Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method?

How would the following costs be classified (product or period) under variable costing at a retail clothing store?

           

	Cost of purchasing clothing	Sales commissions
A)	Product	Product
B)	Product	Period
C)	Period	Product
D)	Period	Period

            Ans:  B    

      17. The principal difference between variable costing and absorption costing centers on:

            A)      whether variable manufacturing costs should be included as product costs.

            B)      whether fixed manufacturing costs should be included as product costs.

            C)      whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

            D)      none of these.

           

            Ans:  B    

      18. Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method?

            A)      direct material cost

            B)      property taxes on the factory building

            C)      sales manager's salary

            D)      all of the above

           

            Ans:  A    

      19. Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that:

            A)      variable costing treats only direct materials and direct labor as product cost while absorption costing treats direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

            B)      variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs while absorption costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

            C)      variable costing treats only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

            D)      variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.

           

            Ans:  D    

      20. The costing method that treats all fixed costs as period costs is:

            A)      absorption costing.

            B)      job-order costing.

            C)      variable costing.

            D)      process costing.

           

            Ans:  C    

      21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.)

           

	Variable costing	Absorption costing
A)	Increase	Increase
B)	Decrease	Increase
C)	Decrease	Decrease
D)	No effect	Decrease

            Ans:  D     LO:  2    

      22. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will:

            A)      fluctuate in direct proportion to changes in production.

            B)      remain constant.

            C)      fluctuate inversely with changes in production.

            D)      be greater than net operating income under absorption costing.

           

            Ans:  B     LO:  2    

      23. Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred?

            A)      fixed manufacturing overhead cost

            B)      fixed selling and administrative expense

            C)      variable selling and administrative expense

            D)      all of the above

           

            Ans:  D     LO:  2     Level:  Hard

      24. Which of the following will usually be found on an income statement prepared using the absorption costing method?

           

	Contribution Margin	Gross Margin
A)	Yes	Yes
B)	Yes	No
C)	No	Yes
D)	No	No

            Ans:  C     LO:  2    

      25. Net operating income under variable and absorption costing will generally:

            A)      always be equal.

            B)      never be equal.

            C)      be equal only when production and sales are equal.

            D)      be equal only when production exceeds sales.

           

            Ans:  C    

      26. When production exceeds sales, net operating income reported under variable costing generally will be:

            A)      greater than net operating income reported under absorption costing.

            B)      less than net operating income reported under absorption costing

            C)      equal to net operating income reported under absorption costing.

            D)      higher or lower because no generalization can be made.

           

            Ans:  B    

      27. Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated?

            A)      change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit.

            B)      number of units produced during the period times the fixed manufacturing overhead rate per unit.

            C)      change in the quantity of units in inventory times the variable manufacturing cost per unit.

            D)      number of units produced during the period times the variable manufacturing cost per unit.

           

            Ans:  A    

      28. When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will:

            A)      tend to fluctuate in the same direction as fluctuations in the level of production.

            B)      tend to remain constant.

            C)      tend to fluctuate inversely with fluctuations in the level of production.

            D)      none of these

           

            Ans:  A    

      29. A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that:

            A)      they omit variable expenses entirely in computing net operating income.

            B)      they shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories.

            C)      they include all fixed manufacturing overhead on the income statement each year as a period cost.

            D)      they ignore inventory levels in computing income charges.

           

            Ans:  B    

      30. Under the theory of constraints (TOC), which of the following is treated as a period cost?    

           

	Direct labor	Direct material
A)	Yes	Yes
B)	Yes	No
C)	No	Yes
D)	No	No

            Ans:  B    

      31. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing?

            A)      $800 decrease

            B)      $200 decrease

            C)      $0

            D)      $200 increase

           

            Ans:  B         

            Solution:

            Change in inventory × Fixed manufacturing costs per unit

            = 100 × $2 = $200 decrease

      32. Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

           

	Unit product cost under variable costing........................	$5.20 per unit
	Fixed manufacturing overhead cost for the year.............	$260,000
	Fixed selling and administrative cost for the year..........	$180,000
	Units (calculators) produced and sold.............................	400,000

            What is Shun's unit product cost under absorption costing for last year?

            A)      $4.10

            B)      $4.55

            C)      $5.85

            D)      $6.30

           

            Ans:  C    

            Solution:

            Unit fixed manufacturing overhead = Fixed manufacturing overhead ÷ Units produced = $260,000 ÷ 400,000 units = $0.65 per unit

            Unit product cost = $5.20 + $0.65 = $5.85

      33. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

           

	Units in beginning inventory.....................	0
	Units produced..........................................	7,100
	Units sold..................................................	7,000
	Units in ending inventory..........................	100
	Variable costs per unit:
	Direct materials......................................	$33
	Direct labor............................................	$53
	Variable manufacturing overhead..........	$1
	Variable selling and administrative.......	$7
	Fixed costs:
	Fixed manufacturing overhead..............	$170,400
	Fixed selling and administrative............	$7,000

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

            A)      $118

            B)      $94

            C)      $111

            D)      $87

           

            Ans:  D    

            Solution:

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $33 + $53 + $1 = $87

      34. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

           

	Units in beginning inventory.....................	0
	Units produced..........................................	1,900
	Units sold..................................................	1,700
	Units in ending inventory..........................	200
	Variable costs per unit:
	Direct materials......................................	$33
	Direct labor............................................	$32
	Variable manufacturing overhead..........	$2
	Variable selling and administrative.......	$6
	Fixed costs:
	Fixed manufacturing overhead..............	$72,200
	Fixed selling and administrative............	$6,800

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

            A)      $67

            B)      $105

            C)      $111

            D)      $73

           

           Ans:  B    

            Solution:

            Unit fixed manufacturing overhead = $72,200 ÷ 1,900 = $38

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

            = $33 + $32 + $2 + $38 = $105

      35. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

           

	Selling price..............................................	$79
	Units in beginning inventory.....................	0
	Units produced..........................................	6,600
	Units sold..................................................	6,300
	Units in ending inventory..........................	300
	Variable costs per unit:
	Direct materials......................................	$14
	Direct labor............................................	$30
	Variable manufacturing overhead..........	$4
	Variable selling and administrative.......	$8
	Fixed costs:
	Fixed manufacturing overhead..............	$46,200
	Fixed selling and administrative............	$88,200

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

            A)      $138,600

            B)      $134,400

            C)      $46,200

            D)      $184,800

           

            Ans:  D    

            Solution:

            Total variable selling and administrative cost = $8 × 6,300 = $50,400

Period cost = Total variable selling and administrative cost + Fixed manufacturing overhead + Fixed selling and administrative cost

= $50,400 + $46,200 + $88,200 = $184,800

      36. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

           

	Selling price..............................................	$97
	Units in beginning inventory.....................	0
	Units produced..........................................	2,200
	Units sold..................................................	2,100
	Units in ending inventory..........................	100
	Variable costs per unit:
	Direct materials......................................	$32
	Direct labor............................................	$25
	Variable manufacturing overhead..........	$2
	Variable selling and administrative.......	$9
	Fixed costs:
	Fixed manufacturing overhead..............	$8,800
	Fixed selling and administrative............	$37,800

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

            A)      $56,700

            B)      $65,500

            C)      $8,800

            D)      $37,800

           

            Ans:  A    

            Solution:

           

            Total variable selling and administrative cost = $9 × 2,100 = $18,900

Period cost = Variable selling and administrative cost + Fixed selling and administrative cost = $18,900 + $37,800 = $56,700

      37. Mullee 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..................................................	$51
	Direct labor........................................................	$12
	Variable manufacturing overhead......................	$2
	Variable selling and administrative expense.....	$5
	Fixed costs per year:
	Fixed manufacturing overhead..........................	$441,000
	Fixed selling and administrative expense..........	$112,000

            The unit product cost under absorption costing is:

            A)      $149

            B)      $65

            C)      $63

            D)      $128

           

            Ans:  D    

            Solution:

            Unit fixed manufacturing overhead = $441,000 ÷ 7,000 = $63

            Unit product cost = $63 + $51 + $12 + $2 = $128

      38. Stoneberger Corporation produces a single product and has the following cost structure:

           

	Number of units produced each year....................	4,000
	Variable costs per unit:
	Direct materials..................................................	$50
	Direct labor........................................................	$72
	Variable manufacturing overhead......................	$6
	Variable selling and administrative expense.....	$3
	Fixed costs per year:
	Fixed manufacturing overhead..........................	$296,000
	Fixed selling and administrative expense..........	$76,000

            The unit product cost under variable costing is:

            A)      $128

            B)      $125

            C)      $202

            D)      $131

           

            Ans:  A    

            Solution:

            Unit product cost = $50 + $72 + $6 = $128

      39. Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations:

           

	Number of units produced.....................................	8,000
	Variable costs per unit:
	Direct materials..................................................	$37
	Direct labor.........................................................	$56
	Variable manufacturing overhead......................	$4
	Variable selling and administrative expense......	$2
	Fixed costs:
	Fixed manufacturing overhead...........................	$312,000
	Fixed selling and administrative expense..........	$448,000

            There were no beginning or ending inventories. The unit product cost under absorption costing was:

            A)      $93

            B)      $97

            C)      $136

            D)      $194

           

            Ans:  C    

            Solution:

            Unit fixed manufacturing overhead = $312,000 ÷ 8,000 = $39

            Unit product cost = $37 + $56 + $4 + $39 = $136

      40. Kray Inc., which produces a single product, has provided the following data for its most recent month of operations:

           

	Number of units produced...............................................	3,000
	Variable costs per unit:
	Direct materials............................................................	$91
	Direct labor..................................................................	$13
	Variable manufacturing overhead................................	$7
	Variable selling and administrative expense...............	$6
	Fixed costs:
	Fixed manufacturing overhead....................................	$237,000
	Fixed selling and administrative expense....................	$165,000

            There were no beginning or ending inventories. The unit product cost under variable costing was:

            A)      $111

            B)      $190

            C)      $117

            D)      $110

           

            Ans:  A    

            Solution:

            Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead = $91 + $13 + $7 = $111

      41. The following data pertain to last year's operations at Clarkson, Incorporated, a company that produces a single product:

           

	Units in beginning inventory.....................	0
	Units produced..........................................	100,000
	Units sold..................................................	98,000
	Selling price per unit.................................	$10.00
	Variable costs per unit:
	Direct materials......................................	$1.50
	Direct labor............................................	$2.50
	Variable manufacturing overhead..........	$1.00
	Variable selling and administrative.......	$2.00
	Fixed costs per year:
	Fixed manufacturing overhead..............	$200,000
	Fixed selling and administrative............	$50,000

            What was the absorption costing net operating income last year?

            A)      $44,000

            B)      $48,000

            C)      $50,000

            D)      $49,000

           

            Ans:  B     LO:  2    

            Solution:

           

            Unit fixed manufacturing overhead = $200,000 ÷ 100,000 = $2

Unit product cost = $1.50 + $2.50 + $1 + $2 = $7

	Absorption costing income statement
	Sales ($10 × 98,000)............................................		$980,000
	Cost of goods sold ($7 × 98,000)........................		686,000
	Gross margin........................................................		294,000
	Selling and administrative expenses expenses:
	Variable selling and administrative..................	$196,000
	Fixed selling and administrative......................	50,000	246,000
	Net operating income..........................................		$   48,000

      42. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

           

	Selling price..............................................	$135
	Units in beginning inventory.....................	0
	Units produced..........................................	6,400
	Units sold..................................................	6,200
	Units in ending inventory..........................	200
	Variable costs per unit:
	Direct materials.........................................	$49
	Direct labor................................................	$38
	Variable manufacturing overhead.............	$6
	Variable selling and administrative...........	$11
	Fixed costs:
	Fixed manufacturing overhead..................	$108,800
	Fixed selling and administrative...............	$74,400

            The total contribution margin for the month under the variable costing approach is:

            A)      $155,000

            B)      $260,400

            C)      $192,200

            D)      $83,400

           

            Ans:  C     LO:  2    

            Solution:

           

	Sales revenue ($135 × 6,200)................................		$837,000
	Variable cost:........................................................
	Direct materials ($49 × 6,200)...........................	$303,800
	Direct labor ($38 × 6,200).................................	235,000
	Variable manufacturing overhead ($6 × 6,200).	37,200
	Variable selling and administrative ($11 × 6,200)..............................................................	68,200	644,800
	Contribution margin..............................................		$192,200

      43. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:

           

	Selling price..............................................	$123
	Units in beginning inventory.....................	0
	Units produced..........................................	1,000
	Units sold..................................................	900
	Units in ending inventory..........................	100
	Variable costs per unit:
	Direct materials......................................	$41
	Direct labor............................................	$26
	Variable manufacturing overhead..........	$4
	Variable selling and administrative.......	$6
	Fixed costs:
	Fixed manufacturing overhead..............	$17,000
	Fixed selling and administrative............	$11,700

            What is the net operating income for the month under variable costing?

            A)      $12,700

            B)      $5,600

            C)      $1,700

            D)      $14,400

           

            Ans:  A     LO:  2    

            Solution:

           

	Sales ($123 × 900).................................................		$110,700
	Variable cost of goods sold ($71 × 900)...............		63,900
	Less variable selling and administrative ($6 × 900)		5,400
	Contribution margin..............................................		41,400
	Fixed cost:
	Fixed manufacturing overhead...........................	$17,000
	Fixed selling and administrative........................	11,700	28,700
	Net operating income............................................		$   12,700

      44. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing?

            A)      $15,000

            B)      $25,000

            C)      $40,000

            D)      $55,000

           

            Ans:  D    

            Solution:

           

            Difference between absorption costing net income and variable costing net income = Change in inventory in units × Unit fixed manufacturing overhead

= (27,000 − 22,000) × $3 = 5,000 × $3 = $15,000

Net income under absorption costing = $40,000 + $15,000 = $55,000

      45. Blake Company produces a single product. Last year, Blake's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year?

            A)      8,200 units

            B)      8,800 units

            C)      11,200 units

            D)      11,800 units

           

            Ans:  B     Level:  Hard

            Solution:

            Direct material + Direct labor + Variable manufacturing overhead

            = Variable unit product cost = $9 – $1 = $8

            Unit fixed manufacturing overhead = $11 – $8 = $3

            Difference in net income between methods ÷ Unit fixed manufacturing overhead = ($3,600) ÷ $3 per unit = (1,200) units

            Units produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800