Inventory Costing – Ch9 | Complete Test Bank 17e - Horngrens Cost Accounting 17th Global Edition | Test Bank with Answer Key by Srikant M. Datar, Madhav V. Rajan. DOCX document preview.

Inventory Costing – Ch9 | Complete Test Bank 17e

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 9 Inventory Costing and Capacity Analysis

Objective 9.1

1) Which of the following costs is inventoried when using variable costing?

A) rent on factory building

B) electricity consumed in manufacturing process

C) sales commission paid on each sale

D) advertising costs incurred for the product

Diff: 1

Objective: 1

AACSB: Application of knowledge

2) Which of the following costs is inventoried when using absorption costing?

A) variable selling costs

B) fixed administrative costs

C) variable manufacturing costs

D) fixed selling costs

Diff: 1

Objective: 1

AACSB: Analytical thinking

3) Which of the following best describes how fixed cost are treated in a variable cost method?

A) They are part of the product cost.

B) They are excluded from inventory cost and are treated as period costs.

C) They are allocated to the product cost using a denominator-level capacity choice.

D) They are classified as nonmanufacturing costs.

Diff: 1

Objective: 1

AACSB: Analytical thinking

4) ________ is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs.

A) Variable costing

B) Mixed costing

C) Absorption costing

D) Standard costing

Diff: 2

Objective: 1

AACSB: Analytical thinking

5) Which of the following is true of absorption costing?

A) It expenses marketing costs as cost of goods sold.

B) It treats direct manufacturing costs as a period cost.

C) It includes fixed manufacturing overhead as an inventoriable cost.

D) It treats indirect manufacturing costs as a period cost.

Diff: 2

Objective: 1

AACSB: Analytical thinking

6) Which of the following is true of variable costing?

A) It expenses administrative costs as cost of goods sold.

B) It treats direct manufacturing costs as a product cost.

C) It includes fixed manufacturing overhead as an inventoriable cost.

D) It is required for external reporting to shareholders.

Diff: 2

Objective: 1

AACSB: Analytical thinking

7) In ________, fixed manufacturing costs are included as inventoriable costs.

A) variable costing

B) absorption costing

C) throughput costing

D) activity-based costing

Diff: 1

Objective: 1

AACSB: Analytical thinking

8) ________ method includes fixed manufacturing overhead costs as inventoriable costs.

A) Variable costing

B) Absorption costing

C) Throughput costing

D) Activity-based costing

Diff: 1

Objective: 1

AACSB: Analytical thinking

9) Which of the following costs will be treated as period costs under absorption costing?

A) raw materials used in the production

B) sales commission paid on sale of product

C) depreciation on factory equipment

D) rent for factory building

Diff: 2

Objective: 1

AACSB: Application of knowledge

10) Under absorption costing, fixed manufacturing costs:

A) are period costs

B) are inventoriable costs

C) are treated as an expense

D) are sunk costs

Diff: 1

Objective: 1

AACSB: Analytical thinking

11) ________ is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs.

A) Fixed costing

B) Variable costing

C) Absorption costing

D) Mixed costing

Diff: 1

Objective: 1

AACSB: Analytical thinking

12) Variable costing regards fixed manufacturing overhead as a(n):

A) administrative cost

B) inventoriable cost

C) period cost

D) product cost

Diff: 1

Objective: 1

AACSB: Analytical thinking

13) Which of the following statements is true regarding costing systems?

A) Under direct costing variable overhead costs only direct variable costs are considered inventoriable.

B) Under direct costing (also called variable costing) variable nonmanufacturing costs are inventoriable.

C) Both absorption costing and variable costing treat all nonmanufacturing costs as period costs.

D) Some period costs are "absorbed" into a product's cost under absorption costing.

Diff: 2

Objective: 1

AACSB: Analytical thinking

14) AAA Manufacturing Inc, makes a product with the following costs per unit:

Direct materials $130

Direct labor $70

Manufacturing overhead (variable) $40

Manufacturing overhead (fixed) $180

Marketing costs $95

What would be the inventoriable cost per unit under variable costing and what would it be under absorption costing?

A) $130 for variable costing and $335 under absorption costing

B) $240 for variable costing and $335 under absorption costing

C) $240 for variable costing and $420 under absorption costing

D) $200 for variable costing and $335 under absorption costing

Diff: 2

Objective: 1

AACSB: Application of knowledge

15) Time Again, LLC produces and sells a mantel clock for $140 per unit. In 2020, 40,000 clocks were produced and 37,000 were sold. Other information for the year includes:

Direct materials $45 per unit

Direct manufacturing labor $9 per unit

Variable manufacturing costs $4.50 per unit

Sales commissions $12.50 per part

Fixed manufacturing costs $64.50 per unit

Administrative expenses, all fixed $39.00 per unit

What is the inventoriable cost per unit using variable costing?

A) $71.00

B) $58.50

C) $54.00

D) $110.00

Diff: 2

Objective: 1

AACSB: Application of knowledge

16) Time Again LLC produces and sells a mantel clock for $190 per unit. In 2020, 44,000 clocks were produced and 35,000 were sold. Other information for the year includes:

Direct materials $44 per unit

Direct manufacturing labor $9 per unit

Variable manufacturing costs $4.50 per unit

Sales commissions $14.00 per part

Fixed manufacturing costs $4.00 per unit

Administrative expenses, all fixed $39.00 per unit

What is the inventoriable cost per unit using absorption costing?

A) $53.00

B) $57.50

C) $61.50

D) $110.50

Diff: 2

Objective: 1

AACSB: Application of knowledge

17) Fast Track Auto produces and sells an auto part for $80 per unit. In 2020, 130,000 parts were produced and 90,000 units were sold. Other information for the year includes:

Direct materials $25 per unit

Direct manufacturing labor $4 per unit

Variable manufacturing costs $3 per unit

Sales commissions $7 per part

Fixed manufacturing costs $750,000 per year

Administrative expenses, all fixed $300,000 per year

What is the inventoriable cost per unit using variable costing?

A) $25

B) $29

C) $32

D) $39

Diff: 2

Objective: 1

AACSB: Application of knowledge

18) Fast Track Auto produces and sells an auto part for $85 per unit. In 2020, 125,000 parts were produced and 90,000 units were sold. Other information for the year includes:

Direct materials $21 per unit

Direct manufacturing labor $6 per unit

Variable manufacturing costs $3 per unit

Sales commissions $6 per part

Fixed manufacturing costs $760,000 per year

Administrative expenses, all fixed $270,000 per year

What is the inventoriable cost per unit using absorption costing?

A) $30.00

B) $36.00

C) $36.08

D) $38.24

Diff: 2

Objective: 1

AACSB: Application of knowledge

19) Variable costing only includes direct manufacturing costs in inventoriable costs.

Diff: 1

Objective: 1

AACSB: Analytical thinking

20) The unit cost of a product is always higher in variable costing than in absorption costing.

Diff: 1

Objective: 1

AACSB: Analytical thinking

21) Under variable costing, lease charges paid on the factory building is an inventoriable cost.

Diff: 1

Objective: 1

AACSB: Analytical thinking

22) Under both variable and absorption costing, research and development costs are period costs.

Diff: 1

Objective: 1

AACSB: Analytical thinking

23) Variable costing is also called direct costing because it considers other nonmanufacturing direct costs, such as direct marketing costs as inventoriable costs.

Diff: 1

Objective: 1

AACSB: Analytical thinking

24) Absorption costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs.

Diff: 1

Objective: 1

AACSB: Analytical thinking

25) The term direct costing means that only direct variable costs are considered inventoriable under variable costing, whereas fixed direct costs, such as marketing costs, are considered period costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

26) One commonality between absorption costing and variable costing is that under both costing methods, all variable manufacturing costs are inventoriable costs and all nonmanufacturing costs in the value chain (such as research and development and marketing), whether variable or fixed, are period costs.

Diff: 2

Objective: 1

AACSB: Analytical thinking

27) Under both variable costing and absorption costing fixed manufacturing costs are not inventoried but are treated as a period expense.

Diff: 2

Objective: 1

AACSB: Analytical thinking

28) For 2020, Rockford, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included:

Direct manufacturing labor $197,500

Variable manufacturing overhead 100,000

Direct materials 160,000

Variable selling expenses 100,000

Fixed administrative expenses 100,000

Fixed manufacturing overhead 250,000

There was no beginning inventory.

Required:

a. Compute the ending finished goods inventory under both absorption and variable costing.

b. Compute the cost of goods sold under both absorption and variable costing.

a. Absorption Variable

Direct materials $160,000 $160,000

Direct manufacturing labor 197,500 197,500

Variable manufacturing overhead 100,000 100,000

Fixed manufacturing overhead 250,000 0

Total $707,500 $457,500

Unit costs:

$707,500/200,000 units $3.5375

$457,500/200,000 units $2.2875

Ending inventory:

50,000 units × $3.5375 $176,875

50,000 units × $2.2875 $114,375

b. Cost of goods sold:

150,000 × $3.5375 $530,625

150,000 × $2.2875 $343,125

Diff: 2

Objective: 1

AACSB: Application of knowledge

29) Fisher Technology Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 3,000 units produced and 2,500 units sold. The manufacturing variable cost per unit is $385 and the variable operating cost per unit was $312.50. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $925.

Required:

Prepare the income statement for Fisher Technology Corporation for September under variable costing.

Revenues (2,500 × $925) $2,312,500

Variable costs

Beginning inventory $ 0

Variable manufacturing costs (3,000 × $385) 1,155,000

Cost of goods available 1,155,000

Deduct ending inventory (500 × $385) (192,500)

Variable cost of goods sold 962,500

Variable operating costs (2,500 × $312.50) 781,250

Total variable costs 1,743,750

Contribution margin 568,750

Fixed costs

Fixed manufacturing costs 450,000

Fixed operating costs 75,000

Total fixed costs 525,000

Operating income $ 43,750

Diff: 2

Objective: 1

AACSB: Application of knowledge

30) a. Explain the difference between the variable and absorption costing methods.

b. Which method(s) are required for external reporting? For internal reporting?

a. Absorption costing includes both fixed and variable manufacturing costs as inventoriable costs, whereas variable costing only includes variable manufacturing costs as inventoriable costs.

b. Absorption costing is required for external reporting to shareholders and for income tax reporting. A company may use whichever method it chooses for internal reporting purposes.

Diff: 2

Objective: 1

AACSB: Analytical thinking

Objective 9.2

1) The contribution-margin format is used for:

A) variable costing income statement

B) mixed costing income statement

C) absorption costing income statement

D) job order costing income statement

Diff: 2

Objective: 2

AACSB: Analytical thinking

2) The gross-margin format is used for:

A) variable costing income statement

B) mixed costing income statement

C) absorption costing income statement

D) standard costing income statement

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Which of the following statements is true of contribution-margin format of the income statement?

A) It is used for absorption costing.

B) It distinguishes between variable and fixed costs in its format.

C) It distinguishes manufacturing costs from nonmanufacturing costs.

D) It calculates gross margin.

Diff: 3

Objective: 2

AACSB: Analytical thinking

4) Which of the following statements is true of gross-margin format of the income statement?

A) It distinguishes between manufacturing and nonmanufacturing costs.

B) It distinguishes variable costs from fixed costs.

C) It is used for variable costing.

D) It calculates the contribution margin from sales.

Diff: 2

Objective: 2

AACSB: Analytical thinking

5) Which of the following would be subtracted from sales while calculating contribution margin in a variable costing format of an operating income statement?

A) direct labor in factory

B) rent on factory building

C) rent on the headquarters building

D) sales commission on incremental sales

Diff: 2

Objective: 2

AACSB: Analytical thinking

6) ________ are subtracted from sales to calculate gross margin.

A) Variable and fixed manufacturing costs

B) Fixed administrative costs

C) Variable administrative costs

D) Fixed selling costs

Diff: 2

Objective: 2

AACSB: Analytical thinking

7) When reviewing the income statements of a firm prepared under both absorption costing and variable costing, which of the following observation would be made?

A) Ending finished goods will differ between the two methods due to the different handling of fixed production costs.

B) Ending finished goods to be reported under the two methods will be equal.

C) Cost of goods sold will be the same under both methods however, operating income will differ.

D) Gross margin will differ under both methods but operating income will be the same.

Diff: 2

Objective: 2

AACSB: Analytical thinking

8) Somerset Finishing produces and sells a decorative pillow for $104.00 per unit. In the first month of operation, 2,200 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

Variable manufacturing costs $24.00 per unit

Variable marketing costs $3.90 per unit

Fixed manufacturing costs $13 per unit

Administrative expenses, all fixed $23.00 per unit

Ending inventories:

Direct materials -0-

WIP -0-

Finished goods 450 units

What is cost of goods sold per unit using variable costing?

A) $24.00

B) $40.90

C) $63.90

D) $27.90

Diff: 2

Objective: 2

AACSB: Application of knowledge

9) Somerset Finishing produces and sells a decorative pillow for $104.00 per unit. In the first month of operation, 2,300 units were produced and 1,800 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

Variable manufacturing costs $24.00 per unit

Variable marketing costs $5.00 per unit

Fixed manufacturing costs $15 per unit

Administrative expenses, all fixed $19.50 per unit

Ending inventories:

Direct materials -0-

WIP -0-

Finished goods 500 units

What is cost of goods sold using variable costing?

A) $43,200

B) $79,200

C) $146,050

D) $66,700

Diff: 2

Objective: 2

AACSB: Application of knowledge

10) Swan Textiles Inc. produces and sells a decorative pillow for $97.50 per unit. In the first month of operation, 2,300 units were produced and 1,900 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

Variable manufacturing costs $22.00 per unit

Variable marketing costs $7.00 per unit

Fixed manufacturing costs $16 per unit

Administrative expenses, all fixed $20.00 per unit

Ending inventories:

Direct materials -0-

WIP -0-

Finished goods 400 units

What is the contribution margin using variable costing?

A) $143,450

B) $130,150

C) $171,950

D) $134,650

Diff: 3

Objective: 2

AACSB: Application of knowledge

11) Swan Textiles Inc. produces and sells a decorative pillow for $103.00 per unit. In the first month of operation, 2,300 units were produced and 1,900 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

Variable manufacturing costs $24.00 per unit

Variable marketing costs $6.00 per unit

Fixed manufacturing costs $14 per unit

Administrative expenses, all fixed $19.50 per unit

Ending inventories:

Direct materials -0-

WIP -0-

Finished goods 400 units

What is the operating income using variable costing?

A) $138,700

B) $75,050

C) $112,100

D) $61,650

Diff: 3

Objective: 2

AACSB: Application of knowledge

12) Jean Peck's Furniture manufactures tables for hospitality sector. It takes only bulk orders and each table is sold for $300 after negotiations. In the month of January, it manufactures 3,200 tables and sells 2,400 tables. Actual fixed costs are the same as the amount of fixed costs budgeted for the month.

The following information is provided for the month of January:

Variable manufacturing costs $140 per unit

Fixed manufacturing costs $105,000 per month

Fixed Administrative expenses $27,000 per month

At the end of the month Jean Peck's Furniture has an ending inventory of finished goods of 800 units. The company also incurs a sales commission of $14 per unit.

What is the cost of goods sold per unit when using absorption costing?

A) $140.00

B) $107.19

C) $172.81

D) $186.81

Diff: 2

Objective: 2

AACSB: Application of knowledge

13) Jean Peck's Furniture manufactures tables for hospitality sector. It takes only bulk orders and each table is sold for $400 after negotiations. In the month of January, it manufactures 3,200 tables and sells 2,400 tables. Actual fixed costs are the same as the amount of fixed costs budgeted for the month.

The following information is provided for the month of January:

Variable manufacturing costs $120 per unit

Fixed manufacturing costs $90,000 per month

Fixed Administrative expenses $30,000 per month

At the end of the month Jean Peck's Furniture has an ending inventory of finished goods of 800 units. The company also incurs a sales commission of $14 per unit.

What is the gross margin when using absorption costing? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $627,200

B) $806,400

C) $485,984

D) $604,488

Diff: 2

Objective: 2

AACSB: Application of knowledge

14) Jean Peck's Furniture manufactures tables for hospitality sector. It takes only bulk orders and each table is sold for $600 after negotiations. In the month of January, it manufactures 3,200 tables and sells 2,600 tables. Actual fixed costs are the same as the amount of fixed costs budgeted for the month.

The following information is provided for the month of January:

Variable manufacturing costs $120 per unit

Fixed manufacturing costs $95,000 per month

Fixed Administrative expenses $27,000 per month

At the end of the month Jean Peck's Furniture has an ending inventory of finished goods of 600 units. The company also incurs a sales commission of $13 per unit.

What is the operating income when using absorption costing? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $1,143,806

B) $1,170,806

C) $1,110,006

D) $1,137,006

Sales ($600 × 2,600)

$1,560,000

Cost of goods sold (($120+ ($95,000/ 3,200) ) × 2,600 units)

$(389,194)

Gross margin

$1,170,806

Administrative expenses

$(27,000)

Variable selling expenses ($13 × 2,600)

$(33,800)

Operating income

$1,110,006

Diff: 3

Objective: 2

AACSB: Application of knowledge

15) Speedy Supplies sells a product at a price of $150. Its variable manufactured cost is $24 and the variable marketing cost per unit is $17.50 with fixed cost per period of $80,000. What would be the change in operating income under variable costs if sales increase from 10,000 to 10,100 units?

A) $12,600

B) $10,850

C) $13,250

D) Loss of $69,150

Diff: 2

Objective: 2

AACSB: Application of knowledge

16) If the unit level of inventory increases during an accounting period, then:

A) less operating income will be reported under absorption costing than variable costing

B) more operating income will be reported under absorption costing than variable costing

C) operating income will be the same under absorption costing and variable costing

D) the exact effect on operating income cannot be determined

Diff: 2

Objective: 2

AACSB: Analytical thinking

17) Which of the following statements is true?

A) When production is equal to sales, operating income will be greater under variable costing than under absorption costing.

B) When production is greater than sales, operating income will be lower under variable costing than absorption costing.

C) When production is less than sales, operating income is higher under absorption costing than variable costing.

D) When production is greater than sales, operating income is greater under variable costing than under variable costing.

Diff: 3

Objective: 2

AACSB: Analytical thinking

18) One possible means of determining the difference between operating incomes for absorption costing and variable costing is by:

A) subtracting sales of the previous period from sales of this period

B) subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory

C) multiplying the number of units produced by the budgeted fixed manufacturing cost rate

D) adding fixed manufacturing costs to the production-volume variance

Diff: 3

Objective: 2

AACSB: Analytical thinking

19) When comparing the operating incomes between absorption costing and variable costing, and ending finished inventory exceeds beginning finished inventory, it may be assumed that:

A) sales decreased during the period

B) variable cost per unit is more than fixed cost per unit

C) there is a favorable production-volume variance

D) absorption costing operating income exceeds variable costing operating income

Diff: 3

Objective: 2

AACSB: Analytical thinking

20) Which of the following statements is true of absorption costing?

A) Absorption costing allocates fixed manufacturing overhead to actual units produced during the period.

B) Absorption costing carries over nonmanufacturing costs to the future periods.

C) Absorption costing shows the same level of profit as variable costing irrespective of the level of inventories.

D) Absorption costing allocates total manufacturing cost using the budgeted level of production for a particular year.

Diff: 2

Objective: 2

AACSB: Analytical thinking

21) Garfield Company has the following information for the current year:

Beginning fixed manufacturing overhead in inventory $250,000

Fixed manufacturing overhead in production 800,000

Ending fixed manufacturing overhead in inventory 90,000

Beginning variable manufacturing overhead in inventory $50,000

Variable manufacturing overhead in production 110,000

Ending variable manufacturing overhead in inventory 30,000

What is the difference between operating incomes under absorption costing and variable costing?

A) $160,000

B) $110,000

C) $20,000

D) $80,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

22) The following information pertains to Stone Wall Corporation:

Beginning fixed manufacturing overhead in inventory $75,000

Ending fixed manufacturing overhead in inventory 47,000

Beginning variable manufacturing overhead in inventory $34,000

Ending variable manufacturing overhead in inventory 17,000

Fixed selling and administrative costs $77,000

Units produced 5,100 units

Units sold 4,200 units

What is the difference between operating incomes under absorption costing and variable costing?

A) $11,000

B) $45,000

C) $28,000

D) $14,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

23) Freetown Corporation incurred fixed manufacturing costs of $32,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,400 units.

Units produced total 1,600 units.

Units sold total 1,300 units.

Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $17,329

B) $26,000

C) $32,000

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

24) Freetown Corporation incurred fixed manufacturing costs of $36,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,600 units.

Units produced total 1,500 units.

Units sold total 1,300 units.

Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

Fixed manufacturing costs included in ending inventory total: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $4,800

B) $5,538

C) $2,770

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

25) Freetown Corporation budgeted fixed manufacturing costs of $34,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,400 units.

Units produced total 1,500 units.

Units sold total 1,300 units.

Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

The production-volume variance is: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $2,834

B) $12,753

C) $15,587

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

26) Freetown Corporation incurred fixed manufacturing costs of $34,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,600 units.

Units produced total 1,800 units.

Units sold total 1,200 units.

Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

Operating income using absorption costing will be ________ than operating income if using variable costing. (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $18,312 higher

B) $11,333 lower

C) $7,848 higher

D) $15,692 lower

Diff: 3

Objective: 2

AACSB: Application of knowledge

27) Venus Corporation incurred fixed manufacturing costs of $6,600 during 2020. Other information for 2020 includes:

The budgeted denominator level is 1,600 units.

Units produced total 770 units.

Units sold total 640 units.

Beginning inventory was zero.

The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:

A) $2,640

B) $5,486

C) $6,600

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

28) Venus Corporation incurred fixed manufacturing costs of $6,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 1,000 units.

Units produced total 770 units.

Units sold total 640 units.

Beginning inventory was zero.

The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

Fixed manufacturing costs included in ending inventory total:

A) $1,013

B) $1,380

C) $780

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

29) Venus Corporation incurred fixed manufacturing costs of $6,100 during 2020. Other information for 2020 includes:

The budgeted denominator level is 1,400 units.

Units produced total 750 units.

Units sold total 600 units.

Beginning inventory was zero.

The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

The production-volume variance totals:

A) $1,220

B) $654

C) $2,832

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

30) Venus Corporation incurred fixed manufacturing costs of $6,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 1,000 units.

Units produced total 760 units.

Units sold total 630 units.

Beginning inventory was zero.

The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

Operating income using variable costing will be ________ than operating income if using absorption costing.

A) $1,440 higher

B) $1,440 lower

C) $3,780 higher

D) $780 lower

Diff: 3

Objective: 2

AACSB: Application of knowledge

31) Jupiter Corporation incurred fixed manufacturing costs of $19,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,100 units.

Units produced total 2,400 units.

Units sold total 1,900 units.

Variable cost per unit is $5

Beginning inventory is zero.

The fixed manufacturing cost rate is based on the budgeted denominator level.

Under absorption costing, total manufacturing costs expensed on the income statement (excluding adjustments for variances) total: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $33,720

B) $26,695

C) $29,195

D) $17,195

Diff: 3

Objective: 2

AACSB: Application of knowledge

32) Jupiter Corporation incurred fixed manufacturing costs of $18,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,200 units.

Units produced total 2,500 units.

Units sold total 1,700 units.

Variable cost per unit is $6

Beginning inventory is zero.

The fixed manufacturing cost rate is based on the budgeted denominator level.

Under absorption costing, the production-volume variance is: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) $4,254

B) $2,200

C) $2,454

D) $0

Diff: 3

Objective: 2

AACSB: Application of knowledge

33) Jupiter Corporation incurred fixed manufacturing costs of $20,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,000 units.

Units produced total 2,200 units.

Units sold total 1,900 units.

Variable cost per unit is $5

Beginning inventory is zero.

The fixed manufacturing cost rate is based on the budgeted denominator level.

Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:

A) $20,000

B) $19,000

C) $30,000

D) $0

Diff: 2

Objective: 2

AACSB: Application of knowledge

34) Jupiter Corporation incurred fixed manufacturing costs of $17,000 during 2020. Other information for 2020 includes:

The budgeted denominator level is 2,400 units.

Units produced total 2,600 units.

Units sold total 1,800 units.

Variable cost per unit is $6

Beginning inventory is zero.

The fixed manufacturing cost rate is based on the budgeted denominator level.

The operating income using variable costing will be ________ as compared to the operating income under absorption costing. (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A) lower by $5,664.00

B) lower by $1,416.00

C) higher by $5,664.00

D) higher by $1,416.00

Diff: 3

Objective: 2

AACSB: Application of knowledge

35) In general, if inventory increases during an accounting period:

A) variable costing will report less operating income than absorption costing

B) absorption costing will report less operating income than variable costing

C) variable costing and absorption costing will report the same operating income

D) both variable costing and absorption costing will show losses

Diff: 3

Objective: 2

AACSB: Application of knowledge

36) At the end of the accounting period, Armstrong Corporation reports operating income of $30,000. Which of the following statements is true, if Armstrong's inventory levels decrease during the accounting period?

A) Variable costing will report less operating income than absorption costing.

B) Absorption costing will report less operating income than variable costing.

C) Variable costing and absorption costing will report the same operating income since the cost of goods sold is the same.

D) Variable costing and absorption costing will report the same operating income since the total costs are the same.

Diff: 3

Objective: 2

AACSB: Application of knowledge

37) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by:

A) changes in the quantity of units actually sold

B) changes in the quantity of units produced

C) changes in ending inventory

D) changes in sales price per unit

Diff: 3

Objective: 2

AACSB: Analytical thinking

38) The contribution-margin format of the income statement is used with absorption costing.

Diff: 1

Objective: 2

AACSB: Analytical thinking

39) The contribution-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs.

Diff: 1

Objective: 2

AACSB: Analytical thinking

40) Fixed manufacturing overhead is a period cost both under variable costing and under absorption costing.

Diff: 2

Objective: 2

AACSB: Analytical thinking

41) In variable costing, all nonmanufacturing costs are subtracted from contribution margin.

Diff: 1

Objective: 2

AACSB: Analytical thinking

42) In absorption costing, fixed manufacturing overhead is treated as a period cost.

Diff: 2

Objective: 2

AACSB: Analytical thinking

43) The basis of the difference between variable costing and absorption costing is how fixed manufacturing costs are accounted for.

Diff: 2

Objective: 2

AACSB: Analytical thinking

44) When production is less than sales, operating income will be the same regardless of whether variable cost or absorption costing is used.

Diff: 2

Objective: 2

AACSB: Analytical thinking

45) Absorption costing enables managers to increase operating income by increasing the unit level of sales, as well as by producing more units.

Diff: 2

Objective: 2

AACSB: Analytical thinking

46) Beginning inventory + cost of goods manufactured = Cost of goods sold + Ending inventory.

Diff: 1

Objective: 2

AACSB: Analytical thinking

47) When production is greater than sales, operating income under variable costing will be less than what it would be under absorption costing.

Diff: 1

Objective: 2

AACSB: Analytical thinking

48) The production-volume variance only exists under variable costing and not under absorption costing.

Diff: 1

Objective: 2

AACSB: Analytical thinking

49) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually manufactured.

Diff: 2

Objective: 2

AACSB: Analytical thinking

50) Absorption-costing income statements usually do not differentiate between variable and fixed costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

51) The production-volume variance, which relates only to fixed manufacturing overhead, exists under absorption costing but not under variable costing.

Diff: 2

Objective: 2

AACSB: Analytical thinking

52) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by such variables as changes in the quantity of units actually sold and fluctuations in actual selling prices.

Diff: 2

Objective: 2

AACSB: Analytical thinking

53) Aspen Manufacturing Company sells its products for $33 each. The current production level is 50,000 units, although only 40,000 units are anticipated to be sold.

Unit manufacturing costs are:

Direct materials $6.00

Direct manufacturing labor $9.00

Variable manufacturing costs $4.50

Total fixed manufacturing costs $180,000

Marketing expenses $3.00 per unit, plus $100,000 per year

Required:

a. Prepare an income statement using absorption costing.

b. Prepare an income statement using variable costing.

a. Absorption-costing income statement:

Sales (40,000 × $33) $1,320,000

Cost of goods sold (40,000 × $23.10*) 924,000

Gross margin 396,000

Marketing:

Variable (40,000 × $3) $120,000

Fixed 100,000 220,000

Operating income $176,000

* $6.00 + $9.00 + $4.50 + ($180,000/50,000) = $23.10

b. Variable-costing income statement:

Sales (40,000 × $33) $1,320,000

Variable costs:

Cost of goods sold (40,000 × $19.50*) $780,000

Marketing (40,000 × $3) 120,000 900,000

Contribution margin 420,000

Fixed costs:

Manufacturing $180,000

Marketing 100,000 280,000

Operating income $140,000

* $6.00 + $9.00 + $4.50 = $19.50

Diff: 2

Objective: 2

AACSB: Application of knowledge

54) Ireland Corporation planned to be in operation for three years.

∙ During the first year, 2018, it had no sales but incurred $240,000 in variable manufacturing expenses and $80,000 in fixed manufacturing expenses.

∙ In 2019, it sold half of the finished goods inventory from 2018 for $200,000 but it had no manufacturing costs.

∙ In 2020, it sold the remainder of the inventory for $240,000, had no manufacturing expenses and went out of business.

∙ Marketing and administrative expenses were fixed and totaled $40,000 each year.

Required:

a. Prepare an income statement for each year using absorption costing.

b. Prepare an income statement for each year using variable costing.

a. Absorption-costing income statements:

2018 2019 2020

Sales $0 $200,000 $240,000

Cost of goods sold 0 160,000 160,000

Gross margin 0 40,000 80,000

Marketing and administrative 40,000 40,000 40,000

Operating income $(40,000) $ 0 $40,000

b. Variable-costing income statements:

2018 2019 2020

Sales $ 0 $200,000 $240,000

Variable expenses 0 120,000 120,000

Contribution margin 0 80,000 120,000

Fixed expenses:

Manufacturing $80,000 $ 0 $ 0

Marketing and administrative 40,000 40,000 40,000

Total fixed 120,000 40,000 40,000

Operating income $(120,000) $40,000 $80,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

55) Jarvis Golf Company sells a special putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was:

Direct manufacturing labor per unit 15 minutes

Fixed selling and administrative costs $ 40,000

Fixed manufacturing overhead 132,000

Direct materials cost per unit 2

Direct manufacturing labor per hour 24

Variable manufacturing overhead per unit 4

Variable selling expenses per unit 2

Required:

a. Compute the cost per unit under both absorption and variable costing.

b. Compute the ending inventories under both absorption and variable costing.

c. Compute operating income under both absorption and variable costing.

a. Absorption Variable

Direct manufacturing labor ($24/4) $ 6.00 $ 6.00

Direct materials 2.00 2.00

Variable manufacturing overhead 4.00 4.00

Fixed manufacturing overhead ($132,000/30,000) 4.40 0

Total cost per unit $16.40 $12.00

b. Absorption Variable

Beginning inventory $0 $0

Cost of goods manufactured:

30,000 × $16.40 $492,000

30,000 × $12.00 ________ $360,000

Cost of goods available for sale $492,000 $360,000

Cost of goods sold:

28,000 × $16.40 $459,200

28,000 × $12.00 ________ $336,000

Ending inventory $ 32,800 $ 24,000

c. Absorption-costing income statement:

Sales (28,000 × $20) $560,000

Cost of goods sold (28,000 × $16.40) 459,200

Gross margin 100,800

Less:

Variable selling and administrative $56,000

Fixed selling and administrative 40,000 96,000

Operating income $ 4,800

Variable-costing income statement:

Sales (28,000 × $20) $560,000

Variable COGS (28,000 × $12) $336,000

Variable selling expenses (28,000 × $2) 56,000 392,000

Contribution margin 168,000

Fixed costs:

Manufacturing $132,000

Selling and administrative 40,000 172,000

Operating income $ (4,000)

Diff: 3

Objective: 2

AACSB: Application of knowledge

56) Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size lots.

As the lots are sold, they are cleared at an average cost of $5,000.

Storm drains and driveways are installed at an average cost of $8,000 per site.

Sales commissions are 10% of selling price.

Administrative costs are $850,000 per year.

The average selling price was $160,000 per lot during 2019 when 50 lots were sold.

During 2020, the company bought another 2,000-acre island and developed it exactly the same way. Lot sales in 2020 totaled 300 with an average selling price of $160,000. All costs were the same as in 2019.

Required:

Prepare income statements for both years using both absorption and variable costing methods.

Land cost $10,000,000/200 sites $50,000 $0

Clearing costs 5,000 5,000

Improvements 8,000 8,000

Total $63,000 $13,000

Absorption-costing income statements: 2019 2020

Sales $8,000,000 $48,000,000

Cost of goods sold:

50 × ($50,000 + $8,000 + $5,000) 3,150,000

300 × ($50,000 + $8,000 + $5,000) ________ 18,900,000

Gross margin $4,850,000 $29,100,000

Variable marketing 800,000 4,800,000

Fixed administrative 850,000 850,000

Operating income $3,200,000 $23,450,000

Variable-costing income statements: 2019 2020

Sales $8,000,000 $48,000,000

Variable expenses:

Cost of operations:

50 × $13,000 650,000

300 × $13,000 3,900,000

Selling expenses 800,000 4,800,000

Contribution margin $6,550,000 $39,300,000

Fixed expenses:

Land 10,000,000 10,000,000

Administrative 850,000 850,000

Operating income $(4,300,000) $28,450,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

57) Aspen Popular Company prepared the following absorption-costing income statement for the year ended May 31, 2020.

Sales (8,000 units) $160,000

Cost of goods sold 108,000

Gross margin $52,000

Selling and administrative expenses 18,000

Operating income $ 29,000

Additional information follows:

Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 8,750 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs

Required:

Prepare a variable-costing income statement for the same period.

Sales $160,000

Variable expenses:

Manufacturing cost of goods sold1 $88,000

Selling and administrative2 12,000 100,000

Contribution margin $ 60,000

Fixed expenses:

Fixed factory overhead3 $21,875

Fixed selling and administrative4 6,000 27,875

Operating income $ 32,125

1 8,000 units × $11 = $88,000

2 8,000 units × $1.50 = $12,000

3 [($108,000/8,000 units) - $11] × 8,750 units = $21,875

4 $18,000 - $12,000 = $6,000

Diff: 3

Objective: 2

AACSB: Application of knowledge

58) The following data are available for Brennan Soft Toys Company for the year ended September 30, 2020.

Sales: 24,000 units at $50 each

Expected and actual production: 30,000 units

Manufacturing costs incurred:

Variable: $525,000

Fixed: $372,000

Nonmanufacturing costs incurred:

Variable: $144,800

Fixed: $77,400

Beginning inventories: none

Required:

a. Determine operating income using the variable-costing approach.

b. Determine operating income using the absorption-costing approach.

c. Explain why operating income is not the same under the two approaches.

a. Sales = 24,000 × $50 = $1,200,000

Variable manufacturing cost = ($525,000/30,000) × 24,000 = $420,000

Contribution margin = $1,200,000 - $420,000 - $144,800 = $635,200

Operating income = $635,200 - $372,000 - $77,400 = $185,800

b. Manufacturing fixed cost = ($372,000/30,000) × 24,000 = $297,600

Gross margin = $1,200,000 - $420,000 - $297,600 = $482,400

Operating income = $482,400 - $144,800 - $77,400 = $260,200

c. Absorption-costing considers fixed manufacturing cost as product cost, whereas variable-costing approach treats fixed manufacturing costs as period costs. In case of Brennan, production is 30,000 units, whereas sales is only 24,000 and hence 6,000 units are likely to remain as ending inventory. These 6,000 units will have fixed manufacturing cost of $12.40 per unit ($372,000/30,000). The total fixed manufacturing cost in ending inventory under absorption-costing approach is $74,400 ($12.40 × 6,000 units). Since this cost is inventoried, and not expensed, under absorption-costing approach, the profit is higher by $74,400 ($260,200 − $185,800) compared to profits under variable-costing approach.

Diff: 3

Objective: 2

AACSB: Application of knowledge

59) Raul Technologies is concerned that increased sales did not result in increased profits for 2020. Both variable unit and total fixed manufacturing costs for 2019 and 2020 remained constant at $35 and $3,500,000, respectively.

In 2019, the company produced 100,000 units and sold 80,000 units at a price of $87.50 per unit. There was no beginning inventory in 2019. In 2020, the company made 70,000 units and sold 90,000 units at a price of $87.50. Selling and administrative expenses were all fixed at $350,000 each year.

Required:

a. Prepare income statements for each year using absorption costing.

b. Prepare income statements for each year using variable costing.

c. Explain why the income was different each year using the two methods. Show computations.

a. Absorption-costing income statements:

2019 2020

Sales $7,000,000 $7,875,000

Cost of goods sold:

Beginning inventory 0 1,400,000

Variable 3,500,000 2,450,000

Fixed 3,500,000 3,500,000

Subtotal 7,000,000 7,350,000

Ending inventory 1,400,000 0

Total COGS 5,600,000 7,350,000

Gross margin 1,400,000 525,000

Selling and administrative 350,000 350,000

Operating income $1,050,000 $ 175,000

b. Variable-costing income statements:

2019 2020

Sales $7,000,000 $7,875,000

Variable expenses 2,800,000 3,150,000

Contribution margin 4,200,000 4,725,000

Fixed expenses:

Manufacturing 3,500,000 3,500,000

Selling and administrative 350,000 350,000

Operating income $ 350,000 $ 875,000

c. Budgeted fixed manufacturing overhead rate for 2019 = $3,500,000 / 100,000 = $35

2019 difference of $700,000 = (100,000 - 80,000) × $35 = $700,000 (favors absorption method)

2020 difference of $700,000 = (70,000 - 90,000) × $35 = $700,000 (favors variable method)

Diff: 3

Objective: 2

AACSB: Application of knowledge

60) The manager of the manufacturing division of Iowa Windows does not understand why income went down when sales went up. Some of the information he has selected for evaluation include:

January February

Units produced 40,000 30,000

Units sold 30,000 40,000

Sales $600,000 $800,000

Beginning inventory 0 150,000

Cost of production 600,000 550,000

Ending inventory 150,000 0

Operating income 70,000 35,000

The division operated at normal capacity during January.

Variable manufacturing cost per unit was $5, and the fixed costs were $400,000.

Selling and administrative expenses were all fixed.

Required:

Explain the profit differences. How would variable costing income statements help the manager understand the division's operating income?

Variable costing helps avoid confusion by relating variations in expenses to sales rather than to inventory fluctuations. Under variable costing, the total fixed amount ($400,000) would be expensed in January and none carried forward into February. Therefore, January's income would be $100,000 less than reported and February's $100,000 more than reported.

Diff: 2

Objective: 2

AACSB: Application of knowledge

61) Explain the difference between the gross margin format and the contribution margin format for the income statement. What information is highlighted with each?

Diff: 2

Objective: 2

AACSB: Analytical thinking

62) Gagnon Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows:

2016 2017 2018 2019 2020

Units produced 50,000 55,000 55,000 44,000 44,000

Units sold 45,000 45,000 50,000 50,000 50,000

Fixed manufacturing costs $55,000 $55,000 $55,000 $55,000 $55,000

East Division uses absorption costing and West Division uses variable costing.

Both use FIFO inventory methods.

Variable manufacturing costs are $5 per unit.

Selling and administrative expenses were identical for each division.

There were no inventories at the beginning of 2016.

Which division reports the highest income each year? Explain.

Diff: 2

Objective: 2

AACSB: Application of knowledge

Objective 9.3

1) Which of the following is a reason for companies to use absorption costing for internal accounting?

A) It is the required inventory method for internal accounting as per GAAP.

B) It measures the cost of all resources, whether manufacturing or nonmanufacturing, necessary to produce inventory.

C) It does not take into account fixed manufacturing overhead while valuing inventory and hence is more suited for decision making.

D) It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders.

Diff: 2

Objective: 3

AACSB: Analytical thinking

2) Many companies have switched from absorption costing to variable costing for internal reporting:

A) to comply with external reporting requirements as required by GAAP

B) to increase bonuses for managers

C) to reduce the undesirable incentive to build up inventories that would show higher operating income

D) so the denominator level is more accurate

Diff: 2

Objective: 3

AACSB: Analytical thinking

3) Ways to "produce for inventory" that result in increasing operating income include:

A) switching production to products that absorb the least amounts of fixed manufacturing costs

B) delaying items that absorb the greatest amount of fixed manufacturing costs

C) switching production to products that absorb the most amounts of fixed manufacturing costs

D) undervaluing ending inventory by not recording certain costs that have been incurred

Diff: 2

Objective: 3

AACSB: Analytical thinking

4) Switching production to products that absorb the highest amount of fixed manufacturing costs is also called:

A) cost reduction

B) cherry picking

C) producing for sales

D) throughput costing

Diff: 2

Objective: 3

AACSB: Analytical thinking

5) To discourage producing for inventory, management can:

A) discourage using nonfinancial measures such as units in ending inventory compared to units in sales as nonfinancial measures may not be congruent with management performance goals

B) evaluate performance over a quarterly period rather than a single year

C) develop budgeting and planning activities that reduce management's freedom to inappropriately build inventory through increased production

D) implement absorption costing across all departments

Diff: 2

Objective: 3

AACSB: Analytical thinking

6) Which of the following steps can a management take to reduce the undesirable effects of absorption costing?

A) It can evaluate managers on quarterly basis rather than the usual yearly period thereby mitigating the undesirable effects of absorption costing.

B) It can delegate powers to managers to decide which orders they want to accept so that any order which will lead to inventory build-up can be rejected.

C) It can empower managers to decide the timings of maintenance of plants thereby ensuring that the production is not affected.

D) It can encourage using nonfinancial measures such as units in ending inventory compared to units in sales.

Diff: 2

Objective: 3

AACSB: Analytical thinking

7) Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:

A) greater operating income and therefore increasing the manager's bonus

B) less operating income and therefore decreasing the manager's bonus

C) not affecting the manager's bonus

D) being unable to determine the manager's bonus using only the above information

Diff: 2

Objective: 3

AACSB: Analytical thinking

8) Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:

A) increasing the manager's bonus

B) decreasing the manager's bonus

C) not affecting the manager's bonus

D) being unable to determine the manager's bonus using only the above information

Diff: 2

Objective: 3

AACSB: Analytical thinking

9) Which of the following is NOT one of the reasons why absorption costing might also be used for internal reporting?

A) It is more useful for managerial decision making than variable costing.

B) It is cost effective and less confusing for managers to use one common method for both internal and external reporting.

C) It can help prevent managers from making decisions that make their performance look good to the detriment of income reported to shareholders.

D) For long-term decision making both variable and fixed costs must be considered for inventory related decisions.

Diff: 2

Objective: 3

AACSB: Analytical thinking

10) Which of the following is a reason for companies adopting variable costing for internal reporting purposes?

A) It is cost-effective to use variable costing for both internal and external reporting.

B) It reduces the incentives for undesirable buildup of inventories.

C) It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory.

D) It assists in accurate pricing decisions in case of long-run pricing.

Diff: 2

Objective: 3

AACSB: Analytical thinking

11) Which of the following is true of absorption costing?

A) It enables a manager to decrease margins and operating income by producing more beginning inventory.

B) It enables a manager to increase margins and operating income by producing more beginning inventory.

C) It enables a manager to decrease margins and operating income by producing more and building ending inventory.

D) It enables a manager to increase margins and operating income by producing more and building ending inventory.

Diff: 2

Objective: 3

AACSB: Analytical thinking

12) Which of the following would NOT lead to a buildup inventory as a strategy to increase operating income?

A) cutting overhead costs as year-end approaches

B) plant manager switching to make products that absorb the highest amounts of fixed cists

C) plant manager accepting an order to increase production and build up inventory when another plant in the same company would be better suited to take on the order

D) allocating resources to production by deferring maintenance of equipment and building beyond the current period

Diff: 2

Objective: 3

AACSB: Analytical thinking

13) Under absorption costing, managers can increase operating income by holding less inventories at the end of the period.

Diff: 2

Objective: 3

AACSB: Analytical thinking

14) To reduce the undesirable incentives to build up inventories that absorption costing can create, a number of companies use variable costing for internal reporting.

Diff: 2

Objective: 3

AACSB: Analytical thinking

15) Evaluating performance of managers over a long period, say over three-to five-years, helps to reduce undesirable buildup of inventories.

Diff: 2

Objective: 3

AACSB: Analytical thinking

16) Absorption costing is the required inventory method for external financial reporting in most countries.

Diff: 1

Objective: 3

AACSB: Analytical thinking

17) One of the most common problems reported by companies using variable costing is the difficulty of classifying costs into fixed or variable categories.

Diff: 2

Objective: 3

AACSB: Analytical thinking

18) Absorption costing helps managers to artificially inflate profits by encouraging the production of products that absorb the highest amount of fixed manufacturing costs.

Diff: 2

Objective: 3

AACSB: Analytical thinking

19) To reduce the undesirable incentives to build up inventories management can institute planning, budgeting, and other controls.

Diff: 2

Objective: 3

AACSB: Analytical thinking

20) Absorption cost data, because it measures the cost of all manufacturing resources, is often used as an input for long-run decisions.

Diff: 2

Objective: 3

AACSB: Analytical thinking

21) Kaiser Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the break-even point, even though sales had increased somewhat each year. The company was operating at about 60 % of plant capacity. The flatware industry was growing, so increased sales were not out of the question.

I. R. Thinking took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the breakeven point during his very first year.

Required:

What do you think Mr. Thinking had in mind for increasing the company's operating income?

Also, he could combine increased production with reduced fixed manufacturing costs such as maintenance. In the short run, several combinations could be undertaken by Mr. Thinking to ensure that the profit picture would improve.

Diff: 3

Objective: 3

AACSB: Application of knowledge

22) Explain three methods under absorption costing that managers can use to improve operating income.

1) A plant manager may switch to manufacturing products that absorb the highest amount of fixed manufacturing costs, regardless of the demand for the product.

2) A plant manager may accept a particular order to increase production, even though another plant in the same company may be better suited to handle the order.

3) To increase production, a manager may defer maintenance beyond the current period.

Diff: 3

Objective: 3

AACSB: Analytical thinking

23) Briefly explain why many companies use absorption costing for external reporting as well as internal accounting.

1) It is cost-effective and less confusing for managers to use one common method of inventory costing for both external and internal reporting and performance evaluation.

2) It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders.

3) It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory. Many companies use inventory costing information for long-run decisions, such as pricing and choosing a product mix. For these long-run decisions, inventory costs should include both variable and fixed costs.

Diff: 3

Objective: 3

AACSB: Analytical thinking

24) Discuss the pros and cons of using absorption costing for both internal and external reporting.

Diff: 3

Objective: 3

AACSB: Analytical thinking

Objective 9.4

1) Throughput is a variation of which of the following systems?

A) absorption costing

B) variable costing

C) job costing

D) standard costing

Diff: 2

Objective: 4

AACSB: Analytical thinking

2) Advocates of throughput costing argue that:

A) fixed manufacturing costs must be included as inventoriable costs and provide less incentive than absorption costing to build-up inventory to increase profits

B) direct manufacturing labor is relatively fixed and therefore should not be included in inventory costs

C) direct materials costs are a cost of the period and therefore should not be included in inventoriable costs

D) including only direct materials as inventoriable costs provides less incentive than absorption costing to produce a build-up of inventory merely to increase profits

Diff: 2

Objective: 4

AACSB: Analytical thinking

3) Assume a manufacturing company that has started production in the current year. Which of the following would result in the highest profit being reported if the company has 1,000 units of ending inventory?

A) throughput costing

B) variable costing

C) absorption costing

D) standard costing

Diff: 2

Objective: 4

AACSB: Analytical thinking

4) Throughput contribution equals:

A) variable costs minus fixed costs

B) revenues minus all direct labor costs

C) revenues minus all direct material cost of goods sold

D) revenues minus manufacturing overhead

Diff: 2

Objective: 4

AACSB: Analytical thinking

5) If 1,000 units are produced and only 700 units are sold, ________ results in the greatest amount of expense reported on the income statement.

A) throughput costing

B) variable costing

C) absorption costing

D) job costing

Diff: 2

Objective: 4

AACSB: Application of knowledge

6) If 800 units are produced and 1,200 units are sold, the costing method which will result in the greatest operating income is:

A) throughput costing

B) variable costing

C) absorption costing

D) period costing

Diff: 2

Objective: 4

AACSB: Analytical thinking

7) Advocates of throughput costing maintain that:

A) both variable and fixed are necessary to produce goods; therefore, both types of costs should be inventoried

B) all manufacturing costs plus some design costs should be inventoried

C) fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units

D) except direct labor no other costs are truly variable in output

Diff: 3

Objective: 4

AACSB: Analytical thinking

8) Glossier Images Inc., produces decorative statues. Management has provided the following information:

Actual sales 35,000 statues

Budgeted production 51,000 statues

Selling price $48 per statue

Direct material costs $7.20 per statue

Variable manufacturing costs $3.50 per statue

Variable administrative costs $5.95 per statue

Fixed manufacturing overhead $4.80 per statue

What is the cost per statue if throughput costing is used?

A) $21.45

B) $16.65

C) $10.70

D) $7.20

Diff: 2

Objective: 4

AACSB: Application of knowledge

9) Glossier Images Inc., produces decorative statues. Management has provided the following information:

Actual sales 30,000 statues

Budgeted production 53,000 statues

Selling price $47 per statue

Direct material costs $7.30 per statue

Variable manufacturing costs $3.45 per statue

Variable administrative costs $5.85 per statue

Fixed manufacturing overhead $4.80 per statue

What is the total throughput contribution?

A) $2,104,100

B) $1,087,500

C) $1,191,000

D) $912,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

10) Answer the following question using the information below:

Jason Novelty Company produces a specialty item. Management has provided the following information:

Actual sales 160,000 units

Budgeted production 104,000 units

Selling price $41 per unit

Direct material costs $10 per unit

Variable manufacturing overhead $4 per unit

Variable administrative costs $5 per unit

Fixed manufacturing overhead $6 per unit

What is the cost per unit if throughput costing is used?

A) $25

B) $14

C) $19

D) $10

Diff: 1

Objective: 4

AACSB: Application of knowledge

11) Answer the following question using the information below:

Jason Novelty Company produces a specialty item. Management has provided the following information:

Actual sales 130,000 units

Budgeted production 101,000 units

Selling price $41 per unit

Direct material costs $10 per unit

Variable manufacturing overhead $4 per unit

Variable administrative costs $7 per unit

Fixed manufacturing overhead $6 per unit

What is the total throughput contribution?

A) $3,131,000

B) $2,600,000

C) $4,030,000

D) $1,820,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

12) Which of the following inventory costing methods results in the least amount of costs being inventoried?

A) absorption costing

B) variable costing

C) throughput costing

D) direct costing

Diff: 2

Objective: 4

AACSB: Analytical thinking

13) A product is sold for $130. Its cost consists of $15 of direct materials, $25 of direct labor, and $10 of manufacturing overhead. What is the throughput margin?

A) $115

B) $90

C) $130

D) $80

Diff: 2

Objective: 4

AACSB: Analytical thinking

14) Throughput costing considers only direct materials and direct manufacturing labor to be truly variable costs.

Diff: 1

Objective: 4

AACSB: Analytical thinking

15) Absorption costing is also referred to as super-variable costing.

Diff: 1

Objective: 4

AACSB: Analytical thinking

16) When production quantity exceeds sales, throughput costing results in reporting lower operating income than variable costing.

Diff: 2

Objective: 4

AACSB: Analytical thinking

17) Throughput costing provides less incentive to produce for inventory than either variable costing or, especially, absorption costing.

Diff: 2

Objective: 4

AACSB: Analytical thinking

18) A company may use absorption costing for external reporting and still choose to use throughput costing for internal reports.

Diff: 2

Objective: 4

AACSB: Analytical thinking

19) Throughput margin equals revenues minus all product costs.

Diff: 1

Objective: 4

AACSB: Analytical thinking

20) Throughput costing results in a higher amount of manufacturing costs being placed in inventory than either variable or absorption costing.

Diff: 2

Objective: 4

AACSB: Analytical thinking

21) Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting?

A) absorption costing

B) variable costing

C) throughput costing

D) direct costing

Diff: 2

Objective: 4

AACSB: Analytical thinking

22) Universal Specialty Group produces a sports theme chair. The following information has been provided by management:

Actual sales 10,000 units

Budgeted production 12,000 units

Selling price $425 per unit

Direct material costs $90.00 per unit

Fixed manufacturing costs $64.00 per unit

Variable manufacturing costs $50.00 per unit

Variable administrative costs $25.00 per unit

Required:

a. What is the cost per statue if absorption costing is used?

b. What is the cost per statue if "super-variable costing" is used?

c. What is the total throughput contribution?

a. The cost per statue = $90+ $64 + $50 = $204

b. The cost per statue = Equal to direct material costs of $90.00

c. The total throughput contribution = 10,000 × ($425 - $90.00) = $3,350,000

Diff: 3

Objective: 4

AACSB: Application of knowledge

23) What is throughput costing? What advantages does it have over variable and absorption costing?

Diff: 2

Objective: 4

AACSB: Analytical thinking

Objective 9.5

1) Practical capacity is the denominator-level concept that:

A) reduces theoretical capacity for unavoidable operating interruptions

B) is the maximum level of operations at maximum efficiency

C) is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year

D) is based on anticipated levels of capacity utilization for the coming budget period

Diff: 1

Objective: 5

AACSB: Analytical thinking

2) ________ reduces theoretical capacity for unavoidable operating interruptions.

A) Practical capacity

B) Theoretical capacity

C) Master-budget capacity utilization

D) Normal capacity utilization

Diff: 1

Objective: 5

AACSB: Analytical thinking

3) ________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year.

A) Practical capacity

B) Theoretical capacity

C) Master-budget capacity utilization

D) Normal capacity utilization

Diff: 1

Objective: 5

AACSB: Analytical thinking

4) ________ is the level of capacity utilization that managers expect for the current budget period, which is typically one year.

A) Practical capacity

B) Master-budget capacity utilization

C) Theoretical capacity

D) Normal capacity utilization

Diff: 2

Objective: 5

AACSB: Analytical thinking

5) ________ is the level of capacity based on producing at full efficiency all the time.

A) Practical capacity

B) Theoretical capacity

C) Normal capacity

D) Demand capacity

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) Which of the following measures capacity levels in terms of demand for the output of the plant?

A) practical capacity and theoretical capacity

B) theoretical capacity and normal capacity utilization

C) normal capacity utilization and master-budget capacity utilization

D) master-budget capacity utilization and practical capacity

Diff: 2

Objective: 5

AACSB: Analytical thinking

7) Which of the following best describes practical capacity?

A) It is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays.

B) It is the level of capacity based on producing at full efficiency all the time.

C) It is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors.

D) It is the level of capacity utilization that managers expect for the current budget period, which is typically one year.

Diff: 2

Objective: 5

AACSB: Analytical thinking

8) The budgeted fixed manufacturing cost rate is the lowest for:

A) practical capacity

B) theoretical capacity

C) master-budget capacity utilization

D) normal capacity utilization

Diff: 2

Objective: 5

AACSB: Analytical thinking

9) Which of the following assumes that capacity will be decreased because of slowdowns due to plant maintenance or other interruptions of the production lines?

A) practical capacity

B) theoretical capacity

C) master-budget capacity utilization

D) normal capacity utilization

Diff: 2

Objective: 5

AACSB: Analytical thinking

10) Kennywood Inc., a manufacturing firm, is able to produce 1,500 pairs of pants per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 504,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. What is the master-budget capacity utilization level for this budget period?

A) 504,000 units

B) 515,000 units

C) 525,600 units

D) 555,500 units

Diff: 2

Objective: 5

AACSB: Application of knowledge

11) Kennywood Inc., a manufacturing firm, is able to produce 1,100 pairs of pants per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 825 units per hour. The plant actually operates only 28 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 504,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. What is the theoretical capacity for the month?

A) 222,750 units

B) 792,000 units

C) 554,400 units

D) 739,200 units

Diff: 2

Objective: 5

AACSB: Application of knowledge

12) Kennywood Inc., a manufacturing firm, is able to produce 1,400 pairs of pants per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 900 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 502,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 520,000. Assume the month has 30 days. What is the practical capacity for the month?

A) 243,000 units

B) 1,008,000 units

C) 583,200 units

D) 907,200 units

Diff: 2

Objective: 5

AACSB: Application of knowledge

13) The throughput margin is calculated as:

A) Sales — Direct materials cost — direct labor costs

B) Sales — Cost of Goods sold less fixed overhead costs

C) Sales — Direct materials costs

D) Sales — total variable costs

Diff: 2

Objective: 5

AACSB: Application of knowledge

14) Under throughput costing, which of the following is considered a variable cost in the short run?

A) direct labor

B) manufacturing overhead

C) direct materials

D) all manufacturing related costs

Diff: 2

Objective: 5

AACSB: Application of knowledge

15) Normal capacity utilization is the level of capacity that satisfies average customer demand over a period and takes into account seasonal, cyclical, and trend factors.

Diff: 2

Objective: 5

AACSB: Analytical thinking

16) Both theoretical capacity and master-budget capacity measure capacity levels in terms of demand for the output of the plant.

Diff: 2

Objective: 5

AACSB: Analytical thinking

17) If the variable manufacturing overhead is $50 per unit for a company, the lowest budgeted manufacturing cost per unit can be obtained by using normal capacity utilization as the denominator level capacity.

Diff: 1

Objective: 5

AACSB: Analytical thinking

18) The choice of the capacity level used to allocate budgeted fixed manufacturing costs to products can greatly affect the product-cost information available to managers.

Diff: 1

Objective: 5

AACSB: Analytical thinking

19) Engineering and human resource factors are both important when estimating theoretical or practical capacity.

Diff: 1

Objective: 5

AACSB: Analytical thinking

20) Practical capacity is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays.

Diff: 2

Objective: 5

AACSB: Analytical thinking

21) To achieve consistency in reporting, a U.S. based company must use the same capacity-level concept for internal reporting and control as it uses for external reporting and tax reporting.

Diff: 2

Objective: 5

AACSB: Analytical thinking

22) For tax reporting in the United States, managers must use the "full absorption" method of inventory costing.

Diff: 1

Objective: 5

AACSB: Analytical thinking

23) Theoretical capacity is unattainable in the real world.

Diff: 1

Objective: 5

AACSB: Analytical thinking

24) A company should use the same denominator level capacity for all the budgets and other purposes so as to facilitate comparability and avoid misrepresentation.

Diff: 2

Objective: 5

AACSB: Analytical thinking

25) Match each of the following items with one or more of the denominator-level capacity concepts by putting the appropriate letter(s) by each item:

a. Theoretical capacity

b. Practical capacity

c. Normal capacity utilization

d. Master-budget capacity utilization

1. Reduces theoretical capacity by considering unavoidable operating interruptions

2. Producing at full efficiency all the time

3. Measures capacity levels in terms of demand

4. Level of capacity utilization that satisfies average customer demand over a period

5. Does not allow for plant maintenance

6. Engineering and human resource factors are important when estimating capacity

7. Level of capacity utilization that managers expect for the current budget period

8. Ideal goal of capacity utilization

9. Takes into account seasonal, cyclical, and trend factors

10. Measures capacity levels in terms of what a plant can supply

1. b

2. a

3. c, d

4. c

5. a

6. a, b

7. d

8. a

9. c

10. a, b

Diff: 2

Objective: 5

AACSB: Application of knowledge

26) Soul Socket Inc. manufactures socket wrenches.

∙ For next month, the vice president of production plans on producing 4,450 wrenches per day.

∙ The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per day.

∙ The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.

∙ Fixed manufacturing costs per month total $374,000.

∙ The company works 22 days a month.

∙ Fixed manufacturing overhead is charged on a per-wrench basis.

Required:

a. What is the theoretical fixed manufacturing overhead rate per wrench for the next month?

b. What is the practical fixed manufacturing overhead rate per wrench for the next month?

c. What is the normal fixed manufacturing overhead rate per wrench for the next month?

d. What is the master-budget fixed manufacturing overhead rate per wrench for the next month?

a. Theoretical overhead rate = $374,000 / (5,000 × 22) = $3.40

b. Practical overhead rate = $374,000 / (4,500 × 22) = $3.78

c. Normal overhead rate = $374,000 / (4,250 × 22) = $4.00

d. Master-budget overhead rate = $374,000 / (4,450 × 22) = $3.82

Diff: 3

Objective: 5

AACSB: Application of knowledge

Objective 9.6

1) Yellow Mountain Manufacturing factors practical capacity as a denominator to calculate budgeted fixed overhead. Theoretical capacity is 15,000 units per year with practical capacity of 12,000 units per year. Budgeted fixed overhead costs were $620,000 and actual overhead costs were $660,000 with actual output of 11,000 units. Which of the following statements is true?

A) The budgeted cost per unit of supplying the capacity was $56.36.

B) The actual cost of supplying capacity was $51.67 per unit.

C) The budgeted cost of supplying the capacity was $51.67 per unit.

D) The budgeted cost of supplying the capacity was $41.33 per unit.

Diff: 2

Objective: 6

AACSB: Analytical thinking

2) The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on:

A) real available capacity

B) an unattainable and idealistic level of capacity

C) normal capacity utilization

D) normal costing

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) The level of capacity that considers unavoidable operating interruptions such as unplanned downtime of an assembly line at manufacturing plant is called:

A) theoretical capacity

B) practical capacity

C) normal capacity utilization

D) master-budget capacity utilization

Diff: 2

Objective: 6

AACSB: Analytical thinking

4) The average level of output that can be completed over a period of time is:

A) theoretical capacity

B) practical capacity

C) normal capacity utilization

D) master-budget capacity utilization

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) Hyland Resources Inc. uses practical capacity as the denominator to set the cost of supplying capacity and for the current period the budgeted cost per unit of supplying capacity was $42. Practical capacity was set at 10,000 units with theoretical capacity at 14,000 units. During the period, only 4,000 units were produced while the master budget assumed that the company would produce 9,000 units. What is the value of the manufacturing resources not used during the period?

A) $252,000

B) $210,000

C) $420,000

D) $42,000

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) Which of the following is true of normal capacity utilization?

A) It will almost always show results that are very close to that of practical capacity utilization.

B) It can result in setting selling prices that are not competitive.

C) It results in the lowest cost estimate of the four capacity options when used for product costing.

D) It is also called master-budget capacity utilization.

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) Which of the following is true of master-budget capacity utilization?

A) It hides the amount of unused capacity.

B) It represents the maximum units of production intended for current capacity.

C) It provides the best cost estimate for benchmarking purposes.

D) It is an average that provides no meaningful feedback to a firm's marketing manager for a particular year.

Diff: 2

Objective: 6

AACSB: Analytical thinking

8) Which of the following capacity levels should a company choose, from a long-run product costing perspective, to allocate budgeted fixed manufacturing costs to products?

A) master-budget capacity utilization to highlight unused capacity

B) normal capacity utilization for benchmarking purposes

C) practical capacity for pricing decisions

D) theoretical capacity for performance evaluation

Diff: 2

Objective: 6

AACSB: Analytical thinking

9) Customers expect to pay a price that includes:

A) the cost of unused capacity

B) only the cost of actual capacity used

C) variable costs but not capacity costs

D) the cost of direct materials, direct labor, and fixed overhead

Diff: 2

Objective: 6

AACSB: Analytical thinking

10) The marketing manager's performance evaluation is most fair when based on a denominator level using ________ as it is the principal short-run planning and control tool.

A) practical capacity

B) theoretical capacity

C) master-budget capacity utilization

D) normal capacity utilization

Diff: 2

Objective: 6

AACSB: Analytical thinking

11) ________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

A) Downward demand spiral

B) Competitor pricing pressure

C) Continuous step down demand

D) Super-demand cutback

Diff: 2

Objective: 6

AACSB: Analytical thinking

12) Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a:

A) stable measure; avoiding the recalculation of unit costs when expected demand levels change

B) fixed costs spread over available capacity

C) can result in a downward demand spiral

D) in fixed overhead costs calculated based on capacity available

Diff: 2

Objective: 6

AACSB: Analytical thinking

13) Using ________ as the denominator level also gives the manager a more accurate idea of the resources needed and used to produce a unit by excluding the cost of unused capacity.

A) practical capacity

B) normal capacity utilization

C) theoretical capacity

D) master-budget capacity utilization

Diff: 2

Objective: 6

AACSB: Analytical thinking

14) The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in:

A) greater utilization of capacity

B) increased unit costs

C) more competitive selling prices

D) greater demand for the product

Diff: 2

Objective: 6

AACSB: Analytical thinking

15) For financial reporting, SFAS 151 requires:

A) the allocation of fixed manufacturing overhead to production must be based on theoretical capacity of the facilities

B) the allocation of fixed manufacturing overhead to production must be based on normal capacity of the facilities

C) the allocation of fixed manufacturing overhead to production must be based on practical capacity of the facilities

D) the allocation of fixed manufacturing overhead to production must be based on the average of the capacity of the facilities over the three most recent period

Diff: 2

Objective: 6

AACSB: Analytical thinking

16) Operating income reported on the end-of-period financial statements is changed when ________ is used to handle the production-volume variance at the end of the accounting period.

A) the adjusted allocation-rate approach

B) the proration approach

C) the write-off variances to cost of goods sold approach

D) the reinstatement approach

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) Which of the following approaches spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold?

A) the adjusted allocation-rate approach

B) the proration approach

C) the write-off variances to cost of goods sold approach

D) the reinstatement approach

Diff: 2

Objective: 6

AACSB: Analytical thinking

18) Which of the following is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit?

A) a method of which fairly apportions indirect production costs among the various items produced

B) requires that theoretical capacity be used as a means of allocating indirect manufacturing costs

C) requires the use of master-budget capacity utilization

D) requires the use of normal capacity utilization

Diff: 2

Objective: 6

AACSB: Analytical thinking

19) Use of practical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity.

Diff: 2

Objective: 6

AACSB: Analytical thinking

20) Using master budget capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Diff: 2

Objective: 6

AACSB: Analytical thinking

21) The downward demand spiral happens when a company cannot meet competitors prices are not met as because of underutilized capacity, higher and higher unit costs result is a greater reluctance to meet competitors' prices.

Diff: 2

Objective: 6

AACSB: Analytical thinking

22) Proration approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

Diff: 2

Objective: 6

AACSB: Analytical thinking

23) Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity.

Diff: 2

Objective: 6

AACSB: Analytical thinking

24) For benchmarking purposes for long-range planning, it is best to use master-budget capacity because all competitors use about the same about of capacity for production.

Diff: 2

Objective: 6

AACSB: Analytical thinking

25) Practical capacity rather than master-budget volume is a better way to price product and avoid downward demand spiral.

Diff: 1

Objective: 6

AACSB: Analytical thinking

26) Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates.

Diff: 1

Objective: 6

AACSB: Analytical thinking

27) Using practical capacity is best for evaluating the marketing manager's performance for a particular year.

Diff: 2

Objective: 6

AACSB: Analytical thinking

28) U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs using the adjusted allocation-rate method or the proration method.

Diff: 2

Objective: 6

AACSB: Analytical thinking

29) The proration approach restates only the ending balances of two inventory accounts: work-in-process and finished goods, to what they would have been if actual rates had been used.

Diff: 2

Objective: 6

AACSB: Analytical thinking

30) The amount of fixed manufacturing costs inventoried depends on two factors: the number of units in ending inventory and the rate at which fixed manufacturing overhead costs are allocated to each unit.

Diff: 2

Objective: 6

AACSB: Analytical thinking

31) Usually there is no production-volume variance when normal capacity utilization is used as the denominator level.

Diff: 1

Objective: 6

AACSB: Analytical thinking

32) Cape Cod Technology Inc. manufactures heavy duty flash lights. January and February operations were identical in every way except for the planned production.

January had a production denominator of 80,000 units.

February had a production denominator of 60,000 units.

Fixed manufacturing costs totaled $200,000.

Sales for both months totaled 62,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.60 per unit variable and $51,000 of fixed. The selling price was $10 per unit.

Required:

Compute the operating income for both months using absorption costing.

January manufacturing cost per unit:

Variable costs: $4.00

Fixed costs ($200,000/80,000) 2.50

Total per unit $6.50

February manufacturing cost per unit:

Variable costs $4.00

Fixed costs ($200,000/60,000 3.33

Total per unit $7.33

January Income Statement

Sales (62,000 × $10) $620,000

Cost of goods sold (62,000 × $6.50) 403,000

Gross margin $217,000

Other costs:

Variable selling and administrative $37,200

Fixed selling and administrative 51,000 88,200

Operating income $128,000

February Income Statement

Sales (62,000 × $10) $620,000

Cost of goods sold (62,000 × $7.33) 454,460

Gross margin $165,540

Other costs:

Variable selling and administrative $37,200

Fixed selling and administrative 51,000 88,200

Operating income $77,340

Diff: 3

Objective: 6

AACSB: Application of knowledge

33) Explain the three alternative approaches to dispose of the production-volume variance.

2. Proration approach: Under this approach, the underallocated or overallocated overhead is spread among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold. The proration restates the ending balances in these accounts to what they would have been if actual cost rates had been used rather than budgeted cost rates.

3. Write-off variances to cost of goods sold approach: Under this approach, production-volume variance is adjusted to the cost of goods sold for that period.

Diff: 2

Objective: 6

AACSB: Analytical thinking

34) Briefly explain what SFAS states about allocating fixed overhead to production.

Diff: 2

Objective: 6

AACSB: Analytical thinking

Objective 9.7

1) It is most difficult to estimate ________ because of the need to predict demand for the next few years.

A) practical capacity

B) theoretical capacity

C) master-budget capacity utilization

D) normal capacity utilization

Diff: 2

Objective: 7

AACSB: Analytical thinking

2) Which of the following capacity levels do proponents of activity-based costing recommend to be used as the denominator level to calculate activity cost rates?

A) practical capacity

B) normal capacity utilization

C) theoretical capacity

D) master-budget capacity utilization

Diff: 2

Objective: 7

AACSB: Analytical thinking

3) Top management at Gifford manufacturing are planning capacity levels and how to assign capacity costs for an upcoming period. Which of the following factors should be considered while developing this plan so that proper control can be achieved?

A) the IRS tax implications of such decisions

B) the level of uncertainty of expected costs and demand

C) the GAAP rules requiring absorption costing

D) the requirements of SFAS 151

Diff: 2

Objective: 7

AACSB: Analytical thinking

4) In planning and control of capacity costs, managers must consider possible capacity measures. Which of the following measures the available supply of capacity in a factory?

A) theoretical capacity

B) practical capacity

C) normal capacity

D) master-budget capacity

Diff: 2

Objective: 7

AACSB: Analytical thinking

5) What is the capacity level generally utilized by the proponents of ABC?

A) theoretical capacity

B) practical capacity

C) normal capacity

D) master-budget capacity

Diff: 2

Objective: 7

AACSB: Analytical thinking

6) Product-sustaining costs in activity-based costing are similar to:

A) mixed costs

B) variable costs

C) semi-variable costs

D) fixed costs

Diff: 2

Objective: 7

AACSB: Analytical thinking

7) There is no output-level variance for variable costing, when:

A) the inventory level decreases during the period

B) the inventory level increases during the period

C) fixed manufacturing overhead is allocated to work in process

D) fixed manufacturing overhead is not allocated to work in process

Diff: 2

Objective: 7

AACSB: Analytical thinking

8) When actual production is below practical capacity, there will be unused-capacity cost only in the manufacturing function while unused capacity is not a factor in nonmanufacturing links of the value chair such as in the marketing function.

Diff: 2

Objective: 7

AACSB: Analytical thinking

9) The only real challenge in planning and controlling capacity costs is with the denominator as the numerator of a budgeted fixed manufacturing cost allocation rate is rarely the issue.

Diff: 1

Objective: 7

AACSB: Analytical thinking

10) If activity based cost accounting is used to allocate capacity related costs, normal capacity measures should be used.

Diff: 2

Objective: 7

AACSB: Analytical thinking

11) Explain how using master-budget capacity utilization for setting prices can lead to a downward demand spiral.

Diff: 2

Objective: 7

AACSB: Analytical thinking

12) Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup its costs?

Diff: 3

Objective: 7

AACSB: Analytical thinking

13) How does the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume variance?

Diff: 3

Objective: 7

AACSB: Analytical thinking

14) Discuss the three methods to dispose of production volume variance.

2) Proration approach - The underallocated or overallocated overhead is spread among the ending balances in work-in-Process Control, finished Goods Control, and Cost of Goods Sold.

3) Write-off variances to cost of goods sold approach - The variance is written off to cost of goods sold.

Diff: 3

Objective: 7

AACSB: Analytical thinking

Objective 9.A

1) Ms. Sophia Jones, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 2020 is as follows:

Total fixed manufacturing overhead

$183,000

Total other fixed expenses

$202,000

Total variable manufacturing expenses

$260,000

Total other variable expenses

$290,000

Units produced

70,000

units

Budgeted production

70,000

units

Units sold

50,000

units

Selling price

$42

What are breakeven sales in units using variable costing? (Round any intermediary calculations to the nearest cent and your final answer up to the next whole unit.)

A) 12,420 units

B) 6,406 units

C) 11,274 units

D) 10,056 units

Diff: 2

Objective: A

AACSB: Application of knowledge

2) Ms. Sophia Jones, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 2020 is as follows:

Total fixed manufacturing overhead

$180,000

Total other fixed expenses

$205,000

Total variable manufacturing expenses

$270,000

Total other variable expenses

$250,000

Units produced

60,000

units

Budgeted production

60,000

units

Units sold

55,000

units

Selling price

$42

What are breakeven sales in units using absorption costing? (Round any intermediary calculations to the nearest cent and your final answer up to the next whole unit.)

A) 5,400 units

B) 5,467 units

C) 6,759 units

D) 11,550 units

Diff: 2

Objective: A

AACSB: Application of knowledge

3) Ms. Sophia Jones, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 2020 is as follows:

Total fixed manufacturing overhead

$181,000

Total other fixed expenses

$205,000

Total variable manufacturing expenses

$250,000

Total other variable expenses

$290,000

Units produced

70,000

units

Budgeted production

70,000

units

Units sold

55,000

units

Selling price

$42

What are breakeven sales in units using absorption costing if the production units are actually 55,000? (Round any intermediary calculations to the nearest cent and your final answer up to the next whole unit.)

A) 11,995 units

B) 5,327 units

C) 7,103 units

D) 7,683 units

Diff: 2

Objective: A

AACSB: Application of knowledge

4) Jenkins Corporation sells one product. The following information is available for the current month:

Selling price per unit

$108

Standard fixed manufacturing costs per unit

$48

Variable selling and administrative costs per unit

$8

Standard variable manufacturing costs per unit

$2

Fixed selling and administrative costs

$44,000

Units produced

12,000

units

Units sold

9,600

units

What is the variable costing breakeven point in units? (Round your final answer up to the next whole unit.)

A) 5,878 units

B) 6,546 units

C) 6,200 units

D) 6,327 units

Diff: 2

Objective: A

AACSB: Application of knowledge

5) Jenkins Corporation sells one product. The following information is available for the current month:

Selling price per unit

$103

Standard fixed manufacturing costs per unit

$48

Variable selling and administrative costs per unit

$9

Standard variable manufacturing costs per unit

$3

Fixed selling and administrative costs

$44,000

Units produced

10,000

units

Units sold

9,800

units

What is the absorption costing breakeven point in units? (Round your final answer up to the next whole unit.)

A) 224 units

B) 1,024 units

C) 379 units

D) 5,759 units

Diff: 2

Objective: A

AACSB: Application of knowledge

6) Henry Chapman Manufacturing Inc. incurred the following expenses during 2020:

Fixed manufacturing costs

$150,000

Fixed nonmanufacturing costs

$88,000

Unit selling price

$310

Total unit cost

$100

Variable manufacturing cost rate

$40

Units produced

1,340

units

What will be the breakeven point if variable costing is used? (Round your final answer up to the next whole unit.)

A) 1,134 units

B) 1,500 units

C) 882 units

D) 556 units

Diff: 2

Objective: A

AACSB: Application of knowledge

7) Henry Chapman Manufacturing Inc. incurred the following expenses during 2020:

Fixed manufacturing costs

$160,000

Fixed nonmanufacturing costs

$90,000

Unit selling price

$250

Total unit cost

$110

Variable manufacturing cost rate

$40

Units produced

1,340

units

What will be the breakeven point in units if absorption costing is used? (Round your final answer up to the next whole unit.)

A) 1,786 units

B) 1,191 units

C) 1,156 units

D) 762 units

Diff: 2

Objective: A

AACSB: Application of knowledge

8) Pitta Manufacturing incurred the following expenses during 2020:

Fixed manufacturing costs

$120,000

Fixed nonmanufacturing costs

$90,000

Unit selling price

$250

Total unit cost

$120

Variable manufacturing cost rate

$40

Units produced

1,370

units

What is the breakeven point in units using absorption costing if the units produced are actually 2,240? (Round your final answer up to the next whole unit.)

A) 1,294 units

B) 1,000 units

C) 913 units

D) 709 units

Diff: 2

Objective: A

AACSB: Application of knowledge

9) Francis Corporation is having trouble selling its inventory because of its ongoing dispute with its logistical partner. The company was not able to sell any inventory in the month of January because of the dispute. It manufactured 8,000 units in January. Francis had no other fixed costs commitment other than fixed manufacturing costs of $100,000. It follows absorption costing. If actual production in January was equal to the denominator level, what is the amount of sales required to attain breakeven point?

A) 1250 units

B) 125 units

C) 10 units

D) 0 units

Diff: 2

Objective: A

AACSB: Application of knowledge

10) Banta Corporation is in the business of selling computers. The following expenses were incurred in March 2020:

Fixed manufacturing costs

$90,000

Fixed nonmanufacturing costs

$35,000

Unit selling price

$1,400

Variable manufacturing cost rate

$800

Units produced

1,800

units

What will be the breakeven point if variable costing is used? (Round your final answer up to the next whole unit.)

A) 90 units

B) 209 units

C) 157 units

D) 150 units

Diff: 2

Objective: A

AACSB: Application of knowledge

11) The breakeven points are the same under both variable costing and absorption costing.

Diff: 2

Objective: A

AACSB: Analytical thinking

12) The breakeven point under absorption costing depends on fixed manufacturing costs, fixed operating (marketing) costs, contribution margin per unit, unit level of production, and the capacity level chosen as the denominator to set the fixed manufacturing cost rate.

Diff: 2

Objective: A

AACSB: Analytical thinking

13) Sutton Hot Dog Stand sells hot dogs for $1.35. Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units. Fixed administrative costs total $30,000. Sales average 400,000 units per month, with planned production of 400,000 hot dogs.

Required:

a. What are breakeven unit sales under variable costing?

b. What are breakeven unit sales under absorption costing if she sells everything she prepares?

c. What are breakeven unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000?

a. Breakeven units = ($90,000 + $30,000) / ($1.35 - $1.05) = 400,000

b. Breakeven units (N) = ([($90,000 + $30,000) + ($0.225 (N - 400,000))]/$1.35 - $1.05)

N = ($120,000 + $0.225N - $90,000) / $0.30

$0.30N = $30,000 + $0.225N

$0.075N = $30,000

N = 400,000 units

c. Breakeven units (N) = ([($90,000 + $30,000) + ($0.18 (N - 500,000))]/$1.35 - $1.05)

N = ($120,000 + $0.18N - $90,000) / $0.30

$0.3N = $30,000 + $0.18N

$0.12N = $30,000

N = 250,000 units

Diff: 3

Objective: A

AACSB: Application of knowledge

Document Information

Document Type:
DOCX
Chapter Number:
9
Created Date:
Jun 30, 2025
Chapter Name:
Chapter 9 Inventory Costing and Capacity Analysis
Author:
Srikant M. Datar, Madhav V. Rajan

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