Question 1

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 2 using absorption costing would be
A) $(9,800)
B) $600
C) $(9,000)
D) $6,000

Accepted Answer

The answer of Taylor Ltd just finished its second year...

Question 2

During its first year of operations, Kima Ltd. experienced the following: If Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be
A) $45,000 lower
B) $270,000 lower
C) $315,000 higher
D) $270,000 higher

Accepted Answer

Under the variable costing method, only variable manufacturing costs are included in the cost of goods sold. Fixed manufacturing overhead costs are treated as period costs and are expensed in the period incurred. Therefore, the difference in operating profit between variable costing and absorption costing is equal to the amount of fixed manufacturing overhead costs that are included in the cost of goods sold under absorption costing, but expensed in the period incurred under variable costing.

In this case, the fixed manufacturing overhead for the year was $270,000. So, if Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be $270,000 lower.

Question 3

Under which costing method(s) are administrative and selling costs considered period expenses? I Absorption costing
II Throughput costing
III Variable costing
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Accepted Answer

The answer of Under which costing method(s) are administrative and...

Question 4

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: In how many months would variable costing profit be equal to absorption costing profit?
A) 0
B) 1
C) 2
D) 3

Accepted Answer

Variable costing profit equals absorption costing profit when there is no change in inventory levels, which occurs in 1 month.

Question 5

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: In how many months would variable costing profit be lower than absorption costing profit?
A) 1
B) 2
C) 3
D) 4

Accepted Answer

Variable costing profit is lower than absorption costing profit when inventory levels increase, as fixed overhead costs are deferred in inventory under absorption costing.

Question 6

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months:  For how many months would variable costing profit be higher than absorption?
A) 1
B) 2
C) 3
D) 4

Accepted Answer

The answer of Rubble Ltd develops an annual overhead budget...

Question 7

The chief executive officer told Nick, the production manager at BRS Ltd, to reduce costs and increase profits. In response, Nick decided to produce more units for inventory. BRS is most likely using
A) Variable costing.
B) Throughput costing.
C) Absorption costing.
D) Capacity-based costing.

Accepted Answer

Nick's decision to produce more units for inventory suggests that BRS Ltd is using absorption costing. Absorption costing involves allocating all manufacturing costs, including fixed overheads, to the products. This encourages companies to produce more units to spread fixed costs over a larger number of units and reduce the cost per unit. This can increase inventory levels, which may not necessarily increase profits as inventory carries additional costs such as storage, insurance, and potentially obsolescence.

Question 8

Which costing method matches costs and revenues most appropriately for generally accepted accounting principles?
A) Throughput costing
B) Absorption costing
C) Variable costing
D) Activity-based costing

Accepted Answer

Absorption costing matches costs and revenues most appropriately for generally accepted accounting principles. It allocates both fixed and variable manufacturing overheads to the cost of goods sold, making it useful for inventory valuation and income measurement. It is also required by GAAP for external financial reporting.

Question 9

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The ending inventory for year 2 using absorption costing would be
A) $51,000
B) $34,000
C) $22,000
D) $17,000

Accepted Answer

By using absorption costing, fixed manufacturing costs ($100,000 per year) are absorbed into the cost of each unit. 
To calculate the ending inventory for year 2 using absorption costing, we need to determine the unit product cost first:

Unit product cost = Variable manufacturing cost + Fixed manufacturing cost per unit 
Year 1: $35 + ($100,000/1,000) = $135 per unit 
Year 2: $35 + ($100,000/1,200) = $118.33 per unit

Next, we can determine the value of ending inventory for year 2:

Ending inventory = Number of units in ending inventory x Unit product cost 
Ending inventory = (1,000 - 400 + 1,200 - 1,200) x $118.33 = $34,000

Therefore, the best choice is B.

Question 10

Variable production overhead is allocated to inventory when using
A) Absorption costing and variable costing
B) Absorption costing and throughput costing
C) Variable costing and throughput costing
D) Absorption costing, variable costing, and throughput costing

Accepted Answer

Variable production overhead is allocated to inventory under absorption costing and variable costing. Throughput costing does not allocate any fixed or variable overhead to inventory.

Question 11

During its first year of operations, Kima Ltd. experienced the following:  The amount of variable costs deducted from revenues under the variable costing approach would be
A) $847,000
B) $831,000
C) $726,000
D) $742,000

Accepted Answer

The answer of During its first year of operations, Kima...

Question 12

Variable costing profit for the period 1^st July through 30^th September was $400. Inventory data are as follows: What is the profit if absorption costing is used? A) $300 B) $500 C) $400 D) $600

Accepted Answer

To calculate profit under absorption costing, we need to include fixed manufacturing overhead as part of the cost of goods sold. As there is no information given about fixed overhead expenses during the period, we cannot calculate the profit exactly. However, we know that under absorption costing, profit is generally higher than under variable costing when production exceeds sales. Therefore, we can conclude that the profit under absorption costing will be higher than $400, which is the profit calculated under variable costing. The only option that meets this requirement is option B, so the answer is B.

Question 13

During its first year of operations, Kima Ltd. experienced the following: The cost of goods sold under absorption costing would be
A) $585,000
B) $735,000
C) $945,000
D) $900,000

Accepted Answer

The answer of During its first year of operations, Kima...

Question 14

Direct materials costs are deducted from revenues when units are sold under which of the following costing method(s)? I Absorption
II Throughput
III Variable
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Accepted Answer

The answer of Direct materials costs are deducted from revenues...

Question 15

Any costs traced or allocated to inventory are expensed when units are sold in which of the following costing method(s)? I Absorption
II Throughput
III Variable
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Accepted Answer

The answer of Any costs traced or allocated to inventory...

Question 16

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity:  The volume variance was favorable in quarter(s)?
A) 2, 3, and 4
B) 2 and 3
C) 3 and 4
D) 3

Accepted Answer

The answer of General Ltd. budgeted fixed overhead costs of...

Question 17

Total production overhead is treated as a product cost when using
A) Absorption costing
B) Throughput costing
C) Variable costing
D) Throughput costing and absorption costing

Accepted Answer

Absorption costing is a method of costing that assigns all manufacturing costs to the product, including direct materials, direct labor, and both variable and fixed manufacturing overhead. Therefore, total production overhead is treated as a product cost under absorption costing.

B) Throughput costing only considers direct materials and direct labor as product costs and treats all other manufacturing costs as period costs.

C) Variable costing also treats only variable manufacturing costs as product costs and treats fixed manufacturing overhead as a period cost.

D) This statement is incorrect as it includes both A and B as the answer, which is not possible.

Question 18

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 1 using absorption costing would be
A) $6,000
B) $(9,000)
C) $(9,800)
D) $600

Accepted Answer

Using absorption costing, fixed manufacturing overhead expenses are assigned to the units produced. In year 1, Taylor Ltd produced 1,000 units but only sold 400, meaning that 600 units remain in ending inventory. These units absorbed a portion of the fixed manufacturing overhead expenses, resulting in a higher operating profit compared to variable costing.
The operating profit for year 1 using absorption costing can be calculated as follows:
Revenue (400 units sold × $20 per unit) = $8,000
Variable expenses (400 units sold × $10 per unit) = $4,000
Contribution margin = $4,000
Fixed manufacturing overhead expenses = $13,800
Net operating loss (absorption costing) = $9,800 (Option C)

Question 19

During its first year of operations, Kima Ltd. experienced the following: The amount of fixed costs deducted from revenues under the absorption costing approach would be
A) $410,000
B) $455,000
C) $390,000
D) $435,000

Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in the cost of goods sold and ending inventory. The amount of fixed costs deducted from revenues would be the total fixed manufacturing overhead, which is $410,000.

Question 20

Philpott's operating profit using absorption costing is $100. Its inventories using both absorption and variable costing are as follows:  Under variable costing, operating profit would be:
A) $102
B) $94
C) $100
D) $96

Accepted Answer

The answer of Philpott's operating profit using absorption costing is...

Quiz 7: Absorption, Variable and Throughput Costing

During its first year of operations, Kima Ltd. experienced the following: If Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be

Under which costing method(s) are administrative and selling costs considered period expenses? I Absorption costing II Throughput costing III Variable costing

The chief executive officer told Nick, the production manager at BRS Ltd, to reduce costs and increase profits. In response, Nick decided to produce more units for inventory. BRS is most likely using

Which costing method matches costs and revenues most appropriately for generally accepted accounting principles?

Variable production overhead is allocated to inventory when using

During its first year of operations, Kima Ltd. experienced the following: The amount of variable costs deducted from revenues under the variable costing approach would be

Variable costing profit for the period 1^st July through 30^th September was $400. Inventory data are as follows: What is the profit if absorption costing is used?

During its first year of operations, Kima Ltd. experienced the following: The cost of goods sold under absorption costing would be

Direct materials costs are deducted from revenues when units are sold under which of the following costing method(s) ? I Absorption II Throughput III Variable

Any costs traced or allocated to inventory are expensed when units are sold in which of the following costing method(s) ? I Absorption II Throughput III Variable

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity: The volume variance was favorable in quarter(s) ?

Total production overhead is treated as a product cost when using

During its first year of operations, Kima Ltd. experienced the following: The amount of fixed costs deducted from revenues under the absorption costing approach would be

Philpott's operating profit using absorption costing is $100. Its inventories using both absorption and variable costing are as follows: Under variable costing, operating profit would be: