Question 1

Which statement best reflects the relationship between absorption costing net income and variable costing net income?

Accepted Answer

Absorption costing includes fixed manufacturing overhead in inventory costs, so when production exceeds sales, some fixed costs are deferred in inventory, leading to higher net income compared to variable costing.

Question 2

Nute Corporation
The following information pertains to Nute Corporation (the per unit amounts apply to all years): $$\begin{array} { l l } 
\text { Beginning inventory } & 1,000 \text { units } \
\text { Ending Finished Goods Inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 40 \
\text { Direct materials per unit } & 20 \
\text { Variable manufacturing overhead per unit } & 10 \
\text { Fixed manufacturing overhead per unit } & 30 \
\text { Variable selling and administrative costs per unit } & 6 \
\text { Fixed selling and administrative costs per unit } & 14
\end{array}$$
-Refer to Nute Corporation. What is the relationship between absorption costing net income and variable costing net income?

Accepted Answer

Absorption costing net income is $150,000 greater than variable costing net income because absorption costing includes fixed manufacturing overhead in the cost of goods sold, while variable costing does not.

Question 3

Ella Company
Last year, Ella Company produced 10,000 units and sold 9,000 units at a sales price of $9 per unit. Costs for last year were as follows: $$\begin{array} { |l | r | } 
\hline\text { Direct materials } & \$ 10,000 \
\hline \text { Direct labour } & 15,000 \
\hline \text { Variable manufacturing overhead } & 5,000 \
\hline \text { Fixed manufacturing overhead } & 20,000 \
\hline \text { Variable selling expense } & 7,200 \
\hline \text { Fixed selling expense } & 5,000 \
\hline \text { Fixed administrative expense } & 12,000 \
\hline
\end{array}$$ Fixed manufacturing overhead is applied on the basis of expected production. Last year, the company expected to produce 10,000 units.The company had no beginning inventories.
-Refer to Ella Company. What is the value of ending Finished Goods Inventory using the absorption costing method?

Accepted Answer

Under absorption costing, ending inventory is valued by including all manufacturing costs (direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead). The cost per unit is calculated as follows:  Direct materials: $10,000 / 10,000 units = $1 per unit  Direct labor: $15,000 / 10,000 units = $1.50 per unit  Variable manufacturing overhead: $5,000 / 10,000 units = $0.50 per unit  Fixed manufacturing overhead: $20,000 / 10,000 units = $2 per unit  Total cost per unit = $1 + $1.50 + $0.50 + $2 = $5 per unit  Ending inventory = 1,000 units (10,000 produced - 9,000 sold) x $5 = $5,000.

Question 4

Nute Corporation
The following information pertains to Nute Corporation (the per unit amounts apply to all years): $$\begin{array} { l l } 
\text { Beginning inventory } & 1,000 \text { units } \
\text { Ending Finished Goods Inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 40 \
\text { Direct materials per unit } & 20 \
\text { Variable manufacturing overhead per unit } & 10 \
\text { Fixed manufacturing overhead per unit } & 30 \
\text { Variable selling and administrative costs per unit } & 6 \
\text { Fixed selling and administrative costs per unit } & 14
\end{array}$$
-Refer to Nute Corporation. What is the value of the ending Finished Goods Inventory using the variable costing method?

Accepted Answer

.

Question 5

How will net income react using the variable costing method, assuming monthly production volume is constant but fewer items are sold during the period than are produced in that same period?

Accepted Answer

With the variable costing method, fixed manufacturing costs are expensed in the period they are incurred instead of being allocated to units produced. Therefore, if fewer items are sold than produced in a period, the fixed manufacturing costs will not be allocated to those unsold units and will be expensed as period costs. This will result in lower net income compared to the absorption costing method, which allocates fixed manufacturing costs to all units produced, regardless of whether they are sold or not. Therefore, net income will be less than net income determined using the absorption costing method.

Question 6

Ella Company
Last year, Ella Company produced 10,000 units and sold 9,000 units at a sales price of $9 per unit. Costs for last year were as follows: $$\begin{array} { |l | r | } 
\hline\text { Direct materials } & \$ 10,000 \
\hline \text { Direct labour } & 15,000 \
\hline \text { Variable manufacturing overhead } & 5,000 \
\hline \text { Fixed manufacturing overhead } & 20,000 \
\hline \text { Variable selling expense } & 7,200 \
\hline \text { Fixed selling expense } & 5,000 \
\hline \text { Fixed administrative expense } & 12,000 \
\hline
\end{array}$$ Fixed manufacturing overhead is applied on the basis of expected production. Last year, the company expected to produce 10,000 units.The company had no beginning inventories.
-Refer to Ella Company. What is the operating income using the variable costing method?

Accepted Answer

The answer of Ella Company
Last year, Ella Company produced 10,000...

Question 7

Nute Corporation
The following information pertains to Nute Corporation (the per unit amounts apply to all years): $$\begin{array} { l l } 
\text { Beginning inventory } & 1,000 \text { units } \
\text { Ending Finished Goods Inventory } & 6,000 \text { units } \
\text { Direct labour per unit } & \$ 40 \
\text { Direct materials per unit } & 20 \
\text { Variable manufacturing overhead per unit } & 10 \
\text { Fixed manufacturing overhead per unit } & 30 \
\text { Variable selling and administrative costs per unit } & 6 \
\text { Fixed selling and administrative costs per unit } & 14
\end{array}$$
-Refer to Nute Corporation. What is the value of the ending Finished Goods Inventory using the absorption costing method?

Accepted Answer

The answer of Nute Corporation
The following information pertains to Nute...

Question 8

Ella Company
Last year, Ella Company produced 10,000 units and sold 9,000 units at a sales price of $9 per unit. Costs for last year were as follows: $$\begin{array} { |l | r | } 
\hline\text { Direct materials } & \$ 10,000 \
\hline \text { Direct labour } & 15,000 \
\hline \text { Variable manufacturing overhead } & 5,000 \
\hline \text { Fixed manufacturing overhead } & 20,000 \
\hline \text { Variable selling expense } & 7,200 \
\hline \text { Fixed selling expense } & 5,000 \
\hline \text { Fixed administrative expense } & 12,000 \
\hline
\end{array}$$ Fixed manufacturing overhead is applied on the basis of expected production. Last year, the company expected to produce 10,000 units.The company had no beginning inventories.
-Refer to Ella Company. What is the operating income for using the absorption costing method?

Accepted Answer

The answer of Ella Company
Last year, Ella Company produced 10,000...

Question 9

Westwood Company
Westwood Company has the following information the current year: $$\begin{array} { l l } 
\text { Selling sales price } & \$ 300 \text { per unit } \
\text { Variable production costs } & \$ 80 \text { per unit produced } \
\text { Variable selling and administrative expenses } &\$ 32 \text { per unit sold } \
\text { Fixed production costs } & \$ 400,000 \
\text { Fixed selling and administrative expenses } & \$ 280,000 \
\text { Units produced } & 20,000 \text { units } \
\text { Units sold } & 16,000 \text { units }
\end{array}$$ The company had no beginning inventories
-Refer to Westwood Company. What is the cost of ending Finished Goods Inventory using the variable costing method?

Accepted Answer

The answer of Westwood Company
Westwood Company has the following information...

Question 10

Triple M Company
Triple M Company had the following data for the month: $$\begin{array}{l}
\text { Variable costs per unit: }\
\begin{array} { l r } 
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 3.20 \
\text { Variable manufacturing overhead } & 1.00 \
\text { Variable selling expenses } & 0.40
\end{array}
\end{array}$$ Fixed manufacturing overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. The company started the month with 300 units in beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100 units were sold during the month at sales price of $14 per unit. Selling and administrative expense for the month, all fixed, totalled $3,600.
-Refer to Triple M Company. What is the operating income using the variable costing method?

Accepted Answer

The answer of Triple M Company
Triple M Company had the...

Question 11

Triple M Company
Triple M Company had the following data for the month: $$\begin{array}{l}
\text { Variable costs per unit: }\
\begin{array} { l r } 
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 3.20 \
\text { Variable manufacturing overhead } & 1.00 \
\text { Variable selling expenses } & 0.40
\end{array}
\end{array}$$ Fixed manufacturing overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. The company started the month with 300 units in beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100 units were sold during the month at sales price of $14 per unit. Selling and administrative expense for the month, all fixed, totalled $3,600.
-Refer to Triple M Company. What is the unit product cost using the variable costing method?

Accepted Answer

The answer of Triple M Company
Triple M Company had the...

Question 12

Assuming more items are sold during a period than are produced in that same period, which of the following will result?

Accepted Answer

When more units are sold than produced, the fixed manufacturing overhead cost per unit under absorption costing will be lower since total fixed manufacturing overhead is spread over more units, resulting in a higher net income under absorption costing compared to variable costing. Therefore, net income using the absorption costing method will be greater than net income using the variable costing method.

Question 13

Which statement best describes the general relationship between inventory values calculated using the variable costing method and inventory values calculated using the absorption costing method?

Accepted Answer

Under variable costing, only variable manufacturing costs are included in inventory values whereas under absorption costing, both variable and fixed manufacturing costs are included. Since fixed costs are not included in inventory values under variable costing, inventory values calculated using the variable costing method will be less than inventory values calculated using the absorption costing method.

Question 14

Triple M Company
Triple M Company had the following data for the month: $$\begin{array}{l}
\text { Variable costs per unit: }\
\begin{array} { l r } 
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 3.20 \
\text { Variable manufacturing overhead } & 1.00 \
\text { Variable selling expenses } & 0.40
\end{array}
\end{array}$$ Fixed manufacturing overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. The company started the month with 300 units in beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100 units were sold during the month at sales price of $14 per unit. Selling and administrative expense for the month, all fixed, totalled $3,600.
-Refer to Triple M Company. What is the unit product cost using the absorption costing method?

Accepted Answer

The answer of Triple M Company
Triple M Company had the...

Question 15

Westwood Company
Westwood Company has the following information the current year: $$\begin{array} { l l } 
\text { Selling sales price } & \$ 300 \text { per unit } \
\text { Variable production costs } & \$ 80 \text { per unit produced } \
\text { Variable selling and administrative expenses } &\$ 32 \text { per unit sold } \
\text { Fixed production costs } & \$ 400,000 \
\text { Fixed selling and administrative expenses } & \$ 280,000 \
\text { Units produced } & 20,000 \text { units } \
\text { Units sold } & 16,000 \text { units }
\end{array}$$ The company had no beginning inventories
-Refer to Westwood Company. What is the net income using the variable costing method?

Accepted Answer

Under variable costing, only variable costs are considered in calculating net income. The contribution margin per unit is $300 - $80 - $32 = $188. Total contribution margin is $188 * 16,000 = $3,008,000. Subtract fixed costs ($400,000 + $280,000 = $680,000) from the total contribution margin to get the net income: $3,008,000 - $680,000 = $2,328,000.

Question 16

Ella Company
Last year, Ella Company produced 10,000 units and sold 9,000 units at a sales price of $9 per unit. Costs for last year were as follows: $$\begin{array} { |l | r | } 
\hline\text { Direct materials } & \$ 10,000 \
\hline \text { Direct labour } & 15,000 \
\hline \text { Variable manufacturing overhead } & 5,000 \
\hline \text { Fixed manufacturing overhead } & 20,000 \
\hline \text { Variable selling expense } & 7,200 \
\hline \text { Fixed selling expense } & 5,000 \
\hline \text { Fixed administrative expense } & 12,000 \
\hline
\end{array}$$ Fixed manufacturing overhead is applied on the basis of expected production. Last year, the company expected to produce 10,000 units.The company had no beginning inventories.
-Refer to Ella Company. What is the value of ending Finished Goods Inventory using the variable costing method?

Accepted Answer

The answer of Ella Company
Last year, Ella Company produced 10,000...

Question 17

Westwood Company
Westwood Company has the following information the current year: $$\begin{array} { l l } 
\text { Selling sales price } & \$ 300 \text { per unit } \
\text { Variable production costs } & \$ 80 \text { per unit produced } \
\text { Variable selling and administrative expenses } &\$ 32 \text { per unit sold } \
\text { Fixed production costs } & \$ 400,000 \
\text { Fixed selling and administrative expenses } & \$ 280,000 \
\text { Units produced } & 20,000 \text { units } \
\text { Units sold } & 16,000 \text { units }
\end{array}$$ The company had no beginning inventories
-Refer to Westwood Company. What is the ending Finished Goods Inventory using the absorption costing method?

Accepted Answer

The answer of Westwood Company
Westwood Company has the following information...

Question 18

Gross margin is to absorption costing as which of the following is to variable costing?

Accepted Answer

Gross margin and gross profit are essentially the same thing in absorption costing and variable costing, respectively. However, since variable costing does not allocate fixed manufacturing overhead costs to products, there is no gross margin, but rather a calculation of contribution margin which represents the amount of revenue that's left after covering variable expenses. Therefore, the answer is D) contribution margin.

Question 19

Triple M Company
Triple M Company had the following data for the month: $$\begin{array}{l}
\text { Variable costs per unit: }\
\begin{array} { l r } 
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 3.20 \
\text { Variable manufacturing overhead } & 1.00 \
\text { Variable selling expenses } & 0.40
\end{array}
\end{array}$$ Fixed manufacturing overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. The company started the month with 300 units in beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100 units were sold during the month at sales price of $14 per unit. Selling and administrative expense for the month, all fixed, totalled $3,600.
-Refer to Triple M Company. What is the operating income using the absorption costing method?

Accepted Answer

Absorption costing includes fixed manufacturing overhead in the unit product cost. The fixed manufacturing overhead is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. So, the fixed manufacturing overhead applied to production is $4,000. The total manufacturing cost is $4,000 + (2,000 units x $8.60) = $20,200. The total cost of goods sold is $20,200 + (300 units x $8.60) = $22,980. The operating income is $29,400 - $22,980 = $3,540.

Question 20

Westwood Company
Westwood Company has the following information the current year: $$\begin{array} { l l } 
\text { Selling sales price } & \$ 300 \text { per unit } \
\text { Variable production costs } & \$ 80 \text { per unit produced } \
\text { Variable selling and administrative expenses } &\$ 32 \text { per unit sold } \
\text { Fixed production costs } & \$ 400,000 \
\text { Fixed selling and administrative expenses } & \$ 280,000 \
\text { Units produced } & 20,000 \text { units } \
\text { Units sold } & 16,000 \text { units }
\end{array}$$ The company had no beginning inventories
-Refer to Westwood Company. What is the net income using the absorption costing method?

Accepted Answer

The answer of Westwood Company
Westwood Company has the following information...

Quiz 8: Absorption and Variable Costing, and Inventory Management

Which statement best reflects the relationship between absorption costing net income and variable costing net income?

How will net income react using the variable costing method, assuming monthly production volume is constant but fewer items are sold during the period than are produced in that same period?

Assuming more items are sold during a period than are produced in that same period, which of the following will result?

Which statement best describes the general relationship between inventory values calculated using the variable costing method and inventory values calculated using the absorption costing method?

Gross margin is to absorption costing as which of the following is to variable costing?