.

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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 3 Level: Medium

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 AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 1 Level: Easy 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 AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Medium 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 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 1 Level: Easy 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 =