Assessment No.

3
MAS-03 Absorption and Variable Costing

Part 1. Multiple Choice Theory: Choose the letter of the best answer.

1. Which of the following statements is true for a firm that uses variable costing?

a. The cost of a unit of product changes because of changes in number of units

manufactured.
b. Profits fluctuate with sales.
c. An idle facility variation is calculated.
d. Product costs include variable administrative costs.

2. 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 decrease in sales.
c. Profits may decrease with increase in sales even if there is no change in selling prices
and costs.
d. Decreased output and constant sales result in increased profit.

3. Which method of inventory costing treats direct manufacturing costs and fixed?
manufacturing overhead costs, both variable and fixed, as inventoriable costs?
a. Direct costing
b. Variable costing
c. Absorption costing
d. Conversion costing

4. Which one of the following statements is correct regarding absorption costing and variable
costing?
a. Overhead costs are treated in the same manner under both costing methods.
b. If finished goods inventory increase, absorption costing results in higher income.
c. Variable manufacturing costs are lower under variable costing.
d. Gross margins are the same under both costing methods.

5. The costing method that is properly classified for both external and internal reporting
purposes is
External Reporting Internal Reporting
a. Activity-based costing No Yes
b. Job-order costing No Yes
c. Variable costing No Yes
d. Process costing No Yes

6. Miracle Company pays bonuses to its managers based on operating income. The company
uses absorption costing, and overhead is applied on the basis of direct labor hours. To
increase bonuses, Miracle Company may do all of the following except
a. Produce those products requiring the most direct labor hours.
b. Defer expenses such as maintenance to a future period.
c. Increase production schedules independent of customer demands.
d. Decrease production of those items requiring the most direct labor hours.

7. Lalyn Company's absorption costing operating income was

 a. Higher than variable costing operating income because actual production exceeded
actual sales.
b. Lower than variable costing operating income because actual production exceeded
actual sales.
c. Lower than variable costing operating income because actual production was less than
planned production.
d. Lower than variable costing operating income because actual sales were less than
planned sales.

8. If production is greater than sales (units), then absorption costing net income will generally
be
a. greater than direct costing net income.
b. less than direct costing net income
c. equal to direct costing net income.
d. additional data is needed to be able to answer.

9. If net earnings were higher using standard direct costing than using standard absorption
costing, what can be said about sales during the period if inventory is priced using the FIFO
method?
a. sales increased.
b. sales exceeded production
c. sales decreased.
d. sales were less than production

10. Under absorption costing, fixed manufacturing overhead costs are best described as
a. direct period costs c. direct product costs
b. indirect period costs d. indirect product costs

11. Under variable costing

a. Net income will tend to move upward and downward in response to changes in levels of
production.
b. Inventory costs will always be lower than absorption costing.
c. net income will tend to vary inversely with production changes.
d. Net income will always be higher than under absorption costing.

12. Which of the following must be known in order to institute a direct (variable) costing
system? a. The controllable and non-controllable components of all costs related to
production. b. Standard production rates and times for all elements of production.
c. Contribution margin and break-even point for all goods in production.
d. The variable and fixed components of all costs related to production.

13. Income under absorption costing may differ from income determined under variable costing.
How is this difference calculated?
a. Change in the quantity of units in inventory times the fixed factory overhead rate per unit.
b. Number of units produced during the period times the fixed factory overhead rate per
unit.
c. Change in the quantity of units in inventory times the variable manufacturing costs per
unit.
d. Number of units produced during the period times the variable manufacturing costs per
unit.
14. What accounts for profit difference between absorption costing and variable costing
methods?
 a. Difference in fixed costs incurred.
b. Difference in variable costs incurred
c. Difference in sales revenue
d. Difference in inventory valuation

15. When production exceeds sales, fixed manufacturing overhead costs

a. Are released from inventory under absorption costing.
b. Are deferred in inventory under absorption costing.
c. Are released from inventory under variable costing.
d. Are deferred in inventory under variable costing.

16. Which one of the following statements is correct regarding absorption costing and variable
costing?
a. Overhead costs are treated in the same manner under both costing methods b. If
finished goods inventory increases, absorption costing results in higher income. b.
Variable manufacturing costs are lower under variable costing.
a. Gross margins are same under both costing methods.

17. Absorption costing and variable costing differ in that

a. Standards can be used with absorption costing, but not with variable costing.
b. Absorption costing inventories are more correctly valued.
b. Production influences income under absorption costing, but not under variable costing.
a. Companies using absorption costing have lower fixed costs.

18. When sales are constant, but production fluctuates

a. Net income will be erratic under variable costing.
b. Absorption costing inventories are more correctly valued.
c. Variable costing will always show a positive need income.
d. Net income will be erratic under absorption costing.

19. Which of the following is true for a firm that uses variable costing?
a. The cost of a unit of product changes because of a change in number of units
manufactured
b. Profit fluctuates with sales.
c. An idle facility variation is calculated
d. Product costs include variable administrative costs

20. A basic tenet of direct costing is that period costs should be currently expensed. What is the
basic rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to specific product. b. Period
costs are generally immaterial in amount and the cost of assigning the amount to specific
products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management.
d. Period costs will occur whether or not production occurs and so it is improper to allocate
these costs to production and defer a current cost of doing business.

21. Choose the true statement from among the following:

a. Variable costing is a method of costing in which only direct material and direct
labor are charged to work in process.
b. Under variable costing, all costs which vary with sales volume are charged to work in
 process.
c. Because certain manufacturing costs are treated as period costs, net earnings will
always be lower under variable costing than under full costing
d. Variable costing clearly points out the fact that if additional units of a product can be sold
for more than the variable costs of producing and selling them, net earnings will
increase.

22. Under the direct costing concept, unit product cost would most likely be increased by a. A
decrease in the remaining useful life of factory machinery depreciated on the units-of
production method.
b. A decrease in the number of units produced.
c. An increase in the remaining useful life of factory machinery depreciated on the sum-of
the-years'-digit method.
d. An increase in the commission paid to salesmen for each unit sold.

23. An example of an item, the entire amount of which is usually an incremental cost
is a. Manufacturing overhead.
b. Direct cost
c. Conversion cost
d. Period costs

24. Loyola Company computes net income, under both the absorption costing approach
and the variable costing approach. For a given year, the absorption costing net income
was greater than the variable costing net income. This fact suggests that:
a. Variable manufacturing costs were less than fixe manufacturing costs.
b. More units were produced during the year than were sold.
c. More units were sold during the year than were produced.
d. Common costs were greater than variable costs for the year.

25. When sales are constant, but the production level fluctuates, net income determined by the
variable costing method will
a. Fluctuate in direct proportion to changes in production.
b. Remain constant.
c. Fluctuate inversely with changes in production.
d. Be greater than net income under variable costing.

26. When sales are constant, but the production level fluctuates, net income determined by the
absorption costing method will
a. Tend to fluctuate in direct direction as fluctuations in the level of production.
b. Tend to remain constant.
c. Tend to fluctuate inversely with changes in production.
d. Be greater than net income under absorption costing.

27. Reporting under the direct costing concept is accomplished by

a. Including only direct costs in the income statement.
b. Matching variable costs against revenues and treating fixed costs as period costs.
c. Treating all costs as period costs.
d. Eliminating the work in process inventory account.
28. Lorie Company's fixed manufacturing overhead cost totaled P1,200,000 and variable selling
costs totaled P1,800,000. Under direct costing, how should these costs be classified?
Period cost Product cost
a. 0 3,000,000
 b. 1,800,000 1,200,000
c. 1, 200,000 1,800,000
d. 3,000,000 0

29. Determine the following statements as true or false

Statement 1. Direct costing and variable costing are different terms that mean the same
thing.
Statement 2. In a variable costing income statement, sales revenue is typically lower than in
absorption costing income statement.

Statement 1 Statement 2
a. False True
b. False False
c. True True
d. True False

30. Under the direct costing, which is classified as a product costs?

a. Only variable productions costs
b. Only variable costs
c. All variable costs
d. All variable and fixed production costs.

Part 2. Multiple Choice Problems: Choose the letter of the best answer.
Items 1 to 6 are based on the following information

Consunji Company employs an absorption costing system for internal reporting purposes:
however, the company is considering using variable costing. Data regarding Consunji's planned
and actual operations for the calendar year are presented below.

Planned Activity Actual Activity

Beginning finished goods inventory in units 35,000 35,000
Sales in units 140,000 140,000
Production in units 140,000 130,000

The planned per-unit cost figures shown below were based on the estimated production and
sale of P 140,000 units per year. Consunji uses a predetermined manufacturing overhead rate
for applying manufacturing overhead to its product; thus, a combined manufacturing overhead
rate for P 9.00 per unit was employed for absorption costing purposes. Any over-or- under
applied manufacturing overhead is closed to the cost of goods sold account at the end of the
reporting period.

Planned Costs Per Unit Total Costs

Direct materials Php 12.00 Php 1,680,000 Php 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 5.00 700,00 715,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Fixed administrative expenses 3.00 420,000 425,000 Total Php 50.00 Php 7,000,000 Php
 6,620,000

The beginning finished goods inventory for absorption costing purposes was valued at the
previous year's planned unit manufacturing costs, which was the same as the current planned
unit manufacturing cost. There are no work-in-process inventories at either the beginning or the
end of the year. The planned actual unit selling price was P70.00 per unit.

1. The value of Consuji Company's actual ending finished gods inventory on the absorption
costing basis was
a. 750,000 c. 1,220,000
b. 1,200,000 d. 1,350,000

2. The value of Consunji Company's actual ending finished gods inventory on the variable
costing basis was
a. 1,400,000 c. 1,000,000
b. 1,125,000 d. 625,000

3. Consunji Company's total fixed costs expensed this year on the absorption costing basis
a. 2,095,000 c. 2,170,000
b. 2,120,000 d. 2,030,000

4. Consunji Company's actual manufacturing contribution margin or the year calculated on the
variable costing basis was
a. 4,375,000 c. 4, 910,000
b. 6,300,000 d. 5,625,000

5. The total variable cost expensed currently by Consunji Company on the variable costing
basis was
a. 4,375,000 c. 4,620,000
b. 4,500,000 d. 4,550,000

6. The difference between Consunji Company's operating income calculated the absorption
costing basis and calculated on the variable costing basis was
a. 65,000 c. 40,000
b. 50,000 d. 90,000

Items 7 and 8 are based on the following information.

Myrtle Company planned and actual manufactured 200,000 units of its single product, its first
year of operations. Variable manufacturing costs were P30.00 per unit of product. Planned and
actual fixed manufacturing costs were P 600,000 and selling and administrative costs totaled
P400,000. Luigi sold 120,000 units of product at a selling price of P40 per unit.

7. Myrtle's operating income under absorption costing is

a. 200,000 c. 600,000
b. 440,000 d. 840,000

8. Myrtle s operating income under variable costing is

a. 200,000 c. 800,000
b. 440,000 d. 600,000

9. Vigan Company had (16,000 units in its beginning inventory. During the year, the company's
 variable production costs were P60 per unit and its fixed manufacturing overhead cost were
P40 per unit. The company's net income for the year was P240,000 lower under absorption
costing than it was under variable costing. Given these facts, the number of units in the
ending inventory must have been
a. 22,000 units c. 6,000 units
b. 10,000 units d. 4,000 units

Items 10-13 are based on the following information:

Sales per unit Php 750
Variable production cost sold 400
Annual fixed manufacturing expenses 1,750,000
Variable office expense (unit) 150
Annual fixed selling expense 250,000
Production during the period 12,500 units
Units sold 10,000 units
No. inventory at Jan. 1(beginning)

10. The ending inventory under direct costing is

a. 1,250,000 c. 1,000,000
b. 1,375,000 d. 1,625,000

Solution:

Production during the period 12,500

Units sold 10,000
Inventory in units P2,500
Variable production cost 400
Total ending inventory P1,000,000

11. Ending inventory under absorption costing is

a. 1,625,000 c. 1,250,000
b. 1,000,000 d. 1,350,000

Solution:
Annual FOH 1,750,000
Production cost 12,500
Fixed overhead per unit 140

Ending inventory 2,500

Variable cost (400 + 140) 540
Total Inventory P1,350,000

12. Total variable annual cost charged to expense in direct costing

a. 5,500,000 c. 4,000,000
b. 5,875,000 d. 5,000,000

Solution:
Variable cost sold (10k units x P400) P4,000,000
Variable expense (10k units x 150) 1,500,000
Total variable cost P5,500,000

13. Total fixed cost charged against current year's operations in absorption costing
a. 1,750,000 c. 2,150,000
b. 1,250,00 d. 1,650,000

Solution:
Fixed overhead (10k x 140) 1,400,000
Fixed expense 250,000
Total fixed cost P 1,650,000

Items 14 and 15 are based on the following information

The books of Kristle Company pertaining to the year ended December 31, 2018, operations, its
first year of operation, showed he following figures relating to Product Maja:

Number units produced Php 200,000 Number units sold at P 150 162,500
Direct Material Used Php 8,875,000 Direct labor 4,250,000 Manufacturing
overhead costs
Fixed Php 5,500,000
Variable Php 3,075,000 8,575,000
Fixed administrative expenses 1,500,000
14. Under variable costing, what would be the finished goods inventory as at December 31,
2018?
a. 4,068,750 c.4, 350,000
b. 3,037,500 d. 2,460,937

Solution:
Units produced P 200,000
Units sold 162,500
Ending inventory 37,500
Unit product cost 81
Total inventory P3,037,500

Computation for unit product cost

Direct Material Used 8,875,000

Direct labor 4,250,000
Variable FOH 3,075,000
Total 16,200,000
Units produced 200,000
Unit product cost P 81

15. Which costing method, variable or absorption would show a higher operating income for
2018 and by how much?
a. Variable by 1,031,250 c. Variable by 1,312,500
b. Absorption by 1,031,250 d. Absorption by 1,312,500
Solution:

Ending inventory 37,500

Mul. to units FOH (5.5M / 200k) 27.5
Total P 1,031,250

Items 16 to 18 are based on the following information:

The annual flexible budget has been prepared for use in making decisions relating to Product
Cha
100,000 units 150,000 units 200,000 units
Sales Php 4,000,000 Php 6,000,000 Php 8,000,000 Manufacturing costs
Variable 1,500,000 2,250,000 1,000,000 Fixed 1,000,000 1,000,000 1,000,000
Total Php 2,500,000 Php 3,250,000 Php 4,000,000

Selling and other expenses

Variable 1,000,000 1,500,000 2,000,000 Fixed 800,000 800,000 800,000 Income
(or loss) Php (300,000) Php 450,000 Php 1,200,000 ========= ==========
==========

The 200,000 units budget has been adopted and will be used for allocating fixed manufacturing
costs to units of Product Cha: at the end of the first six months, the following information is
available
Units
Production 120,000
Sales 60,000

All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred
coincide with the budget. Annual sales have the following sales pattern. First quarter -10%: 2nd
quarter- 20%: 3rd quarter -30% and 4th quarter 40%. Over and under applied fixed
manufacturing costs are deferred until the year end.

16. The amount fixed factory costs applied to product during the first six month under absorption
costing would be
a. Overapplied by P 100,000
b. Equal to fixed cost incurred
c. Underapplied by P 200,000
d. Underapplied by P 400,000

17. Reported net income (or loss) for the six months under absorption costing e, none would
be: a. 800,000 c. 200,000
b. 400,000 d. 600,000
18. Reported net income (or loss) for the six months under variable costing would none
be: a. 720,000 c. (180,000)
b. 360,000 d. 0

Items 19 to 25
The following data apply to Charity Corporation for the year ended December 31,
2018; Sales (10,000 units at P 150) P 1,500,000
Variable production costs (12,000 units) 900,000
Fixed production cost 300,000
 Variable Selling expenses 50,000

Assume that for the questions relating to full costing below, overhead budgets are based on
normal activity of 20,000 units per year.

The only beginning or ending inventory is the ending finished goods inventory of 2,000 units

19. Under absorption costing, the cost of goods sold at standard for the year would
a. 900,000 c.700,000 units.
b. 750,000 d. 800,000

20. Under absorption costing, the cost of ending inventory is

a. 180,000 c. 140,000
b. 150,000 d. 160,000

21. Under variable costing, the cost of goods sold for the year is
a. 900,000 c.700,000
b. 750,000 d. 800,000
22. Under variable costing, the cost of ending inventory for the year would
a. 180,000 c. 140,000
b. 150,000 d. 160,000

23. Under variable costing, the amount by which the revenue exceeds variable costs is
a. 900,000 c. 700,000
b. 750,000 d. 800,000

24. What is the fixed production variance?

a. 50,000 UF c. 120, 000 UF
b. 100,000 UF d. 80,000 UF

25. Net income under absorption costing exceeds net income under variable costing
by: a. 40,000 c. 30, 000
b. 25,000 d. 10,000