Product sales: 1,000 units at $10 each
Variable manufacturing costs: $5.50 per unit
Fixed manufacturing overhead: $1,200
Variable selling and administrative costs: $.50 per unit sold
Fixed selling and administrative costs: $1,000
Units produced: 1,200
Beginning inventory: o units
Assuming operating income under variable costing is $ 1,800, operating Income under
absorption costing is:
Detailed Answer
Correct answer: (C)
Under absorption costing, the fixed manufacturing overheads are allocated to each unit. The cost to each unit is $1 ($1,200 .;. 1,200 units produced). With a sales price of $10 and variable costs of $7 (the $6 from the previous question plus the $1 of fixed manufacturing overhead), the gross margin is $3,000. Subtracting the fixed selling and admin costs from this, we get a profit of $2,000.
2
Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year is:
Planned Activity
Actual Activity
Beginning finished goods inventory
35,000
35,000
Sales
140,000
125,000
Production
140,000
130,000
The planned per unit cost figures shown in the next schedule were based on the estimated production and
sale of 140,000 units for the year. Valyn uses a predetermined manufacturing overhead rate for applying
manufacturing overhead to its product; therefore, a combined manufacturing overhead rate of $9.00 per
unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is
closed to the cost of goods sold account at the end of the reporting year.
Planned Costs Per unit
Planned Total cost
Incurred Costs
Direct materials
$12.00
$1,680,000
$1,560,000
Direct labor
9.00
1,260,000
1,170,000
Variable manufacturing overhead
4.00
560,000
520,000
Fixed manufacturing overhead
5.00
700,000
715,000
Variable selling expenses
8.00
1,120,000
1,000,000
Fixed selling expenses
7.00
980,000
980,000
Variable administrative expenses
3.00
420,000
425,000
Total
$5000
$ 7,000,000
$6,620,000
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s
planned unit manufacturing cost, which was the same as the current year’s planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end ofthe year. The planned
and actual unit selling price for the current year was $70.00 per unit.
The value of Valyn Corporation’s current year actual ending finished goods inventory under
the absorption-costing basis was:
Detailed Answer
Correct answer: (B)
Under absorption costing, the cost per unit produced is $30 ($12 + $9 + $4 + $5). This includes
direct materials and labor, variable manufacturing overhead and fixed manufacturing overhead. Ending
inventory was 40,000 units (35,000 units in beginning inventory and actual production was 5,000 units more
than actual sales). This gives an ending inventory value of $1,200,000 (40,000 units x $30 per unit).
3
Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year is:
Planned Activity
Actual Activity
Beginning finished goods inventory
35,000
35,000
Sales
140,000
125,000
Production
140,000
130,000
The planned per unit cost figures shown in the next schedule were based on the estimated production and
sale of 140,000 units for the year. Valyn uses a predetermined manufacturing overhead rate for applying
manufacturing overhead to its product; therefore, a combined manufacturing overhead rate of $9.00 per
unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is
closed to the cost of goods sold account at the end of the reporting year.
Planned Costs Per unit
Planned Total cost
Incurred Costs
Direct materials
$12.00
$1,680,000
$1,560,000
Direct labor
9.00
1,260,000
1,170,000
Variable manufacturing overhead
4.00
560,000
520,000
Fixed manufacturing overhead
5.00
700,000
715,000
Variable selling expenses
8.00
1,120,000
1,000,000
Fixed selling expenses
7.00
980,000
980,000
Variable administrative expenses
3.00
420,000
425,000
Total
$5000
$ 7,000,000
$6,620,000
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s
planned unit manufacturing cost, which was the same as the current year’s planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end ofthe year. The planned
and actual unit selling price for the current year was $70.00 per unit.
Valyn Corporation’s total fixed costs expensed under the absorption costing basis were:
Detailed Answer
Correct answer: (A)
Under absorption costing the fixed selling ($980,000) and administrative ($425,000) costs are
expensed in full. This is $1,405,000 of fixed costs. Additionally, $5 per unit of fixed manufacturing costs will
be expensed for each unit sold. There were 125,000 units sold, so this is $625,000. In total, this is now
$2,030,000 in expensed fixed costs. However, we are not done. The question states that any over- or underapplied overhead is closed to cost ofgoods sold. This means that any over- or under-applied overhead will be
deducted from (in the case of over-applied) or added to (in the case of under-applied) the amount we calculated above. Overhead was applied at $5 per unit produced. 130,000 units were produced, so this means
that $650,000 of fixed overhead was applied. The actual incurred was $715,000. This $65,000 of underapplied overhead needs to be added to cost of goods sold (a form of expensing). This brings the total to
$2,095,000 of fixed costs that were expensed.
4
Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn’s planned and actual operations for the calendar year is:
Planned Activity
Actual Activity
Beginning finished goods inventory
35,000
35,000
Sales
140,000
125,000
Production
140,000
130,000
The planned per unit cost figures shown in the next schedule were based on the estimated production and
sale of 140,000 units for the year. Valyn uses a predetermined manufacturing overhead rate for applying
manufacturing overhead to its product; therefore, a combined manufacturing overhead rate of $9.00 per
unit was employed for absorption costing purposes. Any over- or underapplied manufacturing overhead is
closed to the cost of goods sold account at the end of the reporting year.
Planned Costs Per unit
Planned Total cost
Incurred Costs
Direct materials
$12.00
$1,680,000
$1,560,000
Direct labor
9.00
1,260,000
1,170,000
Variable manufacturing overhead
4.00
560,000
520,000
Fixed manufacturing overhead
5.00
700,000
715,000
Variable selling expenses
8.00
1,120,000
1,000,000
Fixed selling expenses
7.00
980,000
980,000
Variable administrative expenses
3.00
420,000
425,000
Total
$5000
$ 7,000,000
$6,620,000
The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s
planned unit manufacturing cost, which was the same as the current year’s planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned
and actual unit selling price for the current year was $70.00 per unit.
The difference between Valyn Corporation’s operating income calculated on the absorption
costing basis and calculated on the variable costing basis was:
Detailed Answer
Correct answer: (B)
The difference in income between these two methods is calculated as the fixed cost per unit x
change in the level of inventory. The fixed cost per unit was $5 and the change in inventory was 5,000 units. This is a $25,000 difference between the two methods. The difference in income can be calculated in this way because the beginning finished goods inventory is valued at the same per unit manufacturing cost as the current year’s planned per unit manufacturing cost and there is no beginning work-in-process Inventory.
5
When a firm prepares financial reports using absorption costing:
Detailed Answer
Correct answer: (C)
By definition
6
Inventory turnover is equal to:
Detailed Answer
Correct answer: (C)
Cost of goods sold divided by average inventory.
7
In Maximization case of transportation problem we convert into minimization by subtracting all the elements from the ______________.
Detailed Answer
Correct answer: (C)
highest element.
8
In transportation problem NWC stands for ______________.
Detailed Answer
Correct answer: (A)
North West Corner
9
Oxides of nitrogen & carbon monoxide are known as air ______________ causing and damaging to human health.
Detailed Answer
Correct answer: (A)
pollution.
10
At the end of its fiscal year, Jubal Manufacturing recorded the data below:
Prime cost $800,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Variable selling and other expenses 80,000
Fixed selling and other expenses 40,000
If Jubal uses variable costing, the inventoriable costs for the fiscal year are
Detailed Answer
Answer (B) is correct.
REQUIRED: The inventoriable costs using the variable costing method.
DISCUSSION: The only costs capitalized are the variable costs of manufacturing. Prime costs (direct materials and direct labor) are variable.
Prime costs (direct materials and direct labor) $800,000
Variable manufacturing overhead 100,000
Total inventoriable costs $900,000
Answer (A) is incorrect. The amount of $800,000 equals only the prime costs. Answer (C) is incorrect. The amount of $980,000 includes the variable selling and other expenses. Answer (D) is incorrect. The amount of $1,060,000 equals inventoriable costs under absorption costing
