TOPIC:

Absorption and Variable Costing

EXERCISES:
1. To apply direct costing method, it is necessary that you know
A. Standard production rate and times of production elements
B. Contribution margin and breakeven point in production
C. Variable and fixed cost related to production
D. Controllable and uncontrollable cost of production

2. The following statements about the adoption of variable costing are true, except:
A. All fixed manufacturing costs are recognized as period costs.
B. A direct cost may not become a product cost.
C. It is an acceptable method for general reporting purposes.
D. An indirect cost may be assigned as part of product cost.

3. The change in period-to-period operating income when using variable costing can
be explained by the change in the
A. Unit sales level multiplied by the unit sales price.
B. Finished goods inventory level multiplied by the unit sales price.
C. Unit sales level multiplied by a constant unit contribution margin.
D. Finished goods inventory level multiplied by a constant unit contribution margin.

4. Which of the following is NOT an advantage of using variable costing for internal
reporting purposes?
A. Fixed costs are reported at incurred values, not absorbed values, thus improving
control over those costs.
B. Profits are directly influenced by changes in sales volume.
C. The impact of fixed costs on profits is emphasized.
D. Total costs may be overlooked when evaluating profits.

5. Grey Co.’s 2023 fixed manufacturing overhead costs totaled P100,000, and variable
selling costs totaled P80,000. Under variable costing, how should those costs be
classified?
A. B. C. D.
Period Costs P0 P 80,000 P100,000 P180,000
Product Costs P180,000 P100,000 P 80,000 P0

6. A cost that is included as part of product costs under both absorption costing and
direct costing is:
A. managerial staff costs D. taxes on factory building
B. insurance E. variable materials handling labor
C. variable marketing expenses.

7. Under variable costing,

A. all product costs are variable. C. all product costs are fixed
B. all period costs are variable. D. product costs are both fixed and variable.

8. Which of the following is not associated with absorption costing?

A. functional format C. Period costs
B. gross margin D. contribution margin

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 9. Calculating income under variable costing does NOT require knowing
A. unit sales. C. selling price.
B. unit variable manufacturing costs. D. unit production.

10. A criticism of variable costing for managerial accounting purposes is that it

A. is not acceptable for product line segmented reporting.
B. does not reflect cost-volume-profit relationships.
C. overstates inventories.
D. might encourage managers to emphasize the short term at the expense of the
long term.

11. All of the following are names for the product costing method in which both fixed
and variable costs are included in overhead rates, except:
A. absorption costing C. direct costing
B. conventional costing D. full costing

12. MNO Products, Inc. planned and actually manufactured 200,000 units of its single
product in 2023, its first year of operations. Variable manufacturing costs were P30
per unit of product. Planned and actual fixed manufacturing costs were P600,000,
and marketing and administrative costs totaled P400,000 in 2023. MNO sold
120,000 units of product in 2023 at a selling price of P40 per unit. What is the cost
of the ending inventory assuming variable costing is used?
A. P2,400,000 B. P2,750,000 C. P2,250,000 D. P2,640,000

13. LY & Company completed its first year of operations during which time the
following information were generated:
Total units produced 100,000
Total units sold @ P100 per unit 80,000
Work in process ending inventory 20,000

Costs Variable Cost per Unit Fixed Costs

Raw materials P20.00
Direct labor 12.50
Factory overhead 7.50 P1.2 million
Selling and administrative 10.00 0.7 million
If the company used variable (direct) costing method, the operating income would be
A. P2,100,000 B. P4,000,000 C. P2,480,000 D. P3,040,000

14. Meredith Co.’s 2023 manufacturing costs were as follows:

Direct materials and direct labor P700,000
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed manufacturing overhead 18,000
What amount should be considered product cost for external reporting purposes?
A. P700,000 B. P800,000 C. P880,000 D. P898,000

15. The total production cost for 20,000 units was P21,000 and the total production cost
for making 50,000 units was P34,000. Once production exceeds 25,000 units,
additional fixed costs of P4,000 were incurred. The full production cost per unit for
making 30,000 units is:
A. P0.30 B. P0.68 C. P0.84 D. P0.93

16. At the end of Cristina Co.’s first year of operations, 1,000 units of inventory
remained on hand. Variable and fixed manufacturing cost per unit were P90 and
P20, respectively. If Cristina uses absorption costing rather than direct (variable)
costing, the result would be a higher pretax income of
A. P20,000. B. P70,000. C. P0. D. P90,000.

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 17. Lexie Sloan Industries manufactures a single product using standard costing.
Variable production costs are P13 and fixed production costs are P125,000. Lexie
Sloan uses a normal activity of 12,500 units to set its standard costs. Lexie Sloan
began the year with 1,000 units in inventory, produced 11,000 units, and sold
11,500 units. The standard cost of goods sold under absorption costing would be
A. P115,000 B. P149,500 C. P253,000 D. P264,500

18. Bailey Corp. incurred the following costs in 2023 (its first year of operations) based
on production of 10,000 units:
Direct material P5 per unit
Direct labor P3 per unit
Variable product costs P2 per unit
Fixed product costs (in total) P100,000

When Bailey Corp. prepared its 2001 financial statements, its Cost of Goods Sold was
listed at P100,000. Based on this information, which of the following statements must
be true:
A. Bailey Corp. sold all 10,000 units that it produced.
B. Bailey Corp. sold 5,000 units.
C. Bailey Corp. had a very profitable year.
D. From the information given, one cannot tell whether Bailey Corp.'s financial
statements were prepared based on variable or absorption costing.

19. The Ellis Company has failed to reach its planned activity level during its first 2
years of operation. The following table shows the relationship among 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 2 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 Ellis Company uses an absorption-costing system, gross margin for year 3
should be
A. Greater than Year 1. C. Equal to Year 1.
B. Greater than Year 2. D. Equal to Year 2.

20. O’Malley, Inc. manufactured 700 units of Product A, a new product, during the year.
Product A’s variable and fixed manufacturing costs per unit were P6.00 and P2.00
respectively. The inventory of Product A on December 31, consisted of 100 units.
There was no inventory of Product A on January 1. What would be the change in the
peso amount of inventory on December 31 if variable costing were used instead of
absorption costing?
A. P800 decrease. C. P0
B. P200 decrease. D. P200 increase.

21. Izzie Company had P100,000 income using absorption costing. Izzie has no variable
manufacturing costs. Beginning inventory was P5,000 and ending inventory was
P12,000. What is the income under variable costing?
A. P100,000. B. P107,000 C. P88,000 D. P93,000

22. Webber Ltd. Manufactures a single product for which the costs and selling prices
are:
Variable production costs P 50 per unit
Selling price P125 per unit
Fixed production overhead P200,000 per quarter
Fixed selling and administrative overhead P80,000 per quarter
Normal capacity 20,000 units per quarter

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 Production in first quarter was 19,000 units and sales volume was 16,000 units.
No opening inventory for the quarter.

The absorption costing profit for the quarter was

A. P920,000 B. P950,000 C. P960,000 D. P970,000

23. Sheperd Biscuits manufactures and sells boxed coconut cookies. The biggest market
for these cookies are as gifts that college students buy for their business teachers.
There are 100 cookies per box. The following income statement shows the result of
the first year of operations. This statement was the one included in the company’s
annual report to the stockholders.
24.24.
Sales (400 boxes at P12.50 a box) P5,000.00
Less: Cost of goods sold (400 boxes at P8 per box) 3,200.00
Gross margin 1,800.00
Less: Selling and administrative expenses 800.00
Net income 1,000.00

Variable selling and administrative expenses are P0.90 per box sold. The company
produced 500 boxes during the year. Variable manufacturing costs are P5.25 per box
and fixed manufacturing overhead costs total P1,375 for the year.
What is the company’s direct costing net income?
A. P2,540 B. P2,265 C. P1,000 D. P 725

25. During its first year of operations, a company produced 275,000 units and sold
250,000 units. The following costs were incurred during the year:
Variable Cost per Fixed Costs
Unit
Direct materials P15.00
Direct labor 10.00
Manufacturing overhead 12.50 P2,200,000
Selling and administrative 2.50 1,375,000
The difference between operating income calculated on the absorption-costing basis
and on the variable costing basis is that absorption-costing operating income is
A. P200,000 greater. B. P220,000 greater.
C. P325,000 greater. D. P62,500 lesser.

26. A company has the following cost data:

Fixed manufacturing costs P2,000
Fixed selling, general, and administrative costs 1,000
Variable selling costs per unit sold 1
Variable manufacturing costs per unit 2

Beginning inventory 0 units

Production 100 units
Sales 90units at P40 per unit

Variable and absorption-cost net incomes are:

A. P320 variable, P520 absorption C. P520 variable, P320 absorption
B. P330 variable, P530 absorption D. P530 variable, P330 absorption

27. A company manufactures 50,000 units of a product and sells 40,000 units. Total
manufacturing cost per unit is P50 (variable manufacturing cost, P10; fixed
manufacturing cost, P40). Assuming no beginning inventory, the effect on net
income if absorption costing is used instead of variable costing is that:
A. net income is P400,000 lower C. net income is the same
B. net income is P400,000 higher D. net income is P200,000 higher

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 28. A company had an income of P50,000 using direct costing for a given month.
Beginning and ending inventories for the month are 13,000 units and 18,000 units,
respectively. Ignoring income tax, if the fixed overhead application rate was P2 per
unit, what was the income using absorption costing?
A. P40,000 B. P50,000 C. P60,000 D. P70,000

Questions 29 through 31 are based on the following information.

The following information is available for Karev Co. for its first year of operations:
Sales in units 5,000
Production in units 8,000
Manufacturing costs:
Direct labor P3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead P100,000
Net income (absorption method) P30,000
Sales price per unit P40

29. What would Karev Co. have reported as its income before income taxes if it had used
variable costing?
A. P30,000 B. (P7,500) C. P67,500 D. (P30,000)

30. What was the total amount of SG&A expense incurred by Karev Co.?
A. P30,000 B. P62,500 C. P6,000 D. P36,000

31. Based on variable costing, what would Karev Co. show as the value of its ending
inventory?
A. P120,000 B. P64,500 C. P27,000 D. P24,000

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GEN-FM-018 Rev 0 Effective Date 01 Jun 2021