CHAPTER 4 VARIABLE COSTING AND SEGMENTED REPORTING ‘THEORIES: 1. ‘A basic tenet of direct costing is that period costs should be currently expensed. Whats the rationale behind this procedure? A B. c D. Period costs are uncontrollable and should not be charged to a specific product. Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by management. Because period costs will occur whether or not production is made, it is improper to allocate these costs to production and defer the current costs of doing business, Which of the following must be known about production process in order to institute a direct costing system? A B. c. D. The variable and fixed components of all costs related to production. The controllable and noncontrollable components of all costs related to production Standard production rates and times for all elements of production. Contribution margin and breakeven point for all goods in production. Under the direct costing concept, unit product cost would most likely be increased by a(n): ‘A. decrease in the remaining useful life of factory machinery depreciated on the units-of-production method B. decrease in the number of units produced. increase in the remaining useful life of factory machinery depreciated on the sum-of-the-years’-digits method. D. increase in the commission paid to salesmen for each unit sold. Which of the following statements is true for a firm that uses variable (direct) costing? ‘A. The cost of a unit of product changes because of changes in the number of units manufactured. B. Profits fluctuate with sales. C. Anidle facility variation is calculated. : D. Product costs include “direct” (variable) administrative costs. 7Which of the following is an argument against the use of direct (variable) costing? . A. Absorption costing overstates the balance sheet value of inventories. B, Variable factory overhead is a period cost. C. Fixed factory overhead is difficult to allocate properly. D. Fixed factory overhead is necessary for the production of a product. The primary difference between variable and absorption costing is the inclusion of: fixed selling expenses in product costs of variable factory overhead in period costs variable selling expenses in product costs fixed factory overhead in product costs pope Which of the following statements is true? A. Absorption costing net income exceeds variable costing net income when units produced and sold are equal. B. Variable costing net income exceeds absorption costing net income when units produced exceed units sold. C. Variable costing net income exceeds absorption costing net income when units produced equal units sold. D. Absorption costing net income exceeds variable costing net income when units produced are greater than units sold. Absorption costing of inventories, as required by PFRS, has been criticized for encouraging managers to increase year-end inventories in order to boost reported profits. Which of the following techniques is the most effective in resolving this problem? A. Senior management's control of inventory levels B. Adoption of just-in-time (JIT) production system C. Reward managers based upon the residual income approach D. Use variable costing to determine income for bonus purposes A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income increase is that, compared to budget, actual manufacturing fixed costs had increased. selling and administrative fixed expenses had decreased. sales prices and variable costs had increased proportionately. sales prices had declined proportionately less than the variable costs. pom> 7810. 11. 12. 13. 14. 15. 16, When absorption costing is productcosts except en Alt of the following costs are considered A. direct labor B. variable overhead C._ variable selling and administrativ D. fixed overhead ciated Which of the following is not true of variable costing? Profits may increase though sales decrease. Profits fluctuate with sales. The cost of the product consists of all variable production costs. The income statement under variable costing does not include overhead volume variance. pom ‘When variable costing is used, fixed manufacturing overhead is recognized expense when the: e _ A. costis incurred B. product is completed ©. product is sold D. product is inventoried When variable costing is used, the income statement is usually prepared using: A. acontribution margin format B. an operational format C. a functional format D. all of the given choices Variable costing can be used for external reporting internal reporting either external reporting or internal reporting, neither external reporting nor internal reporting, yvoup Ina variable costing system, product cost includes A. direct materials, direct labor, variable overhead B. direct materials, direct labor, fixed overhead C. direct labor, variable overhead, fixed overhead D. direct materials, variable overhead, fixed overhead Variable costing net income is higher thee absorption net income when more units are sold than produced loser than absorption net income when more units are produced than sold the same as absorption net income when all units produced are sold all of the given choices vom> 7917. 18. 19. The level of production affects income under which of the following methods? A. absorption costing B, both absorption and variable costing C. variable costing D. neither absorption nor variable costing Unabsorbed fixed overhead costs in an absorption costing system are: fixed factory costs not allocated to units produced. variable overhead costs not allocated to units produced. excess variable overhead costs. costs that should be controlled. com> Net earnings determined using full absorption costing can be reconciled to net earnings determined using direct costing by computing the difference between, A. inventoried fixed costs in the beginning and ending inventories and any deferred over- or underapplied fixed factory overhead. B._ inventoried discretionary costs in the beginning and ending inventories, C. gross margin (absorption costing method) and contribution margin (direct costing method). D. sales as recorded under the direct costing method and sales as recorded under the absorption costing method. Net profit under absorption costing may differ from net profit determined under direct costing. How is this difference calculated? A. Change in the quantity of all units in inventory times the relevant fixed costs per unit. B. Change in the quantity of all units produced times the relevant fixed costs 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. Why is income statement under variable costing diverse? A. Ituses terminologies that are so difficult to understand. B. Income may still increase though unit sales decrease. C. Income is rarely affected by the number of units produced. D. It considers cost variances as adjustment to cost of goods sold. Which of the following is not true of variable costing? A. Profits may increase though sales decrease, B. Profits fluctuate with sales. C. The cost of the product consists of all variable production costs. 80D. The income statement under variable cost : volume variance. ‘sting does not include overhead 23. Which of the following is true about absorption costing? A. No fixed factory overhead is charged to production. B. Itis also known as direct costing. C. The term used to designate the difference between sal sold is the "manufacturing margin.” vidi ee oe of goods Over-applied factory overhead is reflected in the income statement as a reduction cost of goods sold. D. 24. What factor related to manufacturing costs causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing? A. Absorption costing considers all costs in the determination of net, efting whereas variable costing considers only direct costs. Absorption costing "inventories" all direct costs, but variable Cate, considers direct costs to be period costs. C. Absorption costing "inventories" all fixed manufacturing costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs. D. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed costs to be period costs. B. 25. Segment profitability analysis may be used to evaluate the profitability of Divisions. Sales territories. Product lines. All of these are correct. voOe> PROBLEMS: 1 During the month of May, Royal Co. produced 10,000 units of Product X. Costs incurred by Roy during May were as follows Direct materials F10}00 Direct labor ae Variable manufacturing overhead 000 Variable selling and general 3.000 Fixed manufacturing overhead 9 Fixed selling and general 000 Total PSL.000 81~~ What are the unit costs under absorption and variable costin, meth respectively? ” re as, A. P5.10; P3.80 C. P4.40; P3.50 B. P3.80 P5.10 D. P3.50: P4.40 The following information pertains to Rafa Corporation: Beginning inventory NONE Ending inventory 5,000 units Direct labor per unit P10 Direct materials per unit 8 Variable overhead per unit 2 Fixed overhead per unit 5 Variable selling costs per unit 6 Fixed selling costs per unit 8 What is the value of ending inventory using the variable costing method? A. P155,000 C. P100,000 B. P125,000 D. P195,000 Consider the following: Sales price, per unit P18 per unit Standard absorption cost rate P12 per unit Standard variable cost rate P8 per unit Variable selling expense rate P2 per unit Fixed selling and administrative expenses 40,000 Fixed manufacturing overhead 60,000 Last period, 13,000 units were produced. In the current period, 15,000 units were produced. In each period, 13,000 units were sold. What is the difference in reported income under absorption and variable costing for the current period? A. The variable-costing income exceeded absorption-costing income by 4,000. B. The absorption-costing income exceeded variable-costing income by 8,000. C. The variable-costing income exceeded absorption-costing income by 6,000. D. Net income will equal between the two methods. The Blue Company has failed to reach its planned activity level during its first two years of operation, ‘The following table shows the relationship between units produced, sales, and normal activity for these years and the projec 82“a relationship for Year 3. All prices and costs have Temaine. two years and are expected to continue in Year 3 < the same forthe last both Year 1 and Year 2. Income has been positive in Sales Planned Produced ae Year 1 90,000 90,000 Soom Year 2 95,000 95,000 100,000 Year 3 90,000 90,000 0000 Because Blue Company uses an absorption costi , ean PANY es rption costing system, one would predict A. Greater than Year 1. B. Greater than Year 2. C. Equal to Year 1. D. Equal to Year 2. 5. A company manufactures a single product for its customers by contracting in advance of production. Therefore, the company only produces units that can be sold by the end of each period. During the last period, the following revenues and costs/expenses were made and costs incurred: Sales 40,000 Direct materials 9,050 Direct labor 6,000 Rent (9/10 factory, 1/10 office) 3,000 Depreciation on factory equipment 2,000 Supervision (2/3 factory, 1/3 office) 1,500 Salespeople’s salaries 1,300 Insurance (2/3 factory, 1/3 office) 1,200 Office supplies 750 Advertising 700 Depreciation on office equipment 500 Interest on Joan —_ Based on the above data, the gross margin percentage for the last period (rounded to nearest percent) was A. 41% C. 46% B. 4% D, 49% © The following information was extracted from the first year of ebsorption- based accounting records of Soulmate Co. anes Total fixed costs incurred moon Total variable costs incurred m0 Total period costs incurred ae Total variable period costs incurred 83Units produced s2.000 Units sold Pow Unit sales price ‘Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its income before taxes would have been A. P 9.50 higher C. P11.00 higher B. P 850 higher D. P 8.33 higher 7. At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales change by P1.00, income will change by A. P 0.25 Cc. P 075 B. P 0.12 D. P 0.10 8. Luna Company had income of P65,000 using absorption costing for a given period. Beginning and ending inventories for that period were 13,000 units and 18,000 respectively. Ignoring income taxes, if the fixed overhead application rate were P2.50 per ‘unit, what would the income have been using variable costing? A. P77,500 Cc. P52,500 B. ¥ 60,000 D. P 20,000 Questions 9 through 12 are based on the following annual flexible budget which has been prepared for use in making decisions relating to Product X. Budgeted units 100,000 150,000 - — 200,000 Sales volume 800,000 P1,200,000 1,600,000 Manufacturing costs. Variable 300,000 P 450,000 P. 600,000 Fixed 200,000 200,00 200,000 500,000 P_650,000 P__800,000 Selling expenses: Variable 200,000 P 300,000 P 400,000 Fixed 160,000 160,000 160,000 360,000 P_ 460,000 P_560,000 Income (or loss) (260,000 P__90,000 2.240.000 The 200,000-unit budget has been adopted and will be used for allocating fixed manufacturing costs to units of Product X. At the end of the first six months the following information available: Units Production completed 20.000 Sales 60,000 84ut fixed costs are budgeted and incurred sn iformly thy foincide with the budget. Yormly throughout the year and all costs incurred and underapplied fixed manufacturing costs ite following seasonal pattern: 18 costs are deferred until yearend. Annual sales | PB First quarter {oe Aas Sales Second quarter | 50% Third quarter i pred Fourth quarter ' 10% i 100% 9, ‘The amount of fixed factory costs applied to product during the first six months under absorption costing would be A. overapplied by P20,000. B. equal to the fixed costs incurred. C. underapplied by P40,000. D. underapplied by P80,000 10. Reported net income (or loss) for the first six months under absorption costing would be A. 160,000 C. P 80,000 B. P 40,000 D. P (40,000) 11. Reported net income (or loss) for the firs six months under direct costing would be A. P144,000. C. P 72,000 B. PO D.. P6,000) 12. Assuming that 90,000 units of Product X were sold during the first six months and that this is to be used as a basis, the revised budget estimate for the total number of units to be sold during this year would be A. 360,000. C. 240,000 B. 200,000, D. 300,000 13, In its first year of operations, Magma Company had the following costs when it produced 100,000 and sold 80,000 units of its only product. Manufacturing: 180,000 Fixed 160,000 Variable Selling and administrative: 90,000 Fixed 40,000 Variable 85—_—_————————- = How much lower would Magma’s net income be if it used variable costing instead of full absorption costing? 36000 "P C. 68,000 B. P54,000 D. P94,000 14. Ward Company has two segments: Audio and Video. Sales for the Audio Segment were P500,000, and variable costs were 40% of sales. The Video Segment also had sales of P500,000, but variable costs were 60% of sales. Fixed costs directly traceable to the Audio and Video segments were P150,000 and 120,000, respectively. Common fixed costs of P200,000 were arbitrarily allocated equally to each segment. What was the segment margin of the Video Segment. ‘A. P200,000 C. P(20,000) B. P 80,000 D. P150,000 15. Consider the Mars Company's segment analysis: Division A Division B Sales 'P300,000 P200,000 Variable costs 150,000 150,000 Contribution margin 150,000 50,000 Direct fixed costs 50,000 30,000 Segment margin 100,000 20,000 Allocated common fixed costs 90,000 60,000 Operating income (loss) P.10,000 ‘P(40,000) Total Company 500,000 300,000 200,000 80,000 120,000 150,000 2(30,000) Common costs are allocated arbitrarily based on sales dollars. If Mars eliminates Segment B, what is the impact on the operating loss of the company? A. The loss decreases by P40,000. B. The loss increases by P20,000. C. The loss decreases by P60,000. D. The loss increases by P40,000. 86VARIABLE COSTING AND SEGMENTED REPORTING Variable overhead Total variable product cost ‘Variable unit cost (P35,000 10,000) ‘Add Fixed overhead per unit (P8,000 + 10,000) ‘Absorption unit cost Answer C Direct materials Direct labor Variable overhead Total unit cost- variable costing Value of ending inventory (8,000 x P20) Answer. 8 Fixed overhead rate per unit P12-P8 Difference in income: 2,000 x P4 ested Answers and Solutions. THEORIES: 1D 6D WA “8 A re we we 48 58 BA wa 50 0c tea mn - PROBLEMS: ue 6B a TA a ac 4c oA 5c 10. 8 SOLUTIONS: 4. Answer: © Direct materials Direct labor 1” 12 43 4 18, waroe 21 24 28. o00>e 10,000 Pe P 8,000 During the curent year, the company’s production equaled the budgeted. The inventory increased ‘Therefore, absorption costing income is higher than the variable costing income. Answer, © “The production and unit sales during year matched with year $ Answer: © Sales Cost of goods sold Direct materials Direct labor 41S 40,00010. un Rent (0.9 x P3,000) Depreciation ‘Supervision (2/3 x P1,500) Insurance (2/3 x P1,200) Gross margin Gross margin percentage (P18,400 + P40,000) Answer: B : CMR per unit = Selling Price ~ Unit variable cost = P12.00~ P3.50 =P8.50 Veriable Cost Per unit Product: (50,000 ~ 30,000) / 20,000 = P1,00 Selling & Adm. (variable period costs) 30,000/12,000 3 Total vanable cosvunit * Total variable costs — variable period cost (selling & adm.) = variable product cost. Answer A 4.00 - (1.00 x.75) P0.25 Answer: C ‘Absorption income 65,000 Less Fixed Overhead in-decrease in Inventory (18,000 ~ 15,000) x 2.50 12,500 -- Income, Variable costing 52,500 Answer. A Budgeted actual fixed overhead (0.5 x P200,000) 100,000 Applied fixed overhead (120,000 x P1.00) 420,000 Overapplied fixed overhead (favorable volume variance) B20,000 Answer B Sales (60,000 x Pe) 480,000 Cost of goods sold (60,000 x P4) 240,000 Gross proft 240,000, Seliing and other expenses (60,000 x 2) + P80,000 200.000, Absorption profit P_40,000 Answer: & otal contribution margin (60,000 x P3) 180,000 Less: Fixed manufacturing OH Fined selling and other expense 80.000 Variable costing profit NL (CM per unit (P1.6M - PO 6M ~ PO.4M) + 200,000) 23.00 4162 13. 14 15. ‘Answer. D The sales pattem indicated that sales for the first Semester was 30%. The assumption was that the pare’” WAS stil valid. Therefore the assumed 90,000 units would be 30 percent f expected annval 490,000 + 0.3) 300,000 units Answer. A The difference in profit between the use of absorption costin us 19 and variable costing is due to the amount of fixed overtiead that is deferred by the unit on hand under absorption costing but immediately ‘recognized as expense. Hence, the difference between the units produced and soid are 20,000 and the per unit fixed overhead is P1.80. Therefore, the of thod Is lower pat unt fd overhead i ‘amount of profit of variablé costing met by Answer. B Sales 500, Variable costs (500,000 x 60%) 309.000 : Contribution margin 200, Direct fixed costs 120.000 ‘Segment margin 80,000 Answer, B Since the common costs are arbitrally allocated, a more appropriate segment analysis folows: Division A Division — Total Company Sales 300,000 200,000 500,000 Variable costs 180,000 450,000 300,000, Contribution margin 150,000 0,000 200,000 Direct fixed costs $0,000 30,000 80.000 Segment margin 00,000, 720,000 £20,000 ‘Common fixed costs = oe 150,000 ‘Operating income (loss) 2.100.000 220,000 B(30.000) Its apparent from this analysis, that the company would lose P20,000 of profits. 417