MANAGEMENT ADVISORY SERVICE HILARIO G.

TAN

THEORY 6. Cay Co.s 1995 fixed manufacturing overhead costs totaled $100,000, and variable selling
Variable costing costs totaled $80,000. Under variable costing, how should those costs be classified?
1. To apply direct costing method it is necessary that you know A. B. C. D.
A. Variable and fixed cost related to production Period Costs $0 $ 80,000 $100,000 $180,000
B. Controllable and uncontrollable cost of production Product Costs $180,000 $100,000 $ 80,000 $0
C. Contribution margin and break even point in production
D. Standard production rate and times of production elements 7. Under the variable-costing concept, unit product cost would most likely be increased by
A. A decrease in the number of units produced.
2. The following statements about the adoption of variable costing are true, except: B. An increase in the commission paid to salesman for each unit sold.
A. A direct cost may not become a product cost. C. A decrease in the remaining useful life of factory machinery depreciated on the units-of-
B. An indirect cost may be assigned as part of product cost. production method.
C. It is an acceptable method for general reporting purposes. D. An increase in the remaining useful life of factory machinery depreciated on the sum-of-
D. All fixed manufacturing costs are recognized as period costs. the-years digits method.
3. Which of the following is NOT an advantage of using variable costing for internal reporting 8. Calculating income under variable costing does NOT require knowing
purposes? A. selling price. C. unit sales.
A. The impact of fixed costs on profits is emphasized. B. unit production. D. unit variable manufacturing costs.
B. Total costs may be overlooked when evaluating profits.
C. Profits are directly influenced by changes in sales volume. 9. Which of the following statements is true for a firm that uses variable costing?
D. Fixed costs are reported at incurred values, not absorbed values, thus improving control A. Profits fluctuate with sales.
over those costs. B. An idle facility variation is calculated.
C. Product costs include variable administrative costs.
4. A criticism of variable costing for managerial accounting purposes is that it D. The cost of a unit of product changes because of changes in number of units
A. overstates inventories. manufactured.
B. does not reflect cost-volume-profit relationships.
C. is not acceptable for product line segmented reporting. 10. The change in period-to-period operating income when using variable costing can be
D. might encourage managers to emphasize the short term at the expense of the long term. explained by the change in the
5. Under variable costing, A. Unit sales level multiplied by the unit sales price.
A. all product costs are fixed. B. Unit sales level multiplied by a constant unit contribution margin.
B. all period costs are variable. C. Finished goods inventory level multiplied by the unit sales price.
C. all product costs are variable. D. Finished goods inventory level multiplied by a constant unit contribution margin.
D. product costs are both fixed and variable.
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Absorption costing C. Decreased output and constant sales result in increased profits.
11. All of the following are names for the product costing method in which both fixed and variable D. Profits may decrease with increased sales even if there is no change in selling prices and
costs are included in overhead rates, except: costs.
A. absorption costing C. direct costing
B. conventional costing D. full costing 17. Under absorption costing, if sales remain constant from period 1 to period 2, the company will
report a larger income in period 2 when
12. Which of the following is not associated with absorption costing? A. period 1 production exceeds period 2 production.
A. contribution margin C. gross margin B. period 2 production exceeds period 1 production.
B. functional format D. Period costs C. fixed production costs are larger in period 2 than period 1.
D. variable production costs are larger in period 2 than period 1.
13. Under absorption costing, fixed manufacturing overhead could be found in all of the following
except the Variable & absorption costing
A. Cost of Goods Sold. C. period costs. 18. A cost that is included as part of product costs under both absorption costing and direct
B. finished goods inventory account. D. work-in-process account. costing is:
A. insurance D. variable marketing expenses.
14. Jansen, Inc. pays bonuses to its managers based on operating income. The company uses B. managerial staff costs E. variable materials handling labor
absorption costing, and overhead is applied on the basis of direct labor hours. To increase C. taxes on factory building
bonuses, Jansens managers may do all of the following except
A. Produce those products requiring the most direct labor. 19. If unit costs remain unchanged and sales volume and sales price per unit both increase from
B. Defer expenses such as maintenance to a future period. the preceding period when operating profits were earned, operating profits must
C. Decrease production of those items requiring the most direct labor. A. Increase under the variable costing method.
D. Increase production schedules independent of customer demands. B. Decrease under the variable costing method.
C. Increase under the absorption costing method.
15. Unabsorbed fixed overhead costs in an absorption costing system are D. Decrease under the absorption costing method.
A. costs that cannot be controlled.
B. excess variable overhead costs. 20. When comparing absorption costing with variable costing, which of the following statements is
C. variable overhead costs not allocated to units produced. not true?
D. fixed manufacturing costs not allocated to units produced. A. When sales volume is more than production volume, variable costing will result in higher
operating profit.
16. When a firm prepares financial reports by using absorption costing B. Under absorption costing, operating profit is a function of both sales volume and
A. Profits will always increase with increases in sales. production volume.
B. Profits will always decrease with decreases in sales. C. Absorption costing enables managers to increase operating profits in the short run by

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increasing inventories. 24. A companys net income recently increased by 30% while its inventory increased to equal a
D. A manager who is evaluated based on variable costing operating profit would be tempted full years sales requirements. Which of the following accounting methods would be most
to increase production at the end of a period in order to get a more favorable review. likely to produce the favorable income results?
A. Absorption costing. C. Standard direct costing.
21. A firm presently has total sales of $100,000. If its sales rise, its B. Direct costing. D. Variable costing.
A. fixed costs will also rise.
B. per unit variable costs will rise. 25. Variable costing and absorption costing will show the same incomes when there are no
C. net income based on absorption costing will go up more than its net income based on A. beginning and ending inventories.
variable costing. B. beginning inventories.
D. net income based on variable costing will go up more than its net income based on C. ending inventories.
absorption costing. D. variable costs.

22. Both Company Y and Company Z produce similar products that need negligible distribution 26. Absorption costing differs from variable costing in that
costs. Their assets operation and accounting are very similar in all respects except that A. absorption costing inventories are more correctly valued.
Company Y uses direct costing and Company Z uses absorption costing. B. companies using absorption costing have lower fixed costs.
A. Co. Z would report a higher net income than Co. Y for the years in which production C. standards can be used with absorption costing, but not with variable costing.
equals sales D. production influences income under absorption costing, but not under variable costing.
B. Co. Y would report a higher inventory value than Co. Z for the years in which production
exceeds sales 27. In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and deducted
C. Co. Z would report a higher inventory value than Co. Y for the years in which production $30,000 of fixed manufacturing overhead. Marvel Co. must be using
exceeds sales A. absorption costing. C. standard costing.
D. Co. Y would report a higher inventory value than Co. Z for the years in which production B. direct costing. D. variable costing.
exceeds the normal or practical capacity
28. Other things being equal, net income computed by direct costing method would exceed net
23. Absorption costing and variable costing are two different methods of assigning costs to units
income computed by absorption costing method if
produced. Of the following five cost items listed, identify the one that is not correctly accounted
A. Units sold were to exceed units produced.
for as a product cost.
B. Units produced were to exceed units sold.
Part of Product Cost under C. Fixed manufacturing costs were to increase.
Absorption Cost Variable Cost D. Variable manufacturing costs were to increase.
A. Direct labor cost Yes Yes
B. Insurance on factory Yes No
C. Manufacturing supplies Yes Yes
D. Packaging and shipping costs Yes Yes
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29. Net income is lower under variable costing than under absorption costing when 33. As compared with total absorption costing profit over the entire life of a company, total variable
A. Production equals sales. costing profit will
B. Production exceeds sales. A. Be less.
C. Production is less than sales. B. Be equal.
D. Production increases from the previous period. C. Be greater.
D. Be substantially greater or less depending upon external factors
30. President X of WXY Corporation requested you to explain the difference of net income
between the variable costing income statements presentation and the absorption costing 34. How will a favorable volume variance affect net income under each of the following methods?
method. You would say that the difference A. B. C. D.
A. Is attributable to the variable costs in the inventory. Absorption Increase Increase Reduce Reduce
B. Is attributable to the fixed costs in ending inventory. Variable No effect Reduce Increase No effect
C. Is equal to the fixed costs per unit times the number of units sold.
D. Is none if there is no change in the fixed costs in the beginning and ending inventories. 35. A single-product company prepares income statements using both absorption and variable
costing methods. Manufacturing overhead cost applied per unit produced in 2001 was the
31. If inventory quantities increase during a period, same as in 2000. The 2001 variable costing statement reported a profit whereas the 2001
A. Variable costing profits will equal absorption costing profits. absorption costing statement reported a loss. The difference in reported income could be
B. Absorption costing profits will exceed variable costing profits. explained by units produced in 2001 being
C. Variable costing profits will exceed absorption costing profits. A. Less than units sold in 2001.
D. Variable costing will show a higher inventory value than absorption costing. B. In excess of units sold in 2001.
C. Less than the activity level used for allocating overhead to the product.
32. A manufacturing company prepares income statements using both absorption- and variable- D. In excess of the activity level used for allocating overhead to the product.
costing methods. At the end of the period, actual sales revenues, total gross margin, and total
contribution margin approximated budgeted figures, whereas net income was substantially PROBLEMS
below the budgeted amount. There were no beginning or ending inventories. The most likely Variable costing
explanation of the net income shortfall is that, compared to budget, actual 1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single product in
A. Manufacturing fixed costs had increased. 2000, its first year of operations. Variable manufacturing costs were P30 per unit of product.
B. Selling and administrative fixed expenses had increased. Planned and actual fixed manufacturing costs were P600,000, and marketing and
C. Sales price and variable costs had declined proportionately. administrative costs totaled P400,000 in 2000. MNO sold 120,000 units of product in 2000 at
D. Sales prices had declined proportionately more than variable costs. a selling price of P40 per unit. What is the cost of the ending inventory assuming variable
costing is used?
A. P2,250,000 C. P2,640,000
B. P2,400,000 D. P2,750,000
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2. LY & Company completed its first year of operations during which time the following Absorption costing
information were generated: 4. The total production cost for 20,000 units was P21,000 and the total production cost for
Total units produced 100,000 making 50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed
Total units sold @ P100 per unit 80,000 costs of P4,000 were incurred. The full production cost per unit for making 30,000 units is:
Work in process ending inventory 20,000 A. P0.30 C. P0.84
Costs Variable Cost per Unit Fixed Costs B. P0.68 D. P0.93
Raw materials P20.00
Direct labor 12.50 5. West Co.s 1988 manufacturing costs were as follows:
Factory overhead 7.50 P1.2 million Direct materials and direct labor $700,000
Selling and administrative 10.00 0.7 million Other variable manufacturing costs 100,000
If the company used variable (direct) costing method, the operating income would be Depreciation of factory building and manufacturing equipment 80,000
A. P2,100,000 C. P3,040,000 Other fixed manufacturing overhead 18,000
B. P2,480,000 D. P4,000,000c. What amount should be considered product cost for external reporting purposes?
A. $700,000 C. $880,000
3. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest market for B. $800,000 D. $898,000
these cookies are as gifts that college students buy for their business teachers. There are 100
cookies per box. The following income statement shows the result of the first year of 6. Coomber Industries manufactures a single product using standard costing. Variable
operations. This statement was the one included in the companys annual report to the production costs are $13 and fixed production costs are $125,000. Coomber uses a normal
stockholders. activity of 12,500 units to set its standard costs. Coomber began the year with 1,000 units in
Sales (400 boxes at P12.50 a box) P5,000.00 inventory, produced 11,000 units, and sold 11,500 units. The standard cost of goods sold
Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00 under absorption costing would be
Gross margin 1,800.00 A. $115,000 C. $253,000
Less: Selling and administrative expenses 800.00 B. $149,500 D. $264,500
Net income 1,000.00
7. Z Corp. incurred the following costs in 2001 (its first year of operations) based on production of
Variable selling and administrative expenses are P0.90 per box sold. The company produced 10,000 units:
500 boxes during the year. Variable manufacturing costs are P5.25 per box and fixed Direct material $5 per unit
manufacturing overhead costs total P1,375 for the year. Direct labor $3 per unit
What is the companys direct costing net income? Variable product costs $2 per unit
A. P 725 C. P2,265 Fixed product costs (in total) $100,000
B. P1,000 D. P2,540

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When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at Units Produced Sales Planned Activity
$100,000. Based on this information, which of the following statements must be true: Year 1 90,000 90,000 100,000
A. Z Corp. sold 5,000 units. Year 2 95,000 95,000 100,000
B. Z Corp. had a very profitable year. Year 3 90,000 90,000 100,000
C. Z Corp. sold all 10,000 units that it produced. Because Blue Company uses an absorption-costing system, gross margin for year 3 should be
D. From the information given, one cannot tell whether Z Corp.'s financial statements were A. Equal to Year 1. C. Greater than Year 1.
prepared based on variable or absorption costing. B. Equal to Year 2. D. Greater than Year 2.
8. A company manufactures a single product for its customers by contracting in advance of 10. Don Juan Ltd. Manufactures a single product for which the costs and selling prices are:
production. Thus, the company produces only units that will be sold by the end of each period. Variable production costs P 50 per unit
For the last period, the following data were available: Selling price P125 per unit
Sales $40,000 Fixed production overhead P200,000 per quarter
Direct materials 9,050 Fixed selling and administrative overhead P80,000 per quarter
Direct labor 6,050 Normal capacity 20,000 units per quarter
Rent (9/10 factory, 1/10 office) 3,000 Production in first quarter was 19,000 units and sales volume was 16,000 units. No opening
Depreciation on factory equipment 2,000 inventory for the quarter.
Supervision (2/3 factory, 1/3 office) 1,500 The absorption costing profit for the quarter was
Salespeoples salaries 1,300 A. P920,000 C. P960,000
Insurance (2/3 factory, 1/3 office) 1,200 B. P950,000 D. P970,000
Office supplies 750
Advertising 700 Variable costing & absorption costing
Depreciation on office equipment 500 11. In the ABC Company, sales are P800,000, cost of goods under absorption costing is
Interest on loan 300 P600,000, and total operating expenses are P120,000. If cost of goods sold is 70% variable
The gross profit margin percentage (rounded) was and total operating expenses are 60% fixed, what is the contribution margin under variable
A. 34% C. 44% costing?
B. 41% D. 46% A. P260,000. C. P332,000.
B. P308,000. D. P380,000.
9. The Blue Company has failed to reach its planned activity level during its first 2 years of
operation. The following table shows the relationship among units produced, sales, and 12. A company has the following cost data:
normal activity for these years and the projected relationship for Year 3. All prices and costs Fixed manufacturing costs $2,000
have remained the same for the last 2 years and are expected to do so in Year 3. Income has Fixed selling, general, and administrative costs 1,000
been positive in both Year 1 and Year 2. Variable selling costs per unit sold 1
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Variable manufacturing costs per unit 2 16. At the end of Killo Co.s first year of operations, 1,000 units of inventory remained on hand.
Variable and fixed manufacturing cost per unit were $90 and $20, respectively. If Killo uses
Beginning inventory 0 units absorption costing rather than direct (variable) costing, the result would be a higher pretax
Production 100 units income of
Sales 90 units at $40 per unit A. $0. C. $70,000.
Variable and absorption-cost net incomes are: B. $20,000. D. $90,000.
A. $320 variable, $520 absorption C. $520 variable, $320 absorption
B. $330 variable, $530 absorption D. $530 variable, $330 absorption 17. A company manufactures 50,000 units of a product and sells 40,000 units. Total
manufacturing cost per unit is $50 (variable manufacturing cost, $10; fixed manufacturing cost,
13. A company had an income of P50,000 using direct costing for a given month. Beginning and $40). Assuming no beginning inventory, the effect on net income if absorption costing is used
ending inventories for the month are 13,000 units and 18,000 units, respectively. Ignoring instead of variable costing is that:
income tax, if the fixed overhead application rate was P2 per unit, what was the income using A. net income is the same C. net income is $400,000 lower
absorption costing? B. net income is $200,000 higher D. net income is $400,000 higher
A. P40,000 C. P60,000
B. P50,000 D. P70,000 18. During its first year of operations, a company produced 275,000 units and sold 250,000 units.
The following costs were incurred during the year:
14. GHI Company had P100,000 income using absorption costing. GHI has no variable Variable Cost per Unit Fixed Costs
manufacturing costs. Beginning inventory was P5,000 and ending inventory was P12,000. Direct materials $15.00
What is the income under variable costing? Direct labor 10.00
A. P88,000 C. P100,000. Manufacturing overhead 12.50 $2,200,000
B. P93,000 D. P107,000 Selling and administrative 2.50 1,375,000
The difference between operating income calculated on the absorption-costing basis and on
15. Fleet, Inc. manufactured 700 units of Product A, a new product, during the year. Product As the variable costing basis is that absorption-costing operating income is
variable and fixed manufacturing costs per unit were $6.00 and $2.00 respectively. The A. $62,500 lesser. C. $220,000 greater.
inventory of Product A on December 31, consisted of 100 units. There was no inventory of B. $200,000 greater. D. $325,000 greater.
Product A on January 1. What would be the change in the dollar amount of inventory on
December 31 if variable costing were used instead of absorption costing? Questions 19 through 21 are based on the following information.
A. $0 C. $200 increase. The following information is available for X Co. for its first year of operations:
B. $200 decrease. D. $800 decrease. Sales in units 5,000
Production in units 8,000

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Manufacturing costs: $360,000 $460,000 $560,000

Direct labor $3 per unit Income (or loss) $(60,000) $90000 $240,000
Direct material 5 per unit
Variable overhead 1 per unit The 200,000 unit budget has been adopted and will be used for allocating fixed manufacturing
Fixed overhead $100,000 costs to units of Product X. At the end of the first 6 months, the following information is available:
Net income (absorption method) $30,000 Units
Sales price per unit $40 Production completed 120,000
Sales 60,000
19. What would X Co. have reported as its income before income taxes if it had used variable All fixed costs are budgeted and incurred uniformly throughout the year, and all costs incurred
costing? coincide with the budget. Over- and under-applied fixed manufacturing costs are deferred until
A. ($30,000) C. $30,000 year-end. Annual sales have the following seasonal pattern.
B. ($7,500) D. $67,500
Portion of Annual Sales
20. What was the total amount of SG&A expense incurred by X Co.? First quarter 10%
A. $6,000 C. $36,000 Second quarter 20%
B. $30,000 D. $62,500 Third quarter 30%
Fourth quarter 40%
21. Based on variable costing, what would X Co. show as the value of its ending inventory?
A. $24,000 C. $64,500
22. The amount of fixed factory costs applied to product during the first 6 months under absorption
B. $27,000 D. $120,000
costing is
A. Over-applied by $20,000. C. Under-applied by $80,000.
Questions 22 through 25 are based on the following information.
B. Under-applied by $40,000. D. Equal to the fixed costs incurred.
The annual flexible budget below was prepared for use in making decisions relations to Product X.
100,000 units 150,000 units 200,000 units
23. Reported net income (or loss) for the first 6 months under absorption costing is
Sales volume $ 800,000 $1,200,000 $1,600,000
A. $(40,000) C. $40,000
Manufacturing costs: B. $0 D. $160,000
Variable $300,000 $450,000 $600,000
Fixed 200,000 200,000 200,000 24. Reported net income (or loss) for the first 6 months under variable costing is
$500,000 $650,000 $800,000 A. $(180,000) C. $40,000
Selling & other expenses B. $0 D. $180,000
Variable $200,000 $300,000 $400,000
Fixed 160,000 160,000 160,000

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25. Assuming that 90,000 units of Product X were sold during the first 6 months and that this is to The 1995 beginning finished goods inventory for absorption costing purposes was valued at the
be used as a basis, the revised budget estimate for the total number of units to be sold during 1994 planned unit manufacturing cost, which was the same as the 1995 planned unit
this year is manufacturing cost. There are no work-in-process inventories at either the beginning or the end of
A. 200,000 C. 360,000 the year. The planned and actual unit selling price for 1995 was $70.00 per unit.
B. 240,000 D. None of the above
26. The value of Valyn Corporations 1995 actual ending finished goods inventory on the
Questions 26 through 31 are based on the following information. absorption costing bases was
Valyn Corporation employs an absorption costing system for internal reporting purposes; however, A. $900,000 C. $1,220,000
the company is considering using variable costing. Data regarding Valyns planned and actual B. $1,200,000 D. $1,350,000
operations for the 1995 calendar year are presented below.
Planned Activity Actual Activity 27. The value of Valyn Corporations 1995 actual ending finished goods inventory on the variable
Beginning finished goods inventory in units 35,000 35,000 costing basis was
Sales in units 140,000 125,000 A. $750,000 C. $1,125,000.
Production in units 140,000 130,000 B. $1,000,000. D. $1,400,000.
The planned per unit cost figures shown in the next schedule were based on the estimated
production and sale of 140,000 units in 1995. Valyn uses a predetermined manufacturing 28. Valyn Corporations total fixed costs expensed in 1995 on the absorption costing bases were
overhead rate for applying manufacturing overhead to its product. Thus, a combined A. $2,030,000 C. $2,095,000
manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes B. $2,055,000 D. $2,120,000
in1995. Any over- or under-applied manufacturing overhead is closed to the cost of goods sold
account at the end of the reporting year. 29. Valyn Corporations actual manufacturing contribution margin for 1995 calculated on the
variable costing basis was
Planned Cost Incurred A. $4,375,000 C. $4,910,000
B. $4,935,000 D. $5,625,000.
Per Unit Total Costs
Direct materials $12.00 $1,680,000 $1,560,000
30. The total variable costs expensed in 1995 by Valyn Corporation on the variable costing basis
Direct labor 9.00 1,260,000 1,170,000
was
Variable manufacturing overhead 4.00 560,000 520,000
A. $4,325,000 C. $4,500,000
Fixed manufacturing overhead 5.00 700,000 715,000
B. $4,375,000 D. $4,550,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000 31. The difference between Valyn Corporations 1995 operating income calculated on the
Variable administrative expenses 2.00 280,000 250,000 absorption costing basis and calculated on the variable costing basis was
Fixed administrative expenses 3.00 420,000 425,000 A. $25,000 C. $65,000
Total $50.00 $7,000,000 $6,620,000 B. $40,000 D. $90,000
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Questions 32 through 37 are based on the following information. ANSWER KEY

Louder Industries manufactures a single product. Variable production costs are $20 and fixed Theory Problem
production costs are $150,000. Louder uses a normal activity of 10,000 units to set its standard 1. A 21. D 1. B 21. B
costs. Louder began the year with no inventory, produced 11,000 units, and sold 10,500 units. 2. C 22. C 2. A 22. A
3. B 23. D 3. A 23. C
32. Ending inventory under variable costing would be 4. D 24. A 4. D 24. B
A. $10,000 C. $17,500 5. C 25. A 5. D 25. D
B. $15,000 D. $20,000 6. D 26. D 6. D 26. B
7. C 27. A 7. A 27. B
33. Ending inventory under absorption costing would be 8. B 28. A 8. D 28. C
A. $10,000 C. $17,500 9. A 29. B 9. A 29. D
D. $20,000 B. $15,000 10. B 30. D 10. B 30. B
11. C 31. B 11. C 31. A
34. The volume variance under variable costing would be
12. A 32. B 12. B 32. A
A. $0 C. $15,000
13. C 33. B 13. C 33. C
B. $10,000 D. Some other number.
14. C 34. A 14. B 34. A
35. The volume variance under absorption costing would be 15. D 35. A 15. B 35. C
A. $0 C. $15,000 16. D 16. B 36. B
B. $10,000 D. Some other number. 17. B 17. D 37. C
18. E 18. B
36. The standard cost of goods sold under variable costing would be 19. A 19. B
A. $200,000 C. $367,500 20. D 20. D
B. $210,000 D. Some other number.

37. The standard cost of goods sold under absorption costing would be
A. $200,000 C. $367,500
B. $210,000 D. Some other number.

When the going gets tough, the tough gets going.

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