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Chapter 17 - Absorption costing

Accountancy (University of Northern Philippines)

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Chapter 17: Absorption, Variable, and

Throughput Costing
MULTIPLE CHOICE QUESTIONS
 1. Under variable costing, fixed manufacturing overhead is:
 A. expensed immediately when incurred.
 B. never expensed.
 C. applied directly to Finished-Goods Inventory.
 D. applied directly to Work-in-Process Inventory.
 E. treated in the same manner as variable manufacturing overhead.
Answer: A LO: 1 Type: RC
 2. All of the following are inventoried under variable costing except:
 A. direct materials.
 B. direct labor.
 C. variable manufacturing overhead.
 D. fixed manufacturing overhead.
 E. items "C" and "D" above.
Answer: D LO: 1 Type: RC
 3. All of the following are expensed under variable costing except:
 A. variable manufacturing overhead.
 B. fixed manufacturing overhead.
 C. variable selling and administrative costs.
 D. fixed selling and administrative costs.
 E. items "C" and "D" above.
Answer: A LO: 1 Type: RC
 4. All of the following costs are inventoried under absorption costing except:
 A. direct materials.
 B. direct labor.
 C. variable manufacturing overhead.
 D. fixed manufacturing overhead.
 E. fixed administrative salaries.
Answer: E LO: 1 Type: RC
 5. All of the following are inventoried under absorption costing except:
 A. direct labor.
 B. raw materials used in production.
 C. utilities cost consumed in manufacturing.
 D. sales commissions.
 E. machine lubricant used in production.
Answer: D LO: 1 Type: N
 6. The underlying difference between absorption costing and variable costing lies in the
treatment of:
 A. direct labor.
 B. variable manufacturing overhead.
 C. fixed manufacturing overhead.
 D. variable selling and administrative expenses.
 E. fixed selling and administrative expenses.
Answer: C LO: 1 Type: RC
 7. Which of the following costs would be treated differently under absorption costing and
variable costing?
Direct Labor Variable Manufacturing Overhead Fixed Administrativ e Expenses

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A. Yes No Yes

B. Yes Yes Yes

C. No Yes No

D. No No Yes

E. No No No

Answer: E LO: 1 Type: RC

 8. Lone Star has computed the following unit costs for the year just ended:
Direct material used $12

Direct labor 18

Variable manufacturing overhead 25

Fixed manufacturing overhead 29

Variable selling and administrative cost 10

Fixed selling and administrative cost 17

Under variable costing, each unit of the company's inventory would be

carried at:

A. $35.

B. $55.

C. $65.

D. $84.

E. some other amount.

Answer: B LO: 1 Type: A

 9. Prescott Corporation has computed the following unit costs for the year just ended:
Direct material used $18

Direct labor 27

Variable manufacturing overhead 30

Fixed manufacturing overhead 32

Variable selling and administrative cost 9

Fixed selling and administrative cost 17

Under absorption costing, each unit of the company's inventory would be

carried at:

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 A. $75.
 B. $107.
 C. $116.
 D. $133.
 E. some other amount.
Answer: B LO: 1 Type: A
 10. Santa Fe Corporation has computed the following unit costs for the year just ended:
Direct material used $25

Direct labor 19

Variable manufacturing overhead 35

Fixed manufacturing overhead 40

Variable selling and administrative cost 17

Fixed selling and administrative cost 32

Which of the following choices correctly depicts the per-unit cost of inventory
under variable costing and absorption costing?

Variable Absorption
Costing Costing

A
$79 $119
.

B
$79 $151
.

C
$96 $119
.

D
$96 $151
.

 E. Some other combination of figures not listed above.

Answer: A LO: 1 Type: A
 11. Delaware has computed the following unit costs for the year just ended:
Variable manufacturing cost $85

Fixed manufacturing cost 20

Variable selling and administrative cost 18

Fixed selling and administrative cost 11

Which of the following choices correctly depicts the per-unit cost of inventory
under variable costing and absorption costing?
 A. Variable, $85; absorption, $105.
 B. Variable, $85; absorption, $116.
 C. Variable, $103; absorption, $105.
 D. Variable, $103; absorption, $116.

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 E. Some other combination of figures not listed above.

Answer: A LO: 1 Type: A
Use the following to answer questions 12-13:
Indiana Company incurred the following costs during the past year when
planned production and actual production each totaled 20,000 units:

$280,00
Direct materials used
0

Direct labor 120,000

Variable manufacturing overhead 160,000

Fixed manufacturing overhead 100,000

Variable selling and administrative

60,000
costs

Fixed selling and administrative

90,000
costs

 12. If Indiana uses variable costing, the total inventoriable costs for the year would be:
 A. $400,000.
 B. $460,000.
 C. $560,000.
 D. $620,000.
 E. $660,000.
Answer: C LO: 1 Type: A
 13. The per-unit inventoriable cost under absorption costing is:
 A. $9.50.
 B. $25.00.
 C. $28.00.
 D. $33.00.
 E. $40.50.
Answer: D LO: 1 Type: A
 14. Consider the following comments about absorption-and variable-costing income
statements:
 I. A variable-costing income statement discloses a firm's contribution margin.
 II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
 III. The amount of variable selling and administrative cost is the same on absorption-and
variable-costing income statements.
Which of the above statements is (are) true?
 A. I only.
 B. II only.
 C. I and II.
 D. II and III.
 E. I, II, and III.
Answer: E LO: 2, 3 Type: N
 15. Roberts, which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units Sales: 37,000 units at $15 per unit Production costs:

Variable: $4 per unit Fixed: $260,000

Selling and administrative costs:

Variable: $1 per unit Fixed: $32,000

The gross margin that the company would disclose on an absorption-costing income statement is:

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 A. $97,500.
 B. $147,000.
 C. $166,500.
 D. $370,000.
 E. some other amount.
Answer: C LO: 2 Type: A
 16. McAfee, which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units Sales: 37,000 units at $15 per unit

Production costs:
Variable: $4 per unit Fixed: $260,000

Selling and administrative costs:

Variable: $1 per unit Fixed: $32,000

The contribution margin that the company would disclose on an absorption-costing income
statement is:
 A. $0.
 B. $147,000.
 C. $166,500.
 D. $370,000.
 E. some other amount.
Answer: A LO: 2 Type: A
 17. Chicago began business at the start of the current year. The company planned to produce
25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30
each. Costs incurred were:
Fixed manufacturing overhead $150,000

Fixed selling and administrative cost 100,000

Variable manufacturing cost per unit 8

Variable selling and administrative cost per unit 2

If there were no variances, the company's absorption-costing net income

would be:
 A. $190,000.
 B. $202,000.
 C. $208,000.
 D. $220,000.
 E. some other amount.
Answer: C LO: 2 Type: A
 18. Norton, which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 37,000 units at $15 per unit Production costs:
Variable: $4 per unit Fixed: $260,000

Selling and administrative costs:

Variable: $1 per unit Fixed: $32,000

The contribution margin that the company would disclose on a variable-costing income
statement is:
 A. $97,500.
 B. $147,000.
 C. $166,500.
 D. $370,000.
 E. some other amount.
Answer: D LO: 3 Type: A

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 19. Madison began business at the start of the current year. The company planned to produce
30,000 units, and actual production conformed to expectations. Sales totaled 28,000 units at $32
each. Costs incurred were:
Fixed manufacturing overhead $150,000

Fixed selling and administrative cost 90,000

Variable manufacturing cost per unit 11

Variable selling and administrative cost per unit 2

If there were no variances, the company's variable-costing net income would

be:
 A. $270,000.
 B. $292,000.
 C. $308,000.
 D. $532,000.
 E. some other amount.
Answer: B LO: 3 Type: A
 20. The following data relate to Lobo Corporation for the year just ended:
Sales revenue $750,000

Cost of goods sold:

Variable portion 370,000

Fixed portion 110,000

Variable selling and administrative cost 50,000

Fixed selling and administrative cost 75,000

Which of the following statements is correct?

 A. Lobo’s variable-costing income statement would reveal a gross margin of $270,000.
 B. Lobo’s variable costing income statement would reveal a contribution margin of
$330,000.
 C. Lobo’s absorption-costing income statement would reveal a contribution margin of
$330,000.
 D. Lobo’s absorption costing income statement would reveal a gross margin of $330,000.
 E. Lobo’s absorption-costing income statement would reveal a gross margin of $145,000.
Answer: B LO: 2, 3 Type: A
Use the following to answer questions 21-22:
Franz began business at the start of this year and had the following costs:
variable manufacturing cost per unit, $9; fixed manufacturing costs,
$60,000; variable selling and administrative costs per unit, $2; and fixed
selling and administrative costs, $220,000. The company sells its units for
$45 each. Additional data follow.

Planned production in 10,00

units 0

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Actual production in 10,00

units 0

Number of units sold 8,500

There were no variances.

 21. The net income (loss) under absorption costing is:
 A. $(7,500).
 B. $9,000.
 C. $15,000.
 D. $18,000.
 E. some other amount.
Answer: D LO: 2 Type: A
 22. The net income (loss) under variable costing is:
 A. $(7,500).
 B. $9,000.
 C. $15,000.
 D. $18,000.
 E. some other amount.
Answer: B LO: 3 Type: A
 23. Income reported under absorption costing and variable costing is:
 A. always the same.
 B. typically different.
 C. always higher under absorption costing.
 D. always higher under variable costing.
 E. always the same or higher under absorption costing.
Answer: B LO: 4 Type: RC
 24. Gomez's inventory increased during the year. On the basis of this information, income
reported under absorption costing:
 A. will be the same as that reported under variable costing.
 B. will be higher than that reported under variable costing.
 C. will be lower than that reported under variable costing.
 D. will differ from that reported under variable costing, the direction of which cannot be
determined from the information given.
 E. will be less than that reported in the previous period.
Answer: B LO: 4 Type: N
 25. Which of the following conditions would cause absorption-costing net income to be
lower than variable-costing net income?
 A. Units sold exceeded units produced.
 B. Units sold equaled units produced.
 C. Units sold were less than units produced.
 D. Sales prices decreased.
 E. Selling expenses increased.
Answer: A LO: 4 Type: N
 26. Which of the following situations would cause variable-costing net income to be lower
than absorption-costing net income?
 A. Units sold equaled 39,000 and units produced equaled 42,000.
 B. Units sold and units produced were both 42,000.
 C. Units sold equaled 55,000 and units produced equaled 49,000.
 D. Sales prices decreased by $7 per unit during the accounting period.
 E. Selling expenses increased by 10% during the accounting period.
Answer: A LO: 4 Type: N
 27. Consider the following statements about absorption-and variable-costing net income:

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 I. Yearly income reported under absorption costing will differ from income reported under
variable costing if production and sales volumes differ.
 II. Long-run, total income reported under absorption costing will often be close to that
reported under variable costing.
 III. Differences in income under absorption and variable costing can often be reconciled by
multiplying the change in inventory (in units) by the variable manufacturing overhead cost per
unit.
Which of the above statements is (are) true?
 A. I only.
 B. II only.
 C. III only.
 D. I and II.
 E. II and III.
Answer: D LO: 4 Type: RC
 28. Which of the following formulas can often reconcile the difference between absorption-
and variable-costing net income?
 A. Change in inventory units x predetermined variable-overhead rate per unit.
 B. Change in inventory units ÷ predetermined variable-overhead rate per unit.
 C. Change in inventory units x predetermined fixed-overhead rate per unit.
 D. Change in inventory units ÷ predetermined fixed-overhead rate per unit.
 E. (Absorption-costing net income -variable-costing net income) x fixed-overhead rate per
unit.
Answer: C LO: 4 Type: RC
 29. Monex reported $65,000 of net income for the year by using absorption costing. The
company had no beginning inventory, planned and actual production of 20,000 units, and sales
of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted
fixed manufacturing overhead was $100,000. If there were no variances, net income under
variable costing would be:
 A. $15,000.
 B. $55,000.
 C. $65,000.
 D. $75,000.
 E. $115,000.
Answer: B LO: 4 Type: A
 30. Canyon reported $106,000 of net income for the year by using variable costing. The
company had no beginning inventory, planned and actual production of 50,000 units, and sales
of 47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted
fixed manufacturing overhead was $150,000. If there were no variances, net income under
absorption costing would be:
 A. $52,000.
 B. $97,000.
 C. $106,000.
 D. $115,000.
 E. $160,000.
Answer: D LO: 4 Type: A
 31. Consider the following statements about absorption costing and variable costing:
 I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
 II. Absorption costing must be used for external financial reporting.
 III. A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
 A. I only.
 B. II only.
 C. III only.
 D. I and II.

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 E. I, II, and III.

Answer: E LO: 5, 6 Type: RC
 32. Consider the following statements about absorption costing and variable costing:
 I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
 II. Variable costing must be used for external financial reporting.
 III. A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
 A. I only.
 B. II only.
 C. III only.
 D. I and II.
 E. I and III.
Answer: E LO: 5, 6 Type: RC
 33. For external-reporting purposes, generally accepted accounting principles require that net
income be based on:
 A. absorption costing.
 B. variable costing.
 C. direct costing.
 D. semivariable costing.
 E. activity-based costing.
Answer: A LO: 6 Type: RC
 34. Under throughput costing, the cost of a unit typically includes:
 A. selling costs.
 B. fixed manufacturing overhead.
 C. the direct costs incurred whenever a unit is manufactured.
 D. administrative costs.
 E. all of the above.
Answer: C LO: 7 Type: RC
 35. Which of the following methods defines product cost as the unit-level cost incurred each
time a unit is manufactured?
 A. Throughput costing.
 B. Indirect costing.
 C. Process costing.
 D. Absorption costing.
 E. Back-flush costing.
Answer: A LO: 7 Type: RC
 36. Orion's management recently committed to incurring direct labor and all manufacturing
overhead charges regardless of the number of units produced. Under throughput costing, the
company's cost of goods sold would include charges for:
 A. selling and administrative costs.
 B. direct materials.
 C. direct labor and manufacturing overhead.
 D. direct materials, direct labor, and manufacturing overhead.
 E. direct materials, direct labor, manufacturing overhead, and selling and administrative
costs.
Answer: B LO: 8 Type: N
 37. Highline Company reported the following costs for the year just ended:
Throughput manufacturing costs $180,000

Non-throughput manufacturing costs 600,000

Selling and administrative costs 125,000

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If Highline uses throughput costing and had sales revenues for the period of
$950,000, which of the following choices correctly depicts the company's
cost of goods sold and net income?

Cost of Goods Sold Net Income

A $180,00
$45,000
. 0

B $180,00 $645,00
. 0 0

C $305,00
$45,000
. 0

D $305,00 $645,00
. 0 0

 E. Some other combination of figures not listed above.

Answer: A LO: 8 Type: A
 38. The fixed-overhead volume variance under variable costing:
 A. coincides with the fixed manufacturing overhead that was applied to production.
 B. is deducted on the income statement.
 C. does not exist.
 D. will equal the fixed-overhead budget variance.
 E. must be unfavorable.
Answer: C LO: 9 Type: RC
 39. Which of the following differs between absorption costing and variable costing?
 A. The number of units produced.
 B. The fixed-overhead volume variance.
 C. Sales revenues.
 D. The treatment of variable manufacturing overhead.
 E. Income tax rates.
Answer: B LO: 9 Type: RC

EXERCISES
Characteristics of Absorption Costing and Variable Costing
 40. Consider the statements that follow.
 1. Variable selling costs are expensed when incurred.
 2. The income statement discloses a company’s contribution margin.
 3. Fixed manufacturing overhead is attached to each unit produced.
 4. Direct labor becomes part of a unit’s cost.
 5. Sales revenue minus cost of goods sold equals contribution margin.
 6. This method must be used for external financial reporting.
 7. Fixed selling and administrative expenses are treated in the same manner as fixed
manufacturing overhead.
 8. This method is sometimes called full costing.
 9. This method requires the calculation of a fixed manufacturing cost per unit.
Required: Determine which of the nine statements:

 A. Relate only to absorption costing.

 B. Relate only to variable costing.
 C. Relate to both absorption costing and variable costing.
 D. Relate to neither absorption costing nor variable costing.
LO: 1, 2, 3, 6 Type: RC, N
Answer:

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 A. 3, 6, 8, 9
 B. 2, 7
 C. 1, 4
D. 5

Miscellaneous Calculations: Variable and

Absorption Costing
 41. Information taken from Grille Corporation's May accounting records follows.
Direct materials used $150,000

Direct labor 80,000

Variable manufacturing overhead 30,000

Fixed manufacturing overhead 100,000

Variable selling and administrative costs 51,000

Fixed selling and administrative costs 60,000

Sales revenues 625,000

Required:
 A. Assuming the use of variable costing, compute the inventoriable costs for the month.
 B. Compute the month's inventoriable costs by using absorption costing.
 C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units
were sold during May. Determine the amount of fixed manufacturing overhead and fixed selling
and administrative costs that would be expensed for the month under (1) variable costing and (2)
absorption costing.
 D. Assume the same data as in requirement "C." Compute the contribution margin that would
be reported on a variable-costing income statement.
LO: 1, 2, 3 Type: A
Answer:

Direct materials used $150,000

Direct labor 80,000

A
.
Variable manufacturing overhead 30,000

Total $260,000

Direct materials used $150,000

Direct labor 80,000

B
Variable manufacturing overhead 30,000
.
Fixed manufacturing overhead 100,000

Total $360,000

C 1. Fixed manufacturing overhead: $100,000 Fixed selling and

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. administrative costs: $60,000

 2. Fixed manufacturing overhead: ($100,000 ÷ 20,000 units) x 18,000 units = $90,000 Fixed
selling and administrative costs: $60,000
 D. Variable manufacturing costs: $150,000 + $80,000 + $30,000 = $260,000 Variable
manufacturing costs per unit: $260,000 ÷ 20,000 units = $13 Contribution margin: $625,000 -
[(18,000 x $13) + $51,000] = $340,000
Miscellaneous Calculations: Variable and
Absorption Costing
 42. Sosa, Inc., began operations at the start of the current year, having a production target of
60,000 units. Actual production totaled 60,000 units, and the company sold 90% of its
manufacturing output at $55 per unit. The following costs were incurred:
Manufacturing:

Direct materials used $300,000

Direct labor 420,000

Variable manufacturing overhead 360,000

Fixed manufacturing overhead 600,000

Selling and administrative:

Variable 120,000

Fixed 630,000

Required:
 A. Assuming the use of variable costing, compute the cost of Sosa's ending finished-goods
inventory.
 B. Compute the company's contribution margin. Would Sosa disclose the contribution
margin on a variable-costing income statement or an absorption-costing income statement?
 C. Assuming the use of absorption costing, how much fixed selling and administrative cost
would Sosa include in the ending finished-goods inventory?
 D. Compute the company's gross margin.
LO: 1, 2, 3 Type: RC, A
Answer:
 A. Variable production costs total $1,080,000 ($300,000 + $420,000 + $360,000), or $18 per
unit ($1,080,000 ÷ 60,000 units). Since 6,000 units remain in inventory [0 + 60,000 -(60,000 x
90%)], the ending finished goods totals $108,000 (6,000 x $18).
B. Sales revenue (60,000 units x 90% x $2,970,00
$55) 0

Less: Variable cost of goods sold

$972,00
(60,000 units x 90% x $18)
0

Variable selling and administrative 120,000 1,092,000

Contribution margin $1,878,00

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The contribution margin is disclosed on a variable-costing income statement.

 C. None. All fixed selling and administrative cost is treated as a period cost and expensed
against revenue.
 D. The cost of a unit would increase by $10 ($600,000 ÷ 60,000 units) because of the
addition of fixed manufacturing overhead. Thus:
$2,970,00
Sales revenue
0

Cost of goods sold (60,000 units x 90% x

1,512,000
$28)

$1,458,00
Gross margin
0

Absorption-and Variable-Costing Income

Calculations
 43. The following data relate to Venture Company, a new corporation, during a period when
the firm produced and sold 100,000 units and 90,000 units, respectively:
Direct materials used $400,000

Direct labor 200,000

Fixed manufacturing overhead 250,000

Variable manufacturing overhead 120,000

Fixed selling and administrative expenses 300,000

Variable selling and administrative

45,000
expenses

The company met its original planned production target of 100,000 units.
There were no variances during the period, and the firm's selling price is $15
per unit.
Required:
 A. What is the cost of Venture's end-of-period finished-goods inventory under the variable-
costing method?
 B. Calculate the company's variable-costing net income.
 C. Calculate the company's absorption-costing net income.
LO: 1, 2, 3 Type: A
Answer:
 A. Ending finished-goods inventory (units): 0 + 100,000 -90,000 = 10,000 Inventoriable
costs under variable costing:
Direct materials used $400,000

Direct labor 200,000

Variable manufacturing overhead 120,000

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Total $720,000

Variable cost per unit produced: $720,000 ÷ 100,000 units = $7.20 per unit
Ending inventory: 10,000 units x $7.20 = $72,000

$1,350,00
B. Sales revenue (90,000 units x $15)
0

Less: Variable costs [(90,000 units x $7.20) +

693,000
$45,000]

Contribution margin $ 657,000

Less: Fixed costs ($250,000 + $300,000) 550,000

Net income $ 107,000

 C. Predetermined fixed overhead rate: $250,000 ÷ 100,000 units = $2.50 Absorption cost per
unit: $7.20 + $2.50 = $9.70
$1,350,00
Sales revenue (90,000 units x $15)
0

Less: Cost of goods sold (90,000 units x

873,000
$9.70)

Gross margin $ 477,000

Less: Operating costs ($300,000 +

345,000
$45,000)

Net income $ 132,000

Absorption-and Variable-Costing Inventory/Income

Calculations
 44. The following data relate to Hunter, Inc., a new company:
Planned and actual production 200,000 units

Sales at $48 per unit 170,000 units

Manufacturing costs:

Variable $18 per unit

Fixed $840,000

Selling and administrative costs:

Variable $7 per unit

Fixed $925,000

There were no variances during the period.

Required:

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 A. Determine the number of units in the ending finished-goods inventory.

 B. Calculate the cost of the ending finished-goods inventory under (1) variable costing and
(2) absorption costing.
 C. Determine the company's variable-costing net income.
 D. Determine the company's absorption-costing net income.
LO: 1, 2, 3 Type: A
Answer:
 A. Ending finished-goods inventory: 0 + 200,000 -170,000 = 30,000 units
 B. Variable costing: 30,000 units x $18 = $540,000 Absorption costing:
Predetermined fixed overhead rate: $840,000 ÷ 200,000 units =
$4.20;

30,000 units x ($18.00 + $4.20) = $666,000

$8,160,00
C. Sales revenue (170,000 units x $48)
0

Less: Variable costs [170,000 units x ($18 + $7)] 4,250,000

$3,910,00
Contribution margin
0

Less: Fixed costs ($840,000 + $925,000) 1,765,000

$2,145,00
Net income
0

$8,160,00
D. Sales revenue (170,000 units x $48)
0

Less: Cost of goods sold [170,000 units x ($18.00 +

3,774,000
$4.20)]

$4,386,00
Gross margin
0

Less: Operating costs [(170,000 units x $7) +

2,115,000
$925,000]

$2,271,00
Net income
0

Conversion of Absorption-Cost Data to Variable-

Cost Data; Working Backwards
 45. Kim, Inc., began business at the start of the current year and maintains its accounting
records on an absorption-cost basis. The following selected information appeared on the
company's income statement and end-of-year balance sheet:
Income-statement data:

Sales revenues (35,000 units x $22) $770,000

Gross margin 210,000

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Total sales and administrative expenses 160,000

Balance-sheet data:

Ending finished-goods inventory (12,000

192,000
units)

Kim achieved its planned production level for the year. The company's fixed
manufacturing overhead totaled $141,000, and the firm paid a 10%
commission based on gross sales dollars to its sales force.
Required:
 A. How many units did Kim plan to produce during the year.
 B. How much fixed manufacturing overhead did the company apply to each unit produced?
 C. Compute Kim's cost of goods sold.
 D. How much variable cost did the company attach to each unit manufactured?
LO: 1, 2, 3 Type: A, N
Answer:
 A. Sales (35,000 units) + ending finished-goods inventory (12,000 units) = production
(47,000 units). Note: There is no beginning finished-goods inventory.
 B. Since planned and actual production figures are the same, Kim applied $3 to each unit
($141,000 ÷ 47,000 units).
C. Sales revenue $770,000

Gross margin 210,000

Cost of goods
$560,000
sold

 D. Kim attached $13 to each unit. This figure can be derived by analyzing cost of goods sold:
Cost of goods sold $560,000

Fixed cost in cost of goods sold (35,000 units x

105,000
$3)

Variable cost of goods sold $455,000

The same $13 figure can be obtained by studying the ending finished-good
inventory:

Ending finished-goods $192,00

inventory 0

Fixed cost (12,000 units x $3) 36,000

$156,00
Variable cost
0

$156,000 ÷ 12,000 units = $13

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Reconciliation of Absorption-and Variable-Costing

Income
 46. Houston Company has per-unit fixed and variable manufacturing costs of $40 and $15,
respectively. Variable selling and administrative costs are $9 per unit. Consider the two cases
that follow for the firm.
Case A: Variable-costing net income, $110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing net income, $178,000; sales, 7,500 units; production, 7,100 units
Required:
 A. From a product-costing perspective, what is the basic difference between absorption
costing and variable costing?
 B. Compute Houston's absorption-costing net income in Case A.
 C. Compute Houston's absorption-costing net income in Case

B.
Answer:
 A. The difference between absorption costing and variable costing lies in the treatment of
fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is a
product cost and attached to each unit produced. In contrast, under variable costing, it is written
off (expensed) as a period cost.
 B. Since the number of units sold equals the number of units produced, variable-and
absorption-income figures are the same: $110,000.
 C. With sales of 7,500 units and production of 7,100 units, income computed under
absorption costing includes $16,000 (400 units x $40) of prior-period fixed manufacturing
overhead. Absorption income is therefore $162,000 ($178,000 -$16,000).
Reconciliation of Absorption-and Variable-Costing
Income
 47. Beachcraft Corporation has fixed manufacturing cost of $12 per unit. Consider the three
independent cases that follow.
Case A: Absorption-and variable costing net income each totaled $240,000 in a period when
the firm produced 18,000 units.

Case B: Absorption-costing net income totaled $320,000 in a period when finished-goods

inventory levels rose by 7,000 units.

Case C: Absorption-costing net income and variable-costing net income respectively totaled
$220,000 and $250,000 in a period when the beginning finished-goods inventory was 14,000
units.

Required:
 A. In Case A, how many units were sold during the period?
 B. In Case B, how much income would Beachcraft report under variable costing?
 C. In Case C, how many units were in the ending finished-goods inventory?
LO: 4 Type: A
Answer:
 A. Absorption-and variable costing income will be the same amount when inventory levels
are unchanged. Thus, sales totaled 18,000 units.

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 B. The difference between absorption-costing income and variable-costing income is $84,000

(7,000 units x $12). Given that inventories are rising, variable-costing net income will amount to
$236,000 ($320,000 -$84,000).
 C. The $30,000 difference in income ($250,000 -$220,000) is explained by the change in
inventory units, multiplied by the fixed overhead per unit. Thus, the inventory changed by 2,500
units ($30,000 ÷ $12). Given that absorption income is less than income computed by the
variable-costing method, inventory levels must have decreased, resulting in an ending inventory
level of 11,500 units (14,000 -2,500).
Throughput Costing, Absorption Costing, Variable
Costing
 48. Coastal Corporation, which uses throughput costing, began operations at the start of the
current year. Planned and actual production equaled 20,000 units, and sales totaled 17,500 units
at $95 per unit. Cost data for the year were as follows:
Direct materials (per unit) $ 18

Conversion cost:

Direct labor 160,000

Variable manufacturing overhead 280,000

Fixed manufacturing overhead 340,000

Selling and administrative costs (total) 430,000

The company classifies direct materials as a throughput cost.

Required:
 A. Compute the company's total cost for the year.
 B. How much of this cost would be held in year-end inventory under (1) absorption costing,
(2) variable costing, and (3) throughput costing?
 C. How much of the company's total cost for the year would appear on the period's income
statement under (1) absorption costing, (2) variable costing, and (3) throughput costing?
 D. Compute the year's throughput-costing net income.
LO: 1, 2, 3, 7 Type: A, N
Answer:

A. Direct materials (20,000 units x

$ 360,000
$18)

Direct labor 160,000

Variable manufacturing overhead 280,000

Fixed manufacturing overhead 340,000

Selling and administrative costs 430,000

$1,570,00
Total
0

 B. The year-end inventory of 2,500 units (20,000 -17,500) is costed as follows:

Absorption Variable Throughput

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Costing Costing Costing

Direct materials $ 360,000 $360,000 $360,000

Direct labor 160,000 160,000

Variable manufacturing overhead 280,000 280,000

Fixed manufacturing overhead 340,000

Total product cost $1,140,000 $800,000 $360,000

Cost per unit (Total ÷ 20,000 units) $57 $40 $18

Year-end inventory (2,500 units x cost

$142,500 $100,000 $45,000
per unit)

 C. The total costs would be allocated between the current period's income statement and the
year-end inventory on the balance sheet. Thus:
Absorption costing: $1,570,000 -$142,500 = $1,427,500
Variable costing: $1,570,000 -$100,000 = $1,470,000 Throughput costing: $1,570,000 -$45,000
= $1,525,000
 D. Throughput income: Sales revenue (17,500 units x $95) -$1,525,000 = $137,500
Throughput Costing
 49. Krell Corporation, which uses throughput costing, began operations at the start of the
current year (20x1). Planned and actual production equaled 40,000 units, and sales totaled
35,000 units at $80 per unit. Cost data for 20x1 were as follows:
Direct materials (per unit) $ 20

Conversion cost:

Direct labor 215,000

Variable manufacturing
340,000
overhead

Fixed manufacturing overhead 528,000

Selling and administrative costs:

Variable (per unit) 8

Fixed 220,000

The company classifies direct materials as a throughput cost.

Required:
 A. What is meant by the term "throughput costing"?
 B. Compute the cost of the company's year-end inventory.
 C. Prepare Krell's income statement for the year.
LO: 1, 7 Type: RC, A
Answer:

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 A. Throughput costing is a technique that assigns only the unit-level spending amounts for
direct costs as the cost of products or services. In this case, direct materials is the only item that
qualifies as a throughput cost.
 B. Ending inventory: 0 + 40,000 units -35,000 units = 5,000 units; 5,000 units x $20 =
$100,000
C. Krell Corporation Throughput-Costing Income Statement For the Year
Ended December 31, 20x1

Sales revenue (35,000 units x $80) $2,800,000

Less: Cost of goods sold (35,000 units x $20) 700,000

Gross margin $2,100,000

Less: Operating costs

Direct labor $ 215,000

Variable manufacturing overhead 340,000

Fixed manufacturing overhead 528,000

Variable selling and administrative costs (35,000 units x $8) 280,000

Fixed selling and administrative costs 220,000

Total operating costs $1,583,000

Net income $ 517,000

Variable-and Absorption-Costing Income

Statements, Volume Variance
 50. Outdoors Company manufactures sleeping bags that sell for $30 each. The variable
standard costs of production are $19.50. Budgeted fixed manufacturing overhead is $100,000,
and budgeted production is 10,000 sleeping bags. The company actually manufactured 12,500
bags, of which 11,000 were sold. There were no variances during the year except for the fixed-
overhead volume variance. Variable selling and administrative costs are $0.50 per sleeping bag
sold; fixed selling and administrative costs are $5,000.
Required:
 A. Calculate the standard product cost per sleeping bag under absorption costing and variable
costing.
 B. Compute the fixed-overhead volume variance.
 C. Prepare income statements for the year by using absorption costing and variable costing.
LO: 2, 3, 9 Type: A
Answer:
 A. The absorption cost is $29.50 [$19.50 + ($100,000  10,000 units)], and the variable cost
is $19.50.
 B. Volume variance = budgeted fixed overhead -fixed overhead applied
= $100,000 -(12,500 units x $10) = $(25,000) or $25,000F

C.
Outdoors Company Absorption-Costing Income Statement For the Year Ended December 31, 20xx

Sales revenue (11,000 units x $30) $330,00

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Less: Cost of goods sold (11,000 units x $29.50) 324,500

Gross margin (at standard) $ 5,500

Add: Fixed-overhead volume variance 25,000

Gross margin (at actual) $ 30,500

Less: Operating expenses [(11,000 units x $0.50) +

10,500
$5,000]

Net income $ 20,000

Outdoors Company Variable-Costing Income Statement For the Year Ended December 31, 20xx

$330,00
Sales revenue (11,000 units x $30)
0

Less: Var. cost of goods sold (11,000 units x $214,50

$19.50) 0

Var. operating expenses (11,000 units x

5,500 220,000
$0.50)

$110,00
Contribution margin
0

Less: Fixed costs ($100,000 + $5,000) 105,000

Net income $ 5,000

DISCUSSION QUESTIONS
Absorption Costing, Variable Costing, and Terminology
 51. Absorption and variable costing are two different methods of measuring income and
costing inventory.
Required:
 A. Product costs are defined as costs associated with the manufacturing process. How does
the operational definition of product cost differ between absorption costing and variable costing?
 B. An absorption-costing income statement will report gross profit or gross margin whereas a
variable-costing income statement will report contribution margin. What is the difference
between these terms?
 C. BoSan, Inc., has greatly modified its manufacturing process to reduce non-value-added
activities and has also adopted the just-in-time philosophy. As a result, the average finished-
goods inventory has dropped from six weeks' supply to eight business days' supply. In view of
these changes, will the difference in operating income between variable costing and absorption
costing be greater or less than in the past? Explain.
LO: 1, 2, 3, 6 Type: RC, N
Answer:
 A. The sole difference between the two methods is that fixed manufacturing overhead costs
are defined as a product cost under absorption costing and as a period cost under variable
costing.

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 B. Gross profit (gross margin) is the difference between sales and cost of goods sold. Cost of
goods sold includes variable and fixed manufacturing costs. Contribution margin, on the other
hand, is the difference between sales and variable expenses, namely, variable cost of goods sold
and variable operating expenses. Fixed costs are ignored when calculating the contribution
margin.
 C. These changes should reduce the differences in operating income between absorption
costing and variable costing. Inventories of work-in-process and finished goods are much smaller
than previously; thus, changes in inventories will be much less significant, which reduces
differences in income.
Reconciliation of Absorption-and Variable-Costing Income
 52. The difference in net income between absorption and variable costing can be explained
by the change in finished-goods inventory (in units) multiplied by the standard fixed
manufacturing overhead rate.
Required: Explain why this calculation accounts for the difference noted.

LO: 4 Type: RC
Answer:
The only difference between the two methods is the treatment of fixed
manufacturing overhead. Such amounts are expensed under variable costing
whereas with absorption costing, a predetermined amount is attached to
each unit manufactured. This applied overhead moves back and forth
between the balance sheet and the income statement depending on what
happens to inventory during the period (i.e., increase or decrease). Because
of this situation, the change in inventory multiplied by the fixed
manufacturing overhead per unit corresponds with the difference in reported
income between absorption costing and variable costing.

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