Managerial Accounting Review

Variable and Absorption Costing

1. Which of the following statements is true for a firm that uses variable costing?
a. The cost of a unit of product changes because of changes in number of units manufactured.
b. Profits fluctuate with sales.
c. An idle facility variation is calculated.
d. Product costs include variable administrative costs.

2. When a firm prepares financial reports by using absorption costing,

a. profits will always increase with increases in sales.
b. Profits will always decrease with decreases in sales.
c. Profits may decrease with increased sales even if there is no change in selling prices and costs.
d. Decreased output and constant sales result in increased profits.

3. Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs,
both variable and fixed, as inventoriable costs?
a. Direct costing.
b. Variable costing
c. Absorption costing.
d. Conversion costing.

4. Which one of the following statements is correct regarding absorption costing and variable costing?
a. Overhead costs are treated in the same manner under both costing methods.
b. If finished goods inventory increases, absorption costing results in higher income.
c. Variable in a manufacturing costs are lower under variable costing.
d. Gross margins are the same under both costing methods.

5. The costing method that is properly classified for both external and internal reporting purposes is
External Internal
Reporting Reporting
a. Activity-based costing No Yes
b. Job-order costing No Yes
c. Variable costing No Yes
d. Process costing No No

6. Absorption costing and variable costing are two different methods of assigning costs to units produced of the
cost item listed below, identify the one that not correctly accounted for as a product cost.
Part of Product
Cost under
Absorption Variable
Cost Cost
a. Manufacturing supplies Yes Yes
b. Insurance on factory Yes No
c. Direct labor cost Yes Yes
d. Packaging and
shipping costs Yes Yes

7. Jansen, Inc. pays Bonuses to its managers based on operating income. The company uses absorption
costing, and overhead is applied on the basis of direct labor hours. To increase bonuses, Jansen's managers
may do all of the following except
a. Produce those products requiring the most direct labor.
b. Defer expenses such as maintenance to a future period.
c. Increase production schedules independent of customer demands.
d. Decrease production of those items requiring the most direct labor.

Questions 8 and 9 are based on the following information. A manufacturer at the end of its fiscal year recorded the
data below:
Prime cost P800,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000

8. If the manufacturer uses variable costing, the inventoriable costs for the fiscal year are
a. P800,000
b. P900,000
c. P980,000
d. P1,060,000

9. Using absorption (full) costing, inventoriable costs are

a. P800,000
 b. P900,000
c. P1,060,000
d. P1,080,000

Questions 10 and 11 are based on the following information. Osawa, Inc. planned and actually manufactured 200,000
units of its single product, its first year of operations. Variable manufacturing costs were P30 per unit of product. Planned
and actual fixed manufacturing costs were P600,000, and selling and administrative costs totaled P400,000. Osawa
sold 120,000 units of product at a selling price of P40 per unit.

10. Osawa’s operating income using absorption (full) costing is

a. P200,000
b. P440,000
c. P600,000
d. P840,000

11. Osawa’s operating income for the year using variable costing is
a. P200,000
b. P440,000
c. P800,000
d. P600,000

Questions 12 and 13 are based on the following information. The following is taken from Valenz Company's records for
the current fiscal year ended November 30:

Direct materials used - P300,000

Direct Labor 100,000
Variable factory overhead 50,000
Fixed factory overhead 80,000
Selling and admin. costs-variable 40,000
Selling and admin. costs -fixed 20,000

12. If Valenz Company uses variable costing, the inventoriable costs for the fiscal year are
a. P400,000
b. P450,000
c. P490,000
d. P530,000

13. Using absorption (full) costing, inventoriable costs are

a. P400,000
b. P450,000
c. P530,000
d. P590,000

Questions 14 through 20 are based on the following information. 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 operations for .the calendar year are presented below.
Planned Actual
Activity Activity
Beginning finished goods
Inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000

The planned per-unit cost figures shown in the next schedule were based on the estimated production and sale of
140,000 units for the year. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing
overhead to its product; thus, a combined manufacturing overhead rate of P9.00 per unit was employed for absorption
costing purposes. Any over- or underapplied manufacturing overhead is closed to the cost of goods sold account at the
end of the reporting year.

Planned Cost Incurred

Per unit Total Costs
Direct materials P12.00 P1,680,000 P1,560,000
Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing
Overhead 4.00 560,000 520,000
Fixed manufacturing
Overhead 5.00 700,000 715,000
variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expensive 7.00 980,000 980,000
Variable administrative
Expenses 2.00 280,000 250,000
Fixed administrative
Expenses 3.00 420,000 425,000
Total P50.00 P7,000,000 P6,620,000
The beginning finished goods inventory for absorption costing purposes was valued at the previous year's planned unit
manufacturing cost, which was the same as the current planned unit manufacturing cost- There are no work-in-process
inventories at either the beginning or the end of the year. The planned and actual unit selling price was P70.00 per unit.

14. The value of Valyn Corporation’s actual ending finished goods inventory on the absorption costing basis was
a. P 900,000
b. P 1,200,000
c. P1,220,000
d. P1,350,000

15. The value of Valyn Corporation’s actual ending finished goods inventory on the variable costing basis was
a. P1,400,000
b. P1,125,000
c. P1,000,000
d. P 750,000

16. Valyn Corporation's absorption costing operating income was

a. Higher than variable costing operating income because actual production exceeded actual sales.
b. Lower than variable costing operating income because actual production exceeded actual sales.
c. Lower than variable costing operating income because actual production was less than planned
production.
d. Lower than variable costing operating income because actual sales were less than planned sales.

17. Valyn Corporation's total fixed costs expensed this year on the absorption costing basis were
a. P2,095,000
b. P2,120,000
c. P2,055,000
d. P2,030,000

18. Refer to the information preceding question 14. Valyn Corporation's actual manufacturing contribution
margin for the year calculated on the variable costing basis was
a. P4,375,000
b. P4,935,000
c. P4,910,000
d. P5,625,000

19. Refer to the information preceding question 14. The total variable cost expensed currently by Valyn
Corporation on the variable costing basis was
a. P4,375,000
b. P4,500,000
c. P4,325,000
d. P4,550,000

20. Refer to the information preceding question 14. The difference between Valyn Corporation’s operating
income calculated on the absorption costing basis and calculated on the variable costing basis was
a. P65,000
b. P25,000
c. P40,000
d. P90,000

A. Joint Product and By Products

21. The principal disadvantage of using the physical quantity method of allocating joint costs is that
a. Costs assigned to inventories may have no relationship to value.
b. Physical quantities may be difficult to measure.
c. Additional processing costs affect the allocation base.
d. Joint costs, by definition, should not be separated on a unit basis.

22. Lankip Company produces two main products and by-product out of a joint process. The ratio of
output quantities to input quantities of direct material used in the joint process remains
consistent from month to month. Lankip has employed the physical- volume method to allocate
joint production costs to the two main products. The net realizable value of the by-product is used
to reduce the joint production costs before the joint costs are allocated to the main products.
Data regarding Lankip's operations for the en rent month are presented in the chart below. During
the month, Lankip incurred joint production costs of $2,520,000. The main products are not
marketable at the split-off point and, thus, have to be processed further.

First Second
 Main Main
Product Product By-product
Monthly output in pounds 90,000 150,000 60,000
Selling price per pound $30 $14 $2
Separable process costs $540,000 $660,000

The amount of joint production cost that Lankip would allocate to the Second Main Product by
using the physical-volume method to allocate joint production costs would be
a. $1,200,000
b. $1,260,000
c. $1,500,000
d. $1,575,000

Questions 23 through 25 are based on the following information. Travis Petroleum is a small company
that acquires crude oil and manufactures it into three intermediate products, differing only in grade.
The products are Grade One, Grade Two and Grade Three. No beginning inventories of finished goods
or work-in-process existed on November 1. The production costs for November were as follows
(assume separable costs were negligible):

Crude oil acquired and put into production $4,000,000

Direct labor and related costs 2,000,000
Factory overhead 3,000,000

Output and sales for November were as follows:

Grade One Grade Two Grade Three

Barrels produced 300,000 240,000 120,000
Barrels sold 80,000 120,000 120,000
Prices per barrel sold $30 $40 $50

23. The portion of the joint production costs assigned to Grade Two based upon physical output is
(rounded to the nearest thousand dollars)
a. $3,273,000
b. $3,375,000
c. $1,636,000
d. $3,512,000

24. The portion of the joint production costs assigned to Grade One based upon the relative sales
values of output is (rounded to the nearest thousand dollars)
a. $3,512,000
b. $3,293,000
c. $1,636,000
d. $4,091,000

25. Based on the relative sales values of output, cost of the ending inventory of Grade Two is
a. $3,512,000
b. $1,756,000
c. $1,636,000
d. $3,376,000

Your word is the lamp to guide my feet. It is the light to my path. Psalms 119:105