 per unit
Ending inventories:
Direct materials
-0-
WIP
-0-
Finished goods
250 units
57) What is cost of goods sold per unit using variable costing?
A) $45
B) $30
C) $27
D) $23
E) $20
58) What is cost of goods sold using variable costing?
A) $35,000
B) $40,250
C) $47,250
D) $52,500
E) $78,750
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59) What is contribution margin using variable costing?
A) $96,250
B) $91,000
C) $84,000
D) $78,750
E) $52,500
60) What is operating income using variable costing?
A) $52,500
B) $78,750
C) $65,750
D) $47,000
E) $40,000
61) Helton Company has the following information for the current year:
Beginning fixed manufacturing overhead in inventory
$95,000
Fixed manufacturing overhead in production
375,000
Ending fixed manufacturing overhead in inventory
25,000
Beginning variable manufacturing overhead in
inventory
$10,000
Variable manufacturing overhead in production
50,000
Ending variable manufacturing overhead in inventory
15,000
What is the difference between operating incomes under absorption costing and variable costing?
A) $65,000
B) $50,000
C) $40,000
D) $5,000
E) $70,000
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62) The following information pertains to Brian Stone Corporation:
Beginning fixed manufacturing overhead in inventory
$60,000
Ending fixed manufacturing overhead in inventory
45,000
Beginning variable manufacturing overhead in
inventory
$30,000
Ending variable manufacturing overhead in inventory
14,250
Fixed selling and administrative costs
$724,000
Units produced
5,000 units
Units sold
4,800 units
What is the difference between operating incomes under absorption costing and variable costing?
A) $750
B) $7,500
C) $15,000
D) $15,750
E) $30,750
Answer the following question(s) using the information below.
Heinrich Corporation budgeted fixed manufacturing costs of $6,000 during 2012. Other information for
2012 includes:
The budgeted denominator level is 1,000 units.
Units produced total 750 units.
Units sold total 600 units.
Beginning inventory was zero.
The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted
denominator level. Manufacturing variances are closed to cost of goods sold.
63) Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances)
total
A) $3,600.
B) $4,800.
C) $6,000.
D) $0.
E) $7,200.
64) Fixed manufacturing costs included in ending inventory total
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A) $1,200.
B) $1,500.
C) $0.
D) $900.
E) $2,400.
65) The production-volume variance is
A) $2,000.
B) $900.
C) $2,400.
D) $0.
E) $1,500.
66) Operating income using absorption costing will be ________ than operating income if using variable
costing.
A) $1,500 higher
B) $1,200 lower
C) $900 higher
D) $2,400 lower
E) no different
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67) Which of the following is an example of a drawback of using absorption costing?
A) It allows management the ability to manipulate operating income via production schedules.
B) An inventoried cost will eventually become part of cost of goods sold.
C) The company’s sales level drives the production schedules.
D) A manager may increase maintenance activities above the budgeted level for the current period.
E) Expensing fixed costs as period costs reducing operating income.
68) Which of the following is a weakness particular to the absorption costing method?
A) A production manager cannot manipulate operating income.
B) A manager is always encouraged to match the production schedule to estimated demand.
C) A manager may be encouraged to switch production to difficult to manufacture products.
D) A downward demand spiral can be created.
E) A manager may be encouraged to defer maintenance.
69) Amalgamated Glass and Mirror Inc. had sales of 37,500 units and production of 50,000 units. Other
information for the year included:
Direct manufacturing labour $375,000
Variable manufacturing overhead 200,000
Direct materials 300,000
Variable selling expenses 200,000
Fixed administrative expenses 200,000
Fixed manufacturing overhead 400,000
There was no beginning inventory.
Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.
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70) For 2012, Nichols Inc., had sales of 75,000 units and production of 100,000 units. Other information for
the year included:
Direct manufacturing labour $187,500
Variable manufacturing overhead 100,000
Direct materials 150,000
Variable selling expenses 100,000
Fixed administrative expenses 100,000
Fixed manufacturing overhead 200,000
There was no beginning inventory.
Required:
a. Compute the ending finished goods inventory under both absorption and variable costing.
b. Compute the cost of goods sold under both absorption and variable costing.
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71) Ace Products sells its products for $22 each. Unit manufacturing costs are: direct materials, $4.00;
direct manufacturing labour, $6.00; and variable manufacturing overhead, $3.00. Total fixed
manufacturing overhead costs are $60,000 and marketing expenses are $2.00 per unit plus $20,000 per
year. The current production level is 25,000 units although only 20,000 units are anticipated to be sold.
Required:
a. Prepare an income statement using absorption costing in the gross margin format.
b. Prepare an income statement using variable costing in the contribution margin format.
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72) Bruster Company sells its products for $66 each. The current production level is 25,000 units, although
only 20,000 units are anticipated to be sold.
Unit manufacturing costs are:
Direct materials $12.00
Direct manufacturing labour $18.00
Variable manufacturing costs $9.00
Total fixed manufacturing costs $180,000
Marketing expenses $6.00 per unit, plus $60,000 per year
Required:
a. Prepare an income statement using absorption costing in the gross margin format.
b. Prepare an income statement using variable costing in the contribution margin format.
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Chapter 9 – Income Effects of Denominator Level on Inventory Valuation
73) Ewing Company planned to be in operation for three years. During the first year, it had no sales but
incurred $120,000 in variable manufacturing expenses and $40,000 in fixed manufacturing expenses. In
the next year, it sold half of the finished goods inventory from the previous year for $100,000 but it had
no manufacturing costs. In the third year, it sold the remainder of the inventory for $120,000, had no
manufacturing expenses and went out of business. Marketing and administrative expenses were fixed
and totalled $20,000 each year.
Required:
a. Prepare an income statement for each year using absorption costing in the gross margin format.
b. Prepare an income statement for each year using variable costing contribution margin format.
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Chapter 9 – Income Effects of Denominator Level on Inventory Valuation
74) Longview Golf Company sells a special putter for $20 each. In March it sold 28,000 putters while
manufacturing 30,000. There was no beginning inventory on March 1. Production information for March
was:
Direct manufacturing labour per unit 15 minutes
Fixed selling and administrative costs $40,000
Fixed manufacturing overhead $132,000
Direct materials cost per unit $2
Direct manufacturing labour per hour $24
Variable manufacturing overhead per unit $4
Variable selling expenses per unit $2
Required:
a. Compute the cost per unit under both absorption and variable costing.
b. Compute the ending inventories under both absorption and variable costing.
c. Compute operating income under both absorption and variable costing.
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75) Alliance Realty bought a 2,000 acre island for $10,000,000 and divided it into 200 equal size lots. As
the lots are sold they are cleared at an average cost of $5,000. Storm drains and driveways are installed at
an average cost of $8,000 per site. Sales commissions are 10 percent of selling price. Administrative costs
are $850,000 per year. The average selling price was $160,000 per lot during the year when 50 lots were
sold.
During the subsequent year, the company bought another 2,000 acre island and developed it exactly the
same way. Lot sales in the second year totalled 300 with an average selling price of $160,000. All costs
were the same as in the first year.
Required:
Prepare income statements for both years using both absorption and variable costing methods. Use the
gross margin format for the absorption method and the contribution margin format for the variable
costing method.
76) Johnson and Sons Company was concerned that increased sales did not result in increased profits for
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2012. Both variable unit and total fixed manufacturing costs for 2011 and 2012 remained constant at $20
and $2,000,000, respectively.
In 2011 the company produced 100,000 units and sold 80,000 units at a price of $50 per unit. There was no
beginning inventory in 2011. In 2012 the company made 70,000 units and sold 90,000 units at a price of
$50. Selling and administrative expenses were all fixed at $100,000 each year.
Required:
a. Prepare income statements for each year using absorption costing in the gross margin format.
b. Prepare income statements for each year using variable costing in the contribution margin format.
c. Explain why the income was different each year using the two methods. Show computations.
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77) The following data are available for Ruggles Company for the year ended September 30, 2012.
Sales:
24,000 units at $50 each
Expected and actual production: 30,000 units
Manufacturing costs incurred:
Variable: $525,000
Fixed: $372,000
Nonmanufacturing costs incurred:
Variable: $144,800
Fixed: $77,400
Beginning inventories: none
Required:
a. Determine operating income using the variable costing approach.
b. Determine operating income using the absorption costing approach.
c. Explain why the income was different each year using the two methods. Show computations.