A company had income of $500,000 based on variable costing. Beginning and ending finished goods inventories were 100,000 units and 96,000 units, respectively. Assume the fixed overhead per unit was $1.50 for both the beginning and ending finished goods inventory. The income under absorption costing is:

 Income __________ when there is zero beginning inventory and all inventory units produced are sold.

Multiple Choice
•    
Will be the same under both variable and absorption costing
Correct
•    
Will be lower than administrative costs under absorption costing
•    
Will be higher than gross profit under variable costing
•    
Will be higher under variable costing than absorption costing
•    
Will be lower under variable costing than absorption costing

Answer

Will be the same under both variable and absorption costing

During its first year of operations, the McCormick Company incurred the following manufacturing costs:
 
Direct materials    $4    per unit
Direct labor    $3    per unit
Variable overhead    $3    per unit
Fixed overhead    $342,000    per year

The company produced 38,000 units, and sold 29,500 units, leaving 8,500 units in inventory at year-end. Income calculated under variable costing is determined to be $410,000. How much income is reported under absorption costing?
Multiple Choice
•    
$333,500
•    
$486,500
Correct
•    
$410,000
•     $401,000
•    
$752,000

Answer

$486,500
Explanation
Income under absorption costing = Income under variable costing + Fixed overhead cost in ending inventory − Fixed overhead cost in beginning inventory. $410,000 + $76,500 − $0 = $486,500.


Under absorption costing, a company had the following unit costs when 9,000 units were produced.
 
Direct labor    $ 7.25    per unit
Direct material    $ 8.00    per unit
Variable overhead    $ 5.50    per unit
Fixed overhead ($67,500/9,000 units)    $ 7.50    per unit
Total production cost    $ 28.25    per unit

Compute the product cost per unit under variable costing if 30,000 units had been produced.
Multiple Choice
•    
$28.25
•    
$15.25

•    
$23.45
•    
$20.75
Correct
•    
$31.75

Answer

$20.75
Explanation
$7.25 DL + $8 DM + $5.50 VOH = $20.75

Which of the following statements is true?
Multiple Choice
•    
Managers can manipulate earnings more easily under variable costing by varying the production level.
•    
Variable costing excludes all overhead from product costs.
•    
Variable costing treats fixed overhead as a period cost.
Correct
•    
Absorption costing treats fixed overhead as an expense in the period it is incurred.
•    
Absorption costing treats fixed overhead as a period cost.

Answer

Variable costing treats fixed overhead as a period cost.

Which of the following is not a product cost under variable costing?
Multiple Choice
•    
Direct labor.
•    
Fixed overhead.
Correct
•    
None of the above.
•    
Variable overhead.

•    
Direct materials.

Answer

Fixed overhead.

Under absorption costing, a company had the following unit costs when 9,000 units were produced.
 
Direct labor    $ 7.25    per unit
Direct material    $ 8.00    per unit
Variable overhead    $ 5.50    per unit
Fixed overhead ($67,500/9,000 units)    $ 7.50    per unit
Total production cost    $ 28.25    per unit

Compute the product cost per unit under absorption costing if 25,000 units had been produced.
Multiple Choice
•    
$15.25

•    
$23.45
Correct
•    
$26.25
•    
$20.75
•    
$28.25

Answer

$23.45
Explanation
$7.25 DL + $8 DM + $5.50 VOH + ($67,500/25,000) FOH = $23.45

During its first year of operations, the McCormick Company incurred the following manufacturing costs:
 
Direct materials    $ 4    per unit
Direct labor    $ 2    per unit
Variable overhead    $ 3    per unit
Fixed overhead    $ 224,000    per year

The company produced 28,000 units, and sold 19,000 units, leaving 9,000 units in inventory at year-end. What is the value of ending inventory under variable costing?
Multiple Choice
•     $305,000

•     $81,000 Correct
•    
$153,000
•    
$72,000
•    
$224,000

Answer

$81,000
Explanation
$4 + $2 + $3 = $9 per unit × 9,000 units = $81,000.

A company had income of $500,000 based on variable costing. Beginning and ending finished goods inventories were 100,000 units and 96,000 units, respectively. Assume the fixed overhead per unit was $1.50 for both the beginning and ending finished goods inventory. The income under absorption costing is:
 
Multiple Choice
•    
$350,000
•    
$500,000
Incorrect
•    
$356,000
•    
$506,000
•    
$494,000
Correct

Answer

$ 494,000
Explanation
Variable costing income    $ 500,000
Fixed overhead in ending FG inventory (96,000 × $1.50)    144,000
Fixed overhead in beginning FG inventory (100,000 × $1.50)    (150,000)
Absorption costing income    $ 494,000



Mentor Corporation has provided the following information for the current year:
 
Units produced    3,500    units
Sale price    $ 200    per unit
Direct materials    $ 70    per unit
Direct labor    $ 55    per unit
Variable manufacturing overhead    $ 20    per unit
Fixed manufacturing overhead    $ 350,000    per year
Variable selling and administrative costs    $ 30    per unit
Fixed selling and administrative costs    $ 150,000    per year

Calculate the product cost per unit using variable costing.
Multiple Choice
•    
$145
Correct
•    
$55

•    
$125
•    
$245
•    
$275

Answer

$145

Explanation
     Variable Costing
Direct materials    $ 70
Direct labor    55
Variable manufacturing overhead    20
Total unit product cost    $ 145



Mentor Corporation has provided the following information for the current year:
 
Units produced    3,500    units
Sale price    $ 200    per unit
Direct materials    $ 70    per unit
Direct labor    $ 55    per unit
Variable manufacturing overhead    $ 20    per unit
Fixed manufacturing overhead    $ 350,000    per year
Variable selling and administrative costs    $ 30    per unit
Fixed selling and administrative costs    $ 150,000    per year

Calculate the product cost per unit using absorption costing.
Multiple Choice
•    
$145
•    
$55

•    
$245
Correct
•    
$275
•    
$125

Answer

$245
Explanation
     Absorption Costing
Direct materials    $ 70
Direct labor    55
Variable manufacturing overhead    20
Fixed manufacturing overhead ($350,000 ÷ 3,500 units)    100
Total unit product cost    $ 245


During its first year of operations, the McCormick Company incurred the following manufacturing costs:
 
Direct materials    $ 5    per unit
Direct labor    $ 2    per unit
Variable overhead    $ 4    per unit
Fixed overhead    $ 324,000    per year

The company produced 36,000 units, and sold 28,500 units, leaving 7,500 units in inventory at year-end. What is the value of ending inventory under absorption costing?
Multiple Choice
•    
$82,500
•    
$406,500

•    
$150,000
Correct
•    
$67,500
•    
$324,000

Answer

$150,000

Explanation
$5 + $2 + $4 + ($324,000/36,000 units) = $20 per unit × 7,500 units = $150,000.

A company had income of $500,000 based on variable costing. Beginning and ending finished goods inventories were 100,000 units and 96,000 units, respectively. Assume the fixed overhead per unit was $1.50 for both the beginning and ending finished goods inventory. The income under absorption costing is:
 
Multiple Choice
•    
$356,000
•    
$494,000
Correct
•    
$350,000

•    
$506,000
•    
$500,000

Answer

$494,000

Explanation
Variable costing income    $ 500,000
Fixed overhead in ending FG inventory (96,000 × $1.50)    144,000
Fixed overhead in beginning FG inventory (100,000 × $1.50)    (150,000)
Absorption costing income    $ 494,000



Which of the following costing methods charges all manufacturing costs to its products?
Multiple Choice
•    
Variable costing
•    
ABC costing
•    
Direct costing
•    
Period costing
Incorrect
•    
Absorption costing

Answer

Absorption costing