Test bank cost and management accounting 4e by barfield ch11

CHAPTER 11
ABSORPTION/VARIABLE COSTING AND COST-VOLUME-PROFIT ANALYSIS
MULTIPLE CHOICE
1.

Consider the following three product costing alternatives: process costing, job order
costing, and standard costing. Which of these can be used in conjunction with
absorption costing?
a.
b.
c.
d.

job order costing
standard costing
process costing
all of them

ANSWER:
2.

absorption costing.
variable costing.
direct costing.
standard costing.

ANSWER:

a

EASY

Another name for absorption costing is
a.
b.
c.
d.

full costing.
direct costing.
job order costing.
fixed costing.

ANSWER:
4.

EASY

In a recent period, Marvel Co. incurred $20,000 of fixed manufacturing overhead and
deducted $30,000 of fixed manufacturing overhead. Marvel Co. must be using
a.
b.
c.
d.

3.

d

a

EASY

If a firm produces more units than it sells, absorption costing, relative to variable
costing, will result in
a.
b.
c.
d.

higher income and assets.
higher income but lower assets.
lower income but higher assets.
lower income and assets.

ANSWER:

a

MEDIUM

11–1


11–2

5.

Chapter 11

Under absorption costing, fixed manufacturing overhead could be found in all of the

following except the
a.
b.
c.
d.

work-in-process account.
finished goods inventory account.
Cost of Goods Sold.
period costs.

ANSWER:
6.

EASY

only on the balance sheet.
only on the income statement.
on both the balance sheet and income statement.
on neither the balance sheet nor income statement.

ANSWER:

c

EASY

Under absorption costing, if sales remain constant from period 1 to period 2, the
company will report a larger income in period 2 when
a.

b.
c.
d.

period 2 production exceeds period 1 production.
period 1 production exceeds period 2 production.
variable production costs are larger in period 2 than period 1.
fixed production costs are larger in period 2 than period 1.

ANSWER:
8.

d

If a firm uses absorption costing, fixed manufacturing overhead will be included
a.
b.
c.
d.

7.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

a

MEDIUM

The FASB requires which of the following to be used in preparation of external
financial statements?

a.
b.
c.
d.

variable costing
standard costing
activity-based costing
absorption costing

ANSWER:

d

EASY


Chapter 11

9.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

An ending inventory valuation on an absorption costing balance sheet would
a.
b.
c.
d.

sometimes be less than the ending inventory valuation under variable costing.

always be less than the ending inventory valuation under variable costing.
always be the same as the ending inventory valuation under variable costing.
always be greater than or equal to the ending inventory valuation under variable
costing.

ANSWER:
10.

EASY

treatment of fixed manufacturing overhead.
treatment of variable production costs.
acceptability for external reporting.
arrangement of the income statement.

ANSWER:

b

EASY

Which of the following is not associated with absorption costing?
a.
b.
c.
d.

functional format
gross margin
period costs

contribution margin

ANSWER:
12.

d

Absorption costing differs from variable costing in all of the following except
a.
b.
c.
d.

11.

11–3

d

EASY

Unabsorbed fixed overhead costs in an absorption costing system are
a.
b.
c.
d.

fixed manufacturing costs not allocated to units produced.
variable overhead costs not allocated to units produced.
excess variable overhead costs.

costs that cannot be controlled.

ANSWER:

a

EASY


11–4

13.

Chapter 11

Profit under absorption costing may differ from profit determined under variable
costing. How is this difference calculated?
a.
b.
c.
d.

Change in the quantity of all units in inventory times the relevant fixed costs per
unit.
Change in the quantity of all units produced times the relevant fixed costs per
unit.
Change in the quantity of all units in inventory times the relevant variable cost
per unit.
Change in the quantity of all units produced times the relevant variable cost per
unit.

ANSWER:
14.

a

EASY

What factor, related to manufacturing costs, causes the difference in net earnings
computed using absorption costing and net earnings computed using variable costing?
a.
b.
c.
d.

Absorption costing considers all costs in the determination of net earnings,
whereas variable costing considers fixed costs to be period costs.
Absorption costing allocates fixed overhead costs between cost of goods sold
and inventories, and variable costing considers all fixed costs to be period costs.
Absorption costing “inventories” all direct costs, but variable costing considers
direct costs to be period costs.
Absorption costing “inventories” all fixed costs for the period in ending finished
goods inventory, but variable costing expenses all fixed costs.

ANSWER:
15.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

b

EASY

The costing system that classifies costs by functional group only is
a.
b.
c.
d.

standard costing.
job order costing.
variable costing.
absorption costing.

ANSWER:

d

EASY


Chapter 11

16.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

A functional classification of costs would classify “depreciation on office equipment”
as a
a.

b.
c.
d.

product cost.
general and administrative expense.
selling expense.
variable cost.

ANSWER:
17.

EASY

process costing.
job order costing.
variable costing.
absorption costing.

ANSWER:

c

EASY

Under variable costing, which of the following are costs that can be inventoried?
a.
b.
c.
d.

variable selling and administrative expense
variable manufacturing overhead
fixed manufacturing overhead
fixed selling and administrative expense

ANSWER:
19.

b

The costing system that classifies costs by both functional group and behavior is
a.
b.
c.
d.

18.

11–5

b

EASY

Consider the following three product costing alternatives: process costing, job order
costing, and standard costing. Which of these can be used in conjunction with variable
costing?
a.
b.

c.
d.

job order costing
standard costing
process costing
all of them

ANSWER:

d

EASY


11–6

20.

Chapter 11

Another name for variable costing is
a.
b.
c.
d.

full costing.
direct costing.
standard costing.

adjustable costing.

ANSWER:
21.

EASY

only on the balance sheet.
only on the income statement.
on both the balance sheet and income statement.
on neither the balance sheet nor income statement.

ANSWER:

b

EASY

Under variable costing,
a.
b.
c.
d.

all product costs are variable.
all period costs are variable.
all product costs are fixed.
product costs are both fixed and variable.

ANSWER:

23.

b

If a firm uses variable costing, fixed manufacturing overhead will be included
a.
b.
c.
d.

22.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

a

EASY

How will a favorable volume variance affect net income under each of the following
methods?
a.
b.
c.
d.

Absorption
reduce
reduce
increase
increase

ANSWER:

c

Variable
no effect
increase
no effect
reduce
EASY


Chapter 11

24.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Variable costing considers which of the following to be product costs?

a.
b.
c.
d.

Fixed
Mfg. Costs
yes
yes

no
no

ANSWER:
25.

Variable
Mfg. Costs
yes
yes
yes
yes

Variable
Selling & Adm.
no
yes
yes
no

EASY

costs are classified by their behavior.
costs are always lower.
it is required for external reporting.
it justifies higher product prices.

ANSWER:

a

EASY

The difference between the reported income under absorption and variable costing is
attributable to the difference in the
a.
b.
c.
d.

income statement formats.
treatment of fixed manufacturing overhead.
treatment of variable manufacturing overhead.
treatment of variable selling, general, and administrative expenses.

ANSWER:
27.

d

Fixed
Selling & Adm.
no
no
no
no

The variable costing format is often more useful to managers than the absorption
costing format because
a.

b.
c.
d.

26.

11–7

b

EASY

Which of the following costs will vary directly with the level of production?
a.
b.
c.
d.

total manufacturing costs
total period costs
variable period costs
variable product costs

ANSWER:

d

EASY

11–8

28.

Chapter 11

On the variable costing income statement, the difference between the “contribution
margin” and “income before income taxes” is equal to
a.
b.
c.
d.

the total variable costs.
the Cost of Goods Sold.
total fixed costs.
the gross margin.

ANSWER:
29.

EASY

deducted in the period that they are incurred.
inventoried until the related products are sold.
treated like period costs.
inventoried until the related products have been completed.

ANSWER:

b

EASY

In the application of “variable costing” as a cost-allocation process in manufacturing,
a.
b.
c.
d.

variable direct costs are treated as period costs.
nonvariable indirect manufacturing costs are treated as product costs.
variable indirect manufacturing costs are treated as product costs.
nonvariable direct costs are treated as product costs.

ANSWER:
31.

c

For financial reporting to the IRS and other external users, manufacturing overhead
costs are
a.
b.
c.
d.

30.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

c

EASY

A basic tenet of variable costing is that period costs should be currently expensed. What
is the rationale behind this procedure?
a.
b.
c.
d.

Period costs are uncontrollable and should not be charged to a specific product.
Period costs are generally immaterial in amount and the cost of assigning the
amounts to specific products would outweigh the benefits.
Allocation of period costs is arbitrary at best and could lead to erroneous
decision by management.
Because period costs will occur whether production occurs, it is improper to
allocate these costs to production and defer a current cost of doing business.

ANSWER:

d

MEDIUM


Chapter 11

32.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Which of the following is a term more descriptive of the type of cost accounting often
called “direct costing”?
a.
b.
c.
d.

out-of-pocket costing
variable costing
relevant costing
prime costing

ANSWER:
33.

EASY

only direct costs
only variable production costs
all variable costs
all variable and fixed manufacturing costs

ANSWER:

b

EASY

Which of the following must be known about a production process in order to institute a
variable costing system?
a.
b.
c.
d.

the variable and fixed components of all costs related to production
the controllable and non-controllable components of all costs related to
production
standard production rates and times for all elements of production
contribution margin and break-even point for all goods in production

ANSWER:
35.

b

What costs are treated as product costs under variable (direct) costing?
a.
b.
c.
d.

34.

11–9

a

EASY

Why is variable costing not in accordance with generally accepted accounting
principles?
a.
b.
c.
d.

Fixed manufacturing costs are treated as period costs under variable costing.
Variable costing procedures are not well known in industry.
Net earnings are always overstated when using variable costing procedures.
Variable costing ignores the concept of lower of cost or market when valuing
inventory.

ANSWER:

a

EASY


11–10

36.

Chapter 11

Which of the following is an argument against the use of direct (variable) costing?

a.
b.
c.
d.

Absorption costing overstates the balance sheet value of inventories.
Variable factory overhead is a period cost.
Fixed manufacturing overhead is difficult to allocate properly.
Fixed manufacturing overhead is necessary for the production of a product.

ANSWER:
37.

b.
c.
d.

EASY

The cost of a unit of product changes because of changes in the number of units
manufactured.
Profits fluctuate with sales.
An idle facility variation is calculated.
None of the above.

ANSWER:

b

EASY

An income statement is prepared as an internal report. Under which of the following
methods would the term contribution margin appear?
a.
b.
c.
d.

Absorption costing
no
no
yes
yes

ANSWER:
39.

d

Which of the following statements is true for a firm that uses variable costing?
a.

38.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

b

Variable costing
no

yes
no
yes

EASY

In an income statement prepared as an internal report using the variable costing method,
fixed manufacturing overhead would
a.
b.
c.
d.

not be used.
be used in the computation of operating income but not in the computation of the
contribution margin.
be used in the computation of the contribution margin.
be treated the same as variable manufacturing overhead.

ANSWER:

b

EASY


Chapter 11

40.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Variable costing has an advantage over absorption costing for which of the following
purposes?
a.
b.
c.
d.

analysis of profitability of products, territories, and other segments of a business
determining the CVP relationship among the major factors of selling price, sales
mix, and sales volume
minimizing the effects of inventory changes on net income
all of the above

ANSWER:
41.

EASY

selling expenses
general and administrative expense
product contribution margin
total contribution margin

ANSWER:

d

EASY

A firm presently has total sales of $100,000. If its sales rise, its
a.
b.
c.
d.

net income based on variable costing will go up more than its net income based
on absorption costing.
net income based on absorption costing will go up more than its net income
based on variable costing.
fixed costs will also rise.
per unit variable costs will rise.

ANSWER:
43.

d

In the variable costing income statement, which line separates the variable and fixed
costs?
a.
b.
c.
d.

42.

11–11

a

MEDIUM

CVP analysis requires costs to be categorized as
a.
b.
c.
d.

either fixed or variable.
fixed, mixed, or variable.
product or period.
standard or actual.

ANSWER:

a

EASY


11–12

44.

Chapter 11

With respect to fixed costs, CVP analysis assumes total fixed costs
a.

b.
c.
d.

per unit remain constant as volume changes.
remain constant from one period to the next.
vary directly with volume.
remain constant across changes in volume.

ANSWER:
45.

EASY

fixed costs decrease.
variable costs remain constant.
costs decrease.
costs remain constant.

ANSWER:

c

EASY

According to CVP analysis, a company could never incur a loss that exceeded its total
a.
b.
c.
d.

variable costs.
fixed costs.
costs.
contribution margin.

ANSWER:
47.

d

CVP analysis relies on the assumptions that costs are either strictly fixed or strictly
variable. Consistent with these assumptions, as volume decreases total
a.
b.
c.
d.

46.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

c

EASY

CVP analysis is based on concepts from
a.
b.
c.

d.

standard costing.
variable costing.
job order costing.
process costing.

ANSWER:

b

EASY


Chapter 11

48.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Cost-volume-profit analysis is a technique available to management to understand better
the interrelationships of several factors that affect a firm’s profit. As with many such
techniques, the accountant oversimplifies the real world by making assumptions. Which
of the following is not a major assumption underlying CVP analysis?
a.
b.
c.
d.

All costs incurred by a firm can be separated into their fixed and variable

components.
The product selling price per unit is constant at all volume levels.
Operating efficiency and employee productivity are constant at all volume
levels.
For multi-product situations, the sales mix can vary at all volume levels.

ANSWER:
49.

EASY

contribution margin per unit.
fixed cost per unit.
total costs per unit.
all of the above.

ANSWER:

a

EASY

Which of the following factors is involved in studying cost-volume-profit relationships?
a.
b.
c.
d.

product mix
variable costs

fixed costs
all of the above

ANSWER:
51.

d

In CVP analysis, linear functions are assumed for
a.
b.
c.
d.

50.

11–13

d

EASY

Cost-volume-profit relationships that are curvilinear may be analyzed linearly by
considering only
a.
b.
c.
d.

fixed and mixed costs.

relevant fixed costs.
relevant variable costs.
a relevant range of volume.

ANSWER:

d

EASY


11–14

52.

Chapter 11

After the level of volume exceeds the break-even point
a.
b.
c.
d.

the contribution margin ratio increases.
the total contribution margin exceeds the total fixed costs.
total fixed costs per unit will remain constant.
the total contribution margin will turn from negative to positive.

ANSWER:
53.

Decrease in
fixed cost
yes
yes
yes
no

ANSWER:

EASY

b

Increase in direct
labor cost
yes
no
no
yes

Increase in
selling price
yes
yes
no
no

EASY

At the break-even point, fixed costs are always
a.
b.
c.
d.

less than the contribution margin.
equal to the contribution margin.
more than the contribution margin.
more than the variable cost.

ANSWER:
55.

b

Which of the following will decrease the break-even point?

a.
b.
c.
d.

54.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

b

EASY

The method of cost accounting that lends itself to break-even analysis is
a.
b.
c.
d.

variable.
standard.
absolute.
absorption.

ANSWER:

a

EASY


Chapter 11

56.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Given the following notation, what is the break-even sales level in units?
SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit
a.
b.
c.

d.

SP/(FC/VC)
FC/(VC/SP)
VC/(SP – FC)
FC/(SP – VC)

ANSWER:
57.

net income
fixed costs
contribution margin
variable costs

ANSWER:

d

MEDIUM

If a firm’s net income does not change as its volume changes, the firm(‘s)
a.
b.
c.
d.

must be in the service industry.
must have no fixed costs.
sales price must equal $0.

sales price must equal its variable costs.

ANSWER:
59.

EASY

Consider the equation X = Sales – [(CM/Sales) × (Sales)]. What is X?
a.
b.
c.
d.

58.

d

d

MEDIUM

Break-even analysis assumes over the relevant range that
a.
b.
c.
d.

total variable costs are linear.
fixed costs per unit are constant.
total variable costs are nonlinear.

total revenue is nonlinear.

ANSWER:

a

EASY

11–15


11–16

60.

Chapter 11

To compute the break-even point in units, which of the following formulas is used?
a.
b.
c.
d.

FC/CM per unit
FC/CM ratio
CM/CM ratio
(FC+VC)/CM ratio

ANSWER:
61.

EASY

FC/CM per unit
VC/CM
FC/CM ratio
VC/CM ratio

ANSWER:

c

EASY

The contribution margin ratio always increases when the
a.
b.
c.
d.

variable costs as a percentage of net sales increase.
variable costs as a percentage of net sales decrease.
break-even point increases.
break-even point decreases.

ANSWER:
63.

a

A firm’s break-even point in dollars can be found in one calculation using which of the
following formulas?
a.
b.
c.
d.

62.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

b

EASY

In a multiple-product firm, the product that has the highest contribution margin per unit
will
a.
b.
c.
d.

generate more profit for each $1 of sales than the other products.
have the highest contribution margin ratio.
generate the most profit for each unit sold.
have the lowest variable costs per unit.

ANSWER:

c

EASY


Chapter 11

64.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

_____________ focuses only on factors that change from one course of action to
another.
a.
b.
c.
d.

Incremental analysis
Margin of safety
Operating leverage
A break-even chart

ANSWER:
65.

EASY

was presently operating at a volume that is below the break-even point.
present fixed costs were less than its contribution margin.
variable costs exceeded its fixed costs.

degree of operating leverage is greater than 100.

ANSWER:

a

EASY

The margin of safety is a key concept of CVP analysis. The margin of safety is the
a.
b.
c.
d.

contribution margin rate.
difference between budgeted contribution margin and actual contribution margin.
difference between budgeted contribution margin and break-even contribution
margin.
difference between budgeted sales and break-even sales.

ANSWER:
67.

a

The margin of safety would be negative if a company(‘s)
a.
b.
c.
d.

66.

11–17

d

EASY

Management is considering replacing an existing sales commission compensation plan
with a fixed salary plan. If the change is adopted, the company’s
a.
b.
c.
d.

break-even point must increase.
margin of safety must decrease.
operating leverage must increase.
profit must increase.

ANSWER:

c

MEDIUM


11–18

68.

Chapter 11

As projected net income increases the
a.
b.
c.
d.

degree of operating leverage declines.
margin of safety stays constant.
break-even point goes down.
contribution margin ratio goes up.

ANSWER:
69.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

a

MEDIUM

A managerial preference for a very low degree of operating leverage might indicate that
a.
b.
c.
d.

an increase in sales volume is expected.
a decrease in sales volume is expected.
the firm is very unprofitable.
the firm has very high fixed costs.

ANSWER:

b

MEDIUM

Use the following information for questions 70–73.
Young Corporation has the following standard costs associated with the manufacture and sale
of one of its products:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expenses
Fixed SG&A expense

$3.00 per unit
2.50 per unit
1.80 per unit
4.00 per unit (based on an estimate
of 50,000 units per year)
.25 per unit
$75,000 per year

During 2001, its first year of operations, Young manufactured 51,000 units and sold 48,000.

The selling price per unit was $25. All costs were equal to standard.
70.

Under absorption costing, the standard production cost per unit for 2001 was
a.
b.
c.
d.

$11.30.
$7.30.
$11.55.
$13.05.

ANSWER:

a

EASY


Chapter 11

71.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Under variable costing, the standard production cost per unit for 2001 was
a.
b.

c.
d.

$11.30.
$7.30.
$7.55.
$11.55.

ANSWER:
72.

EASY

Based on variable costing, the income before income taxes for the year was
a.
b.
c.
d.

$570,600.
$560,000.
$562,600.
$547,500.

ANSWER:
73.

b

c

MEDIUM

The volume variance under absorption costing is
a.
b.
c.
d.

$8,000 F.
$4,000 F.
$4,000 U.
$8,000 U.

ANSWER:

b

MEDIUM

11–19


11–20

Chapter 11

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Use the following information for questions 74–76.

The following information is available for X Co. for its first year of operations:
Sales in units
Production in units
Manufacturing costs:
Direct labor
Direct material
Variable overhead
Fixed overhead
Net income (absorption method)
Sales price per unit
74.

$30,000
($7,500)
$67,500
can’t be determined from the information given

ANSWER:

b

MEDIUM

What was the total amount of SG&A expense incurred by X Co.?
a.
b.
c.
d.

$30,000

$62,500
$6,000
can’t be determined from the information given

ANSWER:
76.

$3 per unit
5 per unit
1 per unit
$100,000
$30,000
$40

What would X Co. have reported as its income before income taxes if it had used
variable costing?
a.
b.
c.
d.

75.

5,000
8,000

b

MEDIUM

Based on variable costing, what would X Co. show as the value of its ending inventory?
a.
b.
c.
d.

$120,000
$64,500
$27,000
$24,000

ANSWER:

c

EASY


Chapter 11

Absorption/Variable Costing and Cost-Volume-Profit Analysis

11–21

Use the following information for questions 77–79.
The following information has been extracted from P Co.’s financial records for its first year of
operations:
Units produced
Units sold
Variable costs per unit:

Direct material
Direct labor
Manufacturing overhead
SG&A
Fixed costs:
Manufacturing overhead
SG&A
77.

$70,000
30,000

$21,000 higher than it would be under variable costing.
$70,000 higher than it would be under variable costing.
$30,000 higher than it would be under variable costing.
higher than it would be under variable costing, but the exact difference cannot be
determined from the information given.

ANSWER:

a

MEDIUM

Based on absorption costing, the Cost of Goods Manufactured for P Co.’s first year
would be
a.
b.
c.
d.

$200,000.
$270,000.
$300,000.
$210,000.

ANSWER:
79.

$8
9
3
4

Based on absorption costing, P Co.’s income in its first year of operations will be
a.
b.
c.
d.

78.

10,000
7,000

b

MEDIUM

Based on absorption costing, what amount of period costs will P Co. deduct?

a.
b.
c.
d.

$70,000
$79,000
$30,000
$58,000

ANSWER:

d

MEDIUM


11–22

80.

Chapter 11

For its most recent fiscal year, a firm reported that its contribution margin was equal to
40 percent of sales and that its net income amounted to 10 percent of sales. If its fixed
costs for the year were $60,000, how much were sales?
a.
b.
c.
d.

$150,000
$200,000
$600,000
can’t be determined from the information given

ANSWER:
81.

b

MEDIUM

At its present level of operations, a small manufacturing firm has total variable costs
equal to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based on
variable costing, if sales change by $1.00, income will change by
a.
b.
c.
d.

$0.25.
$0.10.
$0.75.
can’t be determined from the information given.

ANSWER:
82.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

a

EASY

You obtain the following information regarding fixed production costs from a
manufacturing firm for fiscal year 2001:
Fixed costs in the beginning inventory
Fixed costs incurred this period

$ 16,000
100,000

Which of the following statements is not true:
a.
b.
c.
d.

The maximum amount of fixed production costs that this firm could deduct
using absorption costs in 2001 is $116,000.
The maximum difference between this firm’s 2001 income based on absorption
costing and its income based on variable costing is $16,000.
Using variable costing, this firm will deduct no more than $16,000 for fixed
production costs.
If this firm produced substantially more units than it sold in 2001, variable
costing will probably yield a lower income than absorption costing.

ANSWER:

c

MEDIUM


Chapter 11

Absorption/Variable Costing and Cost-Volume-Profit Analysis

11–23

Use the following information for questions 83–86.
Simple Corp. produces a single product. The following cost structure applied to its first year of
operations, 2001:
Variable costs:
SG&A
$2 per unit
Production
$4 per unit
Fixed costs (total cost incurred for the year):
SG&A
$14,000
Production
$20,000
83.

Assume for this question only that during 2001 Simple Corp. manufactured 5,000 units
and sold 3,800. There was no beginning or ending work-in-process inventory. How
much larger or smaller would Simple Corp.’s income be if it uses absorption rather than
variable costing?

a.
b.
c.
d.

The absorption costing income would be $6,000 larger.
The absorption costing income would be $6,000 smaller.
The absorption costing income would be $4,800 larger.
The absorption costing income would be $4,000 smaller.

ANSWER:
84.

MEDIUM

Assume for this question only that Simple Corp. manufactured and sold 5,000 units in
2001. At this level of activity it had an income of $30,000 using variable costing. What
was the sales price per unit?
a.
b.
c.
d.

$16.00
$18.80
$12.80
$14.80

ANSWER:
85.

c

b

MEDIUM

Assume for this question only that Simple Corp. produced 5,000 units and sold 4,500
units in 2001. If Simple uses absorption costing, it would deduct period costs of
a.
b.
c.
d.

$24,000.
$34,000.
$27,000.
$23,000.

ANSWER:

d

MEDIUM


11–24

86.

Chapter 11

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Assume for this question only that Simple Corp. manufactured 5,000 units and sold
4,000 in 2001. If Simple employs a costing system based on variable costs, the company
would end 2001 with a finished goods inventory of
a.
b.
c.
d.

$4,000.
$8,000.
$6,000.
$5,000.

ANSWER:

a

MEDIUM

Use the following information for questions 87–89.
The following information was extracted from the first year absorption-based accounting
records of Confused Co.
Total fixed costs incurred
Total variable costs incurred
Total period costs incurred
Total variable period costs incurred

Units produced
Units sold
Unit sales price
87.

What is Cost of Goods Sold for Confused Co.’s first year?
a.
b.
c.
d.

$80,000
$90,000
$48,000
can’t be determined from the information given

ANSWER:
88.

$100,000
50,000
70,000
30,000
20,000
12,000
$12

c

DIFFICULT

If Confused Co. had used variable costing in its first year of operations, how much
income (loss) before income taxes would it have reported?
a.
b.
c.
d.

($6,000)
$54,000
$26,000
$2,000

ANSWER:

d

DIFFICULT


Chapter 11

89.

Absorption/Variable Costing and Cost-Volume-Profit Analysis

Based on variable costing, if Confused had sold 12,001 units instead of 12,000, its
income before income taxes would have been
a.
b.

c.
d.

$9.50 higher.
$11.00 higher.
$8.50 higher.
$8.33 higher.

ANSWER:
90.

11–25

c

MEDIUM

Z Corp. incurred the following costs in 2001 (its first year of operations) based on
production of 10,000 units:
Direct material
Direct labor
Variable product costs
Fixed product costs (in total)

$5 per unit
$3 per unit
$2 per unit
$100,000

When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed

at $100,000. Based on this information, which of the following statements must be true:
a.
b.
c.
d.

Z Corp. sold all 10,000 units that it produced.
Z Corp. sold 5,000 units.
Z Corp. had a very profitable year.
From the information given, one cannot tell whether Z Corp.’s financial
statements were prepared based on variable or absorption costing.

ANSWER:

b

MEDIUM