Deck 6: Variable Costing and Performance Reporting

Question 1

Under absorption costing, a company had the following unit costs when 10,000 units were produced:
$\begin{array}{lr}\text { Direct labor } & \$ 2 \text { per unit } \\\text { Direct material } & \$ 3 \text { per unit } \\\text { Variable overhead } &\underline { \$ 4 \text { per unit }} \\\text { Total variable } & \$ 9 \text { per unit } \\\text { Fixed overhead }(\$ 50,000 / 10,000 \text { units }) & \underline {\$ 5 \text { per unit }} \\\text { Total production cost } & \underline {\$ 14 \text { per unit }}\end{array}$ The total production cost per unit under absorption costing if 25,000 units had been produced would be $11.

Answer 1

True

Question 2

Assume a company had the following production costs:
$\begin{array}{ll} \text { Direect labor } &\$ 20,000 \\ \text { Direct material } &\$ 30,000 \\ \text { Variable overhead } &\$ 40,000 \\ \text { Fixed overhead } &\$ 50,000\end{array}$ Under absorption costing, the total production cost per unit when 4,000 units are produced would be $22.50.

Answer 2

False

Question 3

Product costs consist of direct labor, direct materials, and overhead.

Answer 3

True

Question 4

A company normally sells a product for $25 per unit.Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead.The company is currently operating at 100% of capacity producing 30,000 units per year.Total fixed costs are $75,000 per year.The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

Question 5

The use of absorption costing can result in misleading product cost information.

Question 6

During a given year if a company produces and sells the same number of units, then beginning inventory units equal ending inventory units.

Question 7

Variable costing separates the variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.

Question 8

Absorption costing is useful because it reflects the full costs that sales must exceed for the company to be profitable.

Question 9

The traditional costing approach assigns all manufacturing costs to products.

Question 10

The traditional income statement format used for financial reporting is called the contribution margin format.

Question 11

Managers should accept special orders provided the special order price exceeds full cost.

Question 12

The biggest problems with producing too much are lost sales and customer dissatisfaction.

Question 13

Manufacturing overhead costs are those that can be traced directly to the product.

Question 14

Cost information from both absorption costing and variable costing can aid managers in pricing.

Question 15

Absorption costing is not permitted under GAAP.

Question 16

If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.

Question 17

Variable costing treats fixed overhead cost as a period cost.

Question 18

A company normally sells a product for $20 per unit.Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead.The company is currently operating at 70% of capacity producing 14,000 units per year.Total fixed costs are $42,000 per year.The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.

Question 19

Fixed costs change in the short run depending upon management's decision to accept or reject special orders.

Question 20

Many companies link manager bonuses to income computed under absorption costing because this is how income is reported to shareholders.

Question 21

Given the following data, total product cost per unit under variable costing is $7.05.
$\begin{array}{|l|c|}\hline \text { Direct labor } & \$ 3.50 \text { per unit } \\\hline \text { Direct materials } & \$ 1.25 \text { per unit } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 41,400 \\\hline \text { Total fixed overhead } & \$ 150,000 \\\hline & \\\hline \text { Expected units to be produced } & 18,000 \text { units } \\\hline\end{array}$

Question 22

Given the following data, total product cost per unit under absorption costing will be $400 greater than total product cost per unit under variable costing.
$$\begin{array} { | l | c | } \hline \text { Direct labor } & \mathbf { \$ 1 . 5 0 p e r ~ u ni t ~ } \\\hline \text { Direct rmaterials } & \$ 1.50 \mathrm { per } \text { unit } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 900,000 \\\hline \text { Total fixed overhead } & \$ 1,200,000 \\\hline & \\\hline \text { Expected urits to be produced } & \mathbf { 3 , 0 0 0 } \text { units } \\\hline\end{array}$$

Question 23

The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format.

Question 24

Contribution margin is another way to refer to gross margin.

Question 25

When units produced exceed the units sold, income under absorption costing is higher than income under variable costing.

Question 26

Given the following data, total product cost per unit under absorption costing will be greater than total product cost per unit under variable costing.
$$\begin{array} { | l | c | } \hline \text { Direct labor } & \$ 9 \text { per unit } \\\hline \text { Direct rmaterials } & \$ 7 \text { per unit } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 45,000 \\\hline \text { Total fixed overhead } & \$ 27,000 \\\hline & \\\hline \text { Expected urits to be produced } & 9,000 \text { units } \\\hline\end{array}$$

Question 27

The data needed for cost-volume-profit analysis is readily available if the income statement is prepared under absorption costing.

Question 28

When units produced are less than units sold, income under absorption costing is higher than income under variable costing.

Question 29

Given the following data, total product cost per unit under variable costing is $10.75.
$$\begin{array} { | l | c | } \hline \text { Direct labor } & \$ 7 \text { per unit } \\\hline \text { Direct rmaterials } & \$ 1 \text { per unit } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 20,000 \\\hline \text { Total fixed overhead } & \$ 90,000 \\\hline & \\\hline \text { Expected urits to be produced } & 40,000 \text { units } \\\hline\end{array}$$

Question 30

Under a traditional income statement format expenses are grouped according to cost behavior.

Question 31

The variable costing income statement classifies costs based on cost behavior rather than function.

Question 32

Given the following data, total product cost per unit under absorption costing is $11.40.
$$\begin{array} { | l | c | } \hline \text { Direct labor } & \$ 5 \text { per unit } \\\hline \text { Direct rmaterials } & \$ 6 \text { per unit } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 32,800 \\\hline \text { Total fixed overhead } & \$ 164,000 \\\hline & \\\hline \text { Expected urits to be produced } & \mathbf { 8 2 , 0 0 0 u ni t s } \\\hline\end{array}$$

Question 33

During a given year, if a company sells more units than it produces, then ending inventory units will be less than beginning inventory units.

Question 34

Given the following data, total product cost per unit under variable costing will be greater than total product cost under absorption costing.
$$\begin{array} { | l | l | } \hline \text { Direct labor } & \$ 2 \text { per unit } \\\hline \text { Direct materials } & \$ 8 \text { per unit } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 37,500 \\\hline \text { Total fixed overhead } & \$ 249,000 \\\hline & \\\hline \text { Expected urits to be produced } & 15,000\text { units } \\\hline\end{array}$$

Question 35

During a given year, if a company produces more units than it sells, then ending inventory units will be less than beginning inventory units.

Question 36

Given the following data, total product cost per unit under absorption costing is $9.14.
$$\begin{array} { | l | c | } \hline \text { Direct labor } & \mathbf { \$ 0 . 7 2 p e r ~ u n i t ~ } \\\hline \text { Direct rmaterials } & \mathbf { \$ 0 . 8 0 p e r ~ u n i t } \\\hline \text { Overhead } & \\\hline \text { Total variable overhead } & \$ 202,500 \\\hline \text { Total fixed overhead } & \$ 140,400 \\\hline & \\\hline \text { Expected urits to be produced } & 45,000 \text { units } \\\hline\end{array}$$

Question 37

Income under absorption costing will always be different than income under variable costing.

Question 38

Sales less variable costs equals manufacturing margin.

Question 39

When units produced equal units sold, reported income is identical under absorption costing and variable costing.

Question 40

A variable costing income statement focuses attention on the relationship between costs and sales that is not evident from the absorption costing format.

Question 41

The bottom line of a contribution margin report is net income.

Question 42

Reporting contribution margin by market segment is useful in assessing the profitability of each segment.

Question 43

Under absorption costing, a company had the following unit costs when 8,000 units were produced. $\begin{array}{lr}\text { Direct labor } & \$ 8.50 \text { per unit } \\\text { Direct material } & \$ 9.00 \text { per unit } \\\text { Variable overhead } & \$ 6.75 \text { per unit } \\\text { Fixed overhead }(\$ 60,000 / 8,000 \text { units }) &\underline{ \$ 7.50 \text { per unit }} \\\text { Total production cost } & \underline{\$ 31.75 \text { per unit }}\end{array}$ Compute the total production cost per unit under absorption costing if 30,000 units had been produced.

A)$31.75
B)$27.25
C)$26.25
D)$24.25
E)$17.50

Question 44

Which of the following statements is true regarding variable costing?

A)It is a traditional costing approach.
B)Only manufacturing costs that change in total with changes in production level are included in product costs.
C)It is not permitted to be used for managerial reporting.
D)It treats overhead in the same manner as absorption costing.
E)It makes it easier to manipulate earnings with changes in production levels.

Question 45

Variable costing is the only acceptable basis for both external reporting and tax reporting.

Question 46

Which of the following statements is true?

A)Variable costing treats fixed overhead as a period cost.
B)Absorption costing treats fixed overhead as a period cost.
C)Absorption costing treats fixed overhead as an expense in the period it is incurred.
D)Variable costing excludes all overhead from product costs.
E)Managers can manipulate earnings more easily under variable costing by varying the production level.

Question 47

Using a traditional costing approach, which of the following manufacturing costs are assigned to products?

A)Direct materials and direct labor.
B)Direct labor and variable manufacturing overhead.
C)Fixed manufacturing overhead, direct materials, and direct labor.
D)Variable manufacturing overhead, direct materials, and direct labor.
E)Variable manufacturing overhead, direct materials, direct labor, and fixed manufacturing overhead.

Question 48

Under absorption costing, a company had the following unit costs when 8,000 units were produced. $\begin{array}{lr}\text { Direct labor } & \$ 8.50 \text { per unit } \\\text { Direct material } & \$ 9.00 \text { per unit } \\\text { Variable overhead } & \$ 6.75 \text { per unit } \\\text { Fixed overhead }(\$ 60,000 / 8,000 \text { units }) &\underline{ \$ 7.50 \text { per unit }} \\\text { Total production cost } & \underline{\$ 31.75 \text { per unit }}\end{array}$ Compute the total production cost per unit under variable costing if 25,000 units had been produced.

A)$31.75
B)$27.25
C)$26.25
D)$24.25
E)$17.50

Question 49

Which of the following statements is true regarding absorption costing?

A)It is a not the traditional costing approach.
B)It is not permitted to be used for financial reporting.
C)It is not permitted to be used for tax reporting.
D)It assigns all manufacturing costs to products.
E)It requires only variable costs to be treated as product costs.

Question 50

Contribution margin ratio is the percent of each sales dollar used to cover variable costs.

Question 51

Which of the following is not a product cost?

A)Direct labor.
B)Indirect manufacturing costs.
C)Direct materials.
D)Manufacturing overhead.
E)Advertising costs.

Question 52

Multiplying the contribution margin ratio by the expected change in sales equals the expected change in contribution margin.

Question 53

To convert variable costing income to absorption costing income, management will need to change the way fixed overhead costs are treated.

Question 54

Under absorption costing, a company had the following unit costs when 8,000 units were produced. $\begin{array}{lr}\text { Direct labor } & \$ 8.50 \text { per unit } \\\text { Direct material } & \$ 9.00 \text { per unit } \\\text { Variable overhead } & \$ 6.75 \text { per unit } \\\text { Fixed overhead }(\$ 60,000 / 8,000 \text { units }) &\underline{ \$ 7.50 \text { per unit }} \\\text { Total production cost } & \underline{\$ 31.75 \text { per unit }}\end{array}$ Compute the total production cost per unit under variable costing if 20,000 units had been produced.

A)$31.75
B)$27.25
C)$26.25
D)$24.25
E)$17.50

Question 55

Under absorption costing, which of the following statements is not true?

A)Over production and inventory buildup can occur because of how managers are evaluated and rewarded.
B)The fixed costs per unit decline as more units are produced.
C)Variable inventory costs are treated in the same manner as they are under variable costing.
D)Fixed inventory costs are treated in the same manner as they are under variable costing.
E)All manufacturing costs are assigned to products.

Question 56

Contribution margin divided by sales equals contribution margin ratio.

Question 57

Which of the following statements is true?

A)A per unit cost that is constant at all production levels is a variable cost per unit.
B)Reported income under variable costing is affected by production level changes.
C)A per unit cost that is constant at all production levels is a fixed cost per unit.
D)Reported income under absorption costing is not affected by production level changes.
E)A cost that is constant over all levels of production is a variable cost.

Question 58

Information presented in a variable costing format can assist management when making short-term pricing decisions.

Question 59

Contribution margin is the excess of sales over total variable costs.

Question 60

It is not possible to convert reports prepared using variable costing to absorption costing reports.

Question 61

When evaluating a special order, management should:

A)Only accept the order if the incremental revenue exceeds all product costs.
B)Only accept the order if the incremental revenue exceeds fixed product costs.
C)Only accept the order if the incremental revenue exceeds total variable product costs.
D)Only accept the order if the incremental revenue exceeds full absorption product costs.
E)Only accept the order if the incremental revenue exceeds regular sales revenue.

Question 62

A company is currently operating at 75% capacity and producing 3,000 units.Current cost information relating to this production is shown in the table below: $$\begin{array} { | l | c | } \hline & \text { Per Urit } \\\hline \text { Sales price } & \$ 43 \\\hline \text { Direct rraterial } & \$ 7 \\\hline \text { Direct labor } & \$ 6 \\\hline \begin{array} { l } \text { Variable } \\\text { overhead }\end{array} & \$ 4 \\\hline \text { Fixed overhead } & \$ 4 \\\hline\end{array}$$ The company has been approached by a customer with a request for a 200-unit special.What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

A)Any amount over $43 per unit.
B)Any amount over $17 per unit.
C)Any amount over $21 per unit.
D)Any amount over $13 per unit.
E)Any amount over $22 per unit.

Question 63

Assume a company sells a given product for $75 per unit.How many units must be sold to break-even if variable selling costs are $12 per unit, variable production costs are $23 per unit, and total fixed costs are $700,000?

A)11,112 units.
B)13,462 units.
C)9,334 units.
D)17,500 units.
E)6,363 units.

Question 64

Which of the following best describes costs assigned to the product under the absorption costing method? Direct labor (DL)
Direct materials (DM)
Variable selling and administrative
Variable manufacturing overhead
Fixed selling and administrative
Fixed manufacturing overhead

A)DL, DM, variable selling and administrative costs, and variable manufacturing overhead.
B)DL, DM, and variable manufacturing overhead.
C)DL, DM, variable manufacturing overhead, and fixed manufacturing overhead.
D)DL and DM.
E)DL, DM, fixed selling and administrative, and fixed manufacturing overhead.

Question 65

Given Advanced Company's data, compute cost of finished goods in inventory under variable costing.

A)$285,000
B)$712,500
C)$427,500
D)$230,000
E)$345,000

Question 66

Given Advanced Company's data, compute cost per unit of finished goods under absorption costing.

A)$20.00
B)$34.17
C)$25.32
D)$23.00
E)$28.50

Question 67

Given Advanced Company's data, and the knowledge that the product is sold for $50 per unit and operating expenses are $200,000, compute the net income under variable costing.

A)$55,000
B)$67,500
C)$80,500
D)$122,500
E)$205,000

Question 68

Sea Company reports the following information regarding its production cost. $\begin{array}{ll}\text { Units produced } & 42,000 \text { units } \\\text { Direct labor } & \$ 35 \text { per unit } \\\text { Direct materials } & \$ 28 \text { per unit } \\\text { Variable overhead } & \$ 17 \text { per unit } \\\text { Fixed overhead } & \$ 105,000 \text { in total }\end{array}$ Compute production cost per unit under variable costing.

A)$28.00
B)$82.50
C)$80.00
D)$63.00
E)$35.00

Question 69

A company is currently operating at 80% capacity producing 5,000 units.Current cost information relating to this production is shown in the table below: $$\begin{array} { | l | c | } \hline & \text { Per Urit } \\\hline \text { Sales price } & \$ 34 \\\hline \text { Direct rraterial } & \$ 2 \\\hline \text { Direct labor } & \mathbf { \$ 3 } \\\hline \begin{array} { l } \text { Variable } \\\text { overhead }\end{array} & \$ 4 \\\hline \text { Fixed overhead } & \mathbf { \$ 5 } \\\hline\end{array}$$ The company has been approached by a customer with a request for a 100-unit special order.What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

A)Any amount over $34 per unit.
B)Any amount over $20 per unit.
C)Any amount over $14 per unit.
D)Any amount over $9 per unit.
E)Any amount over $5 per unit.

Question 70

Assume a company sells a given product for $12 per unit.How many units must be sold to break even if variable selling costs are $0.50 per unit, variable production costs are $3.50 per unit, and total fixed costs are $4,500,000?

A)391,305 units.
B)562,500 units.
C)529,412 units.
D)281,250 units.
E)375,000 units.

Question 71

Sea Company reports the following information regarding its production cost: $\begin{array}{ll}\text { Units produced } & 42,000 \text { units } \\\text { Direct labor } & \$ 35 \text { per unit } \\\text { Direct materials } & \$ 28 \text { per unit } \\\text { Variable overhead } & \$ 17 \text { per unit } \\\text { Fixed overhead } & \$ 105,000 \text { in total }\end{array}$ Compute production cost per unit under absorption costing.

A)$28.00
B)$82.50
C)$80.00
D)$63.00
E)$35.00

Question 72

Shore Company reports the following information regarding its production cost. $\begin{array}{ll}\text { Units produced } & 28,000 \text { units } \\\text { Direct labor } & \$ 23 \text { per unit } \\\text { Direct materials } & \$ 24 \text { per unit } \\\text { Variable overhead } & \$ 280,000 \text { in total } \\\text { Fixed overhead } & \$ 94,920 \text { in total }\end{array}$ Compute production cost per unit under absorption costing.

A)$57.00
B)$60.39
C)$47.00
D)$23.00
E)$24.00

Question 73

Shore Company reports the following information regarding its production cost: $\begin{array}{ll}\text { Units produced } & 28,000 \text { units } \\\text { Direct labor } & \$ 23 \text { per unit } \\\text { Direct materials } & \$ 24 \text { per unit } \\\text { Variable overhead } & \$ 280,000 \text { per unit } \\\text { Fixed overhead } & \$ 94,920 \text { in total }\end{array}$ Compute production cost per unit under variable costing.

A)$57.00
B)$60.39
C)$47.00
D)$23.00
E)$24.00

Question 74

Clear Company reports the following information for its first year of operations: $\begin{array}{ll}\text { Units produced this year } & 50,000 \text { units } \\\text { Units sold this year } & 49,000 \text { units } \\\text { Direct materials } & \$ 7 \text { per unit } \\\text { Direct labor } & \$ 3 \text { per unit } \\\text { Variable overhead } & \$ 210,000 \text { in total } \\\text { Fixed overhead } & ? \text { in total }\end{array}$ If the company's cost per unit of finished goods using absorption costing is $19.30, what is total fixed overhead?

A)$350,000
B)$255,000
C)$150,000
D)$249,900
E)$147,000

Question 75

Assume a company sells a given product for $90 per unit.How many units must be sold to break even if variable selling costs are $2 per unit, variable production costs are $31 per unit, and total fixed costs are $1,799,946?

A)31,578 units.
B)19,995 units.
C)20,454 units.
D)14,634 units.
E)899,973 units.

Question 76

Given Advanced Company's data, and the knowledge that the product is sold for $50 per unit and operating expenses are $200,000, compute the net income under absorption costing.

A)$55,000
B)$67,500
C)$80,500
D)$122,500
E)$205,000

Question 77

Given Advanced Company's data, compute cost of finished goods in inventory under absorption costing.

A)$285,000
B)$712,500
C)$427,500
D)$230,000
E)$345,000

Question 78

Given Advanced Company's data, compute cost per unit of finished goods under variable costing.

A)$20.00
B)$25.00
C)$21.88
D)$23.00
E)$28.50

Question 79

Which of the following best describes costs assigned to the product under the variable costing method? Direct labor (DL)
Direct materials (DM)
Variable selling and administrative
Variable manufacturing overhead
Fixed selling and administrative
Fixed manufacturing overhead

A)DL, DM, variable selling and administrative costs, and variable manufacturing overhead.
B)DL, DM, and variable manufacturing overhead.
C)DL, DM, variable manufacturing overhead, and fixed manufacturing overhead.
D)DL and DM.
E)DL, DM, fixed selling and administrative, and fixed manufacturing overhead.

Question 80

Cloudy Company reports the following information for the current year: $\begin{array}{ll}\text { Units produced this year } & 51,000 \text { units } \\\text { Units sold this year } & 53,000 \text { units } \\\text { Direct materials } & \$ 6 \text { per unit } \\\text { Direct labor } & \$ 3 \text { per unit } \\\text { Variable overhead } & \$ 255,000 \text { in total } \\\text { Fixed overhead } & ? \text { in total }\end{array}$ If the company's cost per unit of finished goods using absorption costing is $18, what is total fixed overhead?

A)$204,000
B)$212,000
C)$213,690
D)$222,070
E)$459,000