Exam Questions Absorption Versus Variable Costing Chapter 12

CHAPTER 12

ABSORPTION VERSUS VARIABLE COSTING

CHAPTER LEARNING OBJECTIVES

Describe how fixed manufacturing overhead is treated in traditional “absorption” costing.
Outline the key benefits of using variable costing for internal decision-making purposes.
Compare financial statement outcomes from the two methods.
Discuss the impacts of selecting different “denominator volume’ levels for the application of manufacturing overhead.

Current count is:
Knowledge: 31
Comprehension: 27
Application: 65
Analysis: 8
Evaluation: 0
Synthesis: 0
Total: 131

Number and percentage of questions:

Easy: 36

Medium: 82
Hard: 13

Question types:
Multiple Choice: 104

Short Answer: 6

Brief Exercises: 11

Exercises: 8

Problems: 2

MULTIPLE-CHOICE QUESTIONS

A disadvantage of absorption costing is

a. that it is not useful in management’s decision-making process.

b. that it might encourage inventory buildup when there is no demand.

c. both answers are correct.

d. none of the answers are correct.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All the following are included as costs of inventory under absorption costing except

a. direct labor.

b. direct material.

c. fixed operating.

d. fixed manufacturing overhead.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When computing product costs, direct materials, direct labor, and all manufacturing overhead (fixed and variable) are used with

a. product costing.

b. full costing.

c. variable costing.

d. absorption costing.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

All the following are true for absorption costing, except

a. is used for GAAP reporting purposes.

b. is used for external reporting purposes only.

c. is also known as standard costing.

d. treats fixed manufacturing overhead as a period cost.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Operating income, using absorption costing, is gross profit less

a. cost of goods sold.

b. fixed manufacturing overhead and fixed operating expenses.

c. fixed and variable operating expenses.

d. fixed and variable manufacturing overhead.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Income statements, using absorption costing, are sometimes difficult to interpret because they

a. omit variable expenses when computing operating income.

b. shift portions of fixed manufacturing overhead between periods according to changing levels of inventory.

c. include all fixed manufacturing overhead in the calculation of operating income.

d. ignore inventory levels when determining cost of goods sold.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The formula for budgeted fixed manufacturing overhead rate is

a. budgeted usage of cost driver divided by total budgeted fixed MOH.

b. total budgeted fixed MOH divided by budgeted usage of cost driver.

c. budgeted usage of cost driver times total budgeted fixed MOH.

d. total budgeted fixed MOH times budgeted usage of cost driver.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Determining the numerator and denominator when calculating the budgeted fixed-MOH rate

a. can vary for each company and each department and will have no impact on the financial statements.

b. can vary between departments and will impact the financial statements.

c. will not matter, and departments can choose whichever method will increase operating income.

d. will not vary, and all companies and departments will use the same cost drivers.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The formula for applied fixed MOH is

a. budgeted fixed MOH rate times the actual units produced.

b. budgeted fixed MOH rate divided by the actual units produced.

c. the actual units produced divided by the budgeted fixed MOH.

d. budgeted fixed MOH rate times the budgeted units produced.

Ans: A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The fixed MOH volume variance measures

a. the difference between the budgeted fixed MOH cost and what was spent on fixed MOH.

b. the difference between what a company spends versus what a company planned to spend.

c. the actual usage of capacity compared to the planned usage of capacity.

d. the amount of fixed MOH incurred versus the budgeted fixed MOH.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The formula for fixed MOH volume variance is

a. budgeted fixed MOH costs less actual fixed MOH.

b. budgeted fixed MOH costs less applied fixed MOH.

c. units budgeted less actual units produced times budgeted MOH rate.

d. actual units produced less actual units sold times budgeted fixed MOH rate.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which fixed MOH variances help explain the under or overapplied fixed MOH that results in a difference in the fixed MOH Control account?

a. Fixed MOH price variance.

b. Fixed MOH volume variance.

c. Both the Fixed MOH price variance and Fixed MOH volume variance.

d. Only the total Fixed MOH variance.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Conform AI planned to produce 6,000 units but only produced 5,300 for the current year. They had a beginning inventory of 300 units with variable manufacturing cost of $11 per unit. Budgeted fixed MOH for the year was $72,000 with actual costs incurred of $66,000. What will Conform AI report as total overhead variance for the current year?

a. $2,400 F.

b. $2,400 U.

c. $6,000 F.

d. $6,000 U.

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $72,000 ÷ 6,000 = $12 per unit.

5,300 x $12 = $63,600

$66,000 - $63,600 = $2,400 U

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Actual FMOH – applied FMOH = variance

Conform AI planned to produce 6,000 units but only produced 5,300 for the current year. They had a beginning inventory of 300 units with variable manufacturing cost of $11 per unit. Budgeted fixed MOH for the year was $72,000 with actual costs incurred of $66,000. What will Conform AI report as the fixed MOH price variance for the current year?

a. $2,400 F.

b. $2,400 U.

c. $6,000 F.

d. $6,000 U.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $72,000 -$66,000 = $6,000

Budgeted FMOH – incurred FMOH = variance

Conform AI planned to produce 6,000 units but only produced 5,300 for the current year. They had a beginning inventory of 300 units with variable manufacturing cost of $11 per unit. Budgeted fixed MOH for the year was $72,000 with actual costs incurred of $66,000. What will Conform AI report as fixed MOH volume variance for the current year?

a. $2,400 F.

b. $2,400 U.

c. $8,400 F.

d. $8,400 U.

Ans: D, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $72,000 ÷ 6,000 = $12 per unit.

5,300 x $12 = $63,600

$72,000 - $63,600 = $8,400 U

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations:

Units produced 20,000

Direct labor $240,000

Direct material 180,000

Variable manufacturing overhead 280,000

Fixed manufacturing overhead 100,000

Variable operating expenses 130,000

Fixed operating expenses 50,000

If the company has ending inventory of 1,600 units for the month, how much inventory would be reported on the balance sheet using absorption costing?

a. $64,000.

b. $56,000.

c. $66,400.

d. $78,400.

Ans: A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($240,000 + $180,000 + $280,000 + $100,000) ÷ 20,000 = $40 per unit

$40 x 1,600 = $64,000

(DL + DM + V manufacturing costs + F manufacturing costs) ÷ unit produced = manufacturing cost per unit

Manufacturing cost per unit x end inventory units

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the Fixed MOH volume variance for year 1.

a. $15,000 F.

b. $15,000 U.

c. $13,500 F.

d. $13,500 U.

Ans: D, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.

23,500 x $9 = $211,500

$225,000 - $211,500 = $13,500 U

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the adjusted COGS for year 1.

a. $286,000.

b. $418,000.

c. $431,500.

d. $484,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.

23,500 x $9 = $211,500

$225,000 - $211,500 = $13,500 U

($10 + $9) x 22,000 + $13,500 = $431,500

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold + variance

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the gross margin for year 1.

a. $220,000.

b. $268,000.

c. $272,500.

d. $418,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.

23,500 x $9 = $211,500

$225,000 - $211,500 = $13,500 U

($10 + $9) x 22,000 + $13,500 = $431,500

($32 x 22,000) - $431,500 = $272,500

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold + variance= adj COGS

(Selling price per unit x units sold) – adj COGS = GM

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the operating income for year 1.

a. ($56,000).

b. ($3,500).

c. $10,000.

d. $142,000.

Ans: B, LO 1, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.

23,500 x $9 = $211,500

$225,000 - $211,500 = $13,500 U

($10 + $9) x 22,000 + $13,500 = $431,500

($32 x 22,000) - $431,500 = $272,500

$272,500 - $210,000 – ($3 x 22,000) = ($3,500)

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold + variance= adj COGS

(Selling price per unit x units sold) – adj COGS = GM

GM – F operating ex – (V operating ex per unit x units sold) = Op income

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the Fixed MOH volume variance for year 2.

a. $13,500 F.

b. $13,500 U.

c. $18,000 F.

d. $18,000 U.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.

27,000 x $9 = $243,000

$225,000 - $243,000 = $18,000 F

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold + variance

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the adjusted COGS for year 2.

a. $351,000.

b. $495,000.

c. $513,000.

d. $594,000.

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.27,000 x $9 = $243,000

$225,000 - $243,000 = $18,000 F

($10 + $9) x 27,000 - $18,000 = $495,000

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold – variance

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the gross margin for year 2.

a. $209,000.

b. $270,000.

c. $351,000.

d. $360,000.

Ans: A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $225,000 ÷ 25,000 = $9 per unit.

27,000 x $9 = $243,000

$225,000 - $243,000 = $18,000 F

($10 + $9) x 27,000 - $18,000 = $495,000

($32 x 22,000) - $495,000 = $209,000

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold + variance= adj COGS

(Selling price per unit x units sold) – adj COGS = GM

Crystal, the owner of Crystal Clean, is planning for the next year. She uses the absorption method to determine the evaluation of employees and how much to increase their hourly wage. She has budgeted the following information:

Variable operating expenses $3 per unit

Fixed operating expenses $210,000

Variable manufacturing cost $10 per unit

Fixed manufacturing cost $225,000

Units to be produced 25,000 units

Unit selling price $32 per unit

Year 1 Year 2

Beginning inventory (units) 0 1,500

Actual production (units) 23,500 26,000

Sales volume (units) 22,000 27,000

There were no price or efficiency variances for either year. Crystal writes off any fixed MOH volume variance directly to COGS. Calculate the operating income for year 2.

a. ($67,000).

b. $(21,000).

c. $60,000.

d. $69,000.

Ans: A, LO 1, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $$225,000 ÷ 25,000 = $9 per unit.

27,000 x $9 = $243,000

$225,000 - $243,000 = $18,000 F

($10 + $9) x 27,000 - $18,000 = $495,000

($32 x 22,000) - $495,000 = $209,000

$209,000 - $210,000 – ($3 x 22,000) = $(67,000)

Budgeted FMOH ÷ units produced = FMOH per unit

Actual units produced x FMOH = applied FMOH

Budgeted FMOH – applied FMOH = variance

(V Manufacturing costs per unit + F manufacturing cost per unit) x units sold + variance= adj COGS

(Selling price per unit x units sold) – adj COGS = GM

GM – F operating ex – (V operating ex per unit x units sold) = Op income

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, how much is the per unit product cost?

a. $40.

b. $43.

c. $47.

d. $50.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $840,000 ÷ 120,000 = $7 per unit.

$25 + $10 + $5 + $7 = $47 per unit.

FMOH ÷ units produced = FMOH per unit

DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as cost of goods sold?

a. $4,200,000.

b. $4,800,000.

c. $4,935,000.

d. $5,640,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $840,000 ÷ 120,000 = $7 per unit.

$25 + $10 + $5 + $7 = $47 per unit.

$47 x 105,000 = $4,935,000

FMOH ÷ units produced = FMOH per unit

DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit

Abs cost per unit x units sold = COGS

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as the ending inventory value?

a. $600,000.

b. $645,000.

c. $705,000.

d. $750,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $840,000 ÷ 120,000 = $7 per unit.

$25 + $10 + $5 + $7 = $47 per unit.

$47 x (120,000 – 105,000) = $705,000

FMOH ÷ units produced = FMOH per unit

DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit

Abs cost per unit x (units produced - units sold) = end inventory

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as gross margin?

a. $2,760,000.

b. $3,465,000.

c. $3,600,000.

d. $3,885,000.

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $840,000 ÷ 120,000 = $7 per unit.

$25 + $10 + $5 + $7 = $47 per unit.

$47 x 105,000 = $4,935,000

105,000 x $80 = $8,400,000

$8,400,000 - $4,935,000 = $3,465,000

FMOH ÷ units produced = FMOH per unit

DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit

Abs cost per unit x units sold = COGS

Units sold x selling price per unit = total sales

Total sales – COGS = GM

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses absorption costing, what will be reported as operating income?

a. $2,370,000.

b. $2,685,000.

c. $2,970,000.

d. $3,075,000.

Ans: D, LO 1, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $840,000 ÷ 120,000 = $7 per unit.

$25 + $10 + $5 + $7 = $47 per unit.

$47 x 105,000 = $4,935,000

105,000 x $80 = $8,400,000

$8,400,000 - $4,935,000 = $3,465,000

$3,465,000 - $75,000 – (105,000 x $3) = $3,075,000

FMOH ÷ units produced = FMOH per unit

DM per unit + DL per unit + VMOH per unit + FMOH per unit = Abs cost per unit

Abs cost per unit x units sold = COGS

Units sold x selling price per unit = total sales

Total sales – COGS = GM

GM – F op expenses – (V op exp per unit x units sold) = op income

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using absorption costing, how much will the per unit product cost be?

a. $42.

b. $52.

c. $54.

d. $81.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $22 + $15 + $5 + $12 = $54 per unit.

DL per unit + DM per unit + VMOH per unit + FMOH per unit

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using absorption costing, what will Hawks record as total cost of goods sold, assuming no variances were reported?

a. $1,512,000.

b. $1,872,000.

c. $1,944,000.

d. $2,916,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 0 + 40,000 – 4,000 = 36,000 units

$22 + $15 + $5 + $12 = $54 per unit.

36,000 x $54 = $1,944,000

Beg inv + units produced – end inv = units sold

DL per unit + Dm per unit + VMOH per unit + FMOH per unit = absorption product cost per unit

Units sold x absorption product cost per unit

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using absorption costing, what will Hawks record as gross margin if the units were sold for $95 each and assuming no variances were reported?

a. $504,000.

b. $1,476,000.

c. $1,548,000.

d. $1,908,000.

Ans: B, LO 1, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 0 + 40,000 – 4,000 = 36,000 units

$22 + $15 + $5 + $12 = $54 per unit.

36,000 x $54 = $1,944,000

36,000 x $95 = $3,420,000

$3,420,000 - $1,944,000 = $1,476,000

Beg inv + units produced – end inv = units sold

DL per unit + Dm per unit + VMOH per unit + FMOH per unit = absorption product cost per unit

Units sold x absorption product cost per unit = COGS

Units sold x selling price per unit = sales

Sales – COGS = GM

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $80,000

Using absorption costing, what will Hawks record as operating income if the units were sold for $95 each and assuming no variances were reported?

a. $556,000.

b. $988,000.

c. $1,036,000.

d. $1,108,000.

Ans: C, LO 1, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 0 + 40,000 – 4,000 = 36,000 units

$22 + $15 + $5 + $12 = $54 per unit.

36,000 x $54 = $1,944,000

36,000 x $95 = $3,420,000

$3,420,000 - $1,944,000 = $1,476,000

($10 x 36,000) + $80,000 = $440,000

$1,476,000 - $440,000 = $1,036,000

Beg inv + units produced – end inv = units sold

DL per unit + Dm per unit + VMOH per unit + FMOH per unit = absorption product cost per unit

Units sold x absorption product cost per unit = COGS

Units sold x selling price per unit = sales

Sales – COGS = GM

(Var op exp per unit x units sold) + Fixed op exp = total op exp

GM - total op exp

When computing product costs, direct materials, direct labor, and only variable manufacturing overhead are used with

a. product costing.

b. full costing.

c. variable costing.

d. absorption costing.

Ans: C, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Fixed manufacturing overhead costs are recognized as period costs when incurred using

a. product costing.

b. full costing.

c. variable costing.

d. absorption costing.

Ans: C, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following costs are charged to the product when using variable costing?

a. variable manufacturing overhead.

b. fixed manufacturing overhead.

c. variable operating costs.

d. fixed operating costs.

Ans: A, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

If unit sales are constant, everything else remains the same, but units produced fluctuate, operating income under variable costing will

a. fluctuate in direct proportion to changes in production.

b. remain constant.

c. fluctuate inversely with changes in production.

d. generate a higher operating income than absorption costing.

Ans: B, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Operating income, using variable costing, is contribution margin less

a. cost of goods sold.

b. fixed manufacturing overhead and fixed operating expenses.

c. fixed and variable operating expenses.

d. fixed and variable manufacturing overhead.

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Variable costing

a. is used for GAAP reporting purposes.

b. is used for external reporting purposes only.

c. is also known as standard costing.

d. treats fixed manufacturing overhead as a period cost.

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

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

a. property taxes on the factory building.

b. sales manager’s salary.

c. rent on the administration building.

d. indirect labor.

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following terms is used to describe the cost of the product being manufactured and is composed of direct materials, direct labor, and variable manufacturing overhead?

a. absorption costing.

b. standard costing.

c. variable costing.

d. traditional costing.

Ans: C, LO 2, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

On an income statement prepared using variable costing, to calculate contribution margin, a company will subtract what from sales?

a. variable manufacturing costs.

b. variable cost of goods sold.

c. cost of goods sold.

d. variable manufacturing and operating costs.

Ans: D, LO 2, Bloom: K, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management.

On an income statement prepared using variable costing, variable operating expenses are deducted from ____________ to get ________________.

a. sales, contribution margin.

b. contribution margin, operating income.

c. cost of goods sold, contribution margin.

d. sales, gross margin.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, how much is the per unit product cost?

a. $40.

b. $43.

c. $47.

d. $50.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $25 + $10 + $5 = $40

DM per unit + DL per unit + VMOH per unit = variance cost per unit

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as cost of goods sold?

a. $4,200,000.

b. $4,800,000.

c. $4,935,000.

d. $5,640,000.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $25 + $10 + $5 = $40 per unit.

$40 x 105,000 = $4,200,000

DM per unit + DL per unit + VMOH per unit = variance cost per unit

Var cost per unit x units sold = COGS

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as the ending inventory value?

a. $600,000.

b. $645,000.

c. $705,000.

d. $750,000.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $25 + $10 + $5 = $40 per unit.

$40 x (120,000 – 105,000) = $600,000

DM per unit + DL per unit + VMOH per unit = variance cost per unit

Var cost per unit x (units produced - units sold) = end inventory

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as contribution margin?

a. $2,760,000.

b. $3,465,000.

c. $3,600,000.

d. $3,885,000.

Ans: D, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $25 + $10 + $5 = $40 per unit.

$40 x 105,000 = $4,200,000

105,000 x $80 = $8,400,000

$8,400,000 - $4,200,000 – ($3 x 105,000) = $3,885,000

DM per unit + DL per unit + VMOH per unit = variance cost per unit

Var cost per unit x units sold = COGS

Units sold x selling price per unit = total sales

Total sales – COGS – (V op exp per unit x units sold) = CM

BioClinic sells its product for $80 per unit. During 2025, it produced 120,000 units and sold 105,000 units. Costs per unit are: direct materials $25, direct labor $10, variable overhead $5, and variable operating expenses $3. Fixed costs are $840,000 manufacturing overhead, and $75,000 operating expenses. Assuming no variances were reported, no beginning inventory and the company uses variable costing, what will be reported as operating income?

a. $2,370,000.

b. $2,685,000.

c. $2,970,000.

d. $3,075,000.

Ans: C, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $25 + $10 + $5 = $40 per unit.

$40 x 105,000 = $4,200,000

105,000 x $80 = $8,400,000

$8,400,000 - $4,200,000 – ($3 x 105,000) = $3,885,000

$3,885,000 - $840,000 - $75,000 = $2,970,000

DM per unit + DL per unit + VMOH per unit = variance cost per unit

Var cost per unit x units sold = COGS

Units sold x selling price per unit = total sales

Total sales – COGS – (V op exp per unit x units sold) = CM

CM – FMOH - F op expenses = op income

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using variable costing, how much will the per unit product cost be?

a. $42.

b. $52.

c. $54.

d. $81.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $22 + $15 + $5 = $42 per unit.

DL per unit + Dm per unit + VMOH per unit

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using variable costing, what will Hawks record as total cost of goods sold, assuming no variances were reported?

a. $1,512,000.

b. $1,872,000.

c. $1,944,000.

d. $2,916,000.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 0 + 40,000 – 4,000 = 36,000 units

$22 + $15 + $5 = $42 per unit.

36,000 x $42 = $1,512,000

Beg inv + units produced – end inv = units sold

DL per unit + Dm per unit + VMOH per unit = variable product cost per unit

Units sold x variable product cost per unit

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using variable costing, what will Hawks record as contribution margin if the units were sold for $95 each and assuming no variances were reported?

a. $504,000.

b. $1,476,000.

c. $1,548,000.

d. $1,908,000.

Ans: C, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 0 + 40,000 – 4,000 = 36,000 units

$22 + $15 + $5 = $42 per unit.

36,000 x $42 = $1,548,000

36,000 x $95 = $3,420,000

$3,420,000 - $1,944,000 – ($10 * 36,000) = $1,548,000

Beg inv + units produced – end inv = units sold

DL per unit + Dm per unit + VMOH per unit = variable product cost per unit

Units sold x variable product cost per unit = COGS

Units sold x selling price per unit = sales

Sales – COGS – (V op Exp per unit x units sold) = CM

The following information applies to Hawks Corporation:

Beginning Inventory 0 Units

Ending Inventory 4,000 units

Units produced 40,000 units

Direct labor per unit $22

Direct materials per unit $15

Variable manufacturing overhead per unit $5

Fixed manufacturing overhead per unit $12

Variable operating expenses per unit $10

Fixed operating expenses $80,000

Using variable costing, what will Hawks record as operating income if the units were sold for $95 each and assuming no variances were reported?

a. $556,000.

b. $988,000.

c. $1,036,000.

d. $1,108,000.

Ans: B, LO 2, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: 0 + 40,000 – 4,000 = 36,000 units

$22 + $15 + $5 = $42 per unit.

36,000 x $42 = $1,548,000

36,000 x $95 = $3,420,000

$3,420,000 - $1,944,000 – ($10 * 36,000) = $1,548,000

$1,548,000 – ($80,000 + $12 x 40,000) = $988,000

Beg inv + units produced – end inv = units sold

DL per unit + Dm per unit + VMOH per unit = variable product cost per unit

Units sold x variable product cost per unit = COGS

Units sold x selling price per unit = sales

Sales – COGS – (V op Exp per unit x units sold) = CM

CM – (F op Exp + FMOH per unit x units produced) = op income

Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations:

Units produced 20,000

Direct labor $240,000

Direct material $180,000

Variable manufacturing overhead $280,000

Fixed manufacturing overhead $100,000

Variable operating expenses $130,000

Fixed operating expenses $50,000

If the company has ending inventory of 1,600 units for the month, how much inventory would be reported on the balance sheet using variable costing?

a. $64,000.

b. $56,000.

c. $66,400.

d. $78,400.

Ans: B, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($240,000 + $180,000 + $280,000) ÷ 20,000 = $35 per unit

$35 x 1,600 = $56,000

(DL + DM + V manufacturing costs) ÷ unit produced = manufacturing cost per unit

Manufacturing cost per unit x end inventory units

When the monthly units produced are constant, and sales in units are less than the units produced, net income determined with absorption costing procedures will

a. always be greater than operating income determined with variable costing.

b. always be less than operating income determined with variable costing.

c. be equal to operating income determined using variable costing.

d. be equal to contribution margin per unit times units sold.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The difference between variable costing and absorption costing in measuring net income lies in the treatment of

a. direct labor costs.

b. direct material costs.

c. variable manufacturing overhead.

d. fixed manufacturing overhead.

Ans: D, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When calculating inventory for the balance sheet using variable costing as opposed to absorption costing, the inventory values will generally be

a. equal.

b. greater.

c. less.

d. doubled.

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using variable costing and absorption costing, fixed manufacturing costs are treated as

a. product costs under both.

b. product costs using absorption costing and period cost with variable costing.

c. period costs under both.

d. period costs using absorption costing and product cost with variable costing.

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using variable costing and absorption costing, variable manufacturing costs are treated as

a. product costs under both.

b. product costs using absorption costing and period cost with variable costing.

c. period costs under both.

d. period costs using absorption costing and product cost with variable costing.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Which of the following statements is true?

a. Absorption costing net income exceeds variable costing net income when units produced are greater than units sold.

b. Absorption costing net income exceeds variable costing net income when units produced are less than units sold.

c. Variable costing net income exceeds absorption costing net income when units produced exceed units sold.

d. Absorption costing net income exceeds variable costing net income when units produced and sold are equal.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The primary difference between absorption and variable costing is

a. inclusion of fixed manufacturing overhead in product costs.

b. inclusion of fixed operating expenses in period costs.

c. inclusion of variable manufacturing overhead in period costs.

d. inclusion of fixed operating expenses in product costs.

Ans: A, LO 3, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

The product cost per unit for absorption costing is

a. always higher than the product cost for variable costing.

b. always lower than the product cost for variable costing.

c. usually, but not always, higher than the product cost for variable costing.

d. usually, but not always, lower than the product cost for variable costing.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Operating income under absorption costing is higher than operating income under variable costing

a. always, no matter how many units are sold and produced.

b. when units produced equal units sold.

c. when units produced are more than units sold.

d. when units produced are less than units sold.

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Fixed manufacturing overhead costs from the current period are sometimes deferred to future periods using

a. both absorption and variable costing.

b. neither absorption or variable costing.

c. variable costing.

d. absorption costing.

Ans: D, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When the units produced is greater than the units sold,

a. variable and fixed manufacturing overhead costs are deferred until a future period when using absorption costing.

b. variable and fixed manufacturing overhead costs are deferred until a future period when using variable costing.

c. some fixed manufacturing overhead costs are deferred until a future period when using absorption costing.

d. some variable manufacturing overhead costs are deferred until a future period when using absorption costing.

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When the units sold is greater than the units produced,

a. ending inventory using absorption costing will be greater than ending inventory under variable costing.

b. ending inventory using absorption costing will be less than ending inventory under variable costing.

c. ending inventory using absorption costing equal ending inventory under variable costing.

d. ending inventory using absorption costing could be greater than, less than or equal to ending inventory under variable costing.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When using ____________ costing, management may be tempted to produce more units than demand when trying to increase operating income.

a. absorption.

b. variable.

c. both absorption and variable.

d. neither absorption or variable.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

If bonuses are awarded to a manager based on operating income, the manager may choose to increase production to meet the desired operating income when using

a. variable costing to increase net income.

b. variable costing to decrease net income.

c. absorption costing to increase net income.

d. variable costing to increase net income.

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

When comparing variable costing to absorption costing, which of the following would be a potential advantage of using variable costing?

a. Using variable costing is consistent with using the cost-volume-profit analysis.

b. Operating income is affected by the changes in production.

c. Operating income calculated using variable costing is not closely tied to changes in sales levels.

d. All the answers are potential advantages.

Ans: C, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

David Industries expects to sell 260,000 units in 2025. The manager is under pressure to increase operating income for the same period of time. He is trying to decide whether to produce the units required for demand, 260,000 or produce 300,000 units. David Industries would have a higher operating income if the manager decided to produce

a. 260,000 units under variable costing.

b. 260,000 units under absorption costing.

c. 300,000 under variable costing.

d. 300,000 under absorption costing.

Ans: D, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Powell Corporation produced 80,000 units and sold 78,000 units in its first year of operations. If the company had produced 1,000 fewer units, what would have been the effect on operating income under variable and absorption costing?

a. There would be no effect on operating income under variable costing, but operating income under absorption costing would increase.

b. There would be no effect on operating income under variable costing, but operating income under absorption costing would decrease.

c. Operating income under variable costing would decrease, but operating income under absorption costing would increase.

d. Operating income under both variable costing and absorption costing would decrease.

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

During 2025, inventory increased by 7,000 units. The following information for the company is available:

Variable Fixed

Manufacturing costs per unit $12.00 $6.00

Operating costs (variable is per unit) $4.00 $10,500

If the company uses absorption costing rather than variable costing, the effect on operating income would be a

a. $42,000 decrease.

b. $42,000 increase.

c. $52,500 increase.

d. $52,500 decrease.

Ans: B, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: ($12 - $6) x 7,000 = $42,000

(V manufacturing costs – F manufacturing costs) x increase in inventory

During 2025, KM Construction sold 10,000 units, with beginning and ending units for the year of 1,000. Manufacturing costs were as follows:

Variable Fixed

Manufacturing costs per unit $11.00 $7.00

Operating costs (variable is per unit) $3.00 $2.50

Which of the following statements is true?

a. Net income will be the same under both variable and absorption costing.

b. Net income under variable costing will be $45,000 less than net income under absorption costing.

c. Net income under absorption costing will be $40,000 more than under variable costing.

d. The difference in net income cannot be determined.

Ans: A, LO 3, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: Since the inventory level did not change, the number of units manufactured equals the number of units sold. Therefore, operating income is unchanged between variable and absorption costing.

Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year:

Variable manufacturing costs $2,300 per unit

Variable operating costs $65 per unit

Fixed manufacturing costs $25,000

Fixed operating costs $12,000

The company produced 25 units per year for 2025, 2026, and 2027. The company sold 22 units in 2025, 20 units in 2026, and 26 units in 2027. It reported no volume variances for the three-year period. For 2025,

a. absorption costing operating income exceeded variable costing operating income by $3,000.

b. variable costing operating income exceeded absorption costing operating income by $3,000.

c. the operating income for absorption costing equaled operating income for variable costing.

d. the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing.

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $25,000 ÷ 25 = $1,000 per unit.

($5,200 x 22) – (($2,300 + $1,000) x 22) = $41,800

$41,800 – ($65 x 22) - $12,000 = $28,370 (Absorption)

($5,200 x 22) – (($2,300 + $65) x 22) = $62,370

$62,370 – $25,000 - $12,000 = $25,370 (Variable)

$28,370 - $25,370 = $3,000

FMOH ÷ units produced = FMOH per unit

(sale price per unit x units sold) – ((VM costs per unit + FM costs per unit) x units sold) = GM

GM – (V op exp per unit x units sold) – F Op exp = Abs op income

(sale price per unit x units sold) – ((VM costs per unit + V Op costs per unit) x units sold) = CM

CM – FM cost = F op costs = variance op income

Abs op income – variance op income = variance

Angels R Us is currently operating at 100% capacity and incurred the following costs during the first month of operations:

Units produced 20,000

Direct labor $240,000

Direct material $180,000

Variable manufacturing overhead $280,000

Fixed manufacturing overhead $100,000

Variable operating expenses $130,000

Fixed operating expenses $50,000

If the company has ending inventory of 1,600 units for the month, what would be the difference in inventory reported on the balance sheet between absorption and variable costing?

a. Absorption would report $8,000 more in inventory than variable costing.

b. Absorption would report $8,000 less in inventory than variable costing.

c. Absorption would report $2,400 more in inventory than variable costing.

d. Absorption would report $2,400 less in inventory than variable costing.

Ans: A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Solution: $100,000 ÷ 20,000 = $5 per unit

$5 x 1,600 = $8,000

Fixed Manufacturing costs ÷ unit produced = Fixed manufacturing cost per unit

Fixed manufacturing cost per unit x end inventory units = difference

Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year:

Variable manufacturing costs $2,300 per unit

Variable operating costs $65 per unit

Fixed manufacturing costs $25,000

Fixed operating costs $12,000

a. absorption costing operating income exceeded variable costing operating income by $5,000.

b. variable costing operating income exceeded absorption costing operating income by $5,000.

c. the operating income for absorption costing equaled operating income for variable costing.

d. the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing.

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

$25,000 ÷ 25 = $1,000 per unit.

($5,200 x 20) – (($2,300 + $1,000) x 20) = $38,000

$38,000 – ($65 x 20) - $12,000 = $24,700 (Absorption)

($5,200 x 20) – (($2,300 + $65) x 20) = $56,700

$56,700 – $25,000 - $12,000 = $19,700 (Variable)

$24,700 - $19,700 = $5,000

FMOH ÷ units produced = FMOH per unit

(sale price per unit x units sold) – ((VM costs per unit + FM costs per unit) x units sold) = GM

GM – (V op exp per unit x units sold) – F Op exp = Abs op income

(sale price per unit x units sold) – ((VM costs per unit + V Op costs per unit) x units sold) = CM

CM – FM cost = F op costs = variance op income

Abs op income – variance op income = variance

Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year:

Variable manufacturing costs $2,300 per unit

Variable operating costs $65 per unit

Fixed manufacturing costs $25,000

Fixed operating costs $12,000

a. absorption costing operating income exceeded variable costing operating income by $1,000.

b. variable costing operating income exceeded absorption costing operating income by $1,000.

c. the operating income for absorption costing equaled operating income for variable costing.

d. the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing.

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

$25,000 ÷ 25 = $1,000 per unit.

($5,200 x 26) – (($2,300 + $1,000) x 26) = $49,400

$49,400 – ($65 x 26) - $12,000 = $35,710 (Absorption)

($5,200 x 26) – (($2,300 + $65) x 26) = $73,710

$73,710 – $25,000 - $12,000 = $36,710 (Variable)

$36,710 - $35,710 = $1,000

FMOH ÷ units produced = FMOH per unit

(sale price per unit x units sold) – ((VM costs per unit + FM costs per unit) x units sold) = GM

GM – (V op exp per unit x units sold) – F Op exp = Abs op income

(sale price per unit x units sold) – ((VM costs per unit + V Op costs per unit) x units sold) = CM

CM – FM cost = F op costs = variance op income

Abs op income – variance op income = variance

Stanczyk Inc. started operations in January 2025. The company produces and sells cabinets for $5,200 each. The following information pertains to the cost and sales of the cabinets each year:

Variable manufacturing costs $2,300 per unit

Variable operating costs $65 per unit

Fixed manufacturing costs $25,000

Fixed operating costs $12,000

a. absorption costing operating income exceeded variable costing operating income by $7,000.

b. variable costing operating income exceeded absorption costing operating income by $7,000.

c. the operating income for absorption costing equaled operating income for variable costing.

d. the operating income for absorption costing may be greater than, equal to or less than operating income under variable costing.

Ans: A, LO 3, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

$25,000 ÷ 25 = $1,000 per unit.

2025:

($5,200 x 22) – (($2,300 + $1,000) x 22) = $41,800

$41,800 – ($65 x 22) - $12,000 = $28,370 (Absorption)

($5,200 x 22) – (($2,300 + $65) x 22) = $62,370

$62,370 – $25,000 - $12,000 = $25,370 (Variable)

$28,370 - $25,370 = $3,000

2026:

($5,200 x 20) – (($2,300 + $1,000) x 20) = $38,000

$38,000 – ($65 x 20) - $12,000 = $24,700 (Absorption)

($5,200 x 20) – (($2,300 + $65) x 20) = $56,700

$56,700 – $25,000 - $12,000 = $19,700 (Variable)

$24,700 - $19,700 = $5,000

2027:

($5,200 x 26) – (($2,300 + $1,000) x 26) = $49,400

$49,400 – ($65 x 26) - $12,000 = $35,710 (Absorption)

($5,200 x 26) – (($2,300 + $65) x 26) = $73,710

$73,710 – $25,000 - $12,000 = $36,710 (Variable)

$36,710 - $35,710 = $1,000

2025 – 2027

$3,000 + $5,000 - $1,000 = $7,000

For each year 2025, 2026, 2027:

FMOH ÷ units produced = FMOH per unit

(sale price per unit x units sold) – ((VM costs per unit + FM costs per unit) x units sold) = GM

GM – (V op exp per unit x units sold) – F Op exp = Abs op income

(sale price per unit x units sold) – ((VM costs per unit + V Op costs per unit) x units sold) = CM

CM – FM cost = F op costs = variance op income

Abs op income – variable op income = variance

2025 – 2027:

2025 variance + 2026 variance – 2027 variance – total variance

The efficient level of activity performance that is active in the production of goods and services is known as

a. idle capacity.

b. nonproductive capacity.

c. productive capacity.

d. efficient capacity.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

An example of activity capacity that is acquired but not used and will not provide future benefits is

a. idle capacity.

b. nonproductive capacity.

c. productive capacity.

d. efficient capacity.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

If a company acquires the resources needed to perform an activity and the resources are used for its intended purposes, it is knowns as

a. idle capacity.

b. nonproductive capacity.

c. productive capacity.

d. efficient capacity.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

An example of activity capacity that is acquired but not used but could be converted for future benefits is

a. idle capacity.

b. nonproductive capacity.

c. productive capacity.

d. efficient capacity.

Ans: A, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

The type of available capacity that signals the need to improve factory operations is

a. idle capacity.

b. nonproductive capacity.

c. productive capacity.

d. efficient capacity.

Ans: B, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

The type of available capacity that signals the potential for growth opportunities or policy changes is

a. idle capacity.

b. nonproductive capacity.

c. productive capacity.

d. efficient capacity.

Ans: A, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

When calculating the budgeted number of units to be produced, all the following are options except:

a. theoretical capacity.

b. practical capacity.

c. productive capacity.

d. normal capacity.

Ans: C, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Theoretical capacity

a. results in lower, more attainable production expectations based on existing capacity.

b. results in the lowest budgeted fixed MOH rate.

c. results in a higher fixed MOH rate than the normal capacity.

d. results in the highest fixed MOH rate.

Ans: B, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Practical capacity

a. typically leads to an unusually large, unfavorable fixed-MOH volume variance.

b. will lead to an unfavorable fixed MOH volume variance if actual production exceeds planned practical capacity.

c. will lead to a fixed MOH rate that will fluctuate with demand changes.

d. will lead to an unfavorable fixed MOH volume variance if actual production does not meet planned practical capacity.

Ans: D, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Normal capacity

a. results in the highest product cost.

b. is the method used according to IRS guidelines.

c. results in the lowest product cost.

d. results in moderate prices.

Ans: A, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

All the following are true regarding theoretical capacity except:

a. Theoretical capacity results in the lowest product cost.

b. Theoretical capacity results in the lowest budgeted fixed MOH rate.

c. Theoretical capacity usually gives unrealistic targets, which demotivates employees.

d. Theoretical capacity results in the highest fixed MOH rate.

Ans: D, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

All the following are true regarding practical capacity except:

a. Practical capacity produces challenging but feasible goals.

b. Practical capacity will lead to an unfavorable fixed MOH volume variance if actual production exceeds planned practical capacity.

c. Practical capacity has a moderate fixed MOH rate and moderate prices.

d. Practical capacity will lead to an unfavorable fixed MOH volume variance if actual production does not meet planned practical capacity.

Ans: B, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

All the following are true regarding normal capacity except:

a. Normal capacity results in the highest product cost.

b. Normal capacity can fluctuate depending on demand.

c. Normal capacity results in the lowest product cost.

d. Normal capacity can lead to higher prices causing a downward spiral.

Ans: C, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Which method of closing out the fixed MOH volume variance will have no effect on the financial statements, no matter the capacity used?

a. Allocating the fixed MOH volume variance to COGS.

b. Allocating the fixed MOH volume variance equally among WIP Inventory, FG inventory and COGS.

c. Prorating the fixed MOH volume variance to WIP Inventory, FG inventory and COGS.

d. Prorating the fixed MOH volume variance to FG inventory and COGS.

Ans: C, LO 4, Bloom: C, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

The capacity that could cause a downward spiral (or death spiral) is

a. theoretical capacity.

b. practical capacity.

c. productive capacity.

d. normal capacity.

Ans: D, LO 4, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the theoretical capacity?

a. $1.07.

b. $1.19.

c. $1.36.

d. $1.62.

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 225 x 365 x 24 = 1,971,000 units

$2,100,000 ÷ 1,971,000 = $1.07 per unit.

Units per hour x 365 x 24 = budgeted units produced

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the practical capacity?

a. $1.07.

b. $1.19.

c. $1.36.

d. $1.62.

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 210 x (365 – 15) x (24 – 3) = 1,543,500 units

$2,100,000 ÷ 1,543,500 = $1.36 per unit.

Units per hour x (365 – days closed) x (24 – hours shutdown) = budgeted units produced

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Malena is working on budgeting for the next fiscal year. The company recently upgraded their equipment purchases to increase capacity. The new equipment, with the current workforce can produce 225 units per hour, working 365 days per year. The operations currently run 24 hours a day. Malena estimates a more realistic goal is 210 units per hour. She also believes the company will be closed 15 days during the year for maintenance and holidays. She is also accounting for setups and inspection of 3 hours per day that will temporarily stop production. The current system produces 1,300,000 units per year and is tied to demand. If the budgeted fixed MOH costs are $2,100,000 for the upcoming year, what would be the fixed MOH rate using the normal capacity?

a. $1.07.

b. $1.19.

c. $1.36.

d. $1.62.

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: $2,100,000 ÷ 1,300,000 = $1.62 per unit.

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

Using theoretical capacity, what is the denominator level?

a. 400,000.

b. 468,000.

c. 870,000.

d. 920,000.

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 145 x 20 x 25 x 12 months = 870,000 units

Units per hour x hours per day x days per month x months per year = budgeted units produced

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

Using practical capacity, what is the denominator level?

a. 400,000.

b. 468,000.

c. 870,000.

d. 920,000.

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 130 x 15 x 20 x 12 months = 468,000 units

Units per hour x hours per day x days per month x months per year = budgeted units produced

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

Using normal capacity, what is the denominator level?

a. 400,000.

b. 468,000.

c. 870,000.

d. 920,000.

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

Using normal capacity, what is the budgeted fixed MOH rate?

a. $1.06.

b. $1.97.

c. $2.30.

d. $2.37.

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: $920,000 ÷ 400,000 = $2.30 per unit.

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

Using practical capacity, what is the budgeted fixed MOH rate? Round final answer to the nearest cent.

a. $1.06.

b. $1.97.

c. $2.30.

d. $2.37.

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 130 x 15 x 20 x 12 months = 468,000 units

$920,000 ÷ 468,000 = $1.97 per unit.

Units per hour x hours per day x days per month x months per year = budgeted units produced

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

Using theoretical capacity, what is the budgeted fixed MOH rate?

a. $1.06.

b. $1.97.

c. $2.30.

d. $2.37.

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 145 x 20 x 25 x 12 months = 870,000 units

$920,000 ÷ 870,000 = $1.06 per unit.

Units per hour x hours per day x days per month x months per year = budgeted units produced

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

If the company’s actual production was 450,000 units, what is the fixed MOH volume variance using normal capacity? (round the budgeted fixed MOH rate to the nearest two decimals)

a. $115,000 F.

b. $115,000 U.

c. $35,450 F.

d. $35,460 U.

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: $920,000 ÷ 400,000 = $2.30 per unit.

400,000 – 450,000 = (50,000) x $2.30 per unit = $115,000 F

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Budgeted Units produced – actual unit produced = difference x fixed MOH rate = variance

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

If the company’s actual production was 450,000 units, what is the fixed MOH volume variance using practical capacity? (round the budgeted fixed MOH rate to the nearest two decimals)

a. $115,000 F.

b. $115,000 U.

c. $35,450 F.

d. $35,460 U.

Ans: D, LO 4, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 130 x 15 x 20 x 12 months = 468,000 units

$920,000 ÷ 468,000 = $1.97 per unit.

468,000 – 450,000 = 18,000 x $1.97 per unit = $35,460 U

Units per hour x hours per day x days per month x months per year = budgeted units produced

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Budgeted Units produced – actual unit produced = difference x fixed MOH rate = variance

Amanha just learned her company will start a new workday policy. There is a 60% chance the company will start to enforce the policy this year and she has been tasked in determining how the new policy will affect the company. The new policy will have a significant effect on the company’s production output because specific lines will close for periods of time during mandatory layoffs. The current demand of the company is 400,000 units per year. The budgeted fixed MOH costs are $920,000.

She has put together the following information to plan for the coming policy:

Units Hours Days

Per Hour per Day per Month

Theoretical level 145 20 25

Practical level 130 15 20

If the company’s actual production was 450,000 units, what is the fixed MOH volume variance using theoretical capacity? (Round the budgeted fixed MOH rate to the nearest two decimals.)

a. $115,000 F.

b. $115,000 U.

c. $445,200 F.

d. $445,200 U.

Ans: D, LO 4, Bloom: AP, Difficulty: Hard, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Solution: 145 x 20 x 25 x 12 months = 870,000 units

$920,000 ÷ 870,000 = $1.06 per unit.

870,000 – 450,000 = 420,000 x $1.06 per unit = $445,200 U

Units per hour x hours per day x days per month x months per year = budgeted units produced

Budgeted fixed MOH ÷ budgeted units produced = budgeted fixed MOH rate per unit.

Budgeted Units produced – actual unit produced = difference x fixed MOH rate = variance

SHORT ANSWER

105. What is the purpose of absorption costing and how does it work?

Ans: N/A, LO 1, Bloom: AN, Difficulty: Easy, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

Absorption costing is when fixed manufacturing overhead costs are absorbed into the product cost, along with direct materials, direct labor and variable manufacturing overhead costs. Absorption costing is required by GAAP for external reporting purposes. The connection to GAAP is that costs to make the product reside on the balance sheet until sold. Once sold, the costs become cost of goods on the income statement.

The fixed manufacturing costs that are on the balance sheet as inventory are typically referred to as deferred assets as their cost will be recognized as an expense on the income statement in future periods.

Because fixed overhead costs are absorbed into the product cost, companies must also consider volume variances when calculating cost of goods sold on the income statement.

106. When using absorption costing, managers tend to overproduce inventory to show a larger operating income. What are 2 advantages and 2 disadvantages of building inventory?

Ans: N/A, LO 1, Bloom: K, Difficulty: Easy, AACSB: None, AICPA: FN, Measurement IMA: Cost Management

Answer:

Advantages –

If external market signals increased demand, then this approach is reasonable.
One or more inputs might be constrained, or available only seasonally
External forces may dictate inventory building
Moves fixed-MOH to the balance sheet, which boosts income. This could result in benefits to the company, such as access to capital, and/or it could result in benefits to managers and employees via bonuses or other increased compensation.

Disadvantages –

Incurs storage and carrying costs: physical space requirements and employees to manage goods.
Ties up working capital, and the process of moving/storing extra inventory carries risk that it will be damaged.
Potential uncertainty around future market demand and/or obsolescence.
Building excess inventory simply to boost income, with no legitimate business reason to do so, pushes the boundaries of ethics, which is just not good business practice.

107. What is the purpose of variable costing and how does it work?

Ans: N/A, LO 2, Bloom: AN, Difficulty: Easy, AACSB: Analytic, AICPA FN, Measurement IMA: Cost Management

Answer:

Variable costing only includes direct material, direct labor, and variable manufacturing overhead as part of its product costs. All fixed manufacturing overhead is treated as a period cost and expensed in the period incurred.

According to GAAP, the variable costing method can only be used for internal purposes. However, this costing method support management decision-making as it separates costs by behavior, which makes them more straightforward. It also better aligns manager, subunit, and company goals, since managers are no longer incentivized to stockpile inventory to improve performance. It also provides more predictable income results, as its treatment of fixed manufacturing overhead costs are consistent.

108. When comparing inventory under absorption and variable costing there are two stable truths. What are they?

Ans: N/A, LO 3, Bloom: K, Difficulty: Easy, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

1. The difference in FG Inventory values arises because absorption costing includes fixed-MOH as a product cost, while variable costing excludes fixed-MOH from product cost and sends it to the income statement in the period it is incurred.

2. As long as there are units on hand in inventory, absorption costing’s inventory balance will always be higher than variable costing's inventory balance, since it includes fixed-MOH as a product cost and variable costing doesn’t.

109. There are three categories of capacity. What are they and why do they exist?

Ans: N/A, LO 4, Bloom: AN, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Answer:

Productive capacity is time, space, and equipment being used for its intended purpose—

the active production of goods or services.

Nonproductive capacity is usage of time, space, and equipment that does not result in

good products. Examples include downtime for machine setups, factory maintenance, and employees on break. Other examples include capacity usage that results in waste, scrap, and rework. Nonproductive capacity signals a need to improve factory operations.

Idle capacity is the time, space, and equipment that is unused at present but could be

converted to productive capacity to grow the business. Causes of unused capacity include

contractual agreements like work arrangements and holiday closures, or market reasons,

like lack of orders and foregone market share. Idle capacity is a signal for growth opportunities or policy changes that would enable unused capacity to be converted to productive capacity to advance the business.

110. There are three capacities that are impacted by the denominator levels’ volume. Describe the effect on the budgeted fixed manufacturing overhead rate of each type.

Ans: N/A, LO 4, Bloom: AN, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Answer:

Productive capacity results in the lowest budgeted fixed-MOH rate, given that fixed-MOH is spread over the greatest number of units that available capacity can possibly supply. The budgeted fixed-MOH rate is stable, assuming our facility’s resources stay stable. But the fixed-MOH rate is unrealistically low, which could lead to understated product cost.

Nonproductive capacity results in lower, more attainable production expectations based on existing capacity costs, leading to a stable, reasonably low fixed-MOH rate. This begets a moderate product cost.

Idle capacity results in higher fixed-MOH rates, given that planned production aligns with customer demand that could be lower than available capacity. Higher fixed-MOH rates mean higher product costs, which may mask the cost of unused capacity. Unfavorable fixed-MOH volume variances are less likely when using this denominator level because this level of output is generally not difficult to achieve.

BRIEF EXERCISES

111. Mariah is compiling annual financial statements for her business. She uses absorption costing, as per GAAP. Budgeted variable manufacturing costs are $10 per unit and variable operating costs are $2 per unit. Budgeted fixed MOH is $50,000, and budgeted operating costs are $20,000. If she plans to produce 10,000 units, how much cost should be capitalized to inventory for each unit produced?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

$15 per unit

Solution:

$50,000 ÷ 10,000 = $5 + $10 = $15

112. Hall Enterprises has budgeted variable and fixed manufacturing costs of $90,000 and $51,000, respectively. The budgets are based on producing 3,000 units. For the same budget period, variable and fixed operating expenses were budgeted at $12,000 and $24,000, respectively. Hall Enterprises currently uses absorption costing. Assuming no beginning inventory for the period, all 3,000 units were produced, and the company sold 2,700 units, how much in COGS did the company report for the year? How much inventory cost will be on the balance sheet at year end?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation, IMA: Cost Management.

Answer:

COGS = $126,900

Ending Inventory = $14,100

Solution:

$90,000 + $51,000 = $141,000 ÷ 3,000 = $47 per unit

2,700 units x $47 = $126,900

(3,000 – 2,700) x $47 = $14,100

113. Aresia is the manager for Dawson Company. She budgeted for $230,000 in fixed MOH and $80 per unit for variable manufacturing costs for the upcoming fiscal year. She was planning to produce 8,000 units. Actual fixed MOH costs and actual variable manufacturing costs came in on budget but the company was only able to produce and sell 7,600 units. If the company uses absorption costing with standard costs, what is the company’s initial COGS (before any variance is considered)? What is the adjusted COGS after writing off the variance directly to COGS?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

Unadjusted COGS = $826,500

Adjusted COGS = $838,000

Solution:

$230,000 ÷ 8,000 = $28.75 per unit

($28.75 + $80) x 7,600 = $826,500 COGS (unadjusted)

Applied MOH = $28.75 x 7,600 = $218,500

$230,000 - $218,500 = $11,500 U

$826,500 + $11,500 = $838,000 COGS (adjusted)

114. Hall Enterprises has budgeted variable and fixed manufacturing costs of $90,000 and $51,000, respectively. The budgets are based on producing 3,000 units. For the same budget period, variable and fixed operating expenses were budgeted at $12,000 and $24,000, respectively. Hall Enterprises currently uses variable costing. Assuming no beginning inventory for the period, all 3,000 units were produced, and the company sold 2,700 units, how much in COGS did the company report for the year? How much inventory cost will be on the balance sheet at year end?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

COGS = $81,000

Ending Inventory = $9,000

Solution:

$90,000 ÷ 3,000 = $30 per unit

$30 x 2,700 = $81,000 COGS

$30 x (3,000 – 2,700) = $9,000 Ending Inventory

115. Dylan, manager of Burkley Company, is using a variable costing system to evaluate the company’s performance. The company uses standard costing and budgeted to produce 5,000 units with a budgeted cost of $25,000 of fixed MOH and $20 per unit of variable manufacturing costs. Because of supply chain issues, the company was only able to produce 3,500 units with fixed MOH incurred of $17,850. However, they did sell all the units produced, plus the 600 units in beginning inventory.

Assuming no changes in costs from last year to this year, how much will Dylan show on Burkley Company’s report for its COGS this year? How much will be recognized for a fixed MOH volume variance?

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

COGS = $82,000

Fixed MOH Volume Variance = $0

Solution:

3,500 + 600 = 4,100 units sold

4,100 x $20 = $82,000 COGS

Fixed MOH volume variance is not recognized in variable costing because all fixed MOH is expensed in the period incurred.

116. Perla Industries produced 30,000 units and sold 29,000 units in 2025 with no beginning inventory. During the year, the following costs were incurred:

Variable manufacturing costs per unit $106

Variable operating costs per unit $40

Fixed manufacturing costs $270,000

Fixed operating costs $180,000

Calculate the ending inventory balance using both absorption costing and variable costing. Which method would you recommend Perla use for external purposes? Which method should be used to evaluate the managers of the company? Be sure to state your reason why.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

Absorption ending inventory = $115,000

Variable ending inventory = $106,000

If the company is reporting operating income for external purposes, absorption costing should be used as it is required by GAAP. However, if the company is evaluating its managers for internal purposes, it should use variable costing. This system supports management decision-making as it separates costs by behavior which is more straight forward. It will also help eliminate overproducing inventory.

Solution:

Ending Inventory = 30,000 – 29,000 = 1,000

Absorption cost per unit = ($270,000 ÷ 30,000) + $106 = $115

$115 x 1,000 = $115,000, absorption ending inventory

$106 x 1,000 = $106,000, variable ending inventory

117. Perla Industries produced 30,000 units and sold 29,000 units in 2025 with no beginning inventory. During the year, the following costs were incurred:

Variable manufacturing costs per unit $106

Variable operating costs per unit $40

Fixed MOH costs $270,000

Fixed operating costs $180,000

Calculate the COGS for both absorption and variable costing, assuming no variances were recorded. Explain the difference between the two systems.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA FN, Measurement IMA: Cost Management

Answer:

Absorption ending inventory = $3,335,000

Variable ending inventory = $3,074,000

The difference is the fixed MOH of $9 per unit or $261,000 in total

Solution:

Absorption cost per unit = ($270,000 ÷ 30,000) + $106 = $115

$115 x 29,000 = $3,335,000

$106 x 29,000 = $3,074,000

$3,335,000 - $3,074,000 = $261,000 or $9 x 29,000

118. Patterson Inc.’s income statement, using absorption costing is as follows:

Sales $125,000

COGS 82,500

Gross Margin 42,500

Operating expenses 12,000

Operating income $ 30,500

Patterson produced 3,000 units and sold 2,500 units. The company shows a cost per unit for variable manufacturing costs of $20 per unit and $1 per unit for variable operating expenses. If the manager would like to use the same period and create a variable costing income statement, what would it look like?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

Sales $125,000

Less: Variable expenses

COGS 50,000

Operating expenses 2,500 52,500

Contribution Margin 72,500

Less: Fixed expenses

Manufacturing expenses 39,000

Operating expenses 9,500 48,500

Operating income $ 24,000

Solution:

$20 x 2,500 = $50,000

$1 x 2,500 = $2,500

$82,500 ÷ 2,500 units sold = $33 per unit absorption costing

$33 - $20 = $13 per unit fixed manufacturing costs

$13 x 3,000 = $39,000 fixed manufacturing costs

$12,000 - $2,500 = $9,500

119. Tercero Company sold 42,000 units in 2025. The manager did not find any variable cost variances and actual production equaled budgeted production of 40,000 units. Beginning inventory for the year was 3,500 units and last period’s inventory carried the same cost per unit as this period’s production. The company’s income statement used for internal reporting shows the following:

Sales $199,500

Less: Variable expenses

COGS 100,800

Operating expenses 27,300 128,100

Contribution Margin 71,400

Less: Fixed expenses

Manufacturing expenses 20,000

Operating expenses 14,000 34,000

Operating income $ 37,400

The CEO of Tercero wants to determine operating income under absorption costing. Prepare an absorption costing income statement for 2025.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

Sales $199,500

COGS 121,800

Gross Margin 77,700

Operating expenses 41,300

Operating income $ 36,400

Solution:

$100,800 ÷ 42,000 = $2.40 variable manufacturing cost per unit

$20,000 ÷ 40,000 = $.50 fixed MOH per unit

($2.40 + $.50) x 42,000 = $121,800

$27,300 + $14,000 = $41,300

120. Chaviano Construction is planning on purchasing new machinery for the upcoming year. The company believes, if everything is perfect, the machinery can generate 110 units per hour, 24 hours per day, 365 days per year. However, the manager is more realistic and understands the company will shut down for 10 days a year for holidays and will have downtime of approximately 2 hours per day, each day. A more reasonable output of units is 96 per day. The budgeted fixed MOH costs are expected to be $960,000. Calculate Chaviano’s theoretical and practical capacity for the next year. What will the fixed MOH rate be for the theoretical and practical capacity? (Round final answer to nearest cent for fixed MOH rate.)

Ans: N/A, LO 4, Bloom: AP, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Answer:

Theoretical capacity = 963,600 units

Practical capacity = 749,760 units

Theoretical fixed MOH rate = $1.00

Practical fixed MOH rate = $1.28

Solution:

Theoretical capacity = 110 x 24 x 365 = 963,600

Practical capacity = 96 x (24 – 2) x (365 – 10) = 749,760

Theoretical fixed MOH rate = $960,000 ÷ 963,600 = $1.00

Practical fixed MOH rate = $960,000 ÷ 749,760 = $1.28

121. Howard is considering two different denominators levels: theoretical capacity of 2,300 units and practical capacity of 1,900 units. With budgeted fixed MOH costs of $53,000, he thinks the actual production and sales for the two levels will be 2,100 units and 1,650 units, respectively. Calculate the budgeted fixed MOH rate, fixed MOH volume variance (amount and sign), and inventory cost per unit, assuming variable manufacturing costs of $65 per unit for both capacity levels. (Round Fixed MOH rate to the nearest cent. Fixed MOH volume variable round to the nearest dollar.)

Ans: N/A, LO 4, Bloom: AP, Difficulty: Easy, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Answer:

Theoretical capacity:

Fixed MOH rate = $23.04

Fixed MOH volume variance = $4,608 U

Inventory cost per unit = $88.04

Practical capacity:

Fixed MOH rate = $27.89

Fixed MOH volume variance = $6,973 U

Inventory cost per unit = $92.89

Solution:

Theoretical capacity:

Fixed MOH rate = $53,000 ÷ 2,300 = $23.04

Fixed MOH volume variance = (2,300 – 2,100) x $23.04 = $4,608 U

Inventory cost per unit = $23.04 + $65 = $88.04

Practical capacity:

Fixed MOH rate =$53,000 ÷ 1,900 = $27.89

Fixed MOH volume variance = (1,900 – 1,650) x $27.89 = $6,973 U

Inventory cost per unit = $27.89 + $65 = $92.89

EXERCISES

122. Boyd Manufacturing opened for business on January 1, 2025. During 2025, the company budgeted for 12,000 units with fixed manufacturing costs of $78,000 but only produced 10,000 units and incurred fixed productions costs of $64,000 and fixed operating expenses of $23,000. The variable cost to produce each unit was $22 with $6 of variable operating expenses per unit. The company prepares its income statement using absorption costing. Boyd uses standard costing within its absorption costing system. There were no price or efficiency variances this year, and any other variances are written off directly to COGS.

Instructions

a. Calculate the cost per unit that Boyd will capitalize into inventory this year.

b. Calculate Boyd’s fixed MOH volume variance for 2025. (Identify amount and sign)

c. If Boyd sold 9,500 units at $45 per unit, prepare the company’s income statement in good form.

d. Determine the FG Inventory balance to be reported on the balance sheet at the end of 2025.

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

a. $28.50 per unit

b. $13,000 U

Sales $427,500

Less: COGS

COGS (unadjusted) $270,750

Fixed-MOH volume variance 13,000

Adjusted COGS 283,750

Gross margin 143,750

Less: Operating expenses

Variable 57,000

Fixed 23,000 80,000

Operating income $ 63,750

d. $14,250

Solution:

a. ($78,000 ÷ 12,000) = $6.50 + $22 = $28.50 per unit

b. (12,000 – 10,000) x $6.50 = $13,000 U

c. 9,500 x $45 = $427,500

9,500 x $28.50 = $270,750

9,500 x $22 = $57,000

d. (10,000 – 9,500) x $28.50 = $14,250

123. Ziska Engineering prepares its internal reports using standard costing within its variable costing system. As a result, the company writes off any variances directly to COGS. The company has continued to see growth over the last five years but feels it will become stagnant if it can’t meet its budgeted production level due to a disrupted supply chain.

Information to make and sell 1,300 units of its design plans are as follows:

Direct material $12 per unit

Direct labor $26 per unit

Variable MOH $16 per unit

Variable operating $2 per unit

Fixed-MOH $26,000

Fixed operating $6,500

Actual costs came in as budgeted. However, the company only produced 1,150 units and sold 1,200 units at a selling price of $110 per unit. The company began the year with 250 units, and its standard product costs per unit were the same last year as they were this year.

Instructions

a. Calculate the cost per unit that Ziska will capitalize into inventory this year.

b. Calculate how many units were in ending FG inventory this year and the total cost that will be capitalized on the balance sheet.

c. Present Ziska’s current year income statement, in good form, using variable costing.

d. Last year, the company reported an operating income of $24,200. Comment on whether management will be pleased with the current year’s performance.

Ans: N/A, LO 2, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

a. $54 per unit

b. Ending Inventory 200 units, $10,800

Sales $132,000

Less: Variable expenses

COGS $64,800

Operating expenses 2,400 67,200

Contribution margin 64,800

Less: Fixed expenses

Manufacturing expenses 26,000

Operating expenses 6,500 32,500

Operating income $ 32,300

d. While operating income showed an improvement from the previous year, management should still be concerned with the decreased production numbers. Because fixed manufacturing costs are expensed as incurred, part of the costs from the current sales was expensed in the prior period.

Solution:

a. $12 + $26 + $16 = $54 per unit

b. 250 + 1,150 – 1,200 = 200 units

200 x $54 = $10,800

c. 1,200 x $110 = $132,000

1,200 x $54 = $64,800

1,200 x $2 = $2,400

124. Juanita prepared her company’s variable costing income statement for internal planning. The income statement was as follows:

Sales $540,000

Less: Variable expenses

COGS $297,000

Operating expenses 54,000 351,000

Contribution margin 189,000

Less: Fixed expenses

Manufacturing expenses 74,800

Operating expenses 68,000 142,800

Operating income $ 46,200

She was planning to compare the results to the prior period and to plan for the upcoming fiscal year. However, she expects the results to be lower than last year. The company produced 9,200 units, which was 400 units more than budgeted and sold 9,000 units. Juanita did not discover any price or efficiency variances within the standard costing system for the current period, and the variable operating costs per unit were $6.

Instructions

a. Is there a fixed-MOH volume variable hiding within the variable costing income statement? If so, how much and what is the sign, and where is it hidden?

b. If Juanita used absorption costing for the current period, would she have reported a fixed-MOH volume variance? If so, how much and what is the sign, and where would it be reported?

c. If the company writes off standard variances directly to COGS, prepare the company’s current year absorption costing income statement.

d. Explain the operating income difference or no difference between the two methods.

Ans: N/A, LO 3, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

a. There is not a fixed-MOH volume variance using variable costing. Fixed MOH is expensed as incurred.

b. Yes, 3,400 F, reported with COGS before GM

Sales $540,000

Less: COGS

COGS (unadjusted) $373,500

Fixed-MOH volume variance (3,400)

Adjusted COGS 370,100

Gross margin 169,900

Less: Operating expenses

Variable 54,000

Fixed 68,000 122,000

Operating income $ 47,900

d. The difference in operating income is the Fixed-MOH. Using absorption costing, the Fixed-MOH is calculated into the product cost (COGS) and expensed as sold. Variable costing expenses Fixed-MOH in the period incurred.

Solution:

b. $74,800 ÷ 8,800 = $8.50 per unit

(9,200 – 8,800) x $8.50 = $3,400 F

c. $297,000 ÷ 9,000 = $33 per unit

($33 + $8.50) x 9,000 = $373,500

d. $46,200 - $47,900 = $1,700 ÷ (9,200 – 9,000) = $8.50 (proof of variance)

125. Bailey and Ben, B&B Ice Cream, were excited to prepare their current year income statement. This year was the best year yet and they were excited to provide bonuses for their employees, if profit exceeded the company’s expectations. Information for the financial statements is as follows:

Budgeted variable manufacturing costs $1.50 per unit

Budgeted variable operating costs $.50 per unit

Budgeted fixed-MOH $18,000

Budgeted fixed operating costs $6,200

Budgeted production 60,000 units

Budgeted selling price $5.50 per unit

Actual sales volume 61,000 units

Actual production 58,000 units

The company had 5,000 units in beginning inventory, and they carried the same standard costs per unit as this year’s production.

Instructions

a. Calculate the cost per unit that Ziska will capitalize into inventory this year using (1) variable costing and (2) absorption costing.

b. Determine if there would be a fixed-MOH volume variance under either method. If yes, calculate the amount and specify the sign of the variance, if applicable.

c. Prepare a current year income statement, in good form, using variable costing.

d. Prepare a current year income statement, in good form, using absorption costing.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

a. (1) $1.50 per unit

(2) $1.80 per unit

b. Variable – no variance

Absorption 600 U

Sales $335,500

Less: Variable expenses

COGS $91,500

Operating expenses 30,500 122,000

Contribution margin 213,500

Less: Fixed expenses

Manufacturing expenses 18,000

Operating expenses 6,200 24,200

Operating income $ 189,300

d. Sales $335,500

Less: COGS

COGS (unadjusted) $109,800

Fixed-MOH volume variance 600

Adjusted COGS 110,400

Gross margin 225,100

Less: Operating expenses

Variable 30,500

Fixed 6,200 36,700

Operating income $ 188,400

Solution:

a. (1) $1.50 per unit (given)

(2) $18,000 ÷ 60,000 = $.30 + $1.50 = $1.80 per unit

b. (60,000 – 58,000) x .30 = 600 U

c. 61,000 x $5.50 = $335,500

61,000 x $1.50 = $91,500

61,000 x $.50 = $30,500

d. 61,000 x $1.80 (from part a) = $109,800

126. Kristin, the accountant for XYZ Industries, is studying the working papers for her client. She knows the client uses standard costing within its accounting system, but she is not sure which inventory costing method they use to prepare their reports. No variances were reported, except those as noted below, and the prior per-unit costs were the same as the current year. The working papers showed the following information:

Sales volume 1,000 units

Budgeted production 1,125 units

Beginning FG Inventory 130 units

Ending FG Inventory 145 units

Gross margin $7,450

Fixed-MOH Volume variance (unfavorable) $550

Operating Income $4,450

Sales $20,000

Instructions

a. Did the client use absorption costing or variable costing? How can Kristin tell?

b. How much did the client capitalize into inventory on a per-unit basis?

c. How many units did the client produce last year?

d. If the client had used the other costing method (not the one determined in part (a)), how much operating income would the client have reported for the current year?

Ans: N/A, LO 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

a. Absorption costing, the gross margin, and fixed-MOH volume variance were calculated.

b. $12 per unit

c. 1,015 units

d. $4,375 (variable costing)

Solution:

b. $20,000 - $7,450 = $12,550 adjusted COGS

$12,550 - $550 = $12,000 COGS unadjusted

$12,000 ÷ 1,000 = $12 per unit

c. 145 + 1,000 – 130 = 1,015

d. (1,125 – 1,015) = 110

550 ÷ 110 = $5 fixed MOH per unit

(1,015 – 1,000) x $5 = $75

$4,450 - $75 = $4,375

127. Sullivan is pleased with how his company is doing. He sells his car dividers for $35 each. The company has been increasing the number of units produced each year and expects sales to meet production demand. He prepares his income statement using both variable costing and absorption costing. The following income statements were prepared for the current year. There were no price or efficiency variances noted as part of the company’s standard cost system.

Sales $287,000

Cost of goods sold

Unadjusted COGS $172,200

Fixed-MOH volume var 1,800

Adjusted COGS 174,000

Gross margin 113,000

Operating expenses 80,600

Operating income $ 32,400

Sales $287,000

Variable expenses

COGS $123,000

Operating expenses 24,600 147,600

Contribution margin 139,400

Fixed expenses

Fixed-MOH 54,000

Operating expenses 56,000 110,000

Operating income $ 29,400

Sullivan believes the upcoming fiscal year will show an increased sales volume of 10%. All per unit variable costs, selling price, and fixed costs will be consistent with the current year’s information. Budgeted and actual production will remain the same, as the company has enough inventory to cover the increase.

Instructions

a. Identify which income statement reflects which method.

b. Explain the difference in operating income between the two statements.

c. Based on the anticipated sales volume increase, prepare projected income statements under both absorption and variable costing.

Ans: N/A, LO 3, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FN, Measurement IMA: Cost Management

Answer:

a. The left is absorption costing, the right is variable costing.

b. The difference is fixed MOH. Variable costing expensed it as incurred, absorption costing includes the cost in the product cost and expenses it as units are sold.

Absorption

Sales $315,700

Less: COGS

COGS (unadjusted) $189,420

Fixed-MOH volume variance 1,800

Adjusted COGS 191,220

Gross margin 124,480

Less: Operating expenses

Variable 27,060

Fixed 56,000 83,060

Operating income $ 41,420

Variable

Sales $315,700

Less: Variable expenses

COGS $135,300

Operating expenses 27,060 162,360

Contribution margin 153,340

Less: Fixed expenses

Manufacturing expenses 54,000

Operating expenses 56,000 110,000

Operating income $ 43,340

Solution:

c. 287,000 ÷ $35 = 8,200 units sold current

8,200 * (8,200 * 10%) = 9,020 budgeted units sold

$172,200 ÷ 8,200 = $21 per unit (absorption)

$24,600 ÷ 8,200 = $3 per unit variable operating costs

$54,000 ÷ 9,000 = $6 per unit Fixed MOH

$21 - $6 = $15 per unit (variable)

9,020 x $35 = $315,700 (Sales)

9,020 x $3 = $27,060 (V operating costs)

Absorption

9,020 x $21 = $189,420 (COGS)

Variable

9,020 x $15 = $135,300 (COGS)

128. Stivrins Company is in the process of negotiating a new union contract. If the new contract goes into effect, there could be a significant decrease in the company’s production output. More vacation time and shorter shifts will cause several production lines to be inoperable for a short period of time. The normal capacity of the company is set at 93,000 units. Nicklin, the manager, put together the following chart that incorporates the new contract.

Units per Hour Hours per Day Days per month

Theoretical 250 20 25

Practical 225 18 24

Budgeted monthly fixed-MOH costs are expected to be $250,000 with budgeted variable manufacturing costs of $6 per unit. The selling price per unit would be $14, and the company plans to sell 94,000 units per month.

Instructions

a. Calculate the denominator level in units for the theoretical and practical capacity levels for one month.

b. Calculate the budgeted fixed MOH rate of each of the three levels. (Round to the nearest cent.)

c. If the company’s actual production was 97,000 units for the current month, calculate the fixed-MOH volume variance for each denominator level. Be sure to notate the sign of the variance.

d. Assuming there are no price or efficiency variances, and the company’s policy is to write off any variances directly to COGS, prepare a partial income statement through gross margin for each denominator level.

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Answer:

a. Theoretical = 125,000

Practical = 97,200

b. Theoretical = $2.00 per unit

Practical = $2.57 per unit

Normal = $2.69 per unit

c. Theoretical = $56,000 U

Practical = $514 U

Normal = $10,760 F

Sales $1,316,000 $1,316,000 $1,316,000

COGS

COGS(Unadjusted) 752,000 805,580 816,860

Fixed MOH Variance 56,000 514 (10,760)

Adjusted COGS 808,000 806,094 806,100

Gross margin $ 508,000 $ 509,906 $ 509,900

Answer:

a. Theoretical = 250 x 20 x 25 = 125,000

Practical = 225 x 18 x 24 = 97,200

b. Theoretical = $250,000 ÷ 125,000 = $2.00 per unit

Practical = $250,000 ÷ 97,200 = $2.57 per unit

Normal = $250,000 ÷ 93,000 = $2.69 per unit

c. Theoretical = (125,000 – 97,000) x $2.00 = $56,000 U

Practical = (97,200 – 97,000) x $2.57 = $514 U

Normal = (93,000 – 97,000) x $2.69 = $10,760 F

d. 94,000 x $14 = $1,316,000

94,000 x ($6 + $2.00) = $752,000

94,000 x ($6 + $2.57) = $805,580

94,000 x ($6 + $2.69) = $816,860

129. Knuckles is trying to determine a denominator level for the company’s budgeted production that will accurately portray the fixed-MOH cost per unit. The level should provide a solid gross margin and operating income. The company wants to set an achievable denominator so employees are not discouraged, but that will also motivate the employees to work harder to reach the goal.

Knuckles has come up with three fixed-MOH capacity options with fixed-MOH expected to be $240,000 next year.

Theoretical level 120,000 units

Practical level 110,000 units

Normal level 100,000 units

Instructions

a. Calculate the budgeted fixed MOH rate of each level. (Round to the nearest cent.)

b. Which level will generate the highest estimated gross margin per unit?

c. Which level will generate the highest operating income in total? Explain your answer.

d. Which level will best achieve Knuckles' goal of improving employee motivation? Why?

e. Which level represents the most accurate measurement of the fixed-MOH cost per unit? Why?

Ans: N/A, LO 4, Bloom: AN, Difficulty: Medium, AACSB: None, AICPA: BB Resource Management, IMA: Strategic Planning

Answer:

a. Theoretical = $2.00 per unit

Practical = $2.18 per unit

Normal = $2.40 per unit

b. Theoretical

c. Theoretical. This level has the lowest cost per unit. A lower cost per unit indicates a lower COGS and a higher operating income.

d. Practical – This level is challenging yet feasible.

e. Practical - This level applies a moderate fixed-MOH rate with a moderate product cost and moderate prices.

Answer:

a. Theoretical = $240,000 ÷ 120,000 = $2.00 per unit

Practical = $240,000 ÷ 110,000 = $2.18 per unit

Normal = $240,000 ÷ 100,000 = $2.40 per unit

Problems

130. Vasquez Supply Company hired Adrianna as its accountant to replace a retiree. She comes with experience in various industries and can prepare financial statements that use standard costing within an absorption costing system. However, Vasquez would like to prepare its financial statements using variable costing for its internal reports.

Adrianna has gathered the following information for the last 2 years of operation

Budgeted production 120,000 units

Budgeted fixed manufacturing costs $720,000

Budgeted fixed operating expenses $535,000

Budgeted variable operating expenses $12 per unit

Budgeted variable manufacturing cost $32 per unit

Budgeted selling price $60 per unit

2025 2026

Beginning FG Inventory (in units) - 2,600

Actual units produced 115,000 122,000

Sales (in units) 112,400 124,000

Adrianna noted there were no price or efficiency variances for either year. It’s the company’s policy to write off any fixed-MOH volume variances directly to COGS.

Instructions

a. Determine the per-unit cost that would be capitalized under each costing system.

b. Calculate the ending FG Inventory balance under each costing system for 2026.

c. Calculate the Fixed-MOH volume variance for (1) 2025 and (2) 2026. List amount and sign.

d. Prepare an income statement for both years under absorption costing.

e. Prepare an income statement for both years under variable costing.

f. Calculate the difference in operating income (if any) between the two methods for (1) 2025 and (2) 2026. Explain any differences with calculations.

g. Which method would you recommend for internal performance evaluation purposes and why?

h. Which method would you recommend when preparing your financial statements to obtain a loan and why?

Ans: N/A, LO 1, 2, 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Decision Modeling, IMA: Cost Management.

Answer:

a. Absorption = $38.00 per unit

Variable = $32.00 per unit

b. Absorption = $22,800

Variable = $19,200

c. 2025 = $30,000 U

2026 = $12,000 F

2025 2026

Sales $6,744,000 $7,440,000

Less: COGS

COGS (unadjusted) $4,271,200 $4,712,000

Fixed-MOH volume variance 30,000 (12,000)

Adjusted COGS 4,301,200 4,700,000

Gross margin 2,442,800 2,740,000

Less: Operating expenses

Variable 1,348,800 1,488,000

Fixed 535,000 1,883,800 535,000 2,023,000

Operating income $ 559,000 $ 717,000

2025 2026

Sales $6,744,000 $7,440,000

Less: Variable expenses

COGS $3,596,800 $3,968,000

Operating expenses 1,348,800 4,945,600 1,488,000 5,456,000

Contribution margin 1,798,400 1,984,000

Less: Fixed expenses

Manufacturing costs 720,000 720,000

Operating expenses 535,000 1,255,000 535,000 1,255,000

Operating income $ 543,400 $ 729,000

f. 2025 – difference is $15,600 ((115,000 – 112,400) x $6)

2026 – difference is $12,000 ((122,000 – 124,000) x $6)

g. Variable costing – it supports management decision-making as it separates costs by behavior. It also better aligns manager, subunit, and company goals as building inventory is no longer an incentive for improvement.

h. Absorption costing – GAAP requires all financial statements be reported under absorption costing for external purposes. This method capitalizes fixed-MOH costs until the product is sold, per the expense recognition principal.

Solution:

a. Absorption = ($720,000 ÷ 120,000) = $6 + $32 = $38.00 per unit

b. 2,600 + 122,000 – 124,000 = 600 units in ending inventory

Absorption = 600 x $38 = $22,800

Variable = 600 x 32$ = $19,200

c. 2025 = $720,000 – (115,000 x $6) = $30,000 U

2026 = $720,000 – (122,000 x $6) = $12,000 F

d. 2025

Sales = 112,400 x $60 = $6,744,000

COGS = 112,400 x $38 = $4,271,200

V Operating expenses = 112,400 x $12 = 1,348,800

2026

Sales = 124,000 x $60 = $7,440,000

COGS = 124,000 x $38 = $4,712,000

V Operating expenses = 124,000 x $12 = 1,488,000

e. See part d solutions for sales and V operating expenses

2025

COGS = 112,400 x $32 = $3,596,800

2026

COGS = 124,000 x $32 = $3,968,000

f. 2025

$559,000 - $543,400 = $15,600

(115,000 – 112,400) x $6 = $15,600

2026

$717,000 - $729,000 = $12,000

(122,000 – 124,000) x $6 = $12,000

131. Utensils N More manufactures a special ladle that sits upright or can be attached to any pot. The accounting manager, Candace, presents three different income statements to the board of directors at year-end. The board understands absorption costing, as they evaluate the gross margin and gross margin rate on a regular basis. However, it’s Candace’s job to help them understand how fixed-MOH affects the product cost under absorption costing.

Information for three possible capacity levels is shown below. Candace also notes there are no price or efficiency variances this period. Therefore, any fixed-MOH volume variance is written off to COGS.

Budgeted fixed-MOH cost $300,000

Budgeted fixed operating cost $200,000

Budgeted variable manufacturing cost $26 per unit

Budgeted variable operating cost $4 per unit

Theoretical capacity 25,000 units

Practical capacity 20,000 units

Normal capacity 15,000 units

Beginning FG Inventory 3,000 units

Selling price $65 per unit

2025 2026

Actual units produced 18,800 19,200

Sales (in units) $18,700 $19,500

Instructions

a. Calculate the cost per unit that would be capitalized under each possible denominator level. Break out the variable and fixed components and list the total cost per unit.

b. Calculate the fixed-MOH volume variance for each denominator level, identifying amount and sign, for (1) 2025 and (2) 2026.

c. Prepare income statements for 2025 for each denominator level.

d. Prepare income statements for 2026 for each denominator level.

e. Why is income the same or different under each denominator level?

f. What gross margin percentage is earned under each capacity level for (1) 2025 and (2) 2026?

g. If the budgeted sales volume for 2025 was 19,000 units, prepare an income statement for 2025 if Candace used the budgeted sales as its denominator. (Round the fixed-MOH cost per unit to the nearest two cents.)

h. Candace is worried that the demand will decrease in 2027. If the budgeted demand does decrease, how will that affect the fixed-MOH rate? The gross margin and operating income? Should Candace increase the selling price on the ladles? Explain your answer.

Ans: N/A, LO 1, 4 Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Decision Modeling, IMA: Cost Management.

Answer

Theoretical

Variable cost per unit = $26

Fixed cost per unit = $12

Total cost per unit = $38

Practical

Variable cost per unit = $26

Fixed cost per unit = $15

Total cost per unit = $41

Normal

Variable cost per unit = $26

Fixed cost per unit = $20

Total cost per unit = $46

2025

Theoretical 74,400 U

Practical 18,000 U

Normal 76,000 F

2026

Theoretical 69,600 U

Practical 12,000 U

Normal 84,000 F

Theoretical Practical Normal

Sales $1,215,500 $1,215,500 $1,215,500

Less: COGS

COGS (unadjusted) $710,600 $766,700 $860,200

Fixed-MOH volume variance 74,400 18,000 (76,000)

Adjusted COGS 785,000 784,700 784,200

Gross margin 430,500 430,800 431,300

Less: Operating expenses

Variable 74,800 74,800 74,800

Fixed 200,000 274,800 200,000 274,800 200,000 274,800

Operating income $ 155,700 $ 156,000 $ 156,500

Theoretical Practical Normal

Sales $1,267,500 $1,267,500 $1,267,500

Less: COGS

COGS (unadjusted) $741,000 $799,500 $897,000

Fixed-MOH volume variance 69,600 12,000 (84,000)

Adjusted COGS 810,600 811,500 813,000

Gross margin 456,900 456,000 454,500

Less: Operating expenses

Variable 78,000 78,000 78,000

Fixed 200,000 278,000 200,000 278,000 200,000 278,000

Operating income $ 178,900 $ 178,000 $ 176,500

e. With any absorption costing income statement, income varies depending on how many units were sold versus how many units were produced. For 2025, theoretical compared to practical, the difference was $300. The fixed-MOH cost between the 2 levels varied by $3 ($12 – $15) and the units sold compared to the units produced varied by 100 units (18,800 – 18,700). So, 100 units x $3 per unit = $300. This same calculation between methods will work to describe the variances amongst methods.

f. 2025 = 35%

2026 = 36%

Because of the minor differences in gross margin between the three methods, all three methods gross margin rate will be the same each year.

Sales $1,215,500

Less: COGS

COGS (unadjusted) $781,473

Fixed-MOH volume variance 3,158

Adjusted COGS 784,631

Gross margin 430,869

Less: Operating expenses

Variable 74,800

Fixed 200,000 274,800

Operating income $ 156,069

h. If demand decreases, the fixed-MOH rate will increase, causing the overall product cost to increase. This increase will reduce gross margin and operating income. While increasing prices will help the bottom line, if prices follow costs, this could create a downward demand spiral. Candace should not increase the prices on the ladles.

Solution

a. Variable cost per unit given

Total cost per unit = Variable cost per unit + Fixed cost per unit

Theoretical

Fixed cost per unit = $300,000 ÷ 25,000 = $12

Practical

Fixed cost per unit = $300,000 ÷ 20,000 = $15

Normal

Fixed cost per unit = $300,000 ÷ 15,000 = $20

2025

Theoretical 74,400 U (25,000 – 18,800) x $12

Practical 18,000 U (20,000 – 18,800) x $15

Normal 76,000 F (15,000 – 18,800) x $20

2026

Theoretical 69,600 U (25,000 – 19,200) x $12

Practical 12,000 U (20,000 – 19,200) x $15

Normal 84,000 F (15,000 – 19,200) x $20

c. Sales = 18,700 x 65 = 1,215,500

Variable operating expenses = 18,700 x $4 = $74,800

COGS:

Theoretical 710,600 18,700 x $38

Practical 766,700 18,700 x $41

Normal 860,200 18,700 x $46

d. Sales = 19,500 x 65 = 1,267,500

Variable operating expenses = 19,500 x $4 = $78,000

COGS:

Theoretical 741,000 19,500 x $38

Practical 799,500 19,500 x $41

Normal 897,000 19,500 x $46

f. Gross margin rate = gross margin ÷ sales

2025

Theoretical = $430,500 ÷ $1,215,500 = 35%

Practical = $430,800 ÷ $1,215,500 = 35%

Normal = $431,300 ÷ $1,215,500 = 35%

2025

Theoretical = $456,900 ÷ $1,267,500 = 36%

Practical = $456,000 ÷ $1,267,500 = 36%

Normal = $454,500 ÷ $1,267,500 = 36%

g. Fixed MOH-rate = $300,000 ÷ $19,000 = $15.79

Unit cost = $15.79 + $26 = $41.79

Fixed MOH volume variance = (19,000 – 18,700) x $15.79 = $3,158 U

COGS = 18,700 x $41.79 = $781,473

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Created Date:

Aug 21, 2025

Chapter Name:

Chapter 12 Absorption Versus Variable Costing

Author:

Karen Congo Farmer

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