71. Which of the following descriptions would not be found on an income statement prepared using
variable costing?
a.
Sales
b.
Fixed costs
c.
Cost of goods sold
d.
Net operating income
72. Which of the following line descriptions would not be found on an income statement prepared using
absorption costing?
a.
Sales
b.
Contribution margin
c.
Cost of goods sold
d.
Net operating income
73. Assuming the number of units sold and produced are the same, which of the following statements is
true when comparing net operating income using absorption and variable costing?
a.
Absorption costing will yield a higher net operating income.
b.
Variable costing will yield a higher net operating income.
c.
Net operating income will be the same under both methods.
d.
Variable costing will have higher sales revenue.
74. Assuming that the number of units produced is greater than the number of units sold, which of the
following statements is true when comparing net operating income using absorption and variable
costing?
a.
Absorption costing will yield a higher net operating income.
b.
Variable costing will yield a higher net operating income.
c.
Net operating income will be the same under both methods.
d.
Sales revenue will be less using absorption costing.
75. Assuming that the number of units produced is less than the number of units sold, which of the
following statements is true when comparing net operating income using absorption and variable
costing?
a.
Absorption costing will yield a higher net operating income.
b.
Variable costing will yield a higher net operating income.
c.
Net operating income will be the same under both methods.
d.
The sales price per unit will be less using absorption costing.
76. Tyson Manufacturing has the following information available for 2012:
Direct materials
$6.00 per unit
Direct labor
$2.00 per unit
Variable manufacturing overhead
$1.50 per unit
Variable selling and administrative costs
$3.00 per unit
Fixed manufacturing overhead
$40,000
Fixed selling and administrative costs
$50,000
During 2012, Tyson produced 10,000 units out of which 9,100 units were sold for $50 each.
Refer to the information provided for Tyson Manufacturing. What is the net operating income under
variable costing?
a.
$251,250
b.
$254,850
c.
$285,000
d.
$291,250
77. Tyson Manufacturing has the following information available for 2012:
Direct materials
$6.00 per unit
Direct labor
$2.00 per unit
Variable manufacturing overhead
$1.50 per unit
Variable selling and administrative costs
$3.00 per unit
Fixed manufacturing overhead
$40,000
Fixed selling and administrative costs
$50,000
During 2012, Tyson produced 10,000 units out of which 9,100 units were sold for $50 each.
Refer to the information provided for Tyson Manufacturing. What is the net operating income under
absorption costing?
a.
$251,250
b.
$254,850
c.
$285,000
d.
$299,850
78. Cornell Products has the following information available for 2012:
Direct materials
$1.00 per unit
Direct labor
$2.00 per unit
Variable manufacturing overhead
$1.50 per unit
Variable selling and administrative costs
$ .50 per unit
Fixed manufacturing overhead
$30,000
Fixed selling and administrative costs
$25,000
During 2012, Cornell produced 6,000 units out of which 5,400 units were sold for $20 each.
Refer to the information provided for Cornell Products. What is the net operating income under
variable costing?
a.
$35,000
b.
$29,000
c.
$26,000
d.
$23,000
79. Cornell Products has the following information available for 2012:
Direct materials
$1.00 per unit
Direct labor
$2.00 per unit
Variable manufacturing overhead
$1.50 per unit
Variable selling and administrative costs
$ .50 per unit
Fixed manufacturing overhead
$30,000
Fixed selling and administrative costs
$25,000
During 2012, Cornell produced 6,000 units out of which 5,400 units were sold for $20 each.
Refer to the information provided for Cornell Products. What is the net operating income under
absorption costing?
a.
$23,000
b.
$29,000
c.
$26,000
d.
$35,000
80. B & B Manufacturing produces a single product. Last year, the company produced 10,000 units out of
which 9,500 were sold. There were no units in beginning inventory. The company had the following
costs:
Variable costs per unit:
Production
$6.00
Selling and administrative
$2.00
Fixed costs (total):
Production
$15,000
Selling and administrative
$10,000
Refer to the information provided for B & B Manufacturing. What is the unit product cost using
variable costing?
a.
$ 8.00
b.
$ 6.00
c.
$ 7.50
d.
$10.50
81. B & B Manufacturing produces a single product. Last year, the company produced 10,000 units out of
which 9,500 were sold. There were no units in beginning inventory. The company had the following
costs:
Variable costs per unit:
Production
$6.00
Selling and administrative
$2.00
Fixed costs (total):
Production
$15,000
Selling and administrative
$10,000
Refer to the information provided for B & B Manufacturing. What is the unit product cost using
absorption costing?
a.
$ 8.00
b.
$ 6.00
c.
$ 7.50
d.
$10.50
82. Lockhart Products produces a single product. During 2012 the company incurred the following costs:
Variable product costs
$8.00 per unit
Variable period costs
$2.00 per unit
Total fixed product costs
$21,000
Total fixed period costs
$10,000
Lockhart had no units in beginning inventory. During 2012, 6,000 units were produced and 5,000 units
were sold. Which of the following statements is true when comparing net operating income using
absorption versus variable costing?
a.
Net operating income will be $3,500 higher using absorption costing than using variable
costing.
b.
Net operating income will be $3,500 lower using absorption costing than using variable
costing.
c.
Net operating income will be $4,200 higher using absorption costing than using variable
costing.
d.
Net operating income will be $4,200 lower using absorption costing than using variable
costing.
83. Which of the following statements is true regarding variable costing?
a.
Variable costing is also known as full costing.
b.
Per unit contribution margin is affected by production levels in variable costing.
c.
In a variable costing income statement, fixed costs are separated from variable costs.
d.
Variable costing focuses attention on all product costs and not only relevant product costs.
SHORT ANSWER
1. Label whether each of the following costs is most likely fixed (F) or variable (V).
Direct materials
Factory rent
Sales commissions expense
Direct labor
Depreciation on factory building
Direct materials
Factory rent
Sales commissions expense
Direct labor
Depreciation on factory building
2. Label whether each of the following costs is most likely fixed (F) or variable (V).
Factory insurance
Direct materials
Secretary salary
Shipping supplies
Gasoline costs
Factory insurance
Direct materials
Secretary salary
Shipping supplies
Gasoline costs
3. For each of the following statements, fill in the blank with either the word increase, decrease, or stay
the same.
a.
As production increases, total fixed costs ______________.
b.
As production increases, fixed costs per unit _____________.
c.
As production decreases, variable costs per unit _____________.
d.
As production decreases, total variable costs _______________.
4. For each of the following statements, fill in the blank with either the word increase, decrease, or stay
the same.
a.
As production decreases, total fixed costs ______________.
b.
As production decreases, fixed costs per unit _____________.
c.
As production increases, variable costs per unit _____________.
d.
As production increases, total variable costs _______________.
a.
As production decreases, total fixed costs stay the same .
b.
As production decreases, fixed costs per unit increase .
c.
As production increases, variable costs per unit stay the same .
d.
As production increases, total variable costs increase .
5. Briefly describe the difference between fixed, variable, and mixed costs. Give one example of each.
a.
As production increases, total fixed costs stay the same .
b.
As production increases, fixed costs per unit decrease .
c.
As production decreases, variable costs per unit stay the same .
d.
As production decreases, total variable costs decrease .
6. You are the manager of a small cookie stand. The variable cost of producing one chocolate chip cookie
is $.75. Your fixed costs per week are $1,000. What is the total cost per unit if 1,000 cookies are
produced and sold per week? 2,000 cookies? Do your answers for the two quantities differ? Why or
why not?
7. Jameson Inc. plans to double its rental space next year, which will increase its fixed costs by 15%.
Current year costs include variable costs of $14.5 per unit and fixed costs of $850,000. With the
expansion of the rental space, next year’s production is expected to be 7,000 units.
Required: Calculate total estimated costs for next year.
8. Richardson Corporation plans to increase its advertising budget by 20% next year. The company
currently spends $15,000 on advertising costs. In addition to advertising, Richardson spends $50,000
per year for other fixed costs and $10 per unit for variable costs. If Richardson anticipates producing
30,000 units next year, what will be next year’s total costs?
Required: Calculate total estimated costs for next year.
9. Compare and contrast the two methods that are used to predict mixed costs.
10. Describe regression analysis and list several of its possible uses.
11. You are trying to determine whether machine hours or direct labor dollars would be the best cost
driver for overhead costs. You run two regression analyses and obtain the following results:
Machine hours:
Multiple R
.39429
R square
.15547
Adjusted R square
.14964
Standard error
.44416
Direct labor dollars:
Multiple R
.89429
R square
.79547
Adjusted R square
.72723
Standard error
.44416
Which variable would be the best selection for a cost driver and why?
12. Why should income taxes be considered by corporate decision-makers?
13. How do variable costing and absorption costing differ? When is net operating income different under
the two methods?
PROBLEM
1. Your company leases a copier. The contract states that you must pay the leasing company $3,000 per
year and $.005 per copy.
Required:
A.
Write the equation to predict estimated total lease cost.
B.
Compute the estimated total costs if:
i.
10,000 copies are made.
ii.
50,000 copies are made.
C.
Compute the estimated cost per unit if:
i.
10,000 copies are made.
ii.
50,000 copies are made.
2. Sabina and Associates has the following current year costs:
Variable costs
$4 per unit
Fixed costs
$20,000
Next year, the company plans to enter into an arrangement with a supplier that will result in a 15%
decrease in variable costs. They also plan on reducing their rental space, which will decrease fixed
costs by 10%.
Required:
A.
What will be the new equation to predict total costs?
B.
If next year’s production is expected to be 10,000 units, what will be total estimated costs?
A.
Y = $18,000 + $3.40x
change to: $20,000 .90 = $18,000
Y = $18,000 + $3.40 10,000 units = $52,000
3. You run a regression analysis and receive the following results:
Multiple R
.39429
R Square
.15547
Adjusted R Square
.14964
Standard Error
.44416
A.
Y = $3,000 + $.005x
B.
Estimated total costs:
i.
10,000 copies: Y = $3,000 + $.005(10,000) = $3,050
ii.
50,000 copies: Y = $3,000 + $.005(50,000) = $3,250
C.
Estimated cost per unit:
10,000 copies: $3,050 10,000 copies = $.305 per copy
50,000 copies: $3,250 50,000 copies = $.065 per copy
Analysis of Variance
DF
Sum of Squares
Mean Square
Regression
1
5.26588
5.26588
Residual
145
28.60536
.19728
F = 26.69262
Signif F = .0000
Variables in the Equation
Variable
Coefficients
Standard error
t Stat
P-value
X Variable 1
11.0300
.021000
5.166
.0000
Intercept
8833.0700
.090000
9.751
.0000
Required:
A.
What is the fixed cost in this regression analysis?
B.
What is the variable cost per unit?
C.
Prepare the cost equation based upon these results.
D.
Does this regression equation “fit” the data well? What information did you examine to
answer this question?
4. Pearson Products believes one of its costs is a mixed cost and has run a regression analysis which
shows the following:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.963711945
R Square
0.928740713
Adjusted R Square
0.916864165
Standard Error
946.0983069
Observations
8
ANOVA
df
SS
MS
F
Significance F
Regression
1
69996575.46
69996575.46
78.19955153
0.000116235
Residual
6
5370612.038
895102.0063
A.
$8,833.07
B.
$11.03
C.
Y = $8,833.07 + $11.03x
D.
No. The R square value is .15547, which is very low and indicates that a large portion of
changes in cost have not been explained by the x-variable.
Total
7
75367187.5
Coefficients
Standard Error
t Stat
P-value
Intercept
11568.56000
1352.390000
8.554149469
0.000140059
X Variable 1
1.9800000
0.223900000
8.843051031
0.000116235
Required:
A.
Write the equation to predict estimated total mixed costs.
B.
If 1,000 units are produced, what will be total mixed costs?
C.
What does the “R Square” number tell Pearson? Interpret the “R Square” data for Pearson.
5. Noble Inc. documented the number of units produced as well as maintenance costs for the past five
months as follows:
Number of units
Total overhead costs
October
120,000
$ 6,200
November
180,000
10,000
December
100,000
6,000
January
110,000
8,000
February
135,000
9,000
Noble uses the high/low method of estimating mixed costs.
Required:
A.
What is the equation to predict estimated total overhead costs?
B.
If the company expects to produce 150,000 units in March, what will be the estimated
total overhead costs?
A.
Y = $1,000 + $.05x
Highest number of units = November
A.
Y = $11,568.56 + $1.98x
B.
Y = $11,568.56 + $1.98(1,000) = $13,548.56
the costs can be explained by the changes in units produced.
6. Reliable Movers Inc. documented the miles driven and total moving van costs for the past five months
as follows:
Number of miles
Total vehicle costs
January
3,000
$4,800
February
3,500
5,200
March
5,000
6,100
April
4,000
5,000
May
6,000
6,000
In order to budget total vehicle costs for the upcoming summer months, Reliable wishes to estimate
total vehicle costs using the high/low method.
Required:
A.
What is the equation to predict estimated total vehicle costs?
B.
If the company expects to drive 9,000 miles in June, what will be the estimated total
vehicle costs?
Y = $3,600 + $.40x
Highest number of miles = May
Lowest number of miles = January
Variable cost per unit = ($6,000 − $4,800)/(6,000 − 3,000) = $.40 per mile
Calculation of fixed cost: $6,000 = $.40(6,000) + FC
FC = $3,600
(note: using the low activity information will produce the same fixed costs)
Y = $3,600 + $.40(9,000) = $7,200
Lowest number of units = December
Variable cost per unit = ($10,000 − $6,000)/(180,000 − 100,000) = $.05 per unit
Calculation of fixed cost: $10,000 = $.05(180,000) + FC
FC = $1,000
(note: using the low activity information will produce the same fixed costs)
Y = $1,000 + $.05(150,000) = $8,500
7. A manager is considering a special project that will increase cash sales by $80,000 and increase costs
by $30,000. All cash receipts are taxable and all costs are tax deductible. If the tax rate is 30%, what
will be the after-tax profit from the special project?
8. A manager is considering a special project. Corporate policy dictates that all special projects must
generate an after-tax profit of $21,000. If the company expects costs related to the project to be equal
to $43,000, what is the before-tax cash sales price that should be charged in order to adhere to
corporate policy assuming the company has a tax rate of 30%?
9. Preferred Products has the following cost information available for 2012:
Direct materials
$4.00 per unit
Direct labor
$3.00 per unit
Variable manufacturing overhead
$2.00 per unit
Variable selling and administrative costs
$1.00 per unit
Fixed manufacturing overhead
$25,000
Fixed selling and administrative costs
$10,000
During 2012, Preferred produced 5,000 units out of which 4,600 units were sold for $30 each.
Required:
A.
Calculate Preferred’s net operating income assuming the company uses variable costing.
B.
Calculate Preferred’s net operating income assuming the company uses absorption costing.
10. Hellman Manufacturing has the following cost information available for 2012:
Direct materials
$6.00 per unit
Direct labor
$4.00 per unit
Variable manufacturing overhead
$2.00 per unit
Variable selling and administrative costs
$1.00 per unit
Fixed manufacturing overhead
$80,000
Fixed selling and administrative costs
$25,000
During 2012, Merriman produced 12,500 units out of which 11,000 units were sold for $60 each.
Required:
A.
Calculate Hellman’s net operating income assuming the company uses variable costing.
B.
Calculate Hellman’s net operating income assuming the company uses absorption costing.
A.
Variable costing:
Sales (11,000 $60)
Variable costs: [11,000 ($6 + $4 + $2 + $1)]
Contribution margin
Fixed costs: ($80,000 + $25,000)
Net operating income
B.
Absorption costing:
Sales (11,000 $60)
A.
Variable costing:
Sales (4,600 $30)
Variable costs: [4,600 ($4 + $3 + $2 + $1)]
Contribution margin
Fixed costs: ($25,000 + $10,000)
Net operating income
B.
Absorption costing:
Sales (4,600 $30)
Cost of goods sold:
Variable product costs [4,600 ($4 + $3 + $2)]
Fixed product costs [($25,000/5,000) 4,600]
Gross margin
Selling and administrative costs:
Variable selling and administrative (4,600 $1)
Fixed selling and administrative
Net operating income
