Multiple Choice

Topic: Absorption Costing
1. Which of the following types of costs are classified as period costs under absorption costing, but not under variable costing?
A) All non-manufacturing costs
B) Only fixed non-manufacturing costs
C) The cost of purchasing long-lived assets for use in manufacturing
D) None of the above

Topic: Absorption Costing Cost Components
2. All of the following costs are included in inventory under absorption costing EXCEPT:
A) Direct materials
B) Direct labor
C) Fixed manufacturing expenses
D) Variable selling expenses

Topic: Variable Costing Cost Components
LO: 1
3. Under variable costing, which of the following costs are assigned to inventory?
A) Fixed manufacturing costs
B) Variable non-manufacturing costs
C) Variable manufacturing costs
D) None of the above

Topic: Non-manufacturing Period Costs

4. Which of the following inventory valuation approaches treats nonmanufacturing costs as period costs?
A) Absorption
B) Variable
C) Both absorption and variable
D) None of the above

Topic: Fixed Factory Overhead
LO: 1
5. Fixed manufacturing overhead is recorded initially as an asset (inventory) under ______________ costing but as an operating expense under ______________ costing.
A) Absorption; indirect
B) Variable; absorption
C) Absorption; variable
D) Variable; direct

Topic: Changing Sales Volume Constant Production
6. When monthly production volume is constant and sales volume is less than production, net income determined with variable costing procedures will:
A) Always be greater than net income determined using absorption costing
B) Always be less than net income determined using absorption costing
C) Be equal to net income determined using absorption costing
D) Be equal to contribution margin per unit times units sold

Topic: Inventory Calculation Under Variable Costing
7. The following information pertains to Higgins Corporation:

Beginning Inventory 2,000 units
Ending Inventory 10,000 units
Direct labor per unit $25
Direct materials per unit 10
Fixed overhead per unit 15
Fixed SG&A costs per unit 7
Variable overhead per unit 5
Variable SG&A costs per unit 3

What is the value of the ending inventory using the variable costing method?
A) $450,000
B) $430,000
C) $350,000
D) $400,000

Topic: Inventory Calculation under Absorption Costing
8. The following information pertains to Higgins Corporation:

Beginning Inventory 2,000 units
Ending Inventory 10,000 units
Direct labor per unit $25
Direct materials per unit 10
Fixed overhead per unit 15
Fixed SG&A costs per unit 7
Variable overhead per unit 5
Variable SG&A costs per unit 3

What is the value of the ending inventory using the absorption costing method?
A) $400,000
B) $600,000
C) $550,000
D) $500,000

Topic: Absorption and Variable Costing Income Compared

9. Assuming sales prices and cost behavior remain unchanged, when variable costing is used, when does net income change in response to changes in unit sales?
A) Only when number of units sold exceeds number of units produced
B) Only when number of units produced exceeds number of units sold
C) Only when number of units sold exactly equals number of units produced
D) Under all the above conditions

Topic: Overproducing With Absorption Costing

10. Assuming sales prices and cost behavior remain unchanged, when absorption costing is used, overproducing creates all of the following situations except?
A) A buildup of inventory levels
B) Higher net income
C) Less fixed costs on the income statement
D) Less variable cost on the balance sheet

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Exercises

Topic: Absorption Costing Income

1. The following information pertains to Culpepper Pipe Company:

Beginning Inventory 2,000 units
Ending Inventory 12,000 units
Direct labor per unit $20
Direct materials per unit 10
Fixed overhead per unit 15
Fixed SG&A costs per unit 7
Variable overhead per unit 5
Variable SG&A costs per unit 3

Calculate the difference between absorption costing net income and variable costing net income.

Topic: Variable Costing Inventory Valuation

2. Wiscasset Corporation has the following information for October, November, and December of the current year:

October November December
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500

Production costs per unit (based on 10,000 units) are as follows:

Direct labor $ 8
Direct materials 12
Fixed factory overhead 4
Fixed SG&A expenses 4
Variable factory overhead 6
Variable SG&A expenses 10

There were no beginning inventories for October, and all units were sold for $50. Costs are stable over the three months. Calculate Wiscasset's December ending inventory using the variable costing method.

Topic: Absorption Costing Inventory Valuation

3. Wiscasset Corporation has the following information for October, November, and December of the current year:

October November December
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500

Production costs per unit (based on 10,000 units) are as follows:

Direct labor $ 8
Direct materials 12
Fixed factory overhead 4
Fixed SG&A expenses 4
Variable factory overhead 6
Variable SG&A expenses 10

There were no beginning inventories for October, and all units were sold for $50. Costs are stable over the three months. Calculate Wiscasset's December ending inventory using the absorption costing method.

Topic: Absorption and Variable Costing Incomes
4. Wiscasset Corporation has the following information for October, November, and December of the current year:

October November December
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500

Production costs per unit (based on 10,000 units) are as follows:

Direct labor $ 8
Direct materials 12
Fixed factory overhead 4
Fixed SG&A expenses 4
Variable factory overhead 6
Variable SG&A expenses 10

There were no beginning inventories for October, and all units were sold for $50. Costs are stable over the three months. Calculate the difference between Wiscasset's December income under absorption and variable costing.

Topic: Variable Costing Cost Calculation

5. Tannenbaum Company incurred the following costs in manufacturing desk calculators:

Direct labor $12
Direct materials 14
Fixed factory overhead 28
Fixed selling expenses 14
Indirect labor (variable) 6
Indirect materials (variable) 4
Other variable factory overhead 10
Variable selling expenses 20

During the period, the company produced and sold 1,000 units. Calculate the cost per unit using variable costing?

Topic: Absorption Costing Cost Calculation

6. Tannenbaum Company incurred the following costs in manufacturing desk calculators:

Direct labor $ 8
Direct materials 14
Fixed factory overhead 28
Fixed selling expenses 14
Indirect labor (variable) 6
Indirect materials (variable) 4
Other variable factory overhead 10
Variable selling expenses 20

During the period, the company produced and sold 1,000 units. What is the cost per unit using absorption costing?

Topic: Variable Costing Income

7. NeoMetal Company reported the following units of production and sales for October and November of this year:

Month Produced Sold
October 100,000 90,000
November 100,000 105,000

Net income under absorption costing for October was $40,000; net income under variable costing for November was $50,000. Fixed manufacturing costs were $600,000 for each month. Calculate net income for October using variable costing?

Topic: Absorption Costing Income

8. NeoMetal Company reported the following units of production and sales for October and November of this year:

Month Produced Sold
October 100,000 90,000
November 100,000 105,000

Net income under absorption costing for October was $40,000; net income under variable costing for November was $50,000. Fixed manufacturing costs were $600,000 for each month. Calculate net income for November using absorption costing?

 
Problems

Topic: Profit Comparisons: Absorption and Variable Costing

1. The Tucker Corporation has two identical divisions: Eastern and Southern. Their sales, production volume, and fixed manufacturing costs have been the same for both divisions for the last five years and are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5
Units produced 100,000 100,000 100,000 100,000 100,000
Units sold 80,000 90,000 110,000 100,000 115,000
Fixed manufacturing costs $400,000 $400,000 $400,000 $400,000 400,000

Eastern uses absorption costing and Southern uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $10 per unit. Both have identical selling prices and selling and administrative expenses. There were no Year 1 beginning inventories.

Determine the difference in profits for each division for Years 1 through 5. Explain why profits differ between the two divisions.

Topic: Absorption and Variable Inventory Calculations

2. Creekside Company produced 30,000 units and sold 28,000 units during the current fiscal period. Beginning inventory was zero. During the period, the following costs were incurred:

Direct labor per unit $100
Direct materials per unit 20
Variable selling expense per unit 40
Fixed administrative expenses 150,000
Fixed manufacturing overhead 180,000
Fixed selling expenses 120,000
Indirect labor (all variable) 60,000
Indirect materials (all variable) 30,000
Other variable overhead 90,000

Required: Compute the dollar amount of ending inventory using (a) absorption costing and (b) variable costing.