ABSORPTION AND VARIABLE COSTING
1. Peggy's Pillows produces and sells a decorative pillow for $75.00 per unit. In the
first month of operation, 2,000 units were produced and 1,750 units were sold.
Actual fixed costs are the same as the amount budgeted for the month. Other
information for the month includes:
Variable manufacturing costs $20.00 per unit
Variable marketing costs $3.00 per unit
Fixed manufacturing costs $7.00 per unit
Administrative expenses, all fixed $15.00 per unit
Ending inventories:
Direct materials 0
WIP 0
Finished goods 250 units
What is cost of goods sold per unit using variable costing?
a. $20
b. $23
c. $30
d. $45
2. Heston Company has the following information for the current year:
Beginning fixed manufacturing overhead in inventory $190,000
Fixed manufacturing overhead in production 750,000
Ending fixed manufacturing overhead in inventory 50,000
Beginning variable manufacturing overhead in inventory $20,000
Variable manufacturing overhead in production 100,000
Ending variable manufacturing overhead in inventory 30,000
What is the difference between operating incomes under absorption costing and
variable costing?
A) $140,000 [Beg, fixed OH inv- Ending fixed OH inv] 190,000-50,000
B) $100,000
C) $80,000
D) $10,000
3. The only difference between variable and absorption costing is the expensing of:
a. direct manufacturing costs
b. variable marketing costs
c. fixed manufacturing costs
d. Both a and c are correct.
4. Stiller Corporation incurred fixed manufacturing costs of $12,000 during 2011.
Other information for 2011 includes:
The budgeted denominator level is 2,000 units.
Units produced total 1,500 units.
Units sold total 1,200 units.
Beginning inventory was zero.
The company uses absorption costing and the fixed manufacturing cost rate is
based on the budgeted denominator level. Manufacturing variances are closed to
cost of goods sold. The production-volume variance is:
A) $7,200 [12,000/2,000 units = 6] 1,200*6
B) $9,600
C) $12,000
D) 0
5. Which of the following inventory costing methods shown below is required by
GAAP (Generally Accepted Accounting Principles) for external financial
reporting?
A) absorption costing
B) variable costing
C) throughput costing
D) direct costing
6. Variable costing
A) expenses administrative costs as cost of goods sold
B) treats direct manufacturing costs as a product cost
C) includes fixed manufacturing overhead as an inventoriable cost
D) is required for external reporting to shareholders
7. Absorption costing is required for all of the following EXCEPT:
A) generally accepted accounting principles
B) determining a competitive selling price
C) external reporting to shareholders
D) income tax reporting
8. The contribution-margin format of the income statement:
A) is used with absorption costing
B) calculate gross margin
C) distinguishes between manufacturing and nonmanufacturing costs
D) is used with variable costing
9. Kory's Auto produces and sells an auto part for $60.00 per unit. In 2011,
100,000 parts were produced and 75,000 units were sold. Other information for the
year includes:
Direct materials $24.00 per unit
Direct manufacturing labor $4.50 per unit
Variable manufacturing costs $1.50 per unit
Sales commissions $6.00 per part
Fixed manufacturing costs $750,000 per year
Administrative expenses, all fixed $270,000 per year
What is the inventoriable cost per unit using variable costing? $30.00
[DM + Direct manufacturing labor + Variable manufacturing cost]
What is the inventoriable cost per unit using absorption costing? $37.50
[DM + Direct manufacturing labor + Variable manufacturing cost + ( Fixed
manufacturing costs / parts produced]
10. Jarvis Golf Company sells a special putter for $20 each. In March, it sold
28,000 putters while manufacturing 30,000. There was no beginning inventory on
March 1. Production information for March was:
Direct Manufacturing labor per unit: 15 minutes
Fixed selling and administrative costs: $40,000
Fixed manufacturing overhead: 132,000
Direct materials cost per unit: 2
Direct manufacturing labor per hour: 24
Variable manufacturing overhead per unit: 4
Variable selling expenses per unit: 2
Compute the cost per unit under absorption costing
[$6.00 + 2.00 + 4.00 + 4.40 = $16.40]
11. Compute the cost per unit under variable costing
[$6.00 + 2.00 + 4.00 + 0 = $12.00]
12. Compute the ending inventories under absorption costing
[$0 + $492,000 – $459,200 = $32,800]
13. Compute the ending inventories under variable costing
[$0 + $3600,000 - $336,000 = $24,000]
14. Compute operating income under absorption costing
[$560,000 – 459,200 – 96,000 = $4,800]
15. Compute operating income under variable costing
[$560,000 – 392,000 – 172,000 = $ (4,000)] {minus sign “-“ lang pwede sa
Canvas}
16. Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into
200 equal size lots. As the lots are sold, they are cleared at an average cost of
$5,000. Storm drains and driveways are installed at an average cost of $8,000 per
site. Sales commissions are 10% of selling price. Administrative costs are
$850,000 per year. The average selling price was $160,000 per lot during 20X5
when 50 lots were sold.
During 20X6, the company bought another 2,000-acre island and developed it
exactly the same way. Lot sales in 20X6 totaled 300 with an average selling price
of $160,000. All costs were the same as in 20X5
What is the operating income for 20X5 under absorption costing? $3,200,000
17. What is the operating income for 20X6 under absorption costing? $23,450,000
18. What is the operating income for 20X5 under variable costing? $ (4,300,000)
19. What is the operating income for 20X6 under variable costing? $28,450,000
