Chapter 007

Chapter 007, Variable Costing: A Tool for Management
True / False Questions

1. The costs assigned to units in inventory are typically lower under absorption
costing than under variable costing.
FALSE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
2. Under variable costing, product cost contains some fixed manufacturing overhead
cost.
FALSE

Level: Medium
3. Variable selling and administrative expenses are part of product costs under the
variable costing approach.
FALSE

Level: Medium
4. In a manufacturing company using absorption costing, the fixed costs associated

with idle production capacity are commonly included as part of the product cost.
TRUE

Level: Hard
5. Direct labor is always considered to be a product cost under variable costing.

FALSE

Level: Hard
6. Suppose fewer units are sold in year 2 than in year 1. If production exceeds sales in
year 2, net operating income under absorption costing could be higher in year 2 than
in year 1.
TRUE

Level: Hard
7. When reconciling variable costing and absorption costing net operating income,
fixed manufacturing overhead costs released from inventory under absorption costing
should be deducted from variable costing net operating income to arrive at the
absorption costing net operating income.
TRUE

Level: Medium
8. If production exceeds sales for the period, variable costing net operating income
will typically be greater than absorption costing net operating income.
FALSE

Level: Medium
9. When sales exceeds production for a period, absorption costing net operating
income will generally be greater than variable costing net operating income.
FALSE

Level: Easy
10. Profits move in the same direction as sales when variable costing is used if selling
prices, the sales mix, and the cost structure remain the same.
TRUE

Level: Medium
11. Net operating income is affected by changes in production under both variable
costing and absorption costing.
FALSE

Level: Medium
12. Net operating income is not affected by changes in production when absorption
costing is used.
FALSE

Level: Medium
13. Under the absorption costing method, a company can increase profits by
increasing production rather than by increasing sales.
TRUE

Level: Medium
14. Since variable costing emphasizes costs by behavior, it works well with costvolume-profit analysis.
TRUE

Level: Easy
Multiple Choice Questions

15. Which of the following statements is true?
A. When production exceeds sales, a manufacturing company's variable costing net
operating income will usually be greater than its absorption costing net operating
income.
B. The variable costing method is usually not used for external reporting purposes.
C. The absorption costing method treats fixed production costs as period costs.
D. All of these.

Level: Medium
16. Which of the following statements is true for a company that uses variable
costing?
A. The unit product cost changes because of changes in the number of units
manufactured.
B. Profit fluctuates with sales.
C. Any underapplied overhead is included in the product cost.
D. Product costs include variable administration costs.

Level: Medium
17. Which of the following statements is true for a company that uses variable
costing?
A. The unit product cost changes as a result of changes in the number of units
manufactured.
B. Both variable selling costs and variable production costs are included in the unit
product cost.
C. Net operating income moves in the same direction as sales.
D. Net operating income is greatest in periods when production is highest.

Level: Medium
18. Which of the following costs at a sofa manufacturing company would be treated
as a period cost under the variable costing method?
A. the cost of glue used to assemble the wood frame of each sofa produced
B. depreciation on sales vehicles
C. the salary of a factory manager
D. both B and C above

Level: Medium
19. A cost that would be included in product costs under both absorption costing and
variable costing would be:
A. supervisory salaries.
B. equipment depreciation.
C. variable manufacturing costs.
D. variable selling expenses.

Level: Easy
20. Which of the following costs at a manufacturing company would be treated as a

product cost under the absorption costing method?
A. sales commissions
B. fire insurance cost on factory building
C. advertising costs
D. All of these

Level: Medium
21. Assuming that direct labor is a variable cost, product costs under variable costing
include only:
A. direct materials and direct labor.
B. direct materials, direct labor, and variable manufacturing overhead.
C. direct materials, direct labor, variable manufacturing overhead, and variable selling
and administrative expenses.
D. direct material, variable manufacturing overhead, and variable selling and
administrative expenses.

Level: Easy
22. Which of the following statements is true?

A. Expenses are not usually separated into variable and fixed elements in externally
reported income statements.
B. Even if there is no change in units sold, selling price, or cost structure, a company
can increase its absorption costing net operating income from one year to the next just
by producing more units.
C. When finished goods inventory decreases during a period, a manufacturing
company's absorption costing net operating income for that period will usually be
greater than its variable costing net operating income.
D. Both A and B above.

Level: Medium
23. What is the cause of the difference between absorption costing net operating
income and variable costing net operating income?
A. Absorption costing deducts all manufacturing costs from net operating income;
variable costing deducts only prime costs.
B. Absorption costing allocates fixed manufacturing costs between cost of goods sold
and inventories; variable costing considers all fixed manufacturing costs to be period
costs.
C. Absorption costing includes variable manufacturing costs in product costs; variable
costing considers variable manufacturing costs to be period costs.
D. Absorption costing includes fixed administrative costs in product costs; variable
costing considers fixed administrative costs to be period costs.

Level: Medium
24. The gross margin for a manufacturing company is the excess of sales over:
A. cost of goods sold, excluding fixed manufacturing overhead.
B. all variable costs, including variable selling and administrative expenses.
C. cost of goods sold, including fixed manufacturing overhead.
D. variable costs, excluding variable selling and administrative expenses.

Level: Easy
25. Weber Company computes net operating income under both the absorption costing
approach and the variable costing approach. For a given year the absorption costing
net operating income was greater than the variable costing net operating income. This
fact suggests that:
A. variable manufacturing costs were less than fixed manufacturing costs.
B. more units were produced during the year than were sold.
C. more units were sold during the year than were produced.
D. common costs were greater than variable costs for the year.

Level: Medium
26. Net operating income computed using variable costing would exceed net operating
income computed using absorption costing if:
A. units sold exceed units produced.
B. units sold are less than units produced.
C. units sold equal units produced.
D. the average fixed cost per unit is zero.

Level: Medium
27. The costing method that can be used most easily with break-even analysis and
other cost-volume-profit techniques is:
A. variable costing.
B. absorption costing.
C. process costing.
D. job-order costing.

Level: Easy
28. Silver Company produces a single product. Last year, the company's variable
production costs totaled $7,500 and its fixed manufacturing overhead costs totaled
$4,500. The company produced 3,000 units during the year and sold 2,400 units.
There were no units in the beginning inventory. Which of the following statements is
true?
A. Under variable costing, the units in the ending inventory will be costed at $4 each.
B. The net operating income under absorption costing for the year will be $900 lower
than the net operating income under variable costing.
C. The ending inventory under variable costing will be $900 lower than the ending
inventory under absorption costing.
D. Under absorption costing, the units in ending inventory will be costed at $2.50
each.
AACSB: Analytic
Level: Hard
29. Charrd Corporation manufactures a gas operated barbecue grill. The following
information relates to Charrd's operations for last year:
What is Charrd's variable costing unit product cost?

A. $29
B. $34
C. $58
D. $63
Unit fixed manufacturing overhead = $300,000 25,000 = $12
Unit variable product cost = Unit product cost - Unit manufacturing overhead
= $46 - $12 = $34
AACSB: Analytic
Level: Easy
30. A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
What is the variable costing unit product cost for the month?
A. $97
B. $90
C. $68
D. $75
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $20 + $41 + $7
= $68
AACSB: Analytic
Level: Easy
What is the absorption costing unit product cost for the month?
A. $107
B. $94
C. $87
D. $114
cost + Fixed manufacturing overhead cost
= $26 + $55 + $6 + $20
= $107
AACSB: Analytic
Level: Easy
What is the total period cost for the month under variable costing?
A. $151,800
B. $51,800
C. $100,000
D. $125,900
Total variable selling and administrative cost = $7 x 3,700 = $25,900
Period cost = Total variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost
= $25,900 + $100,000 + $25,900
= $151,800
AACSB: Analytic
Level: Easy
What is the total period cost for the month under absorption costing?
A. $48,000
B. $275,100
C. $86,400
D. $188,700
Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost
= $38,400 + $48,000
= $86,400
AACSB: Analytic
Level: Easy
34. Yoshihara Corporation produces a single product and has the following cost
structure:
The absorption costing unit product cost is:

A. $140
B. $197
C. $133
D. $227
Unit fixed manufacturing overhead = $228,000
Unit product cost = $57 + $62 + $71 + $7
= $197
AACSB: Analytic
Level: Easy
4,000 = $57
35. Sharko Corporation produces a single product and has the following cost
structure:
The variable costing unit product cost is:

A. $89
B. $86
C. $164
D. $87
Unit product cost = $66 + $18 + $2
= $86
AACSB: Analytic
Level: Easy
36. Gallipeau Inc., which produces a single product, has provided the following data
for its most recent month of operations:
There were no beginning or ending inventories. The absorption costing unit product
cost was:
A. $219
B. $151
C. $150
D. $300
Unit fixed manufacturing overhead = $68,000
Unit product cost = $68 + $79 + $71 + $1
= $219
AACSB: Analytic
Level: Easy
1,000 = $68
37. Baylor Inc., which produces a single product, has provided the following data for
its most recent month of operations:
There were no beginning or ending inventories. The variable costing unit product cost
was:
A. $91
B. $67
C. $69
D. $61
= $40 + $19 + $8
= $67
AACSB: Analytic
Level: Easy
38. Indiana Corporation produces a single product that it sells for $9 per unit. During
the first year of operations, 100,000 units were produced and 90,000 units were sold.
Manufacturing costs and selling and administrative expenses for the year were as
follows:
What was Indiana Corporation's net operating income for the year using variable
costing?
A. $181,000
B. $271,000
C. $281,000
D. $371,000
AACSB: Analytic
Level: Medium
Source: CMA, adapted
The total contribution margin for the month under variable costing is:
A. $83,900
B. $221,400
C. $135,000
D. $270,000
Total contribution margin = $41 x 5,400 = $221,400
AACSB: Analytic
Level: Easy
The total gross margin for the month under absorption costing is:
A. $163,800
B. $7,800
C. $170,800
D. $312,000
AACSB: Analytic
Level: Easy
What is the net operating income for the month under variable costing?
A. $15,800
B. $5,000
C. $20,800
D. $3,800
Unit product cost = $39 + $15 + $6 = $60
AACSB: Analytic
Level: Medium
What is the net operating income for the month under absorption costing?
A. $(15,900)
B. $19,200
C. $10,200
D. $9,000
Unit product cost = $34 + $43 + $35 + $5 = $117
AACSB: Analytic
Level: Medium
43. Atlantic Company produces a single product. For the most recent year, the
company's net operating income computed by the absorption costing method was
$7,400, and its net operating income computed by the variable costing method was
$10,100. The company's unit product cost was $17 under variable costing and $22
under absorption costing. If the ending inventory consisted of 1,460 units, the
beginning inventory must have been:
A. 920 units
B. 1,460 units
C. 2,000 units
D. 12,700 units
Fixed manufacturing overhead per unit
= Unit cost under absorption costing - Unit cost under variable costing
= $22 - $17 = $5
Difference in income between absorption and variable costing
= Fixed manufacturing overhead per unit x Change in inventory in units
($10,100 - $7,400) = $5 x Change in inventory in units
Change in inventory in units = 540 units
Since variable costing net income is greater than absorption costing net income, then
inventory must have decreased since the beginning of the year. Therefore, beginning
inventory must have been 2,000 units (1,460 units + 540 units).
AACSB: Analytic
Level: Hard
44. Roberts Company produces a single product. During the year just ended, the
company's net operating income under absorption costing was $3,000 lower than
under variable costing. The company sold 9,000 units during the year, and its variable
costs were $9 per unit, of which $3 was variable selling expense. If production cost is
$11 per unit under absorption costing every year, then how many units did the
company produce during the year?
A. 8,000
B. 10,000
C. 9,600
D. 8,400
Direct material + Direct labor + Variable manufacturing overhead
= Variable unit product cost = $9 - $3 = $6
Unit fixed manufacturing overhead = $11 - $6 = $5
Difference in net income between methods Unit fixed manufacturing overhead
= ($3,000) $5 = (600) units
Units produced = Units sold + Change in inventory = 9,000 + (600) = 8,400
AACSB: Analytic
Level: Hard
45. Lee Company produces a single product. At the end of last year, the company had
30,000 units in its ending inventory. Lee's variable production costs are $10 per unit
and its fixed manufacturing overhead costs are $5 per unit every year. The company's
net operating income for the year was $12,000 higher under variable costing than
under absorption costing. Given these facts, the number of units of product in
inventory at the beginning of the year must have been:
A. 28,800 units
B. 27,600 units
C. 32,400 units
D. 42,000 units
Unit fixed manufacturing overhead
= Difference in net income Change in inventory
= $12,000 Change in inventory = $5
Change in inventory = 2,400 units
Beginning inventory = 2,400 + 30,000 = 32,400 units
AACSB: Analytic
Level: Hard
46. Ben Company produces a single product. Last year, the company's net operating
income under absorption costing was $4,400 lower than under variable costing. The
company sold 8,000 units during the year, and its variable costs were $8 per unit, of
which $3 was variable selling expense. Fixed manufacturing overhead was $1 per unit
in beginning inventory under absorption costing. How many units did the company
produce during the year?
A. 12,400 units
B. 3,600 units
C. 7,120 units
D. 7,450 units
Unit fixed manufacturing overhead
= (Difference in income / Change in inventory)
= $4,400 Change in inventory = $1
Change in inventory = 4,400 units
Units produced during the year
= 8,000 units sold - 4,400 units change in inventory
= 3,600 units
AACSB: Analytic
Level: Hard
47. Mcferrin Corporation manufactures a variety of products. Last year, the company's
variable costing net operating income was $53,200. Fixed manufacturing overhead
costs released from inventory under absorption costing amounted to $32,900. What
was the absorption costing net operating income last year?
A. $86,100
B. $20,300
C. $32,900
D. $53,200
Absorption costing net income = Variable costing net income - fixed manufacturing
overhead costs released from inventory
= $53,200 - $32,900 = $20,300
AACSB: Analytic
Level: Easy
48. Last year, Wardrup Corporation's variable costing net operating income was
$67,200. Fixed manufacturing overhead costs released from inventory under
absorption costing amounted to $600. What was the absorption costing net operating
income last year?
A. $67,800
B. $66,600
C. $67,200
D. $600
Absorption costing net income = Variable costing net income - fixed manufacturing
overhead costs released from inventory
= $67,200 - $600 = $66,600
AACSB: Analytic
Level: Easy
49. Schrick Inc. manufactures a variety of products. Variable costing net operating
income was $86,800 last year and ending inventory increased by 1,900 units. Fixed
manufacturing overhead cost was $6 per unit. What was the absorption costing net
operating income last year?
A. $86,800
B. $75,400
C. $98,200
D. $11,400
Fixed manufacturing overhead deferred = $6 x 1,900 = $11,400
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred
= $86,800 + $11,400
= $98,200
AACSB: Analytic
Level: Medium
50. Last year, Gransky Corporation's variable costing net operating income was
$52,100 and its ending inventory increased by 400 units. Fixed manufacturing
overhead cost was $7 per unit. What was the absorption costing net operating income
last year?
A. $52,100
B. $2,800
C. $54,900
D. $49,300
Fixed manufacturing overhead deferred = $7 x 400 = $2,800
= $52,100 + $2,800
= $54,900
AACSB: Analytic
Level: Medium
Harris Company produces a single product. Last year, Harris manufactured 17,000
units and sold 13,000 units. Production costs for the year were as follows:
Sales were $780,000 for the year, variable selling and administrative expenses were
$88,400, and fixed selling and administrative expenses were $170,000. There was no
beginning inventory. Assume that direct labor is a variable cost.
51. The contribution margin per unit was:

A. $17.50
B. $32.50
C. $27.30
D. $25.70
AACSB: Analytic
Level: Medium
52. Under absorption costing, the carrying value on the balance sheet of the ending
inventory for the year would be:
A. $190,800
B. $170,000
C. $230,800
D. $0
+ Fixed manufacturing overhead = ($153,000 17,000) + ($110,500 17,000) +
($204,000 17,000) + $15 = $42.50
Carrying value = Unit product cost x Ending inventory in units = $42.50 x (17,000 13,000) = $42.50 x 4,000 = $170,000
AACSB: Analytic
Level: Medium
53. Under variable costing, the company's net operating income for the year would
be:
A. $60,000 higher than under absorption costing
B. $108,000 higher than under absorption costing
C. $108,000 lower than under absorption costing
D. $60,000 lower than under absorption costing
Unit fixed manufacturing overhead x Change in inventory in units
= ($255,000 17,000) x (17,000 - 13,000)
= $15 x 4,000
= $60,000
Since the units produced are greater than the units sold (inventory increased), net
income under absorption costing will be higher than net income under variable
costing.Level: Hard
AACSB: Analytic

Abdol Company, which has only one product, has provided the following data
concerning its most recent month of operations:
54. What is the unit product cost for the month under variable costing?
A. $73
B. $44
C. $79
D. $38
Direct materials + Direct labor + Variable manufacturing overhead
= $22 + $12 + $4
= $38
AACSB: Analytic
Level: Easy
55. What is the unit product cost for the month under absorption costing?
A. $38
B. $73
C. $44
D. $79
+ Fixed manufacturing overhead
= $22 + $12 + $4 + $35 = $73
AACSB: Analytic
Level: Easy
56. The total contribution margin for the month under the variable costing approach
is:
A. $273,000
B. $42,000
C. $84,500
D. $312,000
AACSB: Analytic
Level: Medium
57. The total gross margin for the month under the absorption costing approach is:
A. $13,000
B. $91,800
C. $273,000
D. $84,500
Unit product cost under absorption costing = $22 + $12 + $4 + $35 = $73
AACSB: Analytic
Level: Medium
58. What is the total period cost for the month under the variable costing approach?
A. $263,500
B. $71,500
C. $302,500
D. $231,000
Variable selling and administrative cost + Fixed costs
= ($6 x 6,500) + ($231,000 + $32,500)
= $39,000 + $263,500
= $302,500
AACSB: Analytic
Level: Hard
59. What is the total period cost for the month under the absorption costing approach?
A. $32,500
B. $71,500
C. $302,500
D. $231,000
Variable selling and administrative cost + Fixed selling and administrative cost
= ($6 x 6,500) + $32,500
= $39,000 + $32,500
= $71,500
AACSB: Analytic
Level: Hard
60. What is the net operating income for the month under variable costing?
A. $13,000
B. $5,700
C. $9,500
D. $3,500
AACSB: Analytic
Level: Medium
61. What is the net operating income for the month under absorption costing?
A. $9,500
B. $3,500
C. $5,700
D. $13,000
AACSB: Analytic
Level: Medium
Walsh Company produces a single product. Last year, the company manufactured
25,000 units and sold 22,000 units. Production costs were as follows:
Sales totaled $440,000, variable selling and administrative expenses were $110,000,
and fixed selling and administrative expenses were $45,000. There was no beginning
inventory. Assume that direct labor is a variable cost.
62. Under absorption costing, the unit product cost would be:
A. $9.00
B. $12.00
C. $13.40
D. $14.00
Unit product cost under absorption costing
= ($100,000 25,000) + ($75,000 25,000) + ($50,000
25,000)
= $4 + $3 + $2 + $3
= $12.00
AACSB: Analytic
Level: Easy
25,000) + ($75,000
63. Under absorption costing, the gross margin would be:

A. $176,000
B. $242,000
C. $66,000
D. $21,000
Unit product cost under absorption costing
= ($100,000 25,000) + ($75,000 25,000) + ($50,000 25,000) + ($75,000
25,000)
= $4 + $3 + $2 + $3
= $12
AACSB: Analytic
Level: Medium
64. The contribution margin per unit would be:

A. $15.00
B. $11.00
C. $8.00
D. $6.00
Variable product cost
= ($100,000 25,000) + ($75,000
AACSB: Analytic
25,000) + ($50,000
25,000) = $9

Level: Medium
65. Under variable costing, the total amount of fixed manufacturing cost in the ending
inventory would be:
A. $0
B. $9,000
C. $14,400
D. $27,000
Under variable costing, all fixed manufacturing overhead is expensed in the period in
which it is incurred. No fixed manufacturing overhead is added to the cost of
inventory.
AACSB: Analytic
Level: Easy
66. The net operating income under variable costing would be:
A. $2,000
B. $21,000
C. $12,000
D. $9,000
Variable product cost
= ($100,000 25,000) + ($75,000 25,000) + ($50,000
Variable selling and administrative cost
= $110,000 22,000 = $5
AACSB: Analytic
Level: Medium
25,000) = $9
67. The net operating income under absorption costing would be:
A. $9,000
B. $12,000
C. $2,000
D. $21,000
Unit direct material = $100,000 25,000 = $4
Unit direct labor = $75,000 25,000 = $3
Unit variable manufacturing overhead = $50,000 25,000 = $2
AACSB: Analytic
Level: Medium
Faxon Company, which has only one product, has provided the following data
A. $122
B. $108
C. $99
D. $131
= $40 + $53 + $6
= $99
AACSB: Analytic
Level: Easy
A. $99
B. $131
C. $122
D. $108
= $40 + $53 + $6 + $23
= $122
AACSB: Analytic
Level: Easy
A. $2,300
B. $(600)
C. $9,300
D. $11,600
AACSB: Analytic
Level: Medium
A. $11,600
B. $2,300
C. $(600)
D. $9,300
= $40 + $53 + $6 + $23
= $122
AACSB: Analytic
Level: Medium
Jarmon Company, which has only one product, has provided the following data
The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.
A. $78
B. $105
C. $73
D. $110
= $45 + $27 + $1
= $73
AACSB: Analytic
Level: Medium
A. $78
B. $73
C. $105
D. $110
= $45 + $27 + $1 + $32
= $105
AACSB: Analytic
Level: Medium
A. $4,500
B. $10,900
C. $25,500
D. $12,800
AACSB: Analytic
Level: Medium
A. $4,500
B. $12,800
C. $25,500
D. $10,900
= $45 + $27 + $1 + $32
= $105
AACSB: Analytic
Level: Medium
Hackney Company, which has only one product, has provided the following data
A. $92
B. $107
C. $100
D. $85
= $30 + $52 + $3
= $85
AACSB: Analytic
Level: Easy
is:
A. $47,000
B. $117,500
C. $12,600
D. $84,600
AACSB: Analytic
Level: Medium
A. $42,300
B. $81,400
C. $114,300
D. $72,000
Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= ($7 x 4,700) + $72,000 + $9,400
= $32,900 + $72,000 + $9,400
= $114,300
AACSB: Analytic
Level: Hard
A. $4,700
B. $(5,300)
C. $1,500
D. $3,200
AACSB: Analytic
Level: Medium
Ilford Company, which has only one product, has provided the following data
A. $87
B. $64
C. $68
D. $83
Product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $27 + $35 + $2
= $64
AACSB: Analytic
Level: Easy
A. $1,200
B. $5,700
C. $6,900
D. $(18,000)
AACSB: Analytic
Level: Medium
Crystal Company produces a single product. The company's variable costing income
statement for the month of May appears below:
The company produced 80,000 units in May and the beginning inventory consisted of
25,000 units. Variable production costs per unit and total fixed costs have remained
constant over the past several months.
82. The dollar value of the company's inventory on May 31 under the absorption
costing method would be:
A. $120,000
B. $90,000
C. $75,000
D. $60,000
Units sold = $900,000 $10 = 90,000
Ending inventory = Beginning inventory + Units produced - Units sold
= 25,000 + 80,000 - 90,000
= 15,000
Unit product cost
= ($450,000 90,000) + $3
= $5 + $3
= $8
Value of ending inventory = Unit product cost x Units in ending inventory
= $8 x 15,000 = $120,000
AACSB: Analytic
Level: Hard
83. Under absorption costing, for the month ended May 31, the company would report
a:
A. $30,000 loss
B. $0 profit
C. $30,000 profit
D. $60,000 profit
Unit fixed manufacturing cost = $240,000
Unit product cost
= ($450,000 90,000) + $3
= $5 + $3
= $8
Units sold = $900,000 $10 = 90,000
AACSB: Analytic
Level: Hard
80,000 = $3
Erie Company manufactures a single product. Assume the following data for the year
just completed:
There were no units in inventory at the beginning of the year. During the year 30,000
units were produced and 25,000 units were sold. Each unit sells for $35.
84. Under absorption costing, the unit product cost would be:
A. $8.00
B. $17.75
C. $13.00
D. $10.75
Unit fixed product cost = $82,500 30,000 = $2.75
Unit product cost = Variable product cost + Fixed product cost
= $8.00 + $2.75
= $10.75
AACSB: Analytic
Level: Easy
85. The company's net operating income under variable costing would be:
A. $407,500
B. $421,250
C. $431,250
D. $417,500
AACSB: Analytic
Level: Medium
Gallager Company, which has only one product, has provided the following data
is:
A. $303,600
B. $132,000
C. $356,400
D. $72,400
AACSB: Analytic
Level: Medium
A. $303,600
B. $132,000
C. $19,800
D. $148,600
Unit product cost = $22 + $23 + $4 + $34 = $83
AACSB: Analytic
Level: Medium
A. $290,600
B. $112,200
C. $231,200
D. $343,400
Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= $8 x 6,600 + $231,200 + $59,400
= $52,800 + $231,200 + $59,400
= $343,400
AACSB: Analytic
Level: Hard
A. $59,400
B. $112,200
C. $343,400
D. $231,200
administrative cost
= $8 x 6,600 + $59,400
= $112,200
AACSB: Analytic
Level: Hard
During its first year of operations, Holt Manufacturing Company incurred the
following costs to produce 200,000 units of its only product:
Holt also incurred the following costs in the sale of 180,000 units of product during its
first year:
Assume that direct labor is a variable cost.
90. What would be the cost per unit of Holt's finished goods inventory at the end of
the first year of operations under the variable costing method?
A. $2.34
B. $2.74
C. $4.50
D. $6.30
= ($144,000 200,000) + ($108,000 200,000) + ($216,000 200,000)
= $0.72 + $0.54 + $1.08
= $2.34
AACSB: Analytic
Level: Easy
91. What would be the cost per unit of Holt's finished goods inventory at the end of
the first year of operations under the absorption costing method?
A. $2.34
B. $2.74
C. $4.50
D. $6.30
Unit fixed manufacturing overhead = $432,000 200,000 = $2.16
= ($144,000 200,000) + ($108,000 200,000) + ($216,000 200,000) + $2.16
= $0.72 + $0.54 + $1.08 + $2.16
= $4.50
AACSB: Analytic
Level: Easy
92. If Holt's variable costing net operating income for this first year is $397,800, what
would its absorption costing net operating income be for this first year?
A. $354,600
B. $441,000
C. $445,800
D. $473,800
Unit fixed manufacturing overhead = $432,000 200,000 = $2.16
Variable costing net income = Absorption costing net income - (Unit fixed
manufacturing overhead x Change in inventory in units)
$397,800 = Absorption costing net income - [$2.16 x (200,000 - 180,000)]
$397,800 = Absorption costing net income - $43,200
Absorption costing net income = $441,000
AACSB: Analytic
Level: Medium
Ross Company produces a single product. The company has direct materials costs of
$8 per unit, direct labor costs of $6 per unit, and manufacturing overhead of $10 per
unit. Sixty percent of the manufacturing overhead is for fixed costs. In addition,
variable selling and administrative costs are $2 per unit, and fixed selling and
administrative costs are $3 per unit at the current activity level. Assume that direct
labor is a variable cost.
93. Under absorption costing, the unit product cost is:

A. $24
B. $20
C. $26
D. $29
cost + Fixed manufacturing overhead cost = $8 + $6 + $10* = $24
* Manufacturing overhead cost of $10 includes variable and fixed costs.
AACSB: Analytic
Level: Easy
94. Under variable costing, the unit product cost is:

A. $24
B. $20
C. $18
D. $21
= $8 + $6 + [$10 x (100% - 60%)] = $8 + $6 + $4= $18
AACSB: Analytic
Level: Easy
Bawcutt Company, which has only one product, has provided the following data
A. $93
B. $62
C. $66
D. $97
= $10 + $45 + $7 = $62
AACSB: Analytic
Level: Easy
A. $62
B. $93
C. $97
D. $66
cost + Fixed manufacturing overhead cost = $10 + $45 + $7 + $31 = $93
AACSB: Analytic
Level: Easy
Dearman Company, which has only one product, has provided the following data
A. $98,700
B. $64,400
C. $65,100
D. $129,500
Period cost = Total variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost = $30,800 + $65,100 + $33,600 =
$129,500
AACSB: Analytic
Level: Hard
A. $33,600
B. $65,100
C. $129,500
D. $64,400
administrative cost = $30,800 + $33,600 = $64,400
AACSB: Analytic
Level: Hard
Mcgougan Corporation produces a single product and has the following cost
structure:
99. The unit product cost under absorption costing is:

A. $126
B. $158
C. $139
D. $121
AACSB: Analytic
Level: Easy
100. The unit product cost under variable costing is:

A. $139
B. $126
C. $122
D. $127
= $81 + $40 + $5 = $126
AACSB: Analytic
Level: Easy
Slovick Inc., which produces a single product, has provided the following data for its
most recent month of operations:
There were no beginning or ending inventories.
101. The unit product cost under absorption costing was:

A. $161
B. $199
C. $262
D. $168
AACSB: Analytic
Level: Easy
102. The unit product cost under variable costing was:

A. $168
B. $164
C. $199
D. $171
= $79 + $82 + $7 = $168
AACSB: Analytic
Level: Easy
Clubb Company, which has only one product, has provided the following data
is:
A. $38,000
B. $92,000
C. $170,200
D. $119,600
AACSB: Analytic

Level: Medium
A. $110,000
B. $92,000
C. $119,600
D. $13,800
AACSB: Analytic
Level: Medium
Elder Company, which has only one product, has provided the following data
A. $9,800
B. $(27,400)
C. $15,400
D. $5,600
AACSB: Analytic
Level: Medium
A. $(27,400)
B. $5,600
C. $9,800
D. $15,400
AACSB: Analytic
Level: Medium
Kidwell Company, which has only one product, has provided the following data
A. $5,800
B. $5,400
C. $8,300
D. $16,000
AACSB: Analytic
Level: Medium
A. $5,800
B. $16,000
C. $5,400
D. $8,300
AACSB: Analytic
Level: Medium
Botwinick Corporation manufactures a variety of products. The following data

pertain to the company's operations over the last two years:
109. What was the absorption costing net operating income last year?
A. $57,000
B. $28,000
C. $58,000
D. $88,000
Absorption costing net income
= Variable costing net operating income + Fixed manufacturing overhead deferred =
$58,000 + $30,000 = $88,000
AACSB: Analytic
Level: Easy
110. What was the absorption costing net operating income this year?
A. $98,000
B. $36,000
C. $68,000
D. $66,000
Absorption costing net income = Variable costing net operating income - Fixed
manufacturing overhead released
= $67,000 - $31,000
= $36,000
AACSB: Analytic
Level: Easy
Schubert Corporation manufactures a variety of products. Variable costing net

operating income last year was $59,000 and this year was $70,000. Last year, $31,000
in fixed manufacturing overhead costs were released from inventory under absorption
costing. This year, $22,000 in fixed manufacturing overhead costs were deferred in
inventory under absorption costing.
A. $90,000
B. $59,000
C. $28,000
D. $68,000
= $59,000 - $31,000
= $28,000
AACSB: Analytic

Level: Easy
A. $92,000
B. $58,000
C. $79,000
D. $61,000
= $70,000 + $22,000
= $92,000
AACSB: Analytic
Level: Easy
Dewiel Corporation manufactures a variety of products. The following data pertain to

the company's operations over the last two years:
A. $90,900
B. $96,900
C. $84,900
D. $92,100
= $90,900 + ($4 x 1,500)
= $96,900
AACSB: Analytic
Level: Medium
A. $105,900
B. $115,500
C. $89,700
D. $109,500
= $110,700 - ($4 x 1,200)
= $105,900
AACSB: Analytic
Level: Medium
Caparros Corporation manufactures a variety of products. Variable costing net

operating income was $62,800 last year and was $74,900 this year. Last year, ending
inventory decreased by 3,300 units. This year, ending inventory increased by 1,900
units. Fixed manufacturing overhead cost is $7 per unit.
A. $72,600
B. $85,900
C. $62,800
D. $39,700
= $62,800 - ($7 x 3,300)
= $39,700
AACSB: Analytic
Level: Medium
A. $88,200
B. $65,100
C. $61,600
D. $53,000
Absorption costing net income
= Variable costing net operating income + Fixed manufacturing overhead deferred
= $74,900 + ($7 x 1,900)
= $88,200
AACSB: Analytic
Level: Medium
Essay Questions
117. Leibson Company, which has only one product, has provided the following data
Required:
a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare a contribution format income statement for the month using variable
costing.
d. Prepare an income statement for the month using absorption costing.
e. Reconcile the variable costing and absorption costing net operating incomes for the
month.
a. & b. Unit product costs
c. & d. Income statements
e. Reconciliation
AACSB: Analytic
Level: Hard
118. Mafli Company, which has only one product, has provided the following data
concerning its most recent month of
operations:
Required:a. What is the
unit product cost for the month under variable costing?b. What is the unit product cost
for the month under absorption costing?c. Prepare a contribution format income
statement for the month using variable costing.d. Prepare an income statement for the
month using absorption costing.e. Reconcile the variable costing and absorption
costing net operating incomes for the month.
a. & b. Unit product costs
c. & d. Income statements
e. Reconciliation
AACSB: Analytic
Level: Medium
119. Fowler Company manufactures a single product. Operating data for the company
and its absorption costing income statements for the last two years are presented
below:
Variable
manufacturing costs are $6 per unit. Fixed manufacturing overhead totals $72,000 in
each year. This overhead is applied at the rate of $4 per unit. Variable selling and
administrative expenses are $2 per unit sold.Required:a. What was the unit product
cost in each year under variable costing?b. Prepare new income statements for each
year using variable costing.c. Reconcile the absorption costing and variable costing
net operating income for each year.
a. The manufacturing cost of $6 per unit is the unit product cost under variable costing
in both years.
b.
c.
AACSB: Analytic
Level: Medium
120. Pachur Company, which has only one product, has provided the following data
Required:
b. Prepare a contribution format income statement for the month using variable
costing.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)
AACSB: Analytic
Level: Hard
121. Qiu Company, which has only one product, has provided the following data
Required:
b. Prepare a contribution format income statement for the month using variable
costing.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)
AACSB: Analytic
Level: Medium
122. Penna Corporation produces a single product and has the following cost
structure:
Required:
a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!
AACSB: Analytic
Level: Easy
123. Smolinski Corporation produces a single product and has the following cost
structure:
Required:
Compute the unit product cost under absorption costing. Show your work!
AACSB: Analytic
Level: Easy
124. Mascioli Corporation produces a single product and has the following cost
structure:
Required:
Compute the unit product cost under variable costing. Show your work!
AACSB: Analytic
Level: Easy
125. Nimocks Inc., which produces a single product, has provided the following data
for its most recent month of operation:
The company had no beginning or ending inventories.

Required:
a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!
AACSB: Analytic
Level: Easy
126. Przygocki Inc., which produces a single product, has provided the following data

Required:
Compute the unit product cost under absorption costing. Show your work!
AACSB: Analytic
Level: Easy
127. Friddell Inc., which produces a single product, has provided the following data

Required:
Compute the unit product cost under variable costing. Show your work!
AACSB: Analytic
Level: Easy
128. Data concerning Sonderegger Company's operations last year appear below:
Required:
a. Prepare an income statement for the year using absorption costing.
b. Prepare a contribution format income statement for the year using variable costing.
c. Prepare a report reconciling the difference in net operating income between
absorption and variable costing for the year.
a.
* $6 = $2.00 + $1.00 + $1.00 + $140,000/70,000

**$150,000 + 60,000 units x $1.50 per unit
AACSB: Analytic
Level: Medium
129. The Hadfield Company manufactures and sells a unique electronic part. The
company's plant is highly automated with low variable and high fixed manufacturing
costs. Operating results on an absorption costing basis for the first three years of
activity were as follows:
Additional information about the company is as follows:

- Variable manufacturing costs (direct labor, direct materials, and variable
manufacturing overhead) total $3 per unit, and fixed manufacturing overhead costs
total $400,000.
- Fixed manufacturing costs are applied to units of product on the basis of the number
of units produced each year (i.e., a new fixed manufacturing overhead rate is
computed each year).
- The company uses a FIFO inventory flow assumption.
- Variable selling and administrative expenses are $2 per unit sold. Fixed selling and
administrative expenses total $100,000.
- Production and sales information for the three years is as follows:
Required:
a. Compute net operating income for each year under the variable costing approach.
b. Referring to the absorption costing income statements above, explain why net
operating income was higher in Year 2 than in Year 1 under absorption costing, in
light of the fact that fewer units were sold in Year 2 than in Year 1.
c. Referring again to the absorption costing income statements, explain why the
company suffered a loss in Year 3 but reported a profit in Year 1, although the same
number of units was sold in each year.
d. If the company had used lean production during Year 2 and Year 3 and produced
only what could be sold, what would the company's net operating income (loss) have
been each year under absorption costing?
b. Production increased sharply in Year 2 even though unit sales declined. The
increase in production resulted in a lower unit product cost in Year 2 than in Year 1.
Furthermore, because production exceeded sales, fixed manufacturing overhead costs
were deferred in inventories. These effects more than offset the loss of revenue due to
lower sales. The company's income thus rose even though sales were down.
c. Production decreased sharply in Year 3. This resulted in an increase in the unit
product cost. In addition, inventories decreased and as a result fixed manufacturing
overhead deferred in inventories in Year 2 were released to the income statement in
Year 3.
d. If lean production had been in use, the net operating income under absorption
costing would have been the same as under variable costing in all three years. With
production geared to sales, there would have been no ending inventory, and therefore,
there would have been no fixed manufacturing overhead costs deferred in inventory to
other years.
AACSB: Analytic
Level: Hard
130. Neuman Company, which has only one product, has provided the following data
Required:
a. Prepare a contribution format income statement for the month using variable
costing.
b. Prepare an income statement for the month using absorption costing.
AACSB: Analytic
Level: Hard
131. O'Bannion Company, which has only one product, has provided the following
data concerning its most recent month of operations:
Required:
a. Prepare a contribution format income statement for the month using variable
costing.
b. Prepare an income statement for the month using absorption costing.
AACSB: Analytic
Level: Medium
132. Boyar Corporation manufactures a variety of products. The following data

Required:
a. Determine the absorption costing net operating income last year. Show your work!
b. Determine the absorption costing net operating income this year. Show your work!
a. and b.
AACSB: Analytic
Level: Easy
133. Soffer Corporation manufactures a variety of products. Last year, variable

costing net operating income was $72,000. The fixed manufacturing overhead costs
released from inventory under absorption costing amounted to $24,000.
Required:
Determine the absorption costing net operating income last year. Show your work!
AACSB: Analytic
Level: Easy
134. Last year, Jaquet Corporation's variable costing net operating income was
$58,000. The fixed manufacturing overhead costs deferred in inventory under
absorption costing amounted to $9,000.
Required:
Determine the absorption costing net operating income last year. Show your work!
AACSB: Analytic
Level: Easy
135. Eagen Corporation manufactures a variety of products. The following data

Required:
a. Determine the absorption costing net operating income for last year. Show your
work!
b. Determine the absorption costing net operating income for this year. Show your
work!
a. and b.
AACSB: Analytic
Level: Medium
136. Cardwell Corporation manufactures a variety of products. Last year, the

company's variable costing net operating income was $63,900 and ending inventory
increased by 900 units. Fixed manufacturing overhead cost per unit was $3.
Required:
Determine the absorption costing net operating income for last year. Show your
work!
AACSB: Analytic
Level: Medium
137. Last year, Brunkow Corporation's variable costing net operating income was
$93,500 and ending inventory increased by 800 units. Fixed manufacturing overhead
cost per unit was $7.
Required:
Determine the absorption costing net operating income for last year. Show your
work!
AACSB: Analytic
Level: Medium
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Chapter 007, Variable Costing: A Tool for Management

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

4. In a manufacturing company using absorption costing, the fixed costs associated

AACSB: Reflective Thinking

5. Direct labor is always considered to be a product cost under variable costing.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Multiple Choice Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

20. Which of the following costs at a manufacturing company would be treated as a

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

22. Which of the following statements is true?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

What is Charrd's variable costing unit product cost?

The absorption costing unit product cost is:

The variable costing unit product cost is:

Total contribution margin = $41 x 5,400 = $221,400

51. The contribution margin per unit was:

AICPA BB: Critical Thinking

63. Under absorption costing, the gross margin would be:

64. The contribution margin per unit would be:

AICPA BB: Critical Thinking

Assume that direct labor is a variable cost.

93. Under absorption costing, the unit product cost is:

94. Under variable costing, the unit product cost is:

99. The unit product cost under absorption costing is:

100. The unit product cost under variable costing is:

There were no beginning or ending inventories.

101. The unit product cost under absorption costing was:

102. The unit product cost under variable costing was:

AICPA FN: Measurement

Botwinick Corporation manufactures a variety of products. The following data

Schubert Corporation manufactures a variety of products. Variable costing net

AICPA FN: Measurement

Dewiel Corporation manufactures a variety of products. The following data pertain to

Caparros Corporation manufactures a variety of products. Variable costing net

a. & b. Unit product costs

c. & d. Income statements

a. & b. Unit product costs

c. & d. Income statements

The company had no beginning or ending inventories.