MANAGEMENT ADVISORY SERVICE HILARIO G.

TAN

THEORY B. all period costs are variable.

Variable costing C. all product costs are variable.
1. To apply direct costing method it is necessary that you know D. product costs are both fixed and variable.
A. Variable and fixed cost related to production 6. Cay Co.’s 1995 fixed manufacturing overhead costs totaled $100,000, and variable selling
B. Controllable and uncontrollable cost of production costs totaled $80,000. Under variable costing, how should those costs be classified?
C. Contribution margin and break even point in production A. B. C. D.
D. Standard production rate and times of production elements Period Costs $0 $ 80,000 $100,000 $180,000
Product Costs $180,000 $100,000 $ 80,000 $0
2. The following statements about the adoption of variable costing are true, except:
A. A direct cost may not become a product cost. 7. Under the variable-costing concept, unit product cost would most likely be increased by
B. An indirect cost may be assigned as part of product cost. A. A decrease in the number of units produced.
C. It is an acceptable method for general reporting purposes. B. An increase in the commission paid to salesman for each unit sold.
D. All fixed manufacturing costs are recognized as period costs. C. A decrease in the remaining useful life of factory machinery depreciated on the
units-of-production method.
3. Which of the following is NOT an advantage of using variable costing for internal reporting D. An increase in the remaining useful life of factory machinery depreciated on the
purposes? sum-of-the-year’s digits method.
A. The impact of fixed costs on profits is emphasized.
B. Total costs may be overlooked when evaluating profits. 8. Calculating income under variable costing does NOT require knowing
C. Profits are directly influenced by changes in sales volume. A. selling price. C. unit sales.
D. Fixed costs are reported at incurred values, not absorbed values, thus improving control B. unit production. D. unit variable manufacturing costs.
over those costs.
9. Which of the following statements is true for a firm that uses variable costing?
4. A criticism of variable costing for managerial accounting purposes is that it A. Profits fluctuate with sales.
A. overstates inventories. B. An idle facility variation is calculated.
B. does not reflect cost-volume-profit relationships. C. Product costs include variable administrative costs.
C. is not acceptable for product line segmented reporting. D. The cost of a unit of product changes because of changes in number of units
D. might encourage managers to emphasize the short term at the expense of the long manufactured.
term.
5. Under variable costing, 10. The change in period-to-period operating income when using variable costing can be
A. all product costs are fixed. explained by the change in the

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A. Unit sales level multiplied by the unit sales price. B. excess variable overhead costs.
B. Unit sales level multiplied by a constant unit contribution margin. C. variable overhead costs not allocated to units produced.
C. Finished goods inventory level multiplied by the unit sales price. D. fixed manufacturing costs not allocated to units produced.
D. Finished goods inventory level multiplied by a constant unit contribution margin.
16. When a firm prepares financial reports by using absorption costing
Absorption costing A. Profits will always increase with increases in sales.
11. All of the following are names for the product costing method in which both fixed and variable B. Profits will always decrease with decreases in sales.
costs are included in overhead rates, except: C. Decreased output and constant sales result in increased profits.
A. absorption costing C. direct costing D. Profits may decrease with increased sales even if there is no change in selling
B. conventional costing D. full costing prices and costs.

12. Which of the following is not associated with absorption costing? 17. Under absorption costing, if sales remain constant from period 1 to period 2, the company will
A. contribution margin C. gross margin report a larger income in period 2 when
B. functional format D. Period costs A. period 1 production exceeds period 2 production.
B. period 2 production exceeds period 1 production.
13. Under absorption costing, fixed manufacturing overhead could be found in all of the following C. fixed production costs are larger in period 2 than period 1.
except the D. variable production costs are larger in period 2 than period 1.
A. Cost of Goods Sold. C. period costs.
B. finished goods inventory account. D. work-in-process account. Variable & absorption costing
18. A cost that is included as part of product costs under both absorption costing and direct
14. Jansen, Inc. pays bonuses to its managers based on operating income. The company uses costing is:
absorption costing, and overhead is applied on the basis of direct labor hours. To increase A. insurance D. variable marketing expenses.
bonuses, Jansen’s managers may do all of the following except B. managerial staff costs E. variable materials handling labor
A. Produce those products requiring the most direct labor. C. taxes on factory building
B. Defer expenses such as maintenance to a future period.
C. Decrease production of those items requiring the most direct labor. 19. If unit costs remain unchanged and sales volume and sales price per unit both increase from
D. Increase production schedules independent of customer demands. the preceding period when operating profits were earned, operating profits must
A. Increase under the variable costing method.
15. Unabsorbed fixed overhead costs in an absorption costing system are B. Decrease under the variable costing method.
A. costs that cannot be controlled. C. Increase under the absorption costing method.

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D. Decrease under the absorption costing method. production exceeds sales

D. Co. Y would report a higher inventory value than Co. Z for the years in which production
20. When comparing absorption costing with variable costing, which of the following statements is exceeds the normal or practical capacity
not true?
23. Absorption costing and variable costing are two different methods of assigning costs to units
A. When sales volume is more than production volume, variable costing will result in higher
produced. Of the following five cost items listed, identify the one that is not correctly accounted
operating profit.
for as a product cost.
B. Under absorption costing, operating profit is a function of both sales volume and
production volume. Part of Product Cost under
C. Absorption costing enables managers to increase operating profits in the short run by Absorption Cost Variable Cost
increasing inventories. A. Direct labor cost Yes Yes
D. A manager who is evaluated based on variable costing operating profit would be B. Insurance on factory Yes No
tempted to increase production at the end of a period in order to get a more C. Manufacturing supplies Yes Yes
favorable review. D. Packaging and shipping Yes Yes
costs
21. A firm presently has total sales of $100,000. If its sales rise, its 24. A company’s net income recently increased by 30% while its inventory increased to equal a full
A. fixed costs will also rise. year’s sales requirements. Which of the following accounting methods would be most likely to
B. per unit variable costs will rise. produce the favorable income results?
C. net income based on absorption costing will go up more than its net income based on A. Absorption costing. C. Standard direct costing.
variable costing. B. Direct costing. D. Variable costing.
D. net income based on variable costing will go up more than its net income based on
absorption costing. 25. Variable costing and absorption costing will show the same incomes when there are no
A. beginning and ending inventories.
22. Both Company Y and Company Z produce similar products that need negligible distribution B. beginning inventories.
costs. Their assets operation and accounting are very similar in all respects except that C. ending inventories.
Company Y uses direct costing and Company Z uses absorption costing. D. variable costs.
A. Co. Z would report a higher net income than Co. Y for the years in which production
equals sales 26. Absorption costing differs from variable costing in that
B. Co. Y would report a higher inventory value than Co. Z for the years in which production A. absorption costing inventories are more correctly valued.
exceeds sales B. companies using absorption costing have lower fixed costs.
C. Co. Z would report a higher inventory value than Co. Y for the years in which C. standards can be used with absorption costing, but not with variable costing.

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D. production influences income under absorption costing, but not under variable inventories.
costing.
31. If inventory quantities increase during a period,
27. In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and deducted A. Variable costing profits will equal absorption costing profits.
$30,000 of fixed manufacturing overhead. Marvel Co. must be using B. Absorption costing profits will exceed variable costing profits.
A. absorption costing. C. standard costing. C. Variable costing profits will exceed absorption costing profits.
B. direct costing. D. variable costing. D. Variable costing will show a higher inventory value than absorption costing.

28. Other things being equal, net income computed by direct costing method would exceed net 32. A manufacturing company prepares income statements using both absorption- and
income computed by absorption costing method if variable-costing methods. At the end of the period, actual sales revenues, total gross margin,
A. Units sold were to exceed units produced. and total contribution margin approximated budgeted figures, whereas net income was
B. Units produced were to exceed units sold. substantially below the budgeted amount. There were no beginning or ending inventories.
C. Fixed manufacturing costs were to increase. The most likely explanation of the net income shortfall is that, compared to budget, actual
D. Variable manufacturing costs were to increase. A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had increased.
C. Sales price and variable costs had declined proportionately.
D. Sales prices had declined proportionately more than variable costs.
29. Net income is lower under variable costing than under absorption costing when
A. Production equals sales.
B. Production exceeds sales.
C. Production is less than sales. 33. As compared with total absorption costing profit over the entire life of a company, total variable
D. Production increases from the previous period. costing profit will
A. Be less.
30. President X of WXY Corporation requested you to explain the difference of net income B. Be equal.
between the variable costing income statements presentation and the absorption costing C. Be greater.
method. You would say that the difference D. Be substantially greater or less depending upon external factors
A. Is attributable to the variable costs in the inventory.
B. Is attributable to the fixed costs in ending inventory. 34. How will a favorable volume variance affect net income under each of the following methods?
C. Is equal to the fixed costs per unit times the number of units sold. A. B. C. D.
D. Is none if there is no change in the fixed costs in the beginning and ending Absorption Increase Increase Reduce Reduce

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Variable No effect Reduce Increase No effect Factory overhead 7.50 P1.2 million
Selling and administrative 10.00 0.7 million
35. A single-product company prepares income statements using both absorption and variable If the company used variable (direct) costing method, the operating income would be
costing methods. Manufacturing overhead cost applied per unit produced in 2001 was the A. P2,100,000 C. P3,040,000
same as in 2000. The 2001 variable costing statement reported a profit whereas the 2001 B. P2,480,000 D. P4,000,000c.
absorption costing statement reported a loss. The difference in reported income could be
explained by units produced in 2001 being 3. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest market for these
A. Less than units sold in 2001. cookies are as gifts that college students buy for their business teachers. There are 100
B. In excess of units sold in 2001. cookies per box. The following income statement shows the result of the first year of
C. Less than the activity level used for allocating overhead to the product. operations. This statement was the one included in the company’s annual report to the
D. In excess of the activity level used for allocating overhead to the product. stockholders.
Sales (400 boxes at P12.50 a box) P5,000.00
PROBLEMS Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00
Variable costing Gross margin 1,800.00
1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single product in Less: Selling and administrative expenses 800.00
2000, its first year of operations. Variable manufacturing costs were P30 per unit of product. Net income 1,000.00
Planned and actual fixed manufacturing costs were P600,000, and marketing and Variable selling and administrative expenses are P0.90 per box sold. The company produced
administrative costs totaled P400,000 in 2000. MNO sold 120,000 units of product in 2000 at 500 boxes during the year. Variable manufacturing costs are P5.25 per box and fixed
a selling price of P40 per unit. What is the cost of the ending inventory assuming variable manufacturing overhead costs total P1,375 for the year.
costing is used? What is the company’s direct costing net income?
A. P2,250,000 C. P2,640,000 A. P 725 C. P2,265
B. P2,400,000 D. P2,750,000 B. P1,000 D. P2,540
2. LY & Company completed its first year of operations during which time the following
information were generated:
Total units produced 100,000 Absorption costing
Total units sold @ P100 per unit 80,000 4. The total production cost for 20,000 units was P21,000 and the total production cost for
Work in process ending inventory 20,000 making 50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed
Costs Variable Cost per Unit Fixed Costs costs of P4,000 were incurred. The full production cost per unit for making 30,000 units is:
Raw materials P20.00 A. P0.30 C. P0.84
Direct labor 12.50 B. P0.68 D. P0.93

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C. Z Corp. sold all 10,000 units that it produced.

5. West Co.’s 1988 manufacturing costs were as follows: D. From the information given, one cannot tell whether Z Corp.'s financial statements were
Direct materials and direct labor $700,000 prepared based on variable or absorption costing.
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000 8. A company manufactures a single product for its customers by contracting in advance of
Other fixed manufacturing overhead 18,000 production. Thus, the company produces only units that will be sold by the end of each period.
What amount should be considered product cost for external reporting purposes? For the last period, the following data were available:
A. $700,000 C. $880,000 Sales $40,000
B. $800,000 D. $898,000 Direct materials 9,050
Direct labor 6,050
6. Coomber Industries manufactures a single product using standard costing. Variable Rent (9/10 factory, 1/10 office) 3,000
production costs are $13 and fixed production costs are $125,000. Coomber uses a normal Depreciation on factory equipment 2,000
activity of 12,500 units to set its standard costs. Coomber began the year with 1,000 units in Supervision (2/3 factory, 1/3 office) 1,500
inventory, produced 11,000 units, and sold 11,500 units. The standard cost of goods sold Salespeople’s salaries 1,300
under absorption costing would be Insurance (2/3 factory, 1/3 office) 1,200
A. $115,000 C. $253,000 Office supplies 750
B. $149,500 D. $264,500 Advertising 700
Depreciation on office equipment 500
7. Z Corp. incurred the following costs in 2001 (its first year of operations) based on production of Interest on loan 300
10,000 units: The gross profit margin percentage (rounded) was
Direct material $5 per unit A. 34% C. 44%
Direct labor $3 per unit B. 41% D. 46%
Variable product costs $2 per unit
Fixed product costs (in total) $100,000 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
normal activity for these years and the projected relationship for Year 3. All prices and costs
When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at have remained the same for the last 2 years and are expected to do so in Year 3. Income has
$100,000. Based on this information, which of the following statements must be true: been positive in both Year 1 and Year 2.
A. Z Corp. sold 5,000 units. Units Produced Sales Planned Activity
B. Z Corp. had a very profitable year. Year 1 90,000 90,000 100,000

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Year 2 95,000 95,000 100,000 Variable manufacturing costs per unit 2

Year 3 90,000 90,000 100,000
Because Blue Company uses an absorption-costing system, gross margin for year 3 should be Beginning inventory 0 units
A. Equal to Year 1. C. Greater than Year 1. Production 100 units
B. Equal to Year 2. D. Greater than Year 2. Sales 90 units at $40 per unit
Variable and absorption-cost net incomes are:
10. Don Juan Ltd. Manufactures a single product for which the costs and selling prices are: A. $320 variable, $520 absorption C. $520 variable, $320 absorption
Variable production costs P 50 per unit B. $330 variable, $530 absorption D. $530 variable, $330 absorption
Selling price¶ P125 per unit
Fixed production overhead P200,000 per quarter 13. A company had an income of P50,000 using direct costing for a given month. Beginning and
Fixed selling and administrative overhead P80,000 per quarter ending inventories for the month are 13,000 units and 18,000 units, respectively. Ignoring
Normal capacity 20,000 units per quarter income tax, if the fixed overhead application rate was P2 per unit, what was the income using
Production in first quarter was 19,000 units and sales volume was 16,000 units. No opening absorption costing?
inventory for the quarter. A. P40,000 C. P60,000
The absorption costing profit for the quarter was B. P50,000 D. P70,000
A. P920,000 C. P960,000
B. P950,000 D. P970,000 14. GHI Company had P100,000 income using absorption costing. GHI has no variable
manufacturing costs. Beginning inventory was P5,000 and ending inventory was P12,000.
Variable costing & absorption costing What is the income under variable costing?
11. In the ABC Company, sales are P800,000, cost of goods under absorption costing is A. P88,000 C. P100,000.
P600,000, and total operating expenses are P120,000. If cost of goods sold is 70% variable B. P93,000 D. P107,000
and total operating expenses are 60% fixed, what is the contribution margin under variable
costing? 15. Fleet, Inc. manufactured 700 units of Product A, a new product, during the year. Product A’s
A. P260,000. C. P332,000. variable and fixed manufacturing costs per unit were $6.00 and $2.00 respectively. The
B. P308,000. D. P380,000. inventory of Product A on December 31, consisted of 100 units. There was no inventory of
Product A on January 1. What would be the change in the dollar amount of inventory on
12. A company has the following cost data: December 31 if variable costing were used instead of absorption costing?
Fixed manufacturing costs $2,000 A. $0 C. $200 increase.
Fixed selling, general, and administrative costs 1,000 B. $200 decrease. D. $800 decrease.
Variable selling costs per unit sold 1

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Sales in units 5,000

Production in units 8,000
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
absorption costing rather than direct (variable) costing, the result would be a higher pretax Manufacturing costs:
income of Direct labor $3 per unit
A. $0. C. $70,000. Direct material 5 per unit
B. $20,000. D. $90,000. Variable overhead 1 per unit
Fixed overhead $100,000
17. A company manufactures 50,000 units of a product and sells 40,000 units. Total Net income (absorption method) $30,000
manufacturing cost per unit is $50 (variable manufacturing cost, $10; fixed manufacturing cost, Sales price per unit $40
$40). Assuming no beginning inventory, the effect on net income if absorption costing is used
instead of variable costing is that: 19. What would X Co. have reported as its income before income taxes if it had used variable
A. net income is the same C. net income is $400,000 lower costing?
B. net income is $200,000 higher D. net income is $400,000 higher A. ($30,000) C. $30,000
B. ($7,500) D. $67,500
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: 20. What was the total amount of SG&A expense incurred by X Co.?
Variable Cost per Unit Fixed Costs A. $6,000 C. $36,000
Direct materials $15.00 B. $30,000 D. $62,500
Direct labor 10.00
Manufacturing overhead 12.50 $2,200,000 21. Based on variable costing, what would X Co. show as the value of its ending inventory?
Selling and administrative 2.50 1,375,000 A. $24,000 C. $64,500
The difference between operating income calculated on the absorption-costing basis and on B. $27,000 D. $120,000
the variable costing basis is that absorption-costing operating income is
A. $62,500 lesser. C. $220,000 greater. Questions 22 through 25 are based on the following information.
B. $200,000 greater. D. $325,000 greater. 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
Questions 19 through 21 are based on the following information. Sales volume $ 800,000 $1,200,000 $1,600,000
The following information is available for X Co. for its first year of operations: Manufacturing costs:

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Variable $300,000 $450,000 $600,000 23. Reported net income (or loss) for the first 6 months under absorption costing is
Fixed 200,000 200,000 200,000 A. $(40,000) C. $40,000
$500,000 $650,000 $800,000 B. $0 D. $160,000
Selling & other expenses
Variable $200,000 $300,000 $400,000 24. Reported net income (or loss) for the first 6 months under variable costing is
Fixed 160,000 160,000 160,000 A. $(180,000) C. $40,000
$360,000 $460,000 $560,000 B. $0 D. $180,000
Income (or loss) $(60,000) $90000 $240,000

The 200,000 unit budget has been adopted and will be used for allocating fixed manufacturing 25. Assuming that 90,000 units of Product X were sold during the first 6 months and that this is to
costs to units of Product X. At the end of the first 6 months, the following information is available: be used as a basis, the revised budget estimate for the total number of units to be sold during
Units this year is
Production completed 120,000 A. 200,000 C. 360,000
Sales 60,000 B. 240,000 D. None of the above
All fixed costs are budgeted and incurred uniformly throughout the year, and all costs incurred
coincide with the budget. Over- and under-applied fixed manufacturing costs are deferred until Questions 26 through 31 are based on the following information.
year-end. Annual sales have the following seasonal pattern. Valyn Corporation employs an absorption costing system for internal reporting purposes; however,
the company is considering using variable costing. Data regarding Valyn’s planned and actual
Portion of Annual Sales operations for the 1995 calendar year are presented below.
First quarter 10% Planned Activity Actual Activity
Second quarter 20% Beginning finished goods inventory in units 35,000 35,000
Third quarter 30% Sales in units 140,000 125,000
Fourth quarter 40% Production in units 140,000 130,000
The planned per unit cost figures shown in the next schedule were based on the estimated
22. The amount of fixed factory costs applied to product during the first 6 months under absorption production and sale of 140,000 units in 1995. Valyn uses a predetermined manufacturing
costing is overhead rate for applying manufacturing overhead to its product. Thus, a combined
A. Over-applied by $20,000. C. Under-applied by $80,000. manufacturing overhead rate of $9.00 per unit was employed for absorption costing purposes
B. Under-applied by $40,000. D. Equal to the fixed costs incurred. in1995. Any over- or under-applied manufacturing overhead is closed to the cost of goods sold
account at the end of the reporting year.

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Planned Cost Incurred 29. Valyn Corporation’s actual manufacturing contribution margin for 1995 calculated on the
Per Unit Total Costs variable costing basis was
Direct materials $12.00 $1,680,000 $1,560, A. $4,375,000 C. $4,910,000
Direct labor 9.00 1,260,000 1,170,0 B. $4,935,000 D. $5,625,000.
Variable manufacturing overhead 4.00 560,000 520,000
Fixed manufacturing overhead 5.00 700,000 715,000 30. The total variable costs expensed in 1995 by Valyn Corporation on the variable costing basis
Variable selling expenses 8.00 1,120,000 1,000,0 was
Fixed selling expenses 7.00 980,000 980,000 A. $4,325,000 C. $4,500,000
Variable administrative expenses 2.00 280,000 250,000 B. $4,375,000 D. $4,550,000
Fixed administrative expenses 3.00 420,000 425,000 31. The difference between Valyn Corporation’s 1995 operating income calculated on the
Total $50.00 $7,000,000 $6,620, absorption costing basis and calculated on the variable costing basis was
The 1995 beginning finished goods inventory for absorption costing purposes was valued at the A. $25,000 C. $65,000
1994 planned unit manufacturing cost, which was the same as the 1995 planned unit B. $40,000 D. $90,000
manufacturing cost. There are no work-in-process inventories at either the beginning or the end of Questions 32 through 37 are based on the following information.
the year. The planned and actual unit selling price for 1995 was $70.00 per unit. Louder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $150,000. Louder uses a normal activity of 10,000 units to set its standard
26. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the costs. Louder began the year with no inventory, produced 11,000 units, and sold 10,500 units.
absorption costing bases was
A. $900,000 C. $1,220,000 32. Ending inventory under variable costing would be
B. $1,200,000 D. $1,350,000 A. $10,000 C. $17,500
B. $15,000 D. $20,000
27. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the variable
costing basis was 33. Ending inventory under absorption costing would be
A. $750,000 C. $1,125,000. A. $10,000 C. $17,500
B. $1,000,000. D. $1,400,000. D. $20,000 B. $15,000

28. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption costing bases were 34. The volume variance under variable costing would be
A. $2,030,000 C. $2,095,000 A. $0 C. $15,000
B. $2,055,000 D. $2,120,000 B. $10,000 D. Some other number.

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35. The volume variance under absorption costing would be ANSWER KEY
A. $0 C. $15,000 Theory Problem
B. $10,000 D. Some other number. 1. A 21. D 1. B 21. B
2. C 22. C 2. A 22. A
36. The standard cost of goods sold under variable costing would be 3. B 23. D 3. A 23. C
A. $200,000 C. $367,500 4. D 24. A 4. D 24. B
B. $210,000 D. Some other number. 5. C 25. A 5. D 25. D
6. D 26. D 6. D 26. B
37. The standard cost of goods sold under absorption costing would be
7. C 27. A 7. A 27. B
A. $200,000 C. $367,500
8. B 28. A 8. D 28. C
B. $210,000 D. Some other number.
9. A 29. B 9. A 29. D
10. B 30. D 10. B 30. B
When the going gets tough, the tough gets going. 11. C 31. B 11. C 31. A
12. A 32. B 12. B 32. A
13. C 33. B 13. C 33. C
14. C 34. A 14. B 34. A
15. D 35. A 15. B 35. C
16. D 16. B 36. B
17. B 17. D 37. C
18. E 18. B
19. A 19. B
20. D 20. D

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