During its first year of operations, Carlos Manufacturing Company incurred the following costs to produce 8,000 units of its product:

During its first year of operations, Carlos Manufacturing Company incurred the following costs to produce 8,000 units of its product:

	Direct materials.........................................	$7 per unit
	Direct labor................................................	$3 per unit
	Variable manufacturing overhead.............	$18 per unit
	Fixed manufacturing overhead..................	$450,000 in total

The company also incurred the following costs in the sale of 7,500 units of product during its first year:

	Variable selling and administrative...........	$2 per unit
	Fixed selling and administrative...............	$60,000 in total

Assume that direct labor is a variable cost.

    107. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the absorption costing method?

            A)      $15,000

            B)      $42,125

            C)      $44,000

            D)      $47,125

           

            Ans:  B    

            Solution:

           

            Unit fixed manufacturing overhead = $450,000 ÷ 8,000 = $56.25

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $84.25 × (8,000 − 7,500) = $84.25 × 500 = $42,125

    108. What is the total cost that would be assigned to Carlos' finished goods inventory at the end of the first year of operations under the variable costing method?

            A)      $15,000

            B)      $42,125

            C)      $44,000

            D)      $14,000

           

            Ans:  D    

            Solution:

           

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $7 + $3 + $18 = $28

Total cost of ending finished goods inventory = Unit product cost × Ending inventory in units = $28 × (8,000 − 7,500) = $28 × 500 = $14,000

    109. If Carlos' absorption costing net operating income for this first year is $118,125, what would its variable costing net operating income be for this first year?

            A)      $86,000

            B)      $90,000

            C)      $104,125

            D)      $146,250

           

            Ans:  B    

            Solution:

           

Variable costing net income = Absorption costing net income – (Unit fixed manufacturing overhead × Change in inventory in units)

= $118,125 − ($56.25 × 500) = $118,125 − $28,125 = $90,000

Use the following to answer questions 110-111:

Kern Company produces a single product. Selected information concerning the operations of the company follow:

	Units in beginning inventory.................................	0
	Units produced......................................................	10,000
	Units sold..............................................................	9,000
	Direct materials.....................................................	$40,000
	Direct labor	$20,000
	Variable factory overhead.....................................	$12,000
	Fixed factory overhead..........................................	$25,000
	Variable selling and administrative expenses.......	$4,500
	Fixed selling and administrative expenses............	$30,000

Assume that direct labor is a variable cost.

    110. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be:

            A)      $7,200

            B)      $7,650

            C)      $8,000

            D)      $9,700

           

            Ans:  A          Source:  CPA, adapted

            Solution:

           

            Unit product cost = ($40,000 + $20,000 + $12,000) ÷ 10,000

= $72,000 ÷ 10,000 = $7.20

Ending inventory = Units produced − Units sold = 10,000 − 9,000 = 1,000

Carrying value of ending finished goods inventory = Unit product cost × Units in ending inventory = $7.20 × 1,000 = $7,200

    111. Which costing method, absorption or variable costing, would show a higher operating income for the year and by what amount?

            A)      Absorption costing net operating income would be higher than variable costing net operating income by $2,500.

            B)      Variable costing net operating income would be higher than absorption costing net operating income by $2,500.

            C)      Absorption costing net operating income would be higher than variable costing net operating income by $5,500.

            D)      Variable costing net operating income would be higher than absorption costing net operating income by $5,500.

           

            Ans:  A          Source:  CPA, adapted

            Solution:

           

            Unit fixed manufacturing overhead = $25,000 ÷ 10,000 = $2.50

Difference between absorption costing net income and variable costing net income = Unit fixed manufacturing overhead × Change in ending inventory in units = $2.50 × (10,000 − 9,000) = $2,500

Since inventory has increased (production exceeds sales), absorption costing net income would be higher than variable costing net income.

Use the following to answer questions 112-113:

Lina Co. produced 100,000 units of its single product during the month of June. Costs incurred during June were as follows:

	Direct materials.....................................................	$100,000
	Direct labor............................................................	$80,000
	Variable manufacturing overhead.........................	$40,000
	Fixed manufacturing overhead..............................	$50,000
	Variable selling and administrative expenses.......	$12,000
	Fixed selling and administrative expenses............	$45,000

Assume that direct labor is a variable cost.

    112. The unit product cost under absorption costing would be:

            A)      $3.27

            B)      $2.70

            C)      $2.20

            D)      $1.80

           

            Ans:  B          Source:  CPA, adapted

            Solution:

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

            = ($100,000 + $80,000 + $40,000 + $50,000) ÷ 100,000

            = $270,000 ÷ 100,000 = $2.70

    113. The unit product cost under variable costing would be:

            A)      $2.82

            B)      $2.70

            C)      $2.32

            D)      $2.20

           

            Ans:  D          Source:  CPA, adapted

            Solution:

            Unit product cost = (Direct materials + Direct labor + Variable manufacturing overhead) ÷ 100,000 units = ($100,000 + $80,000 + $40,000) ÷ 100,000 = $220,000 ÷ 100,000 = $2.20

Use the following to answer questions 114-115:

Bauxar Company, which has only one product, has provided the following data concerning its most recent month of operations:

	Selling price..............................................	$98
	Units in beginning inventory.....................	0
	Units produced..........................................	2,200
	Units sold..................................................	2,100
	Units in ending inventory..........................	100
	Variable costs per unit:
	Direct materials......................................	$29
	Direct labor............................................	$17
	Variable manufacturing overhead..........	$5
	Variable selling and administrative.......	$9
	Fixed costs:
	Fixed manufacturing overhead..............	$33,000
	Fixed selling and administrative............	$29,400

    114. What is the unit product cost for the month under variable costing?

            A)      $75

            B)      $66

            C)      $51

            D)      $60

           

            Ans:  C    

            Solution:

            Direct materials + Direct labor + Variable manufacturing overhead

            = $29 + $17 + $5 = $51

    115. What is the unit product cost for the month under absorption costing?

            A)      $66

            B)      $51

            C)      $60

            D)      $75

           

            Ans:  A    

            Solution:

            Unit fixed manufacturing overhead = $33,000 ÷ 2,200 = $15

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $29 + $17 + $5 + $15 = $66

Use the following to answer questions 116-118:

Crossbow Corp. produces a single product. Data concerning June's operations follow:

	Units in beginning inventory.........	0
	Units produced..............................	6,000
	Units sold......................................	5,000
	Variable costs per unit:
	Manufacturing............................	$7
	Selling and administrative..........	$3
	Fixed costs in total:
	Manufacturing............................	$12,000
	Selling and administrative..........	$3,000

    116. Under variable costing, ending inventory on the balance sheet would be valued at:

            A)      $10,000

            B)      $7,000

            C)      $9,000

            D)      $12,000

           

            Ans:  B    

            Solution:

           

            Unit product cost = $7

Ending inventory = Beginning inventory + Units produced − Units sold

= 0 + 6,000 − 5,000 = 1,000

Value of ending inventory = Unit product cost × Units in ending inventory

= $7 × 1,000 = $7,000

    117. Under absorption costing, ending inventory on the balance sheet would be valued at:

            A)      $10,000

            B)      $7,000

            C)      $9,000

            D)      $12,000

           

            Ans:  C     LO:  2    

            Solution:

           

            Unit fixed manufacturing overhead = $12,000 ÷ 6,000 = $2

Unit product cost = $7 + $2 = $9

Value of ending inventory = Unit product cost × Units in ending inventory

= $9 × 1,000 = $9,000

    118. For the year in question, net operating income under variable costing will be:

            A)      higher than net operating income under absorption costing.

            B)      lower than net operating income under absorption costing.

            C)      the same as net operating income under absorption costing.

            D)      none of these

          

            Ans:  B    

Use the following to answer questions 119-120:

Dearne Company, which has only one product, has provided the following data concerning its most recent month of operations:

	Selling price..............................................	$67
	Units in beginning inventory.....................	0
	Units produced..........................................	5,200
	Units sold..................................................	4,900
	Units in ending inventory..........................	300
	Variable costs per unit:
	Direct materials......................................	$20
	Direct labor............................................	$16
	Variable manufacturing overhead..........	$3
	Variable selling and administrative.......	$4
	Fixed costs:
	Fixed manufacturing overhead..............	$41,600
	Fixed selling and administrative............	$73,500

    119. What is the total period cost for the month under the variable costing approach?

            A)      $41,600

            B)      $93,100

            C)      $115,100

            D)      $134,700

           

            Ans:  D     Level:  Hard

            Solution:

           

Period cost = Variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= $4 × 4,900 + $41,600 + $73,500

= $19,600 + $41,600 + $73,500 = $134,700

    120. What is the total period cost for the month under the absorption costing approach?

            A)      $93,100

            B)      $73,500

            C)      $134,700

            D)      $41,600

           

            Ans:  A     Level:  Hard

            Solution:

           

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $4 × 4,900 + $73,500 = $93,100

Use the following to answer questions 121-122:

Tat Corporation produces a single product and has the following cost structure:

	Number of units produced each year....................	7,000
	Variable costs per unit:
	Direct materials..................................................	$77
	Direct labor........................................................	$89
	Variable manufacturing overhead......................	$5
	Variable selling and administrative expenses....	$3
	Fixed costs per year:
	Fixed manufacturing overhead..........................	$532,000
	Fixed selling and administrative expenses.........	$574,000

    121. The unit product cost under absorption costing is:

            A)      $247

            B)      $166

            C)      $332

            D)      $171

           

            Ans:  A    

            Solution:

            Unit fixed manufacturing overhead = $532,000 ÷ 7,000 = $76

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead = $77 + $89 + $5 + $76 = $247

    122. The unit product cost under variable costing is:

            A)      $169

            B)      $171

            C)      $247

            D)      $174

           

            Ans:  B    

            Solution:

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $77 + $89 + $5 = $171