Absorption and Abc
Absorption and Abc
23. Which of the following is typically regarded as a cost driver in traditional accounting practices?
A. number of purchase orders processed C. number of transactions processed
B. number of customers served D. number of direct labor hours worked
21. Which of the following is not a trait of a traditional cost management system?
A. unit-based drivers C. focus on managing activities
B. allocating intensive D. narrow and rigid product costing
Overhead allocation
35. Conventional product costing uses which of the following procedures?
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced directly to product.
D. All overhead costs are expensed as incurred.
36. The overhead rates of the traditional approach to product costing use
A. nonunit-based cost drivers C. unit-based cost drivers
B. process costing D. job-order costing
32. Product costs can be distorted if a unit-based cost driver is used and
A. nonunit-based overhead costs are a significant proportion of total overhead
B. the consumption ratios differ between unit-based and nonunit-based input categories
C. both a and b
D. neither a nor b
Activity-based management
1. Which system focuses on the management of activities with the objective of improving the value received by the
customer and the profit received by providing this value?
A. activity-based management C. contemporary cost control
B. traditional cost management system D. standard cost system
5. Primary concepts under activity-based management include all of the following except:
A. activity analysis C. activity-based costing
B. total quality management D. cost driver analysis
18. Which of the following falls under the Activity-Based Management umbrella?
Continuous Business process Activity-based
improvement reengineering costing
A. NO NO YES
B. YES NO NO
C. YES YES YES
D. NO YES NO
29. All of the following are ways that activities can be managed to achieve improvements in a process, except
A. activity induction C. activity elimination
B. activity selection D. activity sharing
32. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
A. will have higher product costs than one using a single overhead rate.
B. cannot compute budget variances.
C. will incur additional costs for recordkeeping.
D. must have a preponderance of fixed overhead costs.
Activity-based costing
Reason
21. Of the following, which is the best reason for using activity-based costing?
Benefits
2. The primary benefit of using ABC is that it provides
A. better management decisions.
B. enhanced control over overhead costs.
C. more cost pools.
D. more accurate product costing.
8. The presence of any of the following factors would suggest a switch to ABC except when
A. product line differ greatly in volume.
B. overhead costs constitute a minor portion of total costs.
C. the manufacturing process has changed significantly.
D. production managers are ignoring data provided by the existing system.
Characteristics
6. Which of the following is typical of activity-based costing systems?
A. Use of a single predetermined overhead rate.
B. Use of direct labor hours or direct labor cost to assign overhead.
C. Assumption of correlation between direct labor and incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.
Application
22. ABC should be used in which of the following situations?
Limitation
9. Which of the following is a limitation of activity-based costing?
A. More cost pools C. Poorer management decisions
B. Less control over overhead costs D. Some arbitrary allocations continue
12. Each of the following is a limitation of activity-based costing system except that:
A. it can be expensive to use.
B. it is more complex than the traditional costing.
C. more cost pools are used.
D. some arbitrary allocations still continue.
Cost assignment
15. Which of the following lists the most to least accurate method of cost assignment?
A. direct tracing, driver tracing, allocation C. driver tracing, direct tracing, allocation
B. allocation, direct tracing, driver tracing D. allocation, driver tracing, direct tracing
Steps
16. A well-designed activity-based costing system starts with
A. identifying the activity-cost pools.
B. computing the activity-based overhead rate.
C. assigning manufacturing overhead costs for each activity cost pool to products.
D. analyzing the activities performed to manufacture a product.
65. Successful activity-based costing (ABC) implementation depends upon the firm having:
A. top management support
B. ABC linked to its competitive strategy
C. adequate resources
D. all of the above
24. A base used to allocate the cost of a resource to the different activities using that resource is
A. resource driver C. activity driver
B. final cost object D. driver
42. A base used to allocate the cost of products, customers, or other final cost objects is a(n)
A. resource driver C. activity driver
B. final cost object D. driver
38. Activity drivers differ from resource drivers in that activity drivers
A. are used to assign indirect costs while resource drivers are used to assign direct costs
B. assign the cost of activities to cost objects while resource drivers assign the cost of resources to activities
C. assign the cost of activities to resources and resource drivers assign the cost of resources to cost objects
D. are used to assign direct costs while resource drivers are used to assign indirect costs
Cost pool
31. A cost pool is
A. all of the costs of a particular department.
B. all costs in a group such as variable costs or discretionary fixed costs.
C. all costs related to a product or product line.
D. all costs that have the same driver.
Cost allocation
33. Activity-based overhead rates are more useful than a single plant-wide rate if
A. overhead costs are driven by several activities.
B. direct labor cost varies significantly from department to department.
C. all products require about the same amounts of all activities.
D. manufacturing overhead costs are nearly all fixed.
A. departments. C. products.
B. processes. D. activities.
35. Which of the following best describes the flow of overhead costs in an activity-based costing system?
A. Overhead costs => direct labor cost or hours => products
B. Overhead costs => products
C. Overhead costs => activity cost pools => cost drivers => products
D. Overhead costs => machine hours => products
36. Finding a single cost driver that changes in the same proportion as all the variable factory overhead costs is:
A. simplified by breaking out the fixed portion of overhead cost
B. the first step in variable overhead cost management
C. difficult, but manageable
D. impossible
Activity levels
Unit level
46. Unit-level costs are costs that
A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site
Batch level
54. Batch-level resources are acquired
A. for individual units of product or service
B. for making a group of similar products
C. to produce and sell a specific product
D. to provide a general capacity to produce products and services.
Product-sustaining level
43. Examples of activities at the product level of costs include
A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting and security
56. In a pure activity-based cost system which of the following might be treated as period costs?
A. facility-level costs C. batch-level costs
B. product-level costs D. unit-level costs
48. An activity that adds cost to the product but does not increase it market value is a
A. value-added activity C. cost driver
B. cost-benefit activity D. nonvalue-added activity
50. When a firm redesigns a product to reduce the number of component parts, the firm is
52. Under activity-based costing, benchmarks for product cost should contain an allowance for
66. Page Company’s cost allocation and product costing procedures follow activity-based costing principles. The
following activities have been identified and classified as being either value-adding or non-value adding as to
each product.
1. Raw materials storage activity
2. Design engineering activity
3. Drill press activity
4. Heat treatment activity
5. Quality control inspection activity
6. Issuance of purchase order activity
How are the foregoing activities classified?
Value-adding Non-value adding
A. 1, 2, 5, 6 3, 4
B. 1, 2, 4 3, 5, 6
C. 2, 4, 5 1, 3, 6
D. 2, 3, 4 1, 5, 6
Productivity Measures
51. Manufacturing cycle efficiency is a measure of
A. bottlenecks. C. efficiency.
B. effectiveness. D. quality.
53. The amount of time between the development and the production of a product is
Traditional Costing
Overhead cost per unit
i
. Mary Manufacturing Company manufactures two products (X and Y). The overhead costs of P29,000 have
been divided into three cost pools that use the following activity drivers:
Product No. of Orders No. of Labor Transactions No. of Labor Hours
X 30 100 1,000
Y 20 300 4,000
Cost per pool P5,000 P4,000 P20,000
Using traditional costing, what is the amount of overhead cost to be assigned to Product Y using labor hours
as the allocation base?
A. P21,750 C. P16,000
B. P 5,800 D. P23,200
. Answer: D
Total overhead (5,000 + 4,000 + 20,000) 29,000
Allocated OH to Product Y based on labor hours: 4 ÷ 20 x 29,000 P23,200
Unit cost
ii
. Arid Company produces products BH and XP. The direct cost of BH is P250 per unit and XP is P350 per unit.
Fifty units of BH and 150 units of XP were produced. Overhead amounting to P130,000 is allocated to products
using direct costs as the relevant cost driver.
The cost of XP per unit amounts to
A. P750 C. P1,050
B. P1,000 D. P1,250
. Answer: D
BH: (50 x P250) P 12,500
XP: (150 x P350) 52,500
Total direct costs P 65,000
Activity-based Costing
Batch-level costs
Allocated overhead
iii
. One of Alien Company’s activity cost pools is machine setups, with estimated overhead of P300,000. Alien
produces slacks (400 setups) and shirts (600 setups). How much of the machine setup cost pool should be
assigned to slacks?
A. P 0 C. P150,000
B. P120,000 D. P180,000
. Answer: B
Setup cost per setup (P300,000 ÷ 1,000) P300
Setup costs assigned to slacks (400 x P300) P120,000
iv
. The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60 setups,
respectively. The overhead assigned to each product is
A. Product A P8,000, Product B P8,000 C. Product A P8,000, Product B P6,000
B. Product A, P6,000, Product B P6,000 D. Product A, P6,000, Product B P8,000
. Answer: C
Overhead allocated to:
Product A: (80 x P100) P8,000
Product B: (60 x P100) 6,000
v
. Sylvia Company has identified an activity cost pool to which it has allocated estimated overhead of P1,920,000
and determined the expected use of cost drivers per that activity to by 160,000 inspections. Widgets require
40,000 inspections, Gadgets 30,000 inspections, and Targets, 90,000 inspections.
The overhead assigned to each product is
A. Widgets P40,000, Gadgets P30,000, Targets P90,000
B. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
C. Widgets P360,000, Gadgets P480,000, Targets P1,080,000
D. Widgets P480,000, Gadgets P360,000, Targets P1,080,000
. Answer: D
Overhead rate per inspection: (P1,920,000 ÷ 160,000) P12
Overhead assigned to:
Widgets: (40,000 x P12) P 480,000
Gadgets (30,000 x P12) 360,000
Targets (90,000 x P12) 1,080,000
Unit cost
xi
. Wesleyan University Hospital plans to use activity-based costing to assign hospital indirect costs to the care
of patients. The hospital has identified the following activities and activity rates for the hospital’s indirect
costs:
Activity Activity Rate
Room and meals P150 per day
Radiology P 95 per image
Pharmacy P 20 per physician order
Chemistry lab P 85 per test
Operating room P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The activity information
associated with the two patients is as follows:
Patient Flor Patient Laura
Number of days 7.0 3
Number of images 4.0 2
Number of physician orders 5.0 1
Number of tests 6.0 2
Number operating room hours 4.5 1
Determine the activity cost associated with Patient Flor:
A. P4,500 C. P4,495
B. P4,550 D. P4,515
. Answer: D
Room and meals (7 days x P150) P1,050
Radiology (4 images x P95) 380
Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
Total P4,515
Total cost
xii
. Food Factory, Inc., has identified the following cost drivers for its expected overhead costs for the year:
Budgeted Cost Cost Driver
Cost Pools Cost Driver Level
Setup P 80,000 Number of setups 100
Ordering 40,000 Number of orders 500
Maintenance 100,000 Machine hours 2,500
Power 20,000 Kilowatt hours 5,000
Total direct labor hours budgeted = 1,000 hours.
The following data applies to one of the products completed during the year:
Cost Product X Activity Driver Driver Consumption
Direct materials P2,000 Number of setups 2
Direct labor P2,400 Number of orders 5
Units completed 200 Machine hours 25
Direct labor hours 80 Kilowatt hours 50
If the activity-based cost drivers are used to allocate overhead cost, the total cost of Product X will be:
A. P7,400 C. P4,400
B. P7,800 D. P7,600
Answer: D
Setup P 80,000 ÷ 100 x 2 P1,600
Ordering P 40,000 ÷ 500 x 5 400
Maintenance P100,000 ÷ 2,500 x 25 1,000
Power P 20,000 ÷ 5,000 x 50 200
Total overhead assigned P3,200
Direct materials 2,000
Direct labor 2,400
Total costs assigned P7,600
xiii
. Ray Manufacturing has four categories of overhead. The four categories and expected overhead costs for
each category for next year are listed as follows:
Maintenance P510,000
Material handling 250,000
Setups 60,000
Inspection 210,000
Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours.
100,000 direct labor hours are budgeted for next year.
The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this
job would result in a new business in future years. Usually bids are based upon full manufacturing costs plus
10 percent.
Estimates for the proposed job are as follows:
Direct materials P30,000
Direct labor (8,000 hours) P24,000
Number of material moves 100
Number of inspections 120
Number of setups 24
Number of machine hours 4,000
The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.
Expected activity for the four activity drivers that would be used are:
Machine hours 60,000
Material moves 20,000
Setups 3,000
Quality inspections 12,000
What is the total cost of the proposed job if Ray Manufacturing uses direct labor hours as its only activity
driver?
A. P144,000 C. P112,400
B. P136,400 D. P106,400
Answer: B
Direct materials P 30,000
Direct labor 24,000
Overhead 82,400
Total cost of the job P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) ÷ 100,000 P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30 82,400
xvii
. What would be the per unit overhead cost for Model A if activity-based costing were used?
A. P20.50 C. P82.00
B. P74.00 D. P76.00
Answer: B
Activity rates;
Setups: (P90,000 ÷ 500 setups) P 180
Shipping: (P140,000 ÷ 700 shipments) 200
Engineering (P180,000 ÷ 30 change orders) 6,000
Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to
its production. The plant has two manufacturing processes, process A and process B. Other processes include
engineering, product handling, and procurement. The product relational table for Special is as follows:
Activity Usage
Activity Driver # and Name Product A: Product B:
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500
xxii
. How much overhead cost will be assigned to product B using process B?
A. P1,200,000 C. P120,000
B. P960,000 D. P150,000
Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000
xxiii
. What is the unit cost of Product A?
A. P4.71 C. P4.80
B. P252.00 D. P5.30
Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 ÷ 200,000) P 5.30
xxiv
. Dagger Corporation has the following activities: creating bills of materials (BOM), studying manufacturing
capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger
accounts reveal the following expenditures for manufacturing engineering:
Salaries P150,000
Equipment 80,000
Supplies 20,000
Total P250,000
The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the
equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries
are for two engineers. One is paid P100,000, while the other earns P50,000. The P100,000 engineer spends
40% of his time training employees in new processes and 60% of his time on improving processes. The
remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions:
Creating BOMs 25%
Studying capabilities 10%
Improving processes 20%
Training employees 25%
Designing tooling 20%
What is the cost assigned to the designing tooling activity?
A. P162,500 C. P50,000
B. P 66,000 D. P250,000
Answer: B
Cost of use of equipment (0.65 x P80,000) P 52,000
Supplies (0.2 x P20,000) 4,000
Salary of second engineer (0.2 x P50,000) 10,000
Total cost assigned to designing tool activity P 66,000
xxv
. Set up cost chargeable per unit of M accounting for unused capacity amounts to
A. 2.50 C. 5.00
B. 2.75 D. 5.50
Answer: C
Setup cost chargeable to Product M: (40/55 x P5,50 P4,000
Setup cost per unit, Product M: (P4,000 ÷ 800) P 5.00
xxvi
. Ordering cost chargeable per unit of N ignoring unused capacity amounts to
A. 2.00 C. 3.00
B. 2.67 D. 4.00
Answer: B
Ordering costs chargeable to Product M: 5/15 x P3,200) P1,066.67
Ordering cost per unit, Product M: (P1,066.67 ÷ 400) P 2.67
xxvii
. The cost of unused capacity excluding labor costs amounts to
A. 11,260 C. 11,856
B. 11,460 D. 14,856
Answer: D
Activity rate:
Setup cost: (5,500 ÷ 55) P100 per setup
Ordering: (P3,200 ÷ 20) P160 per order
Receiving cost: (P2,400 ÷ 40) P60 per receipt
Product development: (P2,800 ÷ 400) P 7 per part
General management: (P7,200 ÷ 8,000) P 0.90 per hour
Security: (P9,000 ÷ 9,000) P1.00 per sq. m.
Labor cost: (P56,000 ÷ 6,000) P9.33 per DLH
ii
.Answer: D
BH: (50 x P250) P 12,500
XP: (150 x P350) 52,500
Total direct costs P 65,000
iii
.Answer: B
Setup cost per setup (P300,000 ÷ 1,000) P300
Setup costs assigned to slacks (400 x P300) P120,000
iv
.Answer: C
Overhead allocated to:
Product A: (80 x P100) P8,000
Product B: (60 x P100) 6,000
v
.Answer: D
Overhead rate per inspection: (P1,920,000 ÷ 160,000) P12
Overhead assigned to:
Widgets: (40,000 x P12) P 480,000
Gadgets (30,000 x P12) 360,000
Targets (90,000 x P12) 1,080,000
vi
.Answer: A
Cost of change orders 10 x 600 P6,000
Cost of change order per hour P6,000/5,000 hours P1.20/MH
Cost of change order per unit:
E: 2 hours x P1.20 P2.40
M: 3 hours x P1.20 P3.60
vii
.Answer: A
Materials cost:
Product X: (50 x P100) P 5,000
Product Y: (150 x P230) 34,500
Total P39,500
Material handling cost based on direct materials cost: (P12,000 ÷ P39,500) P0.3038
Material handling cost per unit chargeable to:
Product X: (50,000 x P0.3038 ÷ 50) P 30.38
Product Y: (34,500 x P0.3038 ÷ 150) P 69.87
viii
.Answer: B
Handling cost per move (P200,000 ÷ 100 moves) P2,000
Model A: 20 x P2,000 ÷ 200 P 200
Model B: 80 x P2,000 ÷ 400 P 400
ix
.Answer: C
Cost of change orders based on ABC
E: 8 x P600 ÷ 1,000 P4.80
M: 2 x P600 ÷ 1,000 P1.20
x
.Answer: C
Activity Rates:
Setup (P100,000 ÷ 500) P200.00
Ordering (P40,000 ÷ 3,200) 12.50
Maintenance (P200,000 ÷ 4,000) 50.00
Power (P20,000 ÷ 80,000) 0.25
Overhead costs assigned to Job 500:
Setup (2 x P200) P 400
Ordering (8 x P12.50) 100
Maintenance (40 x P50) 2,000
Power (60 x P025) 15
Total P2,515
xi
.Answer: D
Room and meals (7 days x P150) P1,050
Radiology (4 images x P95) 380
Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
Total P4,515
xii
.Answer: D
Setup P 80,000 ÷ 100 x 2 P1,600
Ordering P 40,000 ÷ 500 x 5 400
Maintenance P100,000 ÷ 2,500 x 25 1,000
Power P 20,000 ÷ 5,000 x 50 200
Total overhead assigned P3,200
Direct materials 2,000
Direct labor 2,400
Total costs assigned P7,600
xiii
.Answer: B
Direct materials P 30,000
Direct labor 24,000
Overhead 82,400
Total cost of the job P136,400
OH rate per DLH:
(P510,000 + P250,000 + P60,000 + P210,000) ÷ 100,000 P10.30 per DLH
Overhead allocated to proposed job: 8,000 x 10.30 82,400
xiv
.Answer: D
Total DLH used (1,000 x 1) + (20 x 5) 2,000
Overhead allocated to Model 2 (0.5 x P480,000) P240,000
Overhead per unit of Model 2: (P240,000 ÷ 200) P1,200
xv
.Answer: C
Overhead allocated to Model 2:
Handling (P140,000 ÷ 140 x 40 moves) P 40,000
Testing (P150,000 ÷ 375 x 125) 50,000
Labor-related (P190,000 ÷ 2) 95,000
Total P185,000
Overhead per unit, Model 2 (P185,000 ÷ 200) P925
xvi
.Answer: B
Overhead rate per DLH (P410,000 ÷ 10,000) P41
Overhead applied to Model A: (4,000 x P41) P164,000
Overhead applied to Model A per unit: (P164,000 ÷ 2,000) P82
xvii
.Answer: B
Activity rates;
Setups: (P90,000 ÷ 500 setups) P 180
Shipping: (P140,000 ÷ 700 shipments) 200
Engineering (P180,000 ÷ 30 change orders) 6,000
xviii
.Answer: A
Total overhead costs: (P400,000 + P900,000 + P300,000) P1,600,000
Overhead applied to X-MAN using direct labor hours
(15,000/40,0000) x P1,600,000 P600,000
xix
.Answer: B
Activity Rates:
Setups (400,000/1,000 setups) P400 per set up
Machining (900,000/50,000 MH) P 18 per MH
Inspection (300,000/1,500 Inspection) P200 per inspection
Overhead assigned to Machman using ABC:
(400xP400) + (26,000xP18) + (700xP200) P768,000
xx
.Answer: C
Direct materials P1,000
Direct labor 4,000
Maintenance 500 x 4 2,000
Inspection 4 x 100 400
Total P7,400
Activity Rate:
Inspection (P150,000 ÷ 1,500) P100/inspection
Maintenance (P100,000 ÷ 25,000) P4/MH
xxi
.Answer: D
OH rate per DLH: (P250,000 ÷ 50,000 DLH) = P5.00
Cost of the proposed job:
Direct materials P1,000
Direct labor 4,000
Overhead (800 hours x P5 4,000
Total P9,000
xxii
.Answer: D
OH assigned to Product B: 6,000 MH x P15 per MH = P150,000
xxiii
.Answer: D
Purchasing cost (250 x P200) P 50,000
Processing costs (80,000 x P12) 960,000
Engineering cost (1,250 x P40) 50,000
Total costs assigned to Product A P1,060,000
Unit cost: (P1,060,000 ÷ 200,000) P 5.30
xxiv
.Answer: B
Cost of use of equipment (0.65 x P80,000) P 52,000
Supplies (0.2 x P20,000) 4,000
Salary of second engineer (0.2 x P50,000) 10,000
Total cost assigned to designing tool activity P 66,000
xxv
.Answer: C
Setup cost chargeable to Product M: (40/55 x P5,50 P4,000
Setup cost per unit, Product M: (P4,000 ÷ 800) P 5.00
xxvi
.Answer: B
Ordering costs chargeable to Product M: 5/15 x P3,200) P1,066.67
Ordering cost per unit, Product M: (P1,066.67 ÷ 400) P 2.67
xxvii
.Answer: D
Activity rate:
Setup cost: (5,500 ÷ 55) P100 per setup
Ordering: (P3,200 ÷ 20) P160 per order
Receiving cost: (P2,400 ÷ 40) P60 per receipt
Product development: (P2,800 ÷ 400) P 7 per part
General management: (P7,200 ÷ 8,000) P 0.90 per hour
Security: (P9,000 ÷ 9,000) P1.00 per sq. m.
Labor cost: (P56,000 ÷ 6,000) P9.33 per DLH
Activity-based Costing
7. The last step in activity-based costing is to
A. identity the major activities that pertain to the manufacture of specific products
B. allocate manufacturing overhead costs to activity cost pools
C. Identify the cost drivers that accurately measure each activity’s contribution to the finished product
D. Assign manufacturing overhead costs for each activity cost pool to products
2. Scheduling, setting up, and moving are examples of activities that are classified as
11. Classify the following as volume (unit) base or non-volume (activity) base:
1. Number of purchase orders issued
2. Direct labor hours
3. Number of machine hours
4. Number of set ups
5. Number of receiving reports issued
6. Direct material cost
A. B. C. D.
Volume (Unit) Base 1, 4, 5, 6 1, 4, 5 1, 2, 3, 4, 5 2, 3, 6
Non-volume (Activity) 2, 3 2, 3, 6 6 1, 4, 5
Base
12. McMd's standard cost card indicates that it takes three hours of direct labor to produce one unit of product. A recently
conducted time and motion study revealed that it should take one hour to produce the same unit. Labor cost is P150 per
hour.
McMd's value-added, and non value-added costs would be
A. P150 and P0 C. P150 and P300
B. P0 and P150 D. P450 and P0
13. Moon Company makes two products, Alpha and Beta. Alpha is being introduced this period, whereas Beta has been in
production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. The only
relevant overhead item is the cost of engineering change orders. Alpha and Beta are expected to require eight and two
change orders, respectively. Alpha and Beta are expected to require 2 and 3 machine hours, respectively. The cost of
a change order is P600.
If Moon is using direct tracing, the amount of overhead per unit that will be assigned to Alpha and Beta, respectively,
are
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively
Absorption Costing & Variable Costing
Variable Costing
47. Which of the following statements is true for a firm that uses variable (direct) costing?
A. The cost of a unit of product changes because of changes in the number of units manufactured
B. Profits fluctuate with sales
C. An idle facility variation is calculated
D. Product costs include “direct” (variable) administrative costs
21. The following information was extracted from the first year of absorption-based accounting records of NOLI Co.
Total fixed costs incurred .P100,000
Total variable costs incurred 50,000
Total period costs incurred .70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales Price P 12
Based on variable costing, if NOLI Company had sold 12,001 units instead of 12,000, its income before taxes would
have been
A. P 9.50 higher C. P8.50 higher
B. P11.00 higher D. P8.33 higher
49. Coo Company manufactures a single product using standard costing. Variable production costs; are P12 and fixed
production costs are P125,000. Coo uses a normal activity of 12,500 units to set its standard costs. Coo began the year
with 1,000 unite in inventory, produced 11,000 units, and sold 11,500 units.
The standard cost of goods sold under variable costing would be
A. P115,000 C. P242,000
B. P138,000 D. P253,000
Absorption Costing
15. When a firm prepares financial reports by using absorption costing
A. profits will always increase with increase in sales
B. profits will always decrease with decreases in sales
C. profits may decrease with increased sales even if there is no change in selling prices and costs
D. decreased output and constant sales result in increased profits
16. Toshiba Company incurred the following costs in manufacturing desk calculators:
Direct materials . P70
Indirect materials (variable) 20
Direct labor 40
Indirect labor (variable) 30
Other variable factory overhead 50
Fixed factory overhead 140
Variable selling expenses 100
Fixed selling expenses 70
During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using absorption costing?
A. P520 C. P420
B. P350 D. P310
50. Colger Company manufacture a single product using standard costing. Variable production costs are P12 and fixed
production costs are P125,000. Colger uses a normal activity of 12,500 units to set its standard costs. Colger began the
year with 1,000 units in inventory, produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under
absorption costing would be
A. P115,000 C. P242,000
B. P132,000 D. P253,000
51. The Trinkets Company estimated the following data for the coming year:
Fixed manufacturing costs P565,000
Variable production costs per peso of sales
Materials P0.125
Direct labor 0.150
Variable overhead 0.075
Variable selling costs per peso of sales 0.150
Trinkets estimates its sales for the coming year to be P2,000,000.
The expected costs of goods sold for the coming year is
A. P1,265,000 C. P1,115,000
B. P1,565,000 D. P700,000
52. Alma Company budgeted that factory overhead for 2004 and 2005 would be P60,000 for each year. The predicted and
actual activity for 2004 and 2005 were 30,000 and 20,000 direct labor hours, respectively.
2004 2005
Sales in units 25,000 25,000
Selling price per unit P10 P10
Direct materials and direct labor per unit P5 P5
The company assumes that the long-run production level is 20,000 direct labor hours per year. The actual factory
overhead cost for the end of 2004 and 2005 was P60,000. Assume that it takes one direct labor hour to make one
finished unit.
When the annual estimated factory overhead rate is used, the gross profits for 2004 and 2005, respectively, are
A. P75,000 and P75,000 C. 75,000 and P55,000
B. P125,000 and P125,000 D. P75,000 and P50,000
14. Apo Company’s variable costing income statement for August appears below:
Sales (P15 per unit) P600,000
Less variable costs:
Variable cost of goods sold:
Beginning inventory P 72,000
Add variable cost of goods manufactured 315,000
Goods available for sale 387,000
Less ending inventory 27,000
Variable cost of goods sold 360,000
Variable selling expenses 80,000
Total variable costs 440,000
Contribution margin 160,000
Fixed costs:
Fixed manufacturing P 105,000
Fixed selling and administrative 35,000
Total fixed costs 140,000
Net income P 20,000
The company produces 35,000 units each month. Variable production costs per unit and total fixed
Using the absorption costing method, the peso value of the company’s inventory on August 31 and
A. B. C. D.
Inventory Value P27,000 P27,000 P36,000 P36,000
Absorption Income P35,000 P 5,000 P 5,000 P35,000
54. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is from the financial
records of the company for the year.
Total manufacturing costs were P2,500,000
Costs of goods of manufactured was P2,425,000
Applied factory overhead was 30 percent of total manufacturing costs
Factory overhead was applied to production at a rate of 80% of direct labor cost
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31
What are the amounts/value of the following cost elements and inventory?
Direct labor Direct materials Work-in-process inventory
A. P750,000 P750,000 P225,000
B. P937,500 P812,500 P225,000
C P937,500 P812,500 P300,000
.
D P750,000 P750,000 P300,000
.
56. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products are as follows:
Direct Materials P4.00
Direct labor 6.00
Factory overhead
Variable 3.00
Fixed (based on a normal capacity of 10,000 units) 2.00
Total 15.00
Beginning inventory 2,000 units
Production 8,000 units
Units sold (selling price P50) 7,000 units
Actual costs:
Direct materials P35,000
Direct labor 50,000
Variable overhead 23,000
Fixed 18,000
Variable selling and adm. 60,000
Fixed selling and adm. 35,000
Variances are closed to cost of sales monthly
How much are the net income under absorption costing and variable costing methods?
A. B. C. D.
Absorption P144,000 P143,000 P144,000 P142,000
Variable P143,000 P144,000 P142,000 P144,000
12. A manufacturing firm presently has total sales of P1,000,000. If its sales rise, its
A. net income based on variable costing will go up more than its net income based on absorption costing.
B. net income based on absorption costing will go up more than its net income based on variable costing.
C. fixed costs will also rise.
D. per unit variable costs will rise.
9. Which of the following is(are) closely related to variable costing than to absorption costing? (M)
1. Predetermined fixed overhead 5. Gross margin
2. Unit sales 6. Volume variance
3. Production units 7. Cost behavior
4. Contribution margin 8. Management accounting
A. 1, 2, 4, 6, 7, 8 C. 1, 3, 4, 7, 8
B. 2, 4, 7, 8 D. 1, 3, 5, 6
57. The level of production affects income; under which of the following methods?
A. Absorption costing C. both absorption and variable costing
B. variable costing D. neither absorption nor variable costing
10. Under which inventory costing method could increases or decreases in income from operations be misinterpreted to be
the result of operating efficiencies or inefficiencies? (M)
A. Variable costing C. Incremental costing
B. Absorption costing D. Differential costing
59. The following information has been extracted from P Co.’s financial records for its first year of operations:
Units produced 10,000
Units sold 7,000
Variable cost per unit:
Direct materials P8
Direct labor 9
Factory overhead 3
SG&A 4
Fixed costs:
Manufacturing overhead P70,000
SG&A 30,000
Based on absorption costing, P Co.’s income in its first year of operations will be
A. P21,000 higher than it would be under variable costing
B. P70,000 higher than it would be under variable costing
C. P30,000 higher than it would be under variable costing
D. Higher than it would be under variable costing, but the exact difference cannot be determinable from this
information
60. 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 2001 calendar year are presented below.
A. P65,000 C. P40,000
B. P25,000 D. P90,000
Activity-based Costing
25. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
A. cost driver. C. cost pool.
B. overhead rate. D. product activity.
11. When absorption costing is used, all of the following costs are considered product costs except
A. direct labor C. variable selling and administrative costs
B. variable overhead D. fixed overhead
22. Net earnings determined using full absorption costing can be reconciled to net earnings determined using direct costing
by computing the difference between
A. Inventoried fixed costs in the beginning and ending inventories and any deferred over- or underapplied fixed factory
overhead.
B. Inventoried discretionary costs in the beginning and ending inventories.
C. Gross margin (absorption costing method) and contribution margin (direct costing method).
D. Sales as recorded under the direct costing method and sales as recorded under the absorption costing method.
23. Net profit under absorption costing may differ from net profit determined under direct costing. How is this difference
calculated?
A. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B. Change in the quantity of all units produced times the relevant fixed costs per unit.
C. Change in the quantity of all units in inventory times the relevant variable cost per unit.
D. Change in the quantity of all units produced times the relevant variable cost per unit.
Sensitivity analysis
20. The level of production affects income under which of the following methods?
A. absorption costing C. variable costing
B. both absorption and variable costing D. neither absorption nor variable costing
18. Variable-costing income will usually exceed absorption costing income when
A. sales exceed production C. production exceeds sales
B. production and sales are equal D. none of these
9. A manufacturing company prepares income statements using both absorption and variable costing methods.
At the end of a period actual sales revenues, total gross profit, and total contribution margin approximated
budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no
beginning or ending inventories. There most likely explanation of the net income increase is that, compared to
budget, actual
A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had decreased.
C. Sales prices and variable costs had increased proportionately.
D. Sales prices had declined proportionately less than variable costs.
14. When variable costing is used, fixed manufacturing overhead is recognized as an expense when the
A. cost is incurred C. product is sold
B. product is completed D. product is inventoried
Variable costing
Ending inventory
. The following information pertains to Sharapova Corporation:
Beginning inventory 0 units
Ending inventory 5,000 units
Direct labor per unit P10
Direct materials per unit 8
Variable overhead per unit 2
Fixed overhead per unit 5
Variable selling costs per unit 6
Fixed selling costs per unit 8
What is the value of ending inventory using the variable costing method?
A. P155,000 C. P100,000
B. P125,000 D. P195,000
Absorption costing
Gross margin
. A company manufactures a single product for its customers by contracting in advance of production. Therefore, the
company only produces units that will be sold by the end of each period. During the last period, the following sales were
made and costs incurred:
Sales P40,000
Direct materials 9,050
Direct labor 6,000
Rent (9/10 factory, 1/10 office) 3,000
Depreciation on factory equipment 2,000
Supervision (2/3 factory, 1/3 office) 1,500
Salespeople’s salaries 1,300
Insurance (2/3 factory, 1/3 office) 1,200
Office supplies 750
Advertising 700
Depreciation on office equipment 500
Interest on loan 300
Based on the above data, the gross margin percentage for the last period (rounded to nearest percent) wasA. 41%
C. 46%
B. 44% D. 49%
Difference in income
. Consider the following:
Sales price, per unit P18 per unit
Standard absorption cost rate P12 per unit
Standard variable cost rate P8 per unit
Variable selling expense rate P2 per unit
Fixed selling and administrative expenses P40,000
Fixed manufacturing overhead P60,000
Last period, 13,000 units were produced. In the current period, 15,000 units were produced. In each period, 13,000
units were sold. What is the difference in reported income under absorption and variable costing for the current
period?
A. The variable-costing income exceeded absorption-costing income by P4,000.
B. The absorption-costing income exceeded variable-costing income by P8,000.
C. The variable-costing income exceeded absorption-costing income by P6,000.
D. Net income will not be different between the two methods.
. The Blue Company has failed to reach its planned activity level during its first two years of operation. The following
table shows the relationship between units produced, sales, and normal activity for these years and the projected
relationship for Year 3. All prices and costs have remained the same for the last two years and are expected to do so in
Year 3. Income has been positive in both Year 1 and Year 2.
Units Produced Sales Planned Activity
Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000
Because Blue Company uses an absorption costing system, one would predict gross margin for Year 3 to beA. Greater
than Year 1. C. Equal to Year 1.
B. Greater than Year 2. D. Equal to Year 2.
Reconciliation
Income under absorption costing
. A company had income of P50,000 using direct costing for a given period. Beginning and ending inventories for that
period were 13,000 units and 18,000 units, respectively. Ignoring income taxes, if the fixed overhead application rate
were P2.00 per unit, what would the income have been using absorption costing?
A. P40,000
B. P50,000
C. P60,000
D. Cannot be determined from the information given.
. At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of sales and total
fixed costs equal to 15% of sales. Based on variable costing, if sales change by P1.00, income will change by
A. P 0.25 C. P 0.75
B. P 0.12 D. P 0.10
. Answer: C
Direct materials P 8
Direct labor 10
Variable overhead 2
Total unit cost- variable costing P20
Value of ending inventory (5,000 x P20) P100,000
. Answer: C
Sales P40,000
Cost of goods sold
Direct materials P9,050
Direct labor 6,050
Rent (0.9 x P3,000) 2,700
Depreciation 2,000
Supervision (2/3 x P1,500) 1,000
Insurance (2/3 x P1,200) 800 (21,600)
Gross margin P18,400
Gross margin percentage (P18,400 ÷ P40,000) 46%
. Answer: C
Direct materials P10,000
Direct labor 20,000
Variable overhead 5,000
Total variable product cost P35,00
Variable unit cost (P35,000 ÷ 10,000) P3.50
Add Fixed overhead per unit (P9,000 ÷ 10,000) 0.90
Absorption unit cost P4.40
. Answer: B
Fixed overhead rate per unit: P12 – P8 P4
Difference in income: 2,000 x P4 P8,000
During the current year, the company’s production equaled the budgeted. The inventory increased. Therefore,
absorption costing income is higher than the variable costing income.
. Answer: C
The production and unit sales during year 3 matched with year 1.
. Answer: C
The income under absorption costing is higher by P10,000 because the amount of fixed overhead that related to unsold
units was deferred and was included as cost of finished goods inventory. The variable costing income statement
immediately wrote the entire fixed overhead that was incurred during the year as period cost.
Fixed overhead deferred as product cost: 5,000 x P2 P10,000
Absorption income (P50,000 + P10,000) P60,000
. Answer: C
Absorption income 65,000
Less Fixed Overhead in decrease in inventory (18,000 – 15,000) x 2.50 12,500
Income, Variable costing 52,500
. Answer: B
CMR per unit = Selling Price – Unit variable cost
P8.50 = P12.00 – P3.50
Variable Cost Per unit
Product: (50,000 – 30,000) / 20,000 = P1.00
Selling & Adm. (variable period costs) 30,000/12,000 2.50
Total variable cost/unit P3.50
* Total variable costs – variable period cost
(selling & adm.) = variable product cost.
. Answer: A
1.00 - (1.00 x .75) = P0.25