MANAGEMENT ADVISORY SERVICES by: rhad estoque, cpa,
mba
Variable/ Absorption Costing
VARIABLE COSTING & ABSORPTION COSTING COMPARED
1. As to treatment of the various operating costs:
Variable Absorption
Throughput
Operating costs Costing Costing Costing
a. Direct materials product cost product cost
product cost
b. Direct labor- variable product cost product cost
period cost
c. Factory overhead
-Variable product cost product cost
period cost
-Fixed period cost product cost
period cost
d. Selling and administrative expense
-Variable period cost period cost period
cost
-Fixed period cost period cost period
cost
2. As to net operating income
Relationship between
Production and Sales Net Income
a. P=S AC = VC
b. P>S AC > VC
c. P<S AC < VC
3. As to cost segregation
Variable costing- segregates costs according to behavior
Absorption costing- segregates costs according to function
4. As to costing of inventories
Variable costing- only variable manufacturing costs
Absorption costing- all manufacturing costs
Throughput costing- only raw materials
Super absorption costing- all manufacturing cost and non-
manufacturing value adding cost
5. As to presentation of income statement
Variable costing- Contribution Margin Income approach
Absorption costing- Conventional Income Statement.
Throughput costing- throughput contribution
RECONCILIATION OF DIRECT COSTING TO ABSORPTION COSTING
NET INCOME
Net income- direct costing xxx
Add: Fixed cost in ending inventory xxx
Less: Fixed cost in beginning inventory xxx
Net income- absorption costing xxx
REVIEW QUESTIONS
1. Which of the following statements is true for a firm that uses
variable costing?
a. The cost of a unit of product changes because of changes in
number of units manufactured
b. Profits fluctuate with sales
c. An idle facility variation is calculated
d. Product costs include variable administrative costs
2. When a firm prepares financial reports by using absorption costing
a. Profits will always increase with increases in sales
b. Profits will always decrease with decreases in sales
c. Profits may decrease with increased sales even if there is no
change in selling prices and costs
d. Deceased output and constant sales result in increased profits
3. Absorption costing and variable costing are two different methods
of assigning costs to units produced. Of the four cost items listed below,
identify the one that is not correctly accounted for as a product cost.
Absorption Variable
Costing Costing
a. Manufacturing supplies yes yes
b. Insurance on factory yes no
c. President’s salary no no
d. Packaging and shipping costs yes yes
4. Jansen, Inc. pays bonuses to its managers based on operating
income. The company uses absorption costing, and overhead is applied on the
basis of direct labor hours. To increase bonuses, Jansen's managers may do
all of the following except
a. Produce those products requiring the most direct labor
b. Defer expenses such as maintenance to a future period
c. Increase production schedules independent of customer demands
d. Decrease production of those items requiring the most direct labor
5. What costs are treated as product costs under variable costing?
a. Only variable production costs
b. Only direct costs
c. All variable and fixed manufacturing costs
d. All variable costs
6. Which of the following is a more descriptive term of the type of
cost accounting called "direct costing"?
a. Out-of-pocket costing
b. Variable costing
c. Relevant costing
d. Prime costing
7. Which of the following comprise factory overhead?
a. All manufacturing costs
b. All manufacturing costs, except direct materials and direct labor.
c. Indirect materials but not indirect labor
d. Indirect labor but not indirect materials
8. Manufacturing overhead includes all of the following except:
a. Indirect factory labor
b. Salary of plant manager
c. Real estate taxes on factory building
d. Depreciation on delivery equipment
9. Depreciation recognized based on output is classified as:
a. Fixed costs
b. Out-of-pocket costs
c. Marginal costs
d. Variable costs
10. A cost accounting concept, which treats fixed overhead as a
product cost, is
a. Conventional costing
b. Process costing
c. Job-order costing
d. Standard direct costing
11. Why is direct costing not in accordance with GAAP?
a. Fixed manufacturing costs are assumed to be period costs
b. Direct costing procedures are not well known in industry
c. Net earnings are always overstated when using direct costing
procedures.
d. Direct costing ignores the concept of lower of cost or market when
valuing inventory.
12. Reporting under the direct costing concept is accomplished by:
a. Treating all costs as period costs.
b. Eliminating the work in process inventory
c. Matching variable costs against revenues and treating fixed costs
as period costs.
d. Including only direct costs in the income statement
13. When all the manufacturing costs used in production are attached
to the product, whether direct or indirect, variable or fixed, this is called
a. Process costing
b. Absorption Costing
c. Variable costing
d. Job order costing
14. Under variable costing, fixed manufacturing overhead is
a. Carried in liability account
b. Carried in an asset account
c. Ignored
d. Immediately charged against sales as a period cost.
15. A principal difference between variable costing and absorption
costing centers on:
a. Whether variable-manufacturing costs should be included as
product costs.
b. Whether fixed manufacturing costs should be included as product
costs.
c. Whether fixed manufacturing costs and fixed selling and
administrative costs should be included as product costs.
d. None of these
16. Under variable costing:
a. Net income will tend to move upward and downward in response to
changes in levels of production.
b. Inventory costs will always be lower than under absorption costing.
c. Net income will tend to vary inversely with production changes.
d. Net income will always be higher than under absorption costing.
17. When sales are constant, but the production level fluctuates, net
income determined by the variable costing method will:
a. Fluctuate in direct proportion to changes in production.
b. Remain constant
c. Fluctuate inversely with changes in production
d. Be greater than net income under absorption costing.
18. Under absorption costing, fixed overhead costs:
a. Are deferred in inventory when production exceeds sales
b. Are always treated as period costs.
c. Are released from inventory when production exceeds sales
d. None of these
19. RV Company computes net income under both the absorption
costing approach and the variable costing approach. For a given year the
absorption costing net income was greater than the variable costing net
income. This fact suggests that
a. Variable manufacturing costs were less than fixed manufacturing
costs
b. More units were produced during the year than were sold
c. More units were sold during the year than were produced
d. Common costs were greater than variable costs for the year
20. Net income computed using variable costing would exceed net
income computed using absorption costing if;
a. Units sold exceed units produced
b. Units sold are less than units produced
c. Units sold equals units produced
d. The unit fixed cost is zero
21. Cay Co.'s fixed manufacturing overhead costs totaled P100,000,
and variable-selling costs totaled P80,000. Under variable costing, how should
these costs be classified?
Period Costs Product Costs
a. P0 P180,000
b. P 80,000 P100,000
c. P100,000 P 80,000
d. P180,000 P 0
22. Under the variable-costing concept, unit product cost would most
likely be increased by
a. A decrease in the remaining useful life of factory machinery
depreciated on the units-of-production method.
b. A decrease in the number of units produced.
c. An increase in the remaining useful life of factory machinery
depreciated on the sum-of the-year's-digits method.
d. An increase in the commission paid to salesman for each unit sold.
[Link] an income statement prepared as an internal report using the
variable costing method, which of the following terms should appear?
Gross Profit (Margin) Operating Income
a. Yes Yes
b. Yes No
c. No No
d. No Yes
24. In an income statement prepared as an internal report using the
variable costing method, variable selling and administrative expenses are
a. Not used.
b. Treated the same as fixed selling and administrative expenses.
c. Used in the computation of operating income but not in the
computation of the contribution margin.
d. Used in the computation of the contribution margin.
25. In an income statement prepared as an internal report using the
variable costing method, fixed factory overhead would
a. Not be used.
b. Be used in the computation of operating income but not in the
computation of the contribution margin
c. Be used in the computation of the contribution margin.
d. Be treated the same as variable factory overhead.
26. Using absorption costing, fixed manufacturing overhead costs are
best described as
a. Direct period costs.
b. Indirect period costs.
c. Direct product costs.
d. Indirect product costs.
27. In an income statement prepared as an internal report, total fixed
costs normally are shown separately under
Absorption Costing Variable Costing
a. No No
b. No Yes
c. Yes Yes
d. Yes No
28. Net earnings determined using full/absorption costing could be
reconciled to net earnings determined using variable costing by computing
the difference between
a. Inventoried fixed costs in the beginning and ending inventories
and any deferred over-or under-applied fixed factory overhead.
b. Inventoried discretionary costs in the beginning and ending
inventories.
c. Gross margin (absorption costing method) and contribution margin
(variable costing method).
d. Sales as recorded under the variable costing method and sales as
recorded under the absorption costing method.
29. Net profit under absorption costing may differ from net profit
determined under variable costing. This difference equals the change in the
quantity of all units
a. In inventory times the relevant fixed costs per unit.
b. Produced times the relevant fixed costs per unit.
c. In inventory times the relevant variable cost per unit.
d. Produced times the relevant variable cost per unit.
30. Advocates of throughput costing argue the following, except
a. only direct materials are truly variable.
b. direct manufacturing labor is relatively fixed.
c. variable manufacturing costs are a cost of the period.
d. variable selling expense is product cost.
31. If 600 units are produced and only 400 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. period costing
32. If 400 units are produced and 600 units are sold, __________ results in the
greatest amount of operating income.
a. throughput costing
b. variable costing
c. absorption costing
d. period costing
33. 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 invento-
ried.
c. fixed manufacturing costs are related to the capacity to produce
rather than to the actual production of specific units.
d. both (a) and (c) are true.
Multiple Choice Problems
1. When using absorption costing, what cost attendant to an element of
production (material, labor or overhead) are used in order to compute
variances from standard amounts?
a. Controllable costs c. Total costs
b. Variable costs d. Fixed costs
2. An income statement is prepared as an internal report. Under which of the
following methods would the term contribution margin appear?
Absorption Costing Direct Costing
a. No No
b. No Yes
c. Yes No
d. Yes Yes
3. The direct costing method includes in inventory
a. Direct material cost, direct labor cost, but not all factory overhead
cost.
b. Direct material cost, direct labor cost, and variable factory overhead
cost
c. Prime cost but not conversion cost
d. Prime cost and all conversion cost
4. What factor, related to manufacturing costs, causes the difference in net
earnings computed using absorption costing and net earnings computed
under direct costing?
a. Absorption costing considers all costs in the determination of net
earnings, whereas direct costing considers only direct costs.
b. Absorption costing allocates fixed costs between cost of goods sold and
inventories and direct costing considers all fixed costs to be period cost.
c. Absorption costing "inventories" all fixed costs for the period in ending
finished goods inventory, but direct costing expense all fixed costs.
d. Absorption costing "inventories" all direct costs, but direct costing
considers direct costs to be period costs,
5. Which of the following must be known about a production process in order
to institute a direct costing system?
a. The variable and fixed components of all costs related to production
b. The controllable and uncontrollable components of all costs related to
production.
c. Standard production rates and times for all elements of productions
d. Contribution margin and breakeven point for all goods in production
6. A basic tenet of direct costing is that period costs should be currently
expensed. What is the basic rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific
product
b. Period costs are generally immaterial in amount and the cost of
assigning the amounts to specific products would outweigh the benefits
c. Allocation of period costs is arbitrary at best and could lead to
erroneous decisions by management
d. Period costs will occur whether or not production occurs and so it is
improper to allocate these costs to production and defer a current cost
of doing business
7. Why is direct costing not in compliance with generally accepted
accounting principles?
a. Fixed manufacturing costs are assumed to be period costs
b. Direct costing procedures are not well known in industry
c. Net earnings are always overstated when using direct costing
procedures
d. Direct costing ignores the concept of cost or market when valuing
inventory
8. What is the basic difference between direct costing and absorption costing?
a. Direct costing always produces less taxable income that absorption
b. Direct costing recognizes fixed costs as a period cost and absorption
costing recognizes fixed costs as product cost
c. Direct costing cannot use standards, whereas standards may be used
with absorption costing
d. Direct costing may be used only in situation where production is
essentially homogenous but absorption costing may be used under any
manufacturing condition
9. What will be the difference in net earnings computed using direct costing
as opposed to absorption costing if the ending inventory increase with
respect to the beginning inventories in terms of units?
a. There will be no difference in net earnings
b. Net earnings computed using direct costing will be higher
c. The difference in net earnings cannot be determined from the
information given
d. Net earnings computed using direct costing will be lower
10. Net earnings determined using absorption costing can be reconciled to
net earnings determined using direct costing by computing the difference
between
a. Inventories fixed costs in the beginning and ending inventories and any
deferred over or underapplied fixed factory overhead
b. Inventories discretionary costs in the beginning and ending inventories
c. Gross margin (absorption costing methods) and contribution margin
(direct costing method).
d. Sales as recorded under the direct costing method and sales as
recorded under the absorption costing method
11. The basic assumption made in direct costing system with respect to fixed
cost is that fixed costs are
a. A sunk cost c. Fixed as to the total cost
b. Product cost d. A period cost
12. When using direct costing system, the contribution margin discloses the
excess of
a. Revenue over fixed costs c. Revenue over variable costs
b. Projected revenues over the breakeven point d. Variable costs over
fixed costs
13. The operating earnings computed using variable (direct) costing would
exceed operating earnings computed using absorption costing if
a. Units sold exceed units produced c. Units sold equal units
produced
b. Units sold are less than units produced d. The unit fixed cost is
zero
14. The net income reported under absorption costing will exceed net income
reported under direct costing for a period if
a. Production equals sales for the period c. Sales exceed production
for the period
b. Production exceeds sales for that period d. The variable overhead
exceed the fixed overhead
15. Alma, Inc., manufactured 700 units of Product A, a new product during
the year. Product A's variable and fixed manufacturing costs per unit were
P6 and P2 respectively. The inventory of Product A on December 31
consisted of 100 units. There was no inventory on January 1. What would
be the change in the peso amount of inventory on December 31 if the
direct costing method was used instead of the absorption costing method?
a. P800 decrease c. P0
b. P200 decrease d. P200 increase
16. Net income reported under variable costing will exceed net income
reported under absorption costing for the period if
a. Production equals sales for that period c. Sales is greater than
production for the period
b. Production is greater than sales for the period d. The variable costs
exceeds the fixed costs
17. Net profit under absorption costing may differ from net profit determined
under direct costing. How is the difference calculated?
a. Change in the quantity of all units in inventory times the relevant fixed
cost per unit
b. Change in the quantity of all units produced times the relevant fixed
cost per unit
c. Change in the quantity of all units in inventory times the relevant
variable cost per unit
d. Change in the quantity of all units produced times the relevant variable
cost per unit
18. If the net earnings were higher using standard direct costing than using
standard absorption costing, what can be said about sales during the
period if inventory is priced using the FIFO method?
a. Sales increased c. Sales were less than
production
b. Sales exceeded production d. Sales decreased
19. Which of the following cost accounting terminology is commonly referred
to as direct costing?
a. Absorption costing c. Variable costing
b. Prime costing d. Relevant costing
20. Direct costing is used for internal purposes which includes the following
except
a. Inventory valuation c. Relevant cost analysis
b. Income measurement d. Capital investment decision
A. Of the 6,000 units produced by the Sta. Teresita Company during
September, 5,000 units were sold at P45 per units
Production costs during the month were:
Material P40,000
Direct Labor 50,000
Factory Overhead:
Fixed 30,000
Variable 36,000
General and administrative expenses, all fixed, totaled P60,000.
21. The net operating income for September under absorption costing was
a. P25,000 b. P30,000 c. P35,000 d. P26,000 e. None of these
22. The net operating income for September under variable costing was
a. P25,000 b. P30,000 c. P35,000 d. P21,000 e. None of these
B. The following information is available for NHECY Corp.'s product line
Selling price per unit P 15
Variable manufacturing costs per unit of production 8
Total annual fixed manufacturing costs 25,000
Variable administrative costs per unit of production 3
Total annual fixed selling and administrative expenses
15,000
There was no inventory at the beginning of the year, During the year
12,500 units were produced and 10,000 units were sold.
23. The ending inventory, assuming Nhecy used direct costing, would be
a. P25,000 b. P32,500 c. P27,500 d. P20,000
24. The ending inventory assuming Nhecy uses absorption costing, would be
a. P23,500 b. P27,500 c. P20,000 d. P25,000
25. The total variable costs charged to expenses for the year, assuming Nhecy
uses direct costing would be
a. P110,000 b. P100,000 c. P 117,500 d. P80,000
26. The total fixed costs charged against the current year's operations,
assuming Nhecy uses absorption costing is
a. P35,000 b. P40,000 c. P25,000 d. P15,000
C. Gerlie Company began its operations on January 1, 2014 and produces a
single product that sells for P10 per unit. Gerlie uses an actual cost
system. In 2014, 100,000 units were produced and 80,000 units were sold.
There were no work-in-process inventory at December 31 ,2014.
Manufacturing costs and selling & adm. expenses for 2014 were as
follows:
Fixed costs Variable costs
Raw material - P2.00 per unit produced
Direct Labor - P1.25 per unit produced
Factory Overhead P 120,000 P .75 per unit produced
Selling and Administrative P 70,000 P1.00 per unit sold
27. What would be Gerlie's operating income for 2014 under variable (direct )
costing method?
a. P 114,000 b. P210,000 c. P234,000 d. P330,000
28.
What would be Gerlie's finished goods inventory at December 31, 2014,
under the absorption costing method?
a. P80,000 b. P104,000 c. P 110,000 d. P124,000
D. Selected information concerning the operations of Elma, Company for the
year ended December 31, 2014, is available as follows:
Units produced 10,000 Fixed selling and adm. expenses
P30,000
Units sold 9,000 Variable selling and adm. Expenses
4,500
Direct material usedP40,000 Finished goods inventory
Direct labor incurredP20,000 January 1, 2014 none
Fixed factory overheadP25,000
Variable factory overheadP 12,000
There are no work-in-process inventories at the beginning of 2014.
29. What would be Elma's finished goods inventory at December 31, 2014.
a. P7,200 b. P7,650 c. P8,000 d. P9,700
30. Which costing method, absorption or variable costing, would show a
higher operating income for 2014 and by what amount?
Costing Method Amount
a. Absorption costingP2,500
b. Variable costing P2,500
c. Absorption costingP5,500
d. Variable costing P5,500
E. Information from Peter Company's records for the year ended December
31, 2014, is available as follows:
Net Sales P 1,400,000 Units manufactured70,000
Cost of goods manufactured Units sold 60,000
Variable P 630,000 Finished goods inventory
Fixed P 315,000 January 1, 2014 none
Operating Expenses
Variable P 98,000
Fixed P140,000
31. What would be Peter’s finished goods inventory at December 31, 2014,
under the variable (direct) costing method?
a. P90,000 b. P140,000 c. P105,000 d. P135,000
32. Under the absorption costing method, Peter's operating income for 2014
would be
a. P217,000 b. P307,000 c. P352,000 d. P374,000
33. During January , 2014, Gabby Inc., produced 10,000 units of Product F
with costs as follows:
Direct Materials P40,000
Direct Labor 22,000
Variable overhead 13,000
Fixed overhead 10,000
P85.000
======
What is Gabby's unit cost of Product F for January, 2014 calculated on the
direct costing method?
a. P6.20 b. P7.20 c. P7.50 d. P8.50
34. Brooks Corp. began operations on January 1, 2014, and produces a single
product that sells for P9 a unit. Brooks uses an actual cost system. 100,000
units were produced and 90,000 units were sold in 2013. There were no
work-in-process inventory at Dec. 31, 2014. Manufacturing costs and
selling and administrative expenses for 2014 were as follows:
Fixed Costs Variable costs
Raw materials - P1.75 per unit produced
Direct labor - 1.25 per unit produced
Factory overhead P100,000 .50 per unit produced
Selling and administrative P 70,000 .60 per unit sold
What would be the operating income for 2014 using the direct costing?
a. P181,000 b. P271,000 c. P281,000 d. P371,000
F. JV Company began operations on January 1, 2014 and produces a single
product that sells for P7 per unit. Standards capacity is 100,000 units per
year. 100,000 units were produced and 80,000 units were sold in 2014.
Manufacturing costs and selling and administrative expenses were as
follows:
Fixed Costs Variable costs
Raw materials P1.50 per unit produced
Direct labor 1.00 per unit produced
Factory overhead P150,000 .50 per unit produced
Selling and administrative P 80,000
.50 per unit sold
There were no variances from the standard variable costs. Any under or
over-applied overhead is written off directly at the year end as an
adjustment to cost of goods sold.
35. In presenting inventory on the balance sheet at December 31, 2014, the
unit cost under absorption costing is
a. P2.50 b. P3.00 c. P3.50 d. P4.50
36. What is the net income for 2013under direct costing?
a. P50,000 b. P80,000 c. P90,000 d. P120,000
G. Stober Company produces a specialty item. Management has provided the
following information:
Actual sales 60,000 units
Budgeted production 50,000 units
Selling price P40.00 per unit
Direct material costs P10.00 per unit
Variable manufacturing overhead P3.00 per unit
Variable administrative costs P5.00 per unit
Fixed manufacturing overhead P4.00 per unit
37. What is the cost per statue if throughput costing is used?
a. P22.00
b. P19.00
c. P15.00
d. P10.00
38. What is the total throughput contribution?
a. P1,500,000
b. P1,620,000
c. P1,380,000
d. P1,800,000
END