Horngren's Financial and Managerial Accounting, 6e (Miller-Nobles)

Chapter 21 Variable Costing

Learning Objective 21-1

1) Absorption costing considers fixed selling and administrative costs as product costs.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

2) Absorption costing is required by the Generally Accepted Accounting Principles (GAAP)

for financial statements issued to investors, creditors, and other external users.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

3) Fixed manufacturing overhead is considered a product cost under variable costing.

Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

4) Absorption costing considers direct materials, direct labor, variable manufacturing

overhead, and fixed manufacturing overhead as product costs.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

5) In absorption costing, all product costs are recorded first as assets in the inventory
accounts.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

6) The traditional income statement format is prepared under absorption costing.

Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
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PE Question Type: Concept
H2: Absorption Costing

7) Under absorption costing, all product costs are first recorded as assets in inventory
accounts, and later transferred to the Cost of Goods Sold account when sold.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

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

A) It considers variable selling and administrative costs as product costs.
B) It considers fixed selling and administrative costs as product costs.
C) It considers fixed manufacturing overhead cost as product costs.
D) It considers variable manufacturing overhead cost as period costs.
Answer: C
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

9) Following GAAP, the income statement issued to investors and creditors must ________.
A) be prepared in the traditional format
B) be prepared using variable costing
C) be prepared in the contribution margin format
D) show the value of contribution margin
Answer: A
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

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10) Which of the following is true of the traditional format of the income statement?
A) It is prepared under the variable costing method.
B) It shows contribution margin as a line item.
C) It is not allowed under GAAP.
D) It is prepared under the absorption costing method.
Answer: D
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

11) Absorption costing considers ________ as product costs.

A) variable manufacturing overhead
B) sales salaries and commissions
C) administrative office salaries
D) advertising costs
Answer: A
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Absorption Costing

12) Answer the following absorption costing questions:

Question Absorption Costing

Which costs are included
as product costs?
Which costs are included
as period costs?

Answer:
Question Absorption Costing
Direct materials
Direct labor
Which costs are included Variable manufacturing overhead
as product costs? Fixed manufacturing overhead
Which costs are included Variable selling and administrative costs
as period costs? Fixed selling and administrative costs

Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Absorption Costing

13) Variable costing is used for external reporting purposes, and absorption costing is used
for internal decision-making purposes.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing
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14) Contribution margin is calculated by deducting the total cost of goods sold from sales
revenue.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

15) The traditional income statement format calculates operating income as gross profit
minus selling and administrative expenses.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

16) Variable costing prepares the income statement using the traditional format.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

17) The contribution margin format of the income statement categorizes costs by their
behavior.
Answer: TRUE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

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18) The fixed manufacturing overhead is considered a product cost in variable costing and
a period cost in absorption costing.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

19) Which of the following statements is true of variable costing?

A) It considers variable manufacturing overhead as period costs.
B) It considers fixed manufacturing overhead as product costs.
C) It considers variable selling and administrative costs as product costs.
D) It considers fixed selling and administrative costs as period costs.
Answer: D
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

20) Period costs under the variable costing method include ________.
A) variable manufacturing overhead
B) variable selling and administrative costs
C) direct materials
D) direct labor
Answer: B
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

21) Variable costing considers only ________ costs when determining product costs.
A) fixed manufacturing
B) variable manufacturing
C) variable selling and administrative
D) fixed selling and administrative
Answer: B
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

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22) Which of the following is considered a period cost under variable costing but not under
absorption costing?
A) fixed selling and administrative costs
B) variable manufacturing costs
C) fixed manufacturing overhead
D) variable selling and administrative costs
Answer: C
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

23) Which of the following is considered a period cost in absorption costing?

A) variable manufacturing overhead costs
B) fixed selling and administrative costs
C) fixed manufacturing overhead costs
D) semi-variable manufacturing overhead costs
Answer: B
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

24) Gross profit is calculated by deducting ________ from sales revenue.

A) total fixed costs
B) cost of goods sold
C) total variable costs
D) selling and administrative costs
Answer: B
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

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25) Which of the following will appear as a line item in the traditional format of an income
statement?
A) contribution margin
B) total variable costs (manufacturing and non-manufacturing)
C) total fixed costs (manufacturing and non-manufacturing)
D) gross profit
Answer: D
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

26) Which of the following will appear as a line item in the income statement prepared
under variable costing?
A) Contribution Margin
B) Total Cost of Goods Sold
C) Work-in-Process Inventory
D) Gross Profit
Answer: A
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

27) Which of the following statements is true of absorption and variable costing methods?
A) Both costing methods consider selling and administrative costs to be period costs.
B) Variable costing considers variable selling and administrative costs to be product costs.
C) Absorption costing considers fixed manufacturing overhead to be period costs.
D) Both costing methods consider fixed manufacturing overhead to be product costs.
Answer: A
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

7
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28) Contribution margin is calculated by deducting ________ from sales revenue.
A) total product costs
B) total selling and administrative costs
C) total fixed costs
D) total variable costs
Answer: D
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

29) A variable costing income statement is used for ________.

A) filing income tax returns
B) external reporting purposes
C) determining the amount of gross profit
D) internal decision-making purposes
Answer: D
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

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30) Aqua Primavera, Inc. has provided the following information for the year.

Units produced 11,000 units

Sales price $500 per unit
Direct materials $45 per unit
Direct labor $30 per unit
Variable manufacturing overhead $55 per unit
Fixed manufacturing overhead $480,000 per year
Variable selling and administration
costs $75 per unit
Fixed selling and administration
costs $300,000 per year

What is the unit product cost using variable costing?

A) $75
B) $85
C) $130
D) $174
Answer: C
Explanation: C)
Direct materials $45
Direct labor 30
Variable manufacturing overhead 55
Total unit product cost $130
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Unit Product Costs

31) Windspring Spas, Inc. reports the following information for August:

Sales Revenue $590,000

Variable Costs 160,000
Fixed Costs 50,000

Calculate the contribution margin for August.

A) $110,000
B) $430,000
C) $380,000
D) $540,000
Answer: B
Explanation: B) Contribution margin = Sales revenue - Variable costs = $590,000 -
$160,000 = $430,000
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Variable Costing

32) Lilypad Hot Tubs, Inc. reports the following information for August:

Sales Revenue $640,000

Variable Costs 210,000
Fixed Costs 73,000
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Calculate the operating income for August using variable costing.
A) $430,000
B) $567,000
C) $357,000
D) $640,000
Answer: C
Explanation: C)
Sales Revenue $640,000
- Variable Costs 210,000
Contribution Margin 430,000
- Fixed Costs 73,000
Operating Income $357,000
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Variable Costing

33) Arianell, Inc. reports the following information for August:

Sales Revenue $800,000

Variable Cost of Goods Sold 110,000
Fixed Cost of Goods Sold 45,000
Variable Selling and Administrative
Costs 100,000
Fixed Selling and Administrative Costs 70,000

Calculate the gross profit for August using absorption costing.

A) $730,000
B) $700,000
C) $690,000
D) $645,000
Answer: D
Explanation: D)
Sales Revenue $800,000
- Cost of Goods Sold ($110,000 + $45,000)155,000
Gross Profit $645,000
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Absorption Costing

34) Morwenna, Inc. reports the following information for August:

Sales Revenue $900,000

Variable Cost of Goods Sold 120,000
Fixed Cost of Goods Sold 60,000
Variable Selling and Administrative
Costs 150,000
Fixed Selling and Administrative Costs 50,000

Calculate the operating income for August using absorption costing.

A) $520,000
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B) $270,000
C) $1,100,000
D) $380,000
Answer: A
Explanation: A)
Sales Revenue $900,000
- Cost of Goods Sold ($120,000 + $60,000) 180,000
Gross Profit 720,000
- Selling and Administrative Costs ($150,000 + $50,000) 200,000
Operating Income $520,000
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Absorption Costing

35) In variable costing, fixed manufacturing overhead is considered a period cost because
________.
A) these costs are indirectly related to production
B) these are not incurred in the period in which the units are produced
C) these costs are incurred whether or not the company manufactures any goods
D) these costs are direct costs incurred for production
Answer: C
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

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36) Llywelyn, Inc. reports the following information for July:

Sales Revenue $960,000

Variable Costs 110,000
Operating
Income 360,000

What is the total fixed cost using variable costing?

A) $850,000
B) $490,000
C) $250,000
D) $470,000
Answer: B
Explanation: B)
Sale revenue $960,000
- Variable costs 110,000
Contribution margin 850,000
- Operating income 360,000
Fixed costs $490,000
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Variable Costing

12
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37) The following data has been provided by Jestina, Inc. for the year.

Units produced and sold 5,500 units

Sales price $300 per unit
Direct materials $90 per unit
Direct labor $50 per unit
Variable manufacturing overhead $40 per unit
Fixed manufacturing overhead $110,000 per year
Fixed selling and administrative costs $150,000 per year

There are no beginning inventories. Prepare an income statement using the contribution
margin format.
Answer:
Jestina, Inc.
Income Statement
Year Ended December 31, 20XX

Sales Revenue $1,650,000

- Variable Costs* 990,000
Contribution Margin 660,000
- Fixed Costs** 260,000
Operating Income 400,000

Explanation:
*Variable costs = 5,500 units × ($90 + $50 + $40) = $990,000
**Fixed costs = $110,000 + $150,000 = $260,000
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Variable Costing

13
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38) Ceriweden, Inc. has provided the following financial data for the year:

Units produced and sold 3,500 units

Sales price $220 per unit
Direct materials $25 per unit
Direct labor $45 per unit
Variable manufacturing overhead $30 per unit
Variable selling and administrative
costs $20 per unit
Fixed manufacturing overhead $105,000 per year
Fixed selling and administrative costs $140,000 per year

There are no beginning inventories. Prepare an income statement for the year using the
traditional format.
Answer:
Ceriweden, Inc.
Income Statement
Year Ended December 31, 20XX

Sales Revenue (3,500 units × $220)$770,000

- Cost of Goods Sold* 455,000
Gross Profit 315,000
- Selling and Administrative Costs**210,000
Operating Income 105,000

Explanation:
* Cost of goods sold = Total variable manufacturing costs + Fixed manufacturing overhead
= [($25 + $45 + $30) × 3,500 units] + $105,000 = $455,000
** Selling and administrative Costs = Total variable selling and administrative costs +
Fixed selling and administrative costs = ($20 × 3,500 units) + $140,000 = $210,000
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Absorption Costing

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39) Answer the following variable costing questions:

Question Variable Costing

Which costs are included
as product costs?
Which costs are included
as period costs?

Answer:
Question Variable Costing
Direct materials
Which costs are included Direct labor
as product costs? Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling and administrative
Which costs are included costs
as period costs? Fixed selling and administrative costs

Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Variable Costing

40) Variable costing considers direct materials, direct labor, variable manufacturing
overhead, and fixed manufacturing overhead as product costs.
Answer: FALSE
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

41) Unit product cost calculations using absorption costing do NOT include ________.
A) fixed manufacturing overhead
B) variable manufacturing overhead
C) variable selling and administrative costs
D) direct materials
Answer: C
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Comparison of Unit Product Costs

15
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42) Emerald Pools, Inc. has provided the following information for the year.

Units produced 14,000 units

Sales price $700 per unit
Direct materials $25 per unit
Direct labor $45 per unit
Variable manufacturing overhead $50 per unit
Fixed manufacturing overhead $470,000 per year
Variable selling and administration
costs $90 per unit
Fixed selling and administration
costs $260,000 per year

What is the unit product cost using absorption costing? (Round any intermediate
calculations and your final answer to the nearest dollar.)
A) $70
B) $154
C) $160
D) $120
Answer: B
Explanation: B)
Direct materials $25
Direct labor 45
Variable manufacturing overhead 50
Fixed manufacturing overhead ($470,000 / 14,000 units) 34
Total unit product cost $154
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Unit Product Costs

16
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43) Amarantha Corp. has provided the following data for the current year.

Units produced 2,500 units

Sales price $200 per unit
Direct materials $75 per unit
Direct labor $65 per unit
Variable manufacturing overhead $25 per unit
$225,000 per
Fixed manufacturing overhead year
Variable selling and administrative
costs $30 per unit
$150,000 per
Fixed selling and administrative costs year

Calculate the unit product cost using absorption costing and variable costing.
Answer:
Variable Absorption
Costing Costing
Direct materials $75 $75
Direct labor 65 65
Variable manufacturing overhead 25 25
Fixed manufacturing overhead
($225,000 / 2,500 units) ____ 90
Total unit product cost $165 $255
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Unit Product Costs

44) Which of the following is NOT a product cost under variable costing?
A) Direct materials
B) Direct labor
C) Variable manufacturing overhead
D) Fixed manufacturing overhead
Answer: D
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Variable Costing

17
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45) Mirabella Company assigns direct materials, direct labor and both variable and fixed
overhead to its product costs. Mirabella Company is using ________.
A) absorption costing
B) variable costing
C) batch costing
D) composite costing
Answer: A
Diff: 1
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Absorption Costing

46) Last year, Adara Company produced 5000 units and sold 3000 units. The company had
no beginning inventory. They incurred the following costs:

Direct materials per unit $13

Direct labor per unit $7
Variable overhead per unit $4
Total fixed manufacturing
overhead $20,000
Total selling and
administrative $70,000

Adara's product cost per unit under absorption costing is

A) $28
B) $24
C) $31
D) $42
Answer: A
Explanation: A)
Fixed cost per unit = 20,000/5000 = $4
Total unit cost = $13 + $7 + $4 + $4 = $28
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Unit Product Costs

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47) Last year, Adara Company produced 11,000 units and sold 9000 units. The company
had no beginning inventory. They incurred the following costs:

Direct materials per unit $18

Direct labor per unit $15
Variable overhead per unit $7
Total fixed manufacturing
overhead $55,000
Total selling and
administrative $80,000

Adara's product cost per unit under variable costing is

A) $45
B) $40
C) $46
D) $52
Answer: B
Explanation: B) Total unit cost = $18 + 15 + $7 = $40
Diff: 2
LO: 21-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Comparison of Unit Product Costs

Learning Objective 21-2

1) The level of inventory on hand at the end of the year does not affect the amount of
operating income calculated under variable costing and absorption costing.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced are More Than Units Sold

2) When all the units produced are sold, the operating income calculated under absorption
costing is higher when compared to the operating income calculated under variable
costing. Assume that there is no beginning Finished Goods Inventory.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

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3) In the variable costing income statement, variable costs are reported separately from
fixed costs.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

4) When all units produced are sold, there is no difference in operating income between
absorption costing and variable costing.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

5) In its first year of business, Talula, Inc. produced and sold 600 units. If Talula uses
variable costing, ________.
A) its operating income for the period will be higher than under absorption costing
B) its operating income for the period will be lower than under absorption costing
C) its value of ending Finished Goods Inventory reported in the balance sheet will be
higher than under absorption costing
D) its operating income will be the same as under absorption costing
Answer: D
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

6) When there are no beginning or ending balances in Finished Goods Inventory, variable
and absorption costing will result in ________.
A) different amounts for ending Work-in-Process Inventory
B) the same operating income
C) different sales revenue
D) different amounts for cost of goods sold
Answer: B
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

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7) When all of the units produced are sold, the operating income is the same under both
the absorption and variable costing methods. Assume no beginning and ending inventories.
Which of the following gives the correct reason for the above statement?
A) All costs incurred have been recorded as expenses.
B) A portion of the fixed manufacturing overhead is still in the Finished Goods Inventory
account.
C) All selling and administrative expenses have been recorded as period costs.
D) Fixed manufacturing costs have not been considered when calculating the operating
incomes.
Answer: A
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

8) Yancey, Inc. reports the following information:

Units produced 560 units

Units sold 560 units
Sales price $150 per unit
Direct materials $10 per unit
Direct labor $20 per unit
Variable manufacturing overhead $30 per unit
Fixed manufacturing overhead $22,000 per year
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $10,000 per year

What is the amount of unit product cost that will be considered for external reporting
purposes? (Round any intermediate calculations and your final answer to the nearest cent.)
A) $59.29
B) $69.29
C) $120.00
D) $99.29
Answer: D
Explanation: D)
Total unit product cost:
Direct materials $10
Direct labor 20
Variable manufacturing overhead 30
Fixed manufacturing overhead ($22,000 / 560 units)39.29
Total unit product cost $99.29
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Equal Units Sold

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9) Sequoyah, Inc. reports the following information:

Units produced 540 units

Units sold 540 units
Sales price $160 per unit
Direct materials $30 per unit
Direct labor $15 per unit
Variable manufacturing overhead $10 per unit
Fixed manufacturing overhead $20,000 per year
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $10,000 per year

What is the unit product cost using variable costing?

A) $60
B) $82
C) $55
D) $105
Answer: C
Explanation: C)
Total unit product cost:
Direct materials $30
Direct labor 15
Variable manufacturing overhead 10
Total unit product cost $55
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Equal Units Sold

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10) Petra, Inc. has collected the following data. (There are no beginning inventories.):

Units produced 480 units

Units sold 480 units
Sales price $210 per unit
Direct materials $40 per unit
Direct labor $35 per unit
Variable manufacturing overhead $30 per unit
Fixed manufacturing overhead $11,000 per year
Variable selling and administrative
costs $10 per unit
Fixed selling and administrative costs $10,000 per year

What is the operating income using absorption costing? (Round any intermediate
calculations to the nearest cent, and your final answer to the nearest dollar.)
A) $39,400
B) $34,600
C) $24,600
D) $29,400
Answer: C
Explanation: C)
Sales Revenue (480 units × $210 per unit) $100,800
Cost of Goods Sold ($105 per unit × 480) + $11,000 61,400
Gross Profit 39,400

Selling and Administrative Costs

Variable Selling and
Administrative Costs (480 units × $10 per unit)$4800
Fixed Selling and Administrative Costs 10,000 14,800
Operating Income $24,600
*Cost of Goods Sold, variable costs per unit: $40 + $35 +$30 = $105
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Equal Units Sold

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11) When there is no beginning Finished Goods Inventory and all the goods that are
produced are sold, the operating income ________.
A) will be higher under absorption costing than variable costing
B) will be lower under absorption costing than variable costing
C) will be higher than the gross profit under variable costing
D) will be the same for both absorption costing and variable costing
Answer: D
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Equal Units Sold

12) In variable costing, the balance of ending Finished Goods Inventory includes fixed
manufacturing overhead.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

13) When there are no units in the beginning Finished Goods Inventory and the units
produced are more than the units sold, the operating income will be higher under
absorption costing than variable costing.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

14) When there are no units in the beginning Finished Goods Inventory and the units
produced are more than the units sold, the operating income will be higher under variable
costing than absorption costing.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

24
Copyright © 2018 Pearson Education, Inc.
15) Under variable costing, the units in the beginning Finished Goods Inventory contain
fixed manufacturing overhead costs.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

16) In variable costing, all fixed manufacturing overhead costs are expensed in the period
incurred.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

17) In its first year of business, Lakota, Inc. produced 600 units and sold 400 units. If
Lakota uses variable costing, ________.
A) its operating income for the period will be higher than under absorption costing
B) its operating income for the period will be lower than under absorption costing
C) its value of ending Finished Goods Inventory reported in the balance sheet will be
higher than under absorption costing
D) its operating income will be the same as under absorption costing
Answer: B
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

18) Which of the following costing methods charges all the manufacturing costs to the
products?
A) variable costing
B) direct costing
C) absorption costing
D) contribution costing
Answer: C
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

25
Copyright © 2018 Pearson Education, Inc.
19) When production is greater than sales, the operating income will be higher under
absorption costing than variable costing. Assume zero beginning and ending inventories.
Which of the following gives the correct reason for the above statement?
A) All costs incurred have been recorded as expenses.
B) A portion of the fixed manufacturing overhead is still in the ending Finished Goods
Inventory account under absorption costing.
C) All selling and administrative expenses have been recorded as period costs.
D) Fixed manufacturing costs have not been considered when calculating the operating
profits.
Answer: B
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are More Than Units Sold

20) Bethel, Inc. has collected the following data. (There are no beginning inventories.)

Units produced 530 units

Sales price $140 per unit
Direct materials $17 per unit
Direct labor $13 per unit
Variable manufacturing overhead $10 per unit
Fixed manufacturing overhead $19,200 per year
Variable selling and administrative
costs $10 per unit
Fixed selling and administrative costs $10,000 per year

What is the operating income using variable costing if 500 units are sold?
A) $15,800
B) $45,000
C) $60,000
D) $4200
Answer: A
Explanation: A) Sales Revenue $70,000
- Variable Costs* 25,000
Contribution Margin 45,000
- Fixed Costs** 29,200
Operating Income $15,800

Explanation:
* Variable costs = [($17 + $13 + $10 + $10) × 500 units] = $25,000
** Fixed costs = $19,200 + $10,000 = 29,200
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

21) Alltech Inc. has collected the following data. (There are no beginning inventories.)

Units produced 510 units

Sales price $120 per unit
Direct materials $19 per unit
Direct labor $15 per unit
26
Copyright © 2018 Pearson Education, Inc.
Variable manufacturing overhead $9 per unit
Fixed manufacturing overhead $16,000 per year
Variable selling and administrative
costs $10 per unit
Fixed selling and administrative costs $12,100 per year

What is the operating income using absorption costing if 500 units are sold? (Round any
intermediate calculations to the nearest cent, and your final answer to the nearest dollar.)
A) $6600
B) $5715
C) $11,171
D) $19,015
Answer: B
Explanation: B)
Sales Revenue ($120 × 500 units) $60,000
*
Cost of Goods Sold ($74.37 × 500 units) 37,185
Gross Profit 22,815
Selling and Administrative Costs:
Variable S&A Costs ($10 × 500 units)5000
Fixed S&A Costs 12,100 17,100
Operating Income $5715
*Total unit product cost:
Direct materials $19
Direct labor 15
Variable manufacturing overhead 9
Fixed manufacturing overhead
($16,000 / 510 units) 31.37
Total unit product cost $74.37
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

27
Copyright © 2018 Pearson Education, Inc.
22) Iagan, Inc. has collected the following data. (There are no beginning inventories.)

Units produced 600 units

Sales price $120 per unit
Direct materials $30 per unit
Direct labor $10 per unit
Variable manufacturing overhead $7 per unit
Fixed manufacturing overhead $17,900 per year
Variable selling and administrative
costs $4 per unit
Fixed selling and administrative costs $10,600 per year

What is the ending balance in Finished Goods Inventory using variable costing if 500 units
are sold?
A) $4000
B) $4700
C) $1700
D) $3000
Answer: B
Explanation: B) Ending Finished Goods Inventory = Unsold units × Total unit product
cost* = (600 units produced - 500 units sold) × $47 = $4700

* Total unit product cost

Direct materials $30
Direct labor 10
Variable manufacturing overhead 7
Total unit product cost $47
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

28
Copyright © 2018 Pearson Education, Inc.
23) Mackenzie, Inc. has collected the following data. (There are no beginning inventories.)

Units produced 700 units

Sales price $130 per unit
Direct materials $30 per unit
Direct labor $12 per unit
Variable manufacturing overhead $10 per unit
Fixed manufacturing overhead $17,400 per year
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $19,700 per year

What is the ending balance in Finished Goods Inventory using absorption costing if 400
units are sold? (Round any intermediate calculations to the nearest cent, and your final
answer to the nearest dollar.)
A) $7457
B) $15,600
C) $33,001
D) $23,058
Answer: D
Explanation: D)
Ending Finished Goods Inventory = Unsold units × Total unit product cost* = 700 units
produced - 400 units sold) × $76.86 = $23,058

Direct materials $30

Direct labor 12
Variable manufacturing overhead 10
Fixed manufacturing overhead
($17,400 / 700 units) 24.86
Total unit product cost $76.86
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

29
Copyright © 2018 Pearson Education, Inc.
24) Sutherland, Inc. reports the following information:

Units produced 580 units

Units sold 470 units
Sales price $200 per unit
Direct materials $29 per unit
Direct labor $8 per unit
Variable manufacturing overhead $13 per unit
Fixed manufacturing overhead $16,600 per year
Variable selling and administrative
costs $6 per unit
Fixed selling and administrative costs $14,000 per year

There are no beginning inventories. What is the ending balance in Finished Goods
Inventory using absorption costing? (Round any intermediate calculations to the nearest
cent, and your final answer to the nearest dollar.)
A) $7218
B) $3148
C) $5500
D) $8648
Answer: D
Explanation: D)
Direct materials $29
Direct labor 8
Variable manufacturing overhead 13
Fixed manufacturing overhead ($16,600 / 580 units)28.62
Total unit product cost 78.62

Ending Finished Goods Inventory [(580 - 470) × $78.62] = $8648

Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

30
Copyright © 2018 Pearson Education, Inc.
25) McFarlane, Inc. reports the following information:

Units produced 600 units

Units sold 410 units
Sales price $130 per unit
Direct materials $25 per unit
Direct labor $9 per unit
Variable manufacturing overhead $16 per unit
Fixed manufacturing overhead $18,300 per year
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $12,900 per year

There are no beginning inventories. What is the ending balance in Finished Goods
Inventory using variable costing?
A) $9500
B) $6460
C) $10,450
D) $15,295
Answer: A
Explanation: A)
Direct materials $25
Direct labor 9
Variable manufacturing overhead 16
Total unit product cost $50

Ending Finished Goods Inventory [(600 - 410) units × $50] = $9500

Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

31
Copyright © 2018 Pearson Education, Inc.
26) Docherty, Inc. reports the following information for the year ended December 31:

Units sold 600 units

Sales price $120 per unit
Direct materials $29 per unit
Direct labor $8 per unit
Variable manufacturing overhead $13 per unit
Fixed manufacturing overhead $25 per unit
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $14,500 per year

The operating income calculated using variable costing and absorption costing amounted
to $9800 and $11,000, respectively. There were no beginning inventories. Determine the
total number of units produced during the year.
A) 600 units
B) 648 units
C) 10 units
D) 48 units
Answer: B
Explanation: B) Number of units in the ending Finished Goods Inventory = (Profit using
absorption costing - Profit using variable costing) / Fixed manufacturing overhead per unit
=
($11,000 - $9800) / $25 per unit = 48 units
Number of units produced = Units sold + Ending Inventory - Beginning Inventory
Number of units produced = 600 units + 48 units - 0 = 648 units
Diff: 3
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

32
Copyright © 2018 Pearson Education, Inc.
27) Yazzie, Inc. reports the following information for the year ended December 31:

Units sold 620 units

Sales price $160 per unit
Direct materials $26 per unit
Direct labor $10 per unit
Variable manufacturing overhead $13 per unit
Fixed manufacturing overhead $30 per unit
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $14,200 per year

The operating income calculated using variable costing and absorption costing amounted
to $9300 and $11,400, respectively. There were no beginning inventories. Determine the
total fixed manufacturing overhead that will be expensed under variable costing for the
year 2016.
A) $20,700
B) $18,600
C) $34,720
D) $30,380
Answer: A
Explanation: A) Number of units in the ending Fixed Goods Inventory = (Profit using
absorption costing - Profit using variable costing) / Fixed manufacturing overhead per unit
=
($11,400 - $9300) / $30 per unit = 70 units

Number of units produced = Units sold + Ending Inventory - Beginning Inventory

Number of units produced = 620 units + 70 units - 0 = 690 units
Under variable costing, total fixed manufacturing overhead incurred during the period are
expensed, irrespective of the period in which the units are sold.
Therefore, total fixed manufacturing overhead expensed under variable costing =
690 units × $30 per unit = $20,700
Diff: 3
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

33
Copyright © 2018 Pearson Education, Inc.
28) Locklear, Inc. reports the following information for the year ended December 31:

Units sold 620 units

Sales price $130 per unit
Direct materials $28 per unit
Direct labor $8 per unit
Variable manufacturing overhead $13 per unit
Fixed manufacturing overhead $12 per unit
Variable selling and administrative
costs $6 per unit
Fixed selling and administrative costs $12,600 per year

The operating income calculated using variable costing and absorption costing amounted
to $10,000 and $12,700, respectively. There were no beginning inventories. Determine the
total fixed manufacturing overhead that will be expensed under absorption costing for the
year.
A) $10,140
B) $7440
C) $24,800
D) $30,380
Answer: B
Explanation: B) Under absorption costing, fixed manufacturing overhead is treated as a
product cost and is expensed when the units sold are sold.
Therefore, total fixed manufacturing overhead cost expensed under absorption costing =
620 units × $12 per unit = $7440
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

34
Copyright © 2018 Pearson Education, Inc.
29) Anatase, Inc. reports the following information:

Units produced 2,500 units

Units sold 2,000 units
Sales price $200 per unit
Direct materials $40 per unit
Direct labor $25 per unit
Variable manufacturing overhead $20 per unit
Fixed manufacturing overhead $90,000 per year
Variable selling and administrative
costs $15 per unit
Fixed selling and administrative costs $75,000 per year

Assume that the production costs and sales prices were the same in the previous year.
Assume no beginning inventories.

Requirements:
a) Calculate unit product cost using absorption costing and variable costing.
b) Calculate the operating income using absorption costing and variable costing.

35
Copyright © 2018 Pearson Education, Inc.
Answer:
a)
Absorption Variable
Costing Costing
Direct materials $40 $40
Direct labor 25 25
Variable manufacturing overhead 20 20
Fixed manufacturing overhead ($90,000 / 2,500
units) 36 -
Total unit product cost $121 $85

b)
Absorption Costing
Sales revenue (2,000 units × $200 per unit) $400,000

Cost of goods sold (2,000 units × $121 per unit) 242,000

Gross profit $158,000
Selling and administrative costs:
Variable selling and administrative costs (2,000
units × $15 per unit) $30,000
Fixed selling and administrative costs 75,000 105,000
Operating income $53,000

Variable Costing
Sales revenue (2,000 units × $200 per unit) $400,000
Variable costs:
Variable manufacturing cost (2,000 units × $85
per unit) $170,000
Variable selling and administrative cost (2,000
units × $15 per unit) 30,000 200,000
Contribution margin 200,000
Fixed costs:
Fixed manufacturing overhead 90,000
Fixed selling and administrative costs 75,000 165,000
Operating income $35,000

Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

36
Copyright © 2018 Pearson Education, Inc.
30) Cinnabar, Inc. has provided the following data for the year:

Direct materials $10 per unit

Direct labor $15 per unit
Variable manufacturing overhead $20 per unit
Fixed manufacturing overhead $25,000 per year
Fixed selling and administrative costs $15,000 per year
Sales price $75 per unit
Beginning Finished Goods Inventory 500 units
Units produced 5,000 units
Units sold 4,500 units

Requirements:
a) Compute Cinnabar's unit product cost under absorption costing and variable costing.
b) Prepare income statements for Cinnabar using absorption costing and variable costing.
c) Calculate the balance in Finished Goods Inventory using absorption costing and variable
costing.
Assume that the production level, costs, and sales prices were the same in the previous
year.

37
Copyright © 2018 Pearson Education, Inc.
Answer:
a)
Absorption Variable
Costing Costing
Direct materials $10 $10
Direct labor 15 15
Variable manufacturing overhead 20 20
Fixed manufacturing overhead ($25,000 / 5,000 units) 5 ___
Total unit product cost $50 $45

b) and c)
Cinnabar, Inc.
Income Statement
Year Ended December 31, 20XX
Absorption Costing:
Sales Revenue (4,500 units × $75 per unit) $337,500
Cost of Goods Sold (4,500 units × $50 per unit) 225,000
Gross Profit 112,500

Selling and Administrative Costs

Fixed Selling and Administrative Costs $15,000 15,000
Operating Income $97,500
Finished Goods Inventory(1,000 units × $50 per unit) $50,000

Variable Costing:
Sales Revenue (4,500 units × $75 per unit) $337,500
Variable Costs:
Variable Manufacturing Cost(4,500 units × $45 per unit) 202,500
Contribution Margin 135,000

Fixed Costs
Fixed Manufacturing Overhead $25,000
Fixed Selling and Administrative Costs 15,000 40,000
Operating Income $95,000
Finished Goods Inventory(1,000 units × $45 per unit)$45,000
Diff: 3
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

38
Copyright © 2018 Pearson Education, Inc.
31) When units produced exceed units sold, how does operating income differ between
variable costing and absorption costing? Assume no beginning Finished Goods Inventory.
Explain your answer.
Answer: When units produced exceed units sold, the operating income will be higher
under absorption costing than variable costing. With absorption costing, some of the fixed
manufacturing overhead costs absorbed in the product cost are still in ending Finished
Goods Inventory and are on the balance sheet.
Diff: 2
LO: 21-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Units Produced Are More Than Units Sold

32) Comet Canisters, Inc. has collected the following data for the current year:

Beginning Finished Goods Inventory 50 units

Units produced 500 units
Units sold 550 units
Sales price $180 per unit
Direct materials $16 per unit
Direct labor $17 per unit
Variable manufacturing overhead $10 per unit
Fixed manufacturing overhead $10,800 per year
Variable selling and administrative
costs $4 per unit
Fixed selling and administrative costs $12,500 per year

What is the unit product cost using absorption costing? (Round your answer to the nearest
cent.)
A) $93.60
B) $43.00
C) $64.60
D) $48.60
Answer: C
Explanation: C) Direct materials$16
Direct labor 17
Variable manufacturing overhead10
Fixed manufacturing overhead
($10,800 / 500 units) 21.60
Total unit product cost $64.60
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are Less Than Units Sold

39
Copyright © 2018 Pearson Education, Inc.
33) In absorption costing, the manufacturing costs expensed are greater than the amount
expensed in variable costing when units produced are less than sold because the units in
beginning inventory under absorption costing were assigned a greater cost in the previous
accounting period.
Answer: TRUE
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are Less Than Units Sold

34) When more units are sold than produced, operating income is less under absorption
costing than variable costing.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are Less Than Units Sold

35) When more units are sold than produced, operating income is higher under absorption
costing than variable costing.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are Less Than Units Sold

36) Feldspar, Inc. started the year with 200 units in the Finished Goods Inventory account.
It produced 600 units during the year and sold 800 units. If Feldspar uses variable costing,
________.
A) its operating income for the period will be higher than under absorption costing
B) its operating income for the period will be lower than under absorption costing
C) its value of ending Finished Goods Inventory reported in the balance sheet will be
higher than under absorption costing
D) its operating income will be the same as under absorption costing
Answer: A
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Units Produced Are Less Than Units Sold

40
Copyright © 2018 Pearson Education, Inc.
37) McIntosh, Inc. reports the following information:

Beginning Finished Goods Inventory 50 units

Units produced 570 units
Units sold 620 units
Sales price $120 per unit
Direct materials $24 per unit
Direct labor $15 per unit
Variable manufacturing overhead $19 per unit
Fixed manufacturing overhead $15,500 per year
Variable selling and administrative
costs $5 per unit
Fixed selling and administrative costs $13,500 per year

What is the unit product cost using variable costing? (Round your answer to the nearest
cent.)
A) $85.19
B) $58.00
C) $61.19
D) $113.88
Answer: B
Explanation: B)
Direct materials $24
Direct labor 15
Variable manufacturing overhead 19
Total unit product cost $58.00
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are Less Than Units Sold

41
Copyright © 2018 Pearson Education, Inc.
38) Marshall, Inc. has collected the following data for the current year:

Beginning Finished Goods Inventory 50 units

Units produced 510 units
Units sold 560 units
Sales price $160 per unit
Direct materials $25 per unit
Direct labor $14 per unit
Variable manufacturing overhead $17 per unit
Fixed manufacturing overhead $12,000 per year
Variable selling and administrative
costs $4 per unit
Fixed selling and administrative costs $13,000 per year

The beginning Finished Goods Inventory costs were $3400 under absorption costing and
$3000 under variable costing. What is the operating income using absorption costing?
(Round any intermediate calculations to the nearest cent, and your final answer to the
nearest dollar.)
A) $45,640
B) $30,400
C) $43,400
D) $3400
Answer: B

Explanation: B)
Absorption costing:
Sales revenue (560 units × $160 per unit) $89,600
Cost of goods sold (50 units × $68.00 per unit) $3400
(510 units × $79.53 per unit) $40,560.30
43,960.30
Gross profit 45,639.70
Selling and administrative costs:
Variable selling and administrative costs(560 units × $4 per unit) 2240
Fixed selling and administrative costs 13,000 15,240
Operating income $30,400

Direct materials $25

Direct labor 14
Variable manufacturing overhead 17
Fixed manufacturing overhead (12,000/510)23.53
Total unit product cost $79.53
Diff: 1
LO: 21-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are Less Than Units Sold

42
Copyright © 2018 Pearson Education, Inc.
39) Barrett, Inc. reports the following information for the year ended December 31:

Beginning Finished Goods Inventory 60 units

Units produced 400 units
Units sold 460 units
Sales price $160 per unit
Direct materials $30 per unit
Direct labor $12 per unit
Variable manufacturing overhead $15 per unit
Fixed manufacturing overhead $15,900 per year
Variable selling and administrative
costs $10 per unit
Fixed selling and administrative costs $12,500 per year

The beginning Finished Goods Inventory costs were $3300 under absorption costing and
$3420 under variable costing.
What is the operating income using variable costing?
A) $42,780
B) $45,200
C) $14,380
D) $4780
Answer: C

Explanation: C)
Barrett, Inc.
Income Statement
Year Ended December 31, 20XX

Sales Revenue (460 units × $160 per unit) $73,600

Variable Costs:
Variable Manufacturing Costs (460 units × $57* per unit)26,220
Variable S&A Costs (460 units × $10 per unit) 4600 30,820

Contribution Margin 42,780

Fixed Costs:
Fixed Manufacturing Costs 15,900
Fixed S&A Costs 12,500
28,400
Operating Income $14,380
*Variable manufacturing costs per unit: 30 + 12 + 15 = 57
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are Less Than Units Sold

43
Copyright © 2018 Pearson Education, Inc.
40) Circetrax, Inc. has provided the following financial information for the year:

Finished Goods Inventory:

Beginning balance, in units 600
Units produced 2800
Units sold 2900
Ending balance, in units 500
Production costs:
Variable manufacturing costs
per unit $60
Total fixed manufacturing costs $42,000

What is the unit product cost for the year using absorption costing?
A) $75
B) $84
C) $130
D) $74
Answer: A
Explanation: A)
Variable manufacturing overhead $60
Fixed manufacturing overhead
($42,000 / 2800 units) 15
Total unit product cost $75
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are Less Than Units Sold

44
Copyright © 2018 Pearson Education, Inc.
41) Betsy's Pies, Inc. has provided the following financial information for the year:

Finished Goods Inventory:

Beginning balance, in units 620
Units produced 2100
Units sold 2200
Ending balance, in units 520
Production Costs:
Variable manufacturing costs
per unit $50
Total fixed manufacturing costs $42,000

What is the unit product cost for the year using variable costing?
A) $70
B) $19
C) $50
D) $81
Answer: C
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are Less Than Units Sold

42) When units produced are less than units sold, how does operating income differ
between variable costing and absorption costing? Explain your answer.
Answer: When units produced are less than units sold, the operating income will be higher
under variable costing. In this scenario, the units sold under absorption costing have a
higher product cost per unit, which increases cost of goods sold and decreases operating
income
Diff: 2
LO: 21-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Units Produced Are Less Than Units Sold

43) For every unit that is produced but not sold, absorption costing "hides" some of the
fixed manufacturing overhead in ending Finished Goods Inventory.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Summary

45
Copyright © 2018 Pearson Education, Inc.
44) The use of variable costing to determine managers' bonuses does not give the incentive
to produce more products than needed.
Answer: TRUE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Summary

45) Under absorption costing, the more units added to ending Finished Goods Inventory,
the less fixed manufacturing overhead is '"hidden" in ending Finished Goods Inventory at
the end of the accounting period.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Summary

46) Under absorption costing, the more fixed manufacturing overhead in ending Finished
Goods Inventory, the larger the Cost of Goods Sold.
Answer: FALSE
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Summary

47) In absorption costing, fixed manufacturing overhead is expensed ________.

A) when all the other non-manufacturing fixed costs are expensed
B) when the product is sold
C) at the end of the period in which it is paid
D) when the units are produced
Answer: B
Diff: 2
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Summary

46
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48) The ________ method allows managers to increase operating income through production
by producing more products than needed.
A) absorption costing
B) variable costing
C) direct costing
D) marginal costing
Answer: A
Diff: 2
LO: 21-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Summary

49) Kertas, Inc. produces paper and office supplies and uses the just-in-time inventory
system. Currently, the company is using variable costing. Which of the following is true of
the effect of costing systems on the financial results of Kertas?
A) Its operating income will be significantly higher if the company uses absorption costing
instead of variable costing.
B) Its operating income will be significantly lower if the company uses absorption costing
instead of variable costing.
C) Its operating income will vary a little if the company uses absorption costing instead of
variable costing.
D) Its operating income will be negative if the company uses absorption costing instead of
variable costing.
Answer: C
Diff: 2
LO: 21-2
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Summary

47
Copyright © 2018 Pearson Education, Inc.
50) McMillan, Inc. has the following cost data:

Direct materials $38 per unit

Direct labor 52 per unit
Variable manufacturing overhead 15 per unit
Fixed manufacturing overhead 10,000 per year

Calculate the unit product cost using absorption costing when production is 200 units, 400
units, and 800 units.
Answer:
Absorption costing for 200 units:
Direct materials $38.00
Direct labor 52.00
Variable manufacturing overhead 15.00
Fixed manufacturing overhead ($10,000 / 200 units) 50
Total unit product cost $155

Absorption costing for 400 units:

Direct materials $38.00
Direct labor 52.00
Variable manufacturing overhead 15.00
Fixed manufacturing overhead ($10,000 / 400 units)25
Total unit product cost $130

Absorption costing for 800 units:

Direct materials $38.00
Direct labor 52.00
Variable manufacturing overhead 15.00
Fixed manufacturing overhead ($10,000 / 800 units)12.50
Total unit product cost $117.5
Diff: 1
LO: 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Summary

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51) Louie's Music produces harmonicas that it sells for $12 each. The company computes a
new monthly fixed manufacturing overhead allocation rate based on the planned number of
harmonicas to be produced that month. Assume all costs and production levels are exactly
as planned. The following data are from Louie's Music's first month in business:

January 2019
Units produced and sold:
Sales in units 1,200
Production in units 1,400
Variable manufacturing cost per
harmonica $4
Sales commission cost per harmonica $1
Total fixed manufacturing overhead $2,800
Total fixed selling and administrative
costs $2,100

Requirements
1. Compute the product cost per harmonica produced under absorption costing.
2. Prepare an income statement for January, 2019
Answer:
Requirement 1
Absorption
Costing
Variable manufacturing cost $4
Fixed manufacturing cost $2,800/1,400 $2
Total unit product cost $6

Requirement 2:
Louie's Music
Income Statement
For the month ended Jan. 31,
2019

Units sold 1200

Sales Revenue (1200 × $12) $14,400
Cost of Goods Sold (1200 × $6) $7,200
Gross Profit $7,200
Selling and Administrative ($1 × 1,200) +
Costs $2,100 $3,300
Operating Income $3,900

Diff: 3
LO: 21-1, 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

49
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52) Louie's Music produces harmonicas that it sells for $12 each. The company computes a
new monthly fixed manufacturing overhead allocation rate based on the planned number of
harmonicas to be produced that month. Assume all costs and production levels are exactly
as planned. The following data are from Louie's Music's first month in business:

January 2019
Units produced and sold:
Sales in units 1200
Production in units 1400
Variable manufacturing cost per
harmonica $4
Sales commission cost per harmonica $1
Total fixed manufacturing overhead $2,800
Total fixed selling and administrative
costs $2,100

Requirements
1. Compute the product cost per harmonica produced under variable costing.
2. Prepare an income statement for January, 2019
Answer:
Requirement 1
Variable
Costing
Variable manufacturing cost $4
Total unit product cost $4

Requirement 2:
Louie's Music
Contribution Margin Income
Statement
For the month ended Jan. 31,
2019

Units sold 1200

Sales Revenue (1200 × $12) $14,400
(1200 × $4) + (1200
Variable Costs × $1) $6,000
Contribution Margin $8,400
Fixed Costs ($2,800 + $2,100) $4,900
Operating Income $3,500

Diff: 3
LO: 21-1, 21-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Units Produced Are More Than Units Sold

50
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Learning Objective 21-3

1) Absorption costing is more appropriate when determining the product costs for long-
term production planning.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Planning Production

2) For short-term pricing decisions, variable costing is an appropriate costing method to

use.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Setting Sales Prices

3) For short-term pricing decisions, fixed costs are usually not relevant because they do not
change.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Setting Sales Prices

4) When setting sales prices in the long run, the sales price must cover the full cost—
including fixed costs.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Setting Sales Prices

5) For which of the following decisions is absorption costing most appropriate?

A) decisions related to using the sales mix to maximize profitability
B) decisions related to controlling short-term costs
C) decisions related to setting sales prices in the long run
D) decisions related to increasing contribution margin
Answer: C
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Summary

6) For decisions that affect setting sales prices, consider the following decision focuses.
State the appropriate costing method and the reason for your answer.

Decision Appropriate Reason

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 Focus Costing Method
Short run

Long run

Answer:
Decision Appropriate
Focus Costing Method Reason
Fixed costs are not relevant in the
Short run short run because they usually do not
Variable change.
The sales price must cover the full
Long run cost in the long run, including fixed
Absorption costs.

Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Setting Sales Prices

7) Some costs are not controllable in the long run. However, in the short run, all costs are
controllable.
Answer: FALSE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Controlling Costs

8) Luis Perez, a production supervisor at Serum Medical, Inc., uses variable costing for any
cost control decisions that he has to make. Which of the following is the reason for his
choice?
A) Fixed costs are not relevant in the long run.
B) Only variable costs are controllable in the long and short run.
C) Absorption costing is not relevant for long-run decisions.
D) Lower management usually does not have control over most fixed costs.
Answer: D
Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Controlling Costs

52
Copyright © 2018 Pearson Education, Inc.
9) For decisions that affect controlling costs, consider the following decision focuses. State
the appropriate costing method and the reason for your answer.

Decision Appropriate
Focus Costing Method Reason
Upper
manageme
nt

Lower
manageme
nt

Answer:
Decision Appropriate
Focus Costing Method Reason
Upper All costs, including fixed costs, are
management controllable by upper management in
Absorption the long run.
Lower Lower management usually does not
management Variable have control over most fixed costs.

Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Controlling Costs

10) Absorption costing is more appropriate than variable costing for making plant
production capacity decisions in the long run.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Planning Production

11) When determining the product costs for long-term production planning, ________.
A) the research and development cost of the product should be ignored
B) variable costing is more appropriate
C) absorption costing is more appropriate
D) the selling and administrative expenses should be ignored
Answer: C
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Planning Production

12) Variable costing is more appropriate than absorption costing when the decision
________.
A) relates to production planning within the capacity limits in the short run
B) involves reducing fixed costs that are controllable by the upper management
C) does not involve analysis of profitability based on sales mix
53
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D) does not involve analysis of contribution margin
Answer: A
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Planning Production

13) For decisions that affect production planning, consider the following decision focuses.
State the appropriate costing method and the reason for your answer.

Decision Appropriate
Focus Costing Method Reason
Short run

Long run

Answer:
Decision Appropriate
Focus Costing Method Reason
With capacity limits in the short run,
Short run products with the highest contribution
Variable margin per unit should be produced.
Long run Expansion to avoid capacity limits
Absorption includes both fixed and variable costs.

Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Planning Production

14) A business segment is an identifiable part of the company for which financial
information is available.
Answer: TRUE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Analyzing Profitability

54
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15) Managers do not consider the sales mix when making decisions because it does not
affect the overall profitability of the company.
Answer: FALSE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Analyzing Profitability

16) Which is the following is the most appropriate reason that sales mix decisions should
be made using variable costing?
A) All costs, including fixed costs, are controllable by upper management in the long run.
B) To increase profits, businesses should emphasize the products with the highest
contribution margin per unit.
C) Sales mix decisions primarily focus on fixed costs.
D) Fixed costs do not affect the operating income in the long run.
Answer: B
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Analyzing Profitability

55
Copyright © 2018 Pearson Education, Inc.
17) Verge, Inc. has two products—Le Cadre and La Bougie. Financial data for both the
products follow:

Le Cadre La Bougie
Units sold 2200 units 600 units
Sales price per unit $500 $1200
Variable manufacturing cost per
unit 320 750
Sales commission (% of sales) 7% 4%

Verge has two sales representatives—Rosemary Wilson and Maria Blanco. Each
representative sold a total of 1400 units during the month of March. Rosemary had a sales
mix of 60% Le Cadre and 40% La Bougie. Maria had a sales mix of 80% Le Cadre and 20%
La Bougie. Based on the above information, calculate Rosemary's total contribution to
company profits.
A) $403,200
B) $121,800
C) $346,920
D) $225,120
Answer: C
Explanation: C)
Le Cadre La Bougie
Sales Revenue
[(1400 × 60%) units × $500 per unit]$420,000
[(1400 × 40%) units × $1200 per unit] $672,000

Variable costs:
Variable manufacturing costs
[(1400 × 60%) units ×$320 per unit] 268,800
[(1400 × 40%) units × $750 per unit]420,000
Sales commission
7% of sales revenue 29,400
4% of sales revenue ______ 26,880
Contribution margin $121,800 $225,120

Total contribution = $121,800 + $225,120 = $346,920

Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

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18) Periphery, Inc. has two products—picture frames and candle holders. Financial data for
both the products follow:

Picture Candle
Frames Holders
Units sold 2100 units 700 units
Sales price per unit $700 $1200
Variable manufacturing cost per
unit 300 650
Sales commission (% of sales) 5% 3%

Periphery has two sales representatives—Andrew Novak and Liu Wei. Each sales
representative sold a total of 1400 units during the month of March. Andrew had a sales
mix of 70% picture frames and 30% candle holders. Liu had a sales mix of 80% picture
frames and 20% candle holders. What is the contribution margin ratio for picture frames
and candle holders, respectively?
A) 57%; 46%
B) 52%; 43%
C) 5%; 3%
D) 43%; 54%
Answer: B
Explanation: B) Contribution margin ratio = Contribution margin / Sales revenue
Contribution margin ratio for picture frames: ($700 - $300 - $35) / $700 = 52%
Contribution margin ratio for candle holders: ($1200 - $650 - $36) / $1200 = 43%
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

57
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19) Pathways Careers, Inc. has two products—Resume Reader and Cover Letter Cure.
Financial data for both the products follow:

Cover
Resume Letter
Reader Cure
Units sold 2000 units 600 units
Sales price per unit $700 $1200
Variable manufacturing cost per
unit 310 650
Sales commission (% of sales) 5% 3%

Pathways has two sales representatives—Curtis Muller and Willow Brown. Each sales
representative sold a total of 1300 units during the month of March. Curtis had a sales mix
of 80% Resume Reader and 20% Cover Letter Cure. Willow had a sales mix of 60% Resume
Reader and 40% Cover Letter Cure. Based on the above information, calculate Willow's
total contribution to company profits.
A) $544,180
B) $590,200
C) $276,900
D) $267,280
Answer: A
Explanation: A)
Resume Cover Letter
Reader Cure
Sales revenue
[(1300 × 60%) units × $700 per unit] $546,000
[(1300 × 40%) units × $1200 per unit] $624,000

Variable costs:
Variable manufacturing costs
[(1300 × 60%) units × $310 per unit] 241,800
[(1300 × 40%) units × $650 per unit] 338,000
Sales commission
5% of sales revenue 27,300
3% of sales revenue _______ 18,720
Contribution margin $276,900 $267,280

Total contribution by Amanda = $276,900 + $267,280 = $544,180

Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

58
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20) Zesty Tomato Company manufactures jam and ketchup. Sales price and cost data for
both products follow:

Jam Ketchup
Sales price $20.00 $42.00
Variable manufacturing costs 12.00 20.00
Sales commission (10%) 2.00 4.20

The company has three sales representatives:

Units Sold
Jam Ketchup
Paul Kowalski 2,000 750
Miriam Omer 2,520 650
May Sasaki 2,300 900

Calculate the total contribution margin and the contribution margin ratio for each sales
representative. Round dollar amounts to nearest dollar and ratio to two decimal places.
Answer:
Paul Miriam May
Sales Revenue
(No of units sold × sale price per unit) Jam $40,000 $50,400 $46,000
Ketchup 31,500 27,300 37,800
Variable costs:
Variable manufacturing costs
(No of units sold × cost per unit) Jam 24,000 30,240 27,600
Ketchup 15,000 13,000 18,000
Sales commission Jam 4,000 5,040 4,600
(10% of sale revenue) Ketchup 3,150 2,730 3,780
Contribution margin 25,350 26,690 29,820
Contribution margin ratio
(Contribution margin / Total sales revenue) 35.45% 34.35% 35.58%
Diff: 3
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

59
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21) Palmer's Plant Food Company sells two products, Quo-Eco and Quo-Pre, with a sales
mix of 65% and 35%, respectively. Quo-Eco has a contribution margin per unit of $10, and
Quo-Pre has a contribution margin per unit of $15. The company sold 1,000 total units in
March.

Requirements:
a) Calculate the total contribution margin for the company.
b) Assume the sales mix shifted to 50% for each product, and calculate the total
contribution margin for the company.
Answer:
a)
Quo-Eco Quo-Pre Total
65% 35%
Units sold 650 350 1,000
Contribution per unit $10 $15
Contribution margin
(Units sold × contribution per unit) $6,500 $5,250 $11,750
Total contribution margin = $6,500 + $5,250 = $11,750

b)
Quo-Eco Quo-Pre Total
50% 50%
Units 500 500 1,000
Contribution per unit $10 $15
Contribution margin
(Units sold × contribution per unit) $5,000 $7,500 $12,500

Total contribution margin = $5,000 + $7,500 = $12,500

Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

60
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22) Sunrise Breakfast Foods, Inc. has two products—waffles and toaster pastries. Financial
data for both the products follows:

Waffles Pastries
Sales price per unit $500 $1,000
Variable manufacturing cost per
unit 320 750
Sales commission (% of sales) 7% 5%

Sunrise has two sales representatives—Iolana and Sachi. Each sales representative sold a
total of 1,500 units during the month of March. Iolana had a sales mix of 70% waffles and
30% pastries. Sachi had a sales mix of 60% waffles and 40% pastries. Which sales
representative has the highest contribution ratio? Explain the reason for your answer.
(Round your percent answers to two decimal places.)
Answer:
Sales mix for Sachi:
1,500 units × 60% = 900 waffles
1,500 units × 40% = 600 pastries

Sales mix for Iolana:

1,500 units × 70% = 1,050 waffles
1,500 units × 30% = 450 pastries

Calculation for Sachi's total contribution ratio:

Waffles Pastries
Sales revenue
(900 units × $500 per unit) $450,000
(600 units × $1,000 per unit) $600,000
Variable costs:
Variable manufacturing costs
(900 units × $320 per unit) 288,000
(600 units × $750 per unit) 450,000
Sale commission:
7% of sales revenue 31,500
5% of sales revenue ________ 30,000
Contribution margin $130,500 $120,000

Total contribution = $130,500 + $120,000 = $250,500

Sachi's contribution margin ratio = $250,500 / $1,050,000 = 23.86% (rounded)

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Calculation for Iolana's total contribution ratio:
Waffles Pastries
Sales revenue
(1,050 units × $500 per unit)$525,000
(450 units × $1,000 per unit) $450,000

Variable costs:
Variable manufacturing costs
(1,050 units × $320 per unit) 336,000
(450 units × $750 per unit) 337,500
Sales commission
7% of sales revenue 36,750
5% of sales revenue ________ 22,500
Contribution margin $152,250 $90,000

Total contribution = $152,250 + $90,000 = $242,250

Iolana's contribution margin ratio = $242,250 / $975,000 = 24.85% (rounded)

Because waffles have a higher contribution margin ratio of 29% compared to pastries'
contribution margin ratio of 20%, Iolana was able to contribute more to the company
profits than Sachi did. This occurs because Iolana sold a higher proportion of waffles than
pastries.
Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

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23) For decisions that affect analyzing profitability, consider the following decision focus.
State the appropriate costing method and the reason for your answer.

Decision Appropriate
Focus Costing Method Reason
Sales mix

Answer:
Decision Appropriate
Focus Costing Method Reason
Sales mix To increase profits, businesses should
emphasize the products with the
Variable highest contribution margin per unit.

Diff: 2
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Profitability

24) Absorption costing is used to analyze contribution margin.

Answer: FALSE
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Analyzing Contribution Margin

63
Copyright © 2018 Pearson Education, Inc.
25) Delos, Inc. reports the following information for April:

Sigma Gamma
Units sold 2000 units 750 units
Sales price per unit $350 $700
Variable manufacturing cost per
unit 175 500
Sales commission per unit:
Sigma: 8% of sales price 28
Gamma: 8% of sales price 56

What is the contribution margin of Sigma?

A) $119,000
B) $644,000
C) $350,000
D) $294,000
Answer: D
Explanation: D) Sigma
Sale revenue (2000 units × $350 per unit) $700,000
Variable costs:
Variable manufacturing costs(2000 units × $175 per unit)350,000
Sale commission (8% of sale revenue) 56,000
Contribution margin 294,000
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Contribution Margin

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26) Trillium, Inc. reports the following information for April:

Alpha Beta
Units sold 4000 units 700 units
Sales price per unit $300 $700
Variable manufacturing cost per
unit 200 500
Sales commission per unit:
Alpha: 4% of sales price 12
Beta: 8% of sales price 56

What is the contribution margin ratio of Beta? (Round your answer to two decimal places.)
A) 28.57%
B) 20.57%
C) 33.33%
D) 8.00%
Answer: B
Explanation: B)
Unit contribution margin = Sales price per unit - Variable cost per unit = $700 - $500 - $56
= $144

Contribution margin ratio = Contribution margin per unit / Sales price per unit = $144 /
$700 = 20.57%
Diff: 1
LO: 21-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Analyzing Contribution Margin

Learning Objective 21-4

1) Service companies do not have fixed costs; all costs incurred by service companies are
variable costs.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Can Variable Costing Be Used for Decision Making in a Service Company? (H1)

2) Variable costing cannot be used in service companies.

Answer: FALSE
Explanation: Variable costing can also be used in service companies, especially in making
short-term decisions.
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Can Variable Costing Be Used for Decision Making in a Service Company? (H1)

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3) Variable costing can also be used in service companies, especially in making short-term
decisions.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Can Variable Costing Be Used for Decision Making in a Service Company? (H1)

4) By separating costs by behavior, fixed and variable, a service company can calculate the
contribution margin ratio by dividing the contribution margin by revenues.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Operating Income

5) Happy Home, Inc. provides housekeeping services. The following financial data have
been provided.

Service Revenue $80,000

Cleaning Supplies Used 21,500
Wages Expense 18,350
Office Rent Expense 5350
Depreciation Expense
—Machinery 750

Calculate the operating income for the company.

A) $40,150
B) $34,800
C) $34,050
D) $52,400
Answer: C
Explanation: C) Service Revenue $80,000
Variable Costs
Cleaning Supplies Used $21,500
Wage Expense 18,350 39,850
Contribution Margin 40,150
Fixed Costs
Office Rent Expense 5350
Depreciation—Machinery 750 6100
Operating Income $34,050
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Operating Income

6) The contribution margin for service companies is calculated by subtracting fixed costs
from service revenue.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Application of knowledge

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AICPA Functional: Measurement
PE Question Type: Concept
H2: Profitability Analysis

7) The calculation of contribution margin ratio for service companies is significantly

different from that of manufacturing companies.
Answer: FALSE
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Profitability Analysis

8) In service companies, variable costing can be used for profitability analysis and
contribution margin analysis.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Profitability Analysis

67
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9) Tidy Turf, Inc. provides housekeeping services. The following financial data have been
provided.

Service Revenue $60,000

Cleaning Supplies Used 21,000
Wages Expense 20,350
Office Rent Expense 5350
Depreciation Expense
—Machinery 550

Calculate the contribution margin and the contribution margin ratio. (Round your
contribution margin to the nearest dollar, and your contribution margin ratio to two
decimal places.)
A) $54,650; 91.08%
B) $39,650; 66.08%
C) $12,750; 21.25%
D) $18,650; 31.08%
Answer: D
Explanation: D)
Service Revenue $60,000
Variable Costs:
Cleaning Supplies Used $21,000
Wages Expense 20,350 41,350
Contribution Margin $18,650

Contribution margin ratio = $18,650 / $60,000 = 31.08%

Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

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10) Intricate Computer Solutions provides services to corporate and individual customers.
During the month of June, the corporate business segment provided services to 300
customers and earned $70,000 in revenue. The individual business segment provided
services to 300 customers and earned $40,000 in revenue. The variable costs for the
corporate and individual business segments amounted to $33,000 and $25,100,
respectively. In addition, the fixed costs of the company amounted to $8000. Calculate the
contribution margin from each corporate customer. (Round your answer to the nearest
cent.)
A) $49.67
B) $96.67
C) $23.00
D) $123.33
Answer: D
Explanation: D)
Corporate
Service revenue $70,000
Variable costs 33,000
Contribution margin $37,000

Contribution margin from each corporate customer = $37,000 / 300 customers = $123.33
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

11) PC Solutions, Inc. provides services to corporate and individual customers. During the
month of June, the corporate business segment provided services to 500 customers and
earned $60,000 in revenue. The individual business segment provided services to 400
customers and earned $35,000 in revenue. The variable costs for the corporate and
individual business segments amounted to $32,000 and $25,100, respectively. In addition,
the fixed costs of the company amounted to $7500. Calculate the contribution margin from
each customer of the individual business segment. (Round your answer to the nearest
cent.)
A) $56.00
B) $24.75
C) $41.00
D) $6.00
Answer: B
Explanation: B)
Service revenue $35,000
Variable costs 25,100
Contribution margin $9900
Contribution margin from each customer of the individual segment = $9900 / 400
customers = $24.75
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

69
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12) Chou Computer Services provides services to corporate and individual customers.
During the month of June, the corporate business segment provided services to 300
customers and earned $60,000 in revenue. The individual business segment provided
services to 400 customers and earned $35,000 in revenue. The variable costs for the
corporate and individual business segments amounted to $32,500 and $25,300,
respectively. In addition, the fixed costs of the company amounted to $8000. The
contribution margin ratios of the corporate segment and individual segment are ________,
respectively. (Round your answers two decimal places.)
A) 78.57% and 16.17%
B) 54.17% and 27.71%
C) 54.17% and 72.29%
D) 45.83% and 27.71%
Answer: D
Explanation: D) Corporate Individual
Service revenue $60,000 $35,000
Variable costs 32,500 25,300
Contribution margin $27,500 $9700
Contribution margin ratio 45.83% 27.71%
Diff: 1
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

70
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13) Exceptional Events provides event management services. The company has three
employees, each assigned to specific customers. The company considers each employee's
territory as a business segment. The following data relate to its three segments for the
month of June:

Maribel Jessica Timothy

Sale revenue $8000 $10,600 $13,350
Variable costs $5700 $7000 $12,000

The business segments had the following number of customers: Maribel, 25; Jessica, 29;
and Timothy, 34. The total fixed costs for the month amount to $3500. What is the
operating income of Exceptional Events for the month of June?
A) $7250
B) $3750
C) $31,950
D) $2300
Answer: B
Explanation: B)
Maribel Jessica Timothy Total
Service revenue $8000 $10,600 $13,350 $31,950
Variable costs $5700 $7000 $12,000 $24,700
Contribution margin $2300 $3600 $1350 $7250
Fixed cost $3500
Operating income $3750
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

71
Copyright © 2018 Pearson Education, Inc.
14) Bright Castle Company provides cleaning services to commercial and residential
customers. The commercial business segment provided services to 310 customers and the
residential business segment provided services to 635 customers.

Commerci
al Residential Total
Service Revenue $85,000 $119,000 $204,000
Variable Costs 25,000 56,000 81,000
Contribution Margin 60,000 63,000 123,000
Fixed Costs 42,000 47,000 89,000
Operating Income $18,000 $16,000 $34,000

State which segment has the higher average variable cost per customer and provide the
amount of the average variable cost per customer for that segment. (Round the answer to
the nearest dollar.)
A) Residential, $128
B) Commercial, $88
C) Residential, $88
D) Commercial, $128
Answer: C
Explanation: C)
Average variable cost:
Commercial = $25,000 / 310 = $81
Residential = $56,000 / 635 = $88
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

72
Copyright © 2018 Pearson Education, Inc.
15) Adventures Company provides event management services. The company has three
employees, each assigned to specific customers. The company considers each employee's
territory as a business segment. The following data relate to its three segments for the
month of June:

Francisco Liu Jordan

Sale Revenue $8000 $12,800 $13,350
Variable costs $5700 $5200 $10,500

The business segments had the following number of customers: Francisco, 24 ; Liu, 28; and
Jordan, 33. The total fixed costs for the month of June amount to $3400. Which business
segment was the most profitable?
A) Francisco
B) Liu
C) Jordan
D) Both Francisco and Liu are equally profitable
Answer: B
Explanation: B)
Francisco Liu Jordan
Service revenue $8000 $12,800 $13,350
Variable costs 5700 5200 10,500
Contribution margin $2300 $7600 $2850
Contribution margin ratio28.75% 59.38% 21.35%
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

73
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16) Elegant Affairs, Inc. provides catering services. The company has three segments:
Standard, Deluxe, and Premium. The company provides the following data for its three
segments for the month of July:

Standard Deluxe Premium

No. of customers 30 20 40
Service revenue $9,000 $8,200 $8,600
Variable costs $5,500 $3,800 $4,200

The total fixed costs for the month amount to $2,500.

Requirements:
a) Calculate the contribution margin ratio for each business segment.
b) Compute the service revenue per customer, variable cost per customer, and contribution
margin per customer for each business segment.
Answer:
Standard Deluxe Premium
Service revenue $9,000 $8,200 $8,600
Variable costs 5,500 3,800 4,200
Contribution margin $3,500 $4,400 $4,400
Fixed cost
Operating income
Contribution margin ratio 38.89% 53.66% 51.16%
Service revenue per customer $300.00 $410.00 $215.00
Variable cost per customer $183.33 $190.00 $105.00
Contribution margin per customer$116.67$220.00 $110.00
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

74
Copyright © 2018 Pearson Education, Inc.
17) Framework Company provides architectural services. The company provides the
following financial data:

Service Revenue $30,000

Salaries and Other Variable Costs20,350
Rent Expense 4,500
Depreciation Expense 500

Requirements:
a) Calculate the contribution margin, contribution margin ratio, and operating income.
b) Framework provided service to 150 customers during the month. Determine the average
amount the company charged each customer.
Answer:
(a)
Service Revenue $30,000
Variable Costs:
Salaries and Other Variable Costs 20,350
Contribution Margin $9,650

Fixed Costs:
Rent Expense $4,500
Depreciation Expense 500 5,000
Operating Income $4,650
Contribution Margin Ratio ($9,650 / $30,000) 32.17%
(b)
Average amount charged ($30,000 / 150) $200.00
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Profitability Analysis

75
Copyright © 2018 Pearson Education, Inc.
18) Spruce-Up Company provides cleaning services to commercial and residential
customers. The commercial business segment provided services to 250 customers and the
residential business segment provided services to 625 customers.

Commercial Residential Total

Service Revenue $86,000 $115,000 $201,000
Variable Costs 31,000 56,000 87,000
Fixed Costs 46,000 53,000 99,000
Operating Income $9000 $6000 $15,000

Identify the segment with the lower contribution margin ratio and show the amount of its
contribution margin ratio. (Round your answer to two decimals.)
A) Residential, 51.30%
B) Commercial, 40.00%
C) Residential, 48.70%
D) Commercial, 10.47%
Answer: A
Explanation: A)
Commercial segment:
Contribution margin ratio = Contribution margin / Service revenue
= $55,000 / $86,000 = 63.95%
Residential segment:
Contribution margin ratio = Contribution margin / Service revenue
= $59,000 / $115,000 = 51.30%
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Analysis

76
Copyright © 2018 Pearson Education, Inc.
19) Magic Maid Service provides maid service to residential clients. Following are data for
a recent week:

Service Revenue$3,200
Variable Costs 1,900

The contribution margin ratio is 59.38% (rounded to two decimal places).

Answer: FALSE
Explanation:
Contribution Margin Ratio = Contribution Margin / Service Revenue
= ($3,200 - $1,900) / $3,200
= $1,300 / $3,200
= 40.63%
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Analysis

20) To explain why two business segments have different contribution margin ratios, take
the total amounts and expand them into their two components—units and amount per unit
—by dividing the totals by the number of units.
Answer: TRUE
Diff: 1
LO: 21-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Contribution Margin Analysis

77
Copyright © 2018 Pearson Education, Inc.
21) Habitat Help Company provides cleaning services to commercial and residential
customers. The commercial business segment provided services to 310 customers and the
residential business segment provided services to 575 customers.

Commercial Residential Total

Service Revenue $91,000 $121,000 $212,000
Variable Costs 23,000 47,000 70,000
Fixed Costs 46,000 48,000 94,000
Operating Income $22,000 $26,000 $48,000

What is the contribution margin ratio for Habitat Help Company? (Round answer to two
decimal places.)
A) 77.36%
B) 22.64%
C) 66.98%
D) 55.66%
Answer: C
Explanation: C)
Contribution margin ratio = Contribution margin / Service revenue
= ($212,000 - $70,000) / $212,000
= 0.6698 = 66.98%
Diff: 2
LO: 21-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Contribution Margin Analysis

78
Copyright © 2018 Pearson Education, Inc.
22) Orderly Headquarters, Inc. has two business segments: Commercial and Residential.
The following data have been provided for the year ending December 31, 20XX.

Commercial Residential
Service Revenue $5,900 $8,500
Variable costs 3,500 5,400

The company incurred $1,500 as fixed costs.

Requirements:
a) Prepare the income statement of Orderly Headquarters showing the contribution margin
of each segment.
b) Calculate the contribution margin ratio of each segment. Which segment is more
profitable and why?
Answer:
a)
Orderly Headquarters, Inc.
Income Statement
Year Ended December 31, 20XX

Commercial Residential Total

Service Revenue $5,900 $8,500 $14,400
Variable Costs 3,500 5,400 8,900
Contribution Margin $2,400 $3,100 5,500
Fixed Cost 1,500
Operating Income $4,000

b)
Contribution margin ratio is contribution margin divided by service revenue
Contribution margin ratio (Commercial) = $2,400 / $5,900 = 40.68%
Contribution margin ratio (Residential) = $3,100 / $8,500 = 36.47%

As the contribution margin ratio of the Commercial segment is higher than the Residential
segment, it is more profitable. For the commercial segment, variable costs amount to
approximately 59.32% of its revenue. However, the Residential segment's variable costs
amount to 63.53% of its revenue.
Diff: 2
LO: 21-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Contribution Margin Analysis

79
Copyright © 2018 Pearson Education, Inc.
23) Healthy Environs Company provides cleaning services for residential and commercial
customers. Following are data for the month of June:

Residential Commercial Total

Number of customers 600 400 1,000
Service revenue $ 48,000 $ 40,000 $88,000
Variable costs 14,000 22,000 36,000
Contribution
margin 34,000 18,000 52,000
Fixed costs 41,000
Operating income $11,000

For each type of customer, determine both the contribution margin per customer and the
contribution margin ratio. Round to two decimal places. Show your computations. What
type of service is more profitable?
Answer:
Business Total contribution margin Contribution margin per
Segment Number of customers customer
Residential $34,000 / 600 customers $56.67 per customer
Commercial $18,000 / 400 customers $45.00 per customer

Contribution margin
Business Segment Net service revenue Contribution margin ratio
Residential $34,000 / $48,000 0.7083 = 70.83%
Commercial $18,000 / $40,000 0.4500 = 45.00%

Residential service is more profitable. This is indicated by the higher contribution margin
per customer and contribution margin ratio.
Diff: 3
LO: 21-4
AACSB: Analytical thinking
AICPA Functional: Measurement
PE Question Type: Critical thinking
H2: Contribution Margin Analysis

80
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