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True/False Questions

1. Under variable costing, only variable production costs are treated as product costs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
2. Under variable costing, variable selling and administrative costs are included in
product costs.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
3. Absorption costing treats all manufacturing costs as product costs.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
4. In the preparation of financial statements using variable costing, fixed manufacturing
overhead is treated as a period cost.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
5. Absorption costing treats fixed manufacturing overhead as a period cost.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
6. When the number of units in work in process and finished goods inventories increase,
absorption costing net operating income will typically be greater than variable costing
net operating income.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Easy
7. Net operating income computed using absorption costing will always be greater than
net operating income computed using variable costing.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking


Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-5

8. When reconciling variable costing and absorption costing net operating income, fixed
manufacturing overhead costs released from inventory under absorption costing
should be added to variable costing net operating income to arrive at the absorption
costing net operating income.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
9. When production exceeds sales for the period, absorption costing net operating
income will exceed variable costing net operating income.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking


Level: Medium

10. Under variable costing it may be possible to report a profit even if the company sells
less than the break-even volume of sales.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 4

AICPA BB: Critical Thinking


Level: Medium

11. Absorption costing net operating income is closer to the net cash flow of a period than
is variable costing net operating income.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 4

AICPA BB: Critical Thinking


Level: Medium

12. Variable costing is not permitted for income tax purposes, but it is widely accepted for
external financial reports.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium
13. A basic concept of the contribution approach and variable costing is that fixed costs
are not important in an organization.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium
14. Variable costing is better suited to cost-volume-profit calculations than absorption
costing.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 4

AICPA BB: Critical Thinking


Level: Easy

15. When lean production is introduced, the difference in net operating income computed
under the absorption and variable costing methods is reduced.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 5

AICPA BB: Critical Thinking


Level: Easy

Multiple Choice Questions


16. How would the following costs be classified (product or period) under variable costing
at a retail clothing store?
A)
B)
C)
D)

Cost of purchasing clothing Sales commissions


Product
Product
Product
Period
Period
Product
Period
Period

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Medium
17. The principal difference between variable costing and absorption costing centers on:
A) whether variable manufacturing costs should be included as product costs.
B) whether fixed manufacturing costs should be included as product costs.
C) whether fixed manufacturing costs and fixed selling and administrative costs
should be included as product costs.
D) none of these.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
18. Which of the following costs at a manufacturing company would be treated as a
product cost under the variable costing method?
A) direct material cost
B) property taxes on the factory building
C) sales manager's salary
D) all of the above
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-7

19. Assuming that direct labor is a variable cost, the primary difference between the
absorption and variable costing is that:
A) variable costing treats only direct materials and direct labor as product cost
while absorption costing treats direct materials, direct labor, and the variable
portion of manufacturing overhead as product costs.
B) variable costing treats direct materials, direct labor, the variable portion of
manufacturing overhead, and an allocated portion of fixed manufacturing
overhead as product costs while absorption costing treats only direct materials,
direct labor, and the variable portion of manufacturing overhead as product
costs.
C) variable costing treats only direct materials, direct labor, the variable portion of
manufacturing overhead, and the variable portion of selling and administrative
expenses as product cost while absorption costing treats direct materials, direct
labor, the variable portion of manufacturing overhead, and an allocated portion
of fixed manufacturing overhead as product costs.
D) variable costing treats only direct materials, direct labor, and the variable portion
of manufacturing overhead as product costs while absorption costing treats
direct materials, direct labor, the variable portion of manufacturing overhead,
and an allocated portion of fixed manufacturing overhead as product costs.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
20. The costing method that treats all fixed costs as period costs is:
A) absorption costing.
B) job-order costing.
C) variable costing.
D) process costing.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy

21. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold
780,000 sets of artificial tan lines. What would have happened to net operating income
in this first year under the following costing methods if Bronfren had produced 20,000
fewer sets? (Assume that Bronfren has both variable and fixed production costs.)
A)
B)
C)
D)

Variable costing Absorption costing


Increase
Increase
Decrease
Increase
Decrease
Decrease
No effect
Decrease

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Medium
22. When sales are constant, but the production level fluctuates, net operating 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 operating income under absorption costing.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
23. Under the variable costing method, which of the following is always expensed in its
entirety in the period in which it is incurred?
A) fixed manufacturing overhead cost
B) fixed selling and administrative expense
C) variable selling and administrative expense
D) all of the above
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-9

24. Which of the following will usually be found on an income statement prepared using
the absorption costing method?
A)
B)
C)
D)

Contribution Margin Gross Margin


Yes
Yes
Yes
No
No
Yes
No
No

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy
25. Net operating income under variable and absorption costing will generally:
A) always be equal.
B) never be equal.
C) be equal only when production and sales are equal.
D) be equal only when production exceeds sales.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
26. When production exceeds sales, net operating income reported under variable costing
generally will be:
A) greater than net operating income reported under absorption costing.
B) less than net operating income reported under absorption costing
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium

27. Net operating income under absorption costing may differ from net operating income
determined under variable costing. How is this difference calculated?
A) change in the quantity of units in inventory times the fixed manufacturing
overhead rate per unit.
B) number of units produced during the period times the fixed manufacturing
overhead rate per unit.
C) change in the quantity of units in inventory times the variable manufacturing
cost per unit.
D) number of units produced during the period times the variable manufacturing
cost per unit.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard Source: CMA, adapted
28. When sales are constant, but the production level fluctuates, net operating income
determined by the absorption costing method will:
A) tend to fluctuate in the same direction as fluctuations in the level of production.
B) tend to remain constant.
C) tend to fluctuate inversely with fluctuations in the level of production.
D) none of these
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium
29. A reason why absorption costing income statements are sometimes difficult for the
manager to interpret is that:
A) they omit variable expenses entirely in computing net operating income.
B) they shift portions of fixed manufacturing overhead from period to period
according to changing levels of inventories.
C) they include all fixed manufacturing overhead on the income statement each
year as a period cost.
D) they ignore inventory levels in computing income charges.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-11

30. Under the theory of constraints (TOC), which of the following is treated as a period
cost?
A)
B)
C)
D)

Direct labor Direct material


Yes
Yes
Yes
No
No
Yes
No
No

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Medium
31. Fleet Corporation produces a single product. The company manufactured 700 units
last year. The ending inventory consisted of 100 units. There was no beginning
inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing
costs were $2.00 per unit. What would be the change in the dollar amount of ending
inventory if variable costing was used instead of absorption costing?
A) $800 decrease
B) $200 decrease
C) $0
D) $200 increase
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted
Solution:
Change in inventory Fixed manufacturing costs per unit
= 100 $2 = $200 decrease

32. Shun Corporation manufactures and sells a hand held calculator. The following
information relates to Shun's operations for last year:
Unit product cost under variable costing.........................
Fixed manufacturing overhead cost for the year.............
Fixed selling and administrative cost for the year...........
Units (calculators) produced and sold.............................

$5.20 per unit


$260,000
$180,000
400,000

What is Shun's unit product cost under absorption costing for last year?
A) $4.10
B) $4.55
C) $5.85
D) $6.30
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = Fixed manufacturing overhead Units produced
= $260,000 400,000 units = $0.65 per unit
Unit product cost = $5.20 + $0.65 = $5.85

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-13

33. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:
Units in beginning inventory.....................
Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
7,100
7,000
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$33
$53
$1
$7

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$170,40
0
$7,000

What is the unit product cost for the month under variable costing?
A) $118
B) $94
C) $111
D) $87
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $33 + $53 + $1 = $87

34. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:
Units in beginning inventory.....................
Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
1,900
1,700
200

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$33
$32
$2
$6

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$72,20
0
$6,800

What is the unit product cost for the month under absorption costing?
A) $67
B) $105
C) $111
D) $73
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $72,200 1,900 = $38
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
cost + Fixed manufacturing overhead cost
= $33 + $32 + $2 + $38 = $105

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-15

35. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:
Selling price...............................................

$79

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
6,600
6,300
300

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$14
$30
$4
$8

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$46,20
0
$88,20
0

What is the total period cost for the month under the variable costing approach?
A) $138,600
B) $134,400
C) $46,200
D) $184,800
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Total variable selling and administrative cost = $8 6,300 = $50,400
Period cost = Total variable selling and administrative cost + Fixed manufacturing
overhead + Fixed selling and administrative cost
= $50,400 + $46,200 + $88,200 = $184,800

36. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:
Selling price...............................................

$97

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
2,200
2,100
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$32
$25
$2
$9

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$8,800
$37,80
0

What is the total period cost for the month under the absorption costing approach?
A) $56,700
B) $65,500
C) $8,800
D) $37,800
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Total variable selling and administrative cost = $9 2,100 = $18,900
Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $18,900 + $37,800 = $56,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-17

37. Mullee Corporation produces a single product and has the following cost structure:
Number of units produced each year.....................
Variable costs per unit:
Direct materials..................................................
Direct labor.........................................................
Variable manufacturing overhead......................
Variable selling and administrative expense......
Fixed costs per year:
Fixed manufacturing overhead...........................
Fixed selling and administrative expense...........

7,000
$51
$12
$2
$5
$441,00
0
$112,00
0

The unit product cost under absorption costing is:


A) $149
B) $65
C) $63
D) $128
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $441,000 7,000 = $63
Unit product cost = $63 + $51 + $12 + $2 = $128

38. Stoneberger Corporation produces a single product and has the following cost
structure:
Number of units produced each year.....................
Variable costs per unit:
Direct materials..................................................
Direct labor.........................................................
Variable manufacturing overhead......................
Variable selling and administrative expense......
Fixed costs per year:
Fixed manufacturing overhead...........................
Fixed selling and administrative expense...........

4,000
$50
$72
$6
$3
$296,00
0
$76,000

The unit product cost under variable costing is:


A) $128
B) $125
C) $202
D) $131
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = $50 + $72 + $6 = $128

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-19

39. Beamish Inc., which produces a single product, has provided the following data for its
most recent month of operations:
Number of units produced.....................................
Variable costs per unit:
Direct materials...................................................
Direct labor.........................................................
Variable manufacturing overhead.......................
Variable selling and administrative expense......
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative expense...........

8,000
$37
$56
$4
$2
$312,00
0
$448,00
0

There were no beginning or ending inventories. The unit product cost under absorption
costing was:
A) $93
B) $97
C) $136
D) $194
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $312,000 8,000 = $39
Unit product cost = $37 + $56 + $4 + $39 = $136

40. Kray Inc., which produces a single product, has provided the following data for its
most recent month of operations:
Number of units produced...............................................
Variable costs per unit:
Direct materials............................................................
Direct labor...................................................................
Variable manufacturing overhead................................
Variable selling and administrative expense................
Fixed costs:
Fixed manufacturing overhead.....................................
Fixed selling and administrative expense.....................

3,000
$91
$13
$7
$6
$237,00
0
$165,00
0

There were no beginning or ending inventories. The unit product cost under variable
costing was:
A) $111
B) $190
C) $117
D) $110
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $91 + $13 + $7 = $111

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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41. The following data pertain to last year's operations at Clarkson, Incorporated, a
company that produces a single product:
Units in beginning inventory.....................
Units produced...........................................
Units sold...................................................

0
100,000
98,000

Selling price per unit..................................

$10.00

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$1.50
$2.50
$1.00
$2.00

Fixed costs per year:


Fixed manufacturing overhead...............
Fixed selling and administrative.............

$200,00
0
$50,000

What was the absorption costing net operating income last year?
A) $44,000
B) $48,000
C) $50,000
D) $49,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead = $200,000 100,000 = $2
Unit product cost = $1.50 + $2.50 + $1 + $2 = $7
Absorption costing income statement
Sales ($10 98,000)............................................
Cost of goods sold ($7 98,000).........................
Gross margin........................................................
Selling and administrative expenses expenses:
Variable selling and administrative................... $196,000
Fixed selling and administrative.......................
50,000
Net operating income...........................................

$980,000
686,000
294,000
246,000
$ 48,000

42. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:
Selling price...............................................

$135

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
6,400
6,200
200

Variable costs per unit:


Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Variable selling and administrative...........

$49
$38
$6
$11

Fixed costs:
Fixed manufacturing overhead..................
Fixed selling and administrative................

$108,80
0
$74,400

The total contribution margin for the month under the variable costing approach is:
A) $155,000
B) $260,400
C) $192,200
D) $83,400
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Sales revenue ($135 6,200)................................
Variable cost:.........................................................
Direct materials ($49 6,200)............................
Direct labor ($38 6,200)..................................
Variable manufacturing overhead ($6 6,200).
Variable selling and administrative ($11
6,200)..............................................................
Contribution margin..............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$837,000
$303,800
235,000
37,200
68,200

644,800
$192,200

7-23

43. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:
Selling price...............................................

$123

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
1,000
900
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$41
$26
$4
$6

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$17,00
0
$11,70
0

What is the net operating income for the month under variable costing?
A) $12,700
B) $5,600
C) $1,700
D) $14,400
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Sales ($123 900).................................................
Variable cost of goods sold ($71 900)................
Less variable selling and administrative ($6 900)
Contribution margin...............................................
Fixed cost:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$110,700
63,900
5,400
41,400
$17,000
11,700

28,700
$ 12,700

44. Swifton Company produces a single product. Last year, the company had net
operating income of $40,000 using variable costing. Beginning and ending inventories
were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost
was $3.00 per unit, what was the income using absorption costing?
A) $15,000
B) $25,000
C) $40,000
D) $55,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Difference between absorption costing net income and variable costing net
income = Change in inventory in units Unit fixed manufacturing overhead
= (27,000 22,000) $3 = 5,000 $3 = $15,000
Net income under absorption costing = $40,000 + $15,000 = $55,000
45. Blake Company produces a single product. Last year, Blake's net operating income
under absorption costing was $3,600 lower than under variable costing. The company
sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1
was variable selling expense. If production cost was $11 per unit under absorption
costing, then how many units did the company produce during the year?
A) 8,200 units
B) 8,800 units
C) 11,200 units
D) 11,800 units
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard
Solution:
Direct material + Direct labor + Variable manufacturing overhead
= Variable unit product cost = $9 $1 = $8
Unit fixed manufacturing overhead = $11 $8 = $3
Difference in net income between methods Unit fixed manufacturing overhead =
($3,600) $3 per unit = (1,200) units
Units produced = Units sold + Change in inventory = 10,000 + (1,200) = 8,800

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-25

46. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual
operating results for the first two years of operations:
Units (spice racks) produced.................................
Units (spice racks) sold..........................................
Absorption costing net operating income..............
Variable costing net operating income..................

Year 1
40,000
37,000
$44,00
0
$38,00
0

Year 2
40,000
41,000
$52,00
0
???

Pungent's cost structure and selling price were the same for both years. What is
Pungent's variable costing net operating income for Year 2?
A) $48,000
B) $50,000
C) $54,000
D) $56,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard
Solution:
Unit fixed manufacturing overhead = Difference in net income Change in inventory
= ($44,000 $38,000) (40,000 37,000) = $6,000 3,000 = $2
Variable costing net operating income = Absorption costing net income Difference
in net operating income
= $52,000 [(40,000 41,000) $2)]
= $52,000 ($2,000) = $54,000

47. Sipho Corporation manufactures a variety of products. Last year, the company's
variable costing net operating income was $90,900. Fixed manufacturing overhead
costs released from inventory under absorption costing amounted to $21,900. What
was the absorption costing net operating income last year?
A) $69,000
B) $90,900
C) $21,900
D) $112,800
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Absorption costing net income = Variable costing net income fixed manufacturing
overhead costs released from inventory
= $90,900 $21,900 = $69,000
48. Last year, Kirsten Corporation's variable costing net operating income was $63,400.
Fixed manufacturing overhead costs released from inventory under absorption costing
amounted to $10,700. What was the absorption costing net operating income last year?
A) $10,700
B) $74,100
C) $63,400
D) $52,700
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Absorption costing net income = Variable costing net income fixed manufacturing
overhead costs released from inventory
= $63,400 $10,700 = $52,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-27

49. Bellue Inc. manufactures a variety of products. Variable costing net operating income
was $96,300 last year and ending inventory decreased by 2,600 units. Fixed
manufacturing overhead cost was $1 per unit. What was the absorption costing net
operating income last year?
A) $2,600
B) $93,700
C) $96,300
D) $98,900
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Absorption costing net income = Variable costing net income fixed manufacturing
overhead costs released from inventory
= $96,300 [2,600 $1] = $96,300 $2,600 = $93,700
50. Last year, Tinklenberg Corporation's variable costing net operating income was
$52,400 and its ending inventory decreased by 1,400 units. Fixed manufacturing
overhead cost was $8 per unit. What was the absorption costing net operating income
last year?
A) $41,200
B) $11,200
C) $63,600
D) $52,400
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Absorption costing net income = Variable costing net income fixed manufacturing
overhead costs released from inventory
= $52,400 [1,400 $8] = $52,400 $11,200 = $41,200

Use the following to answer questions 51-53:


Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000 units and
sold 12,000 units. Production costs for the year were as follows:
Direct materials......................................................
Direct labor............................................................
Variable manufacturing overhead.........................
Fixed manufacturing overhead..............................

$150,00
0
$180,00
0
$135,00
0
$210,00
0

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed
selling and administrative expenses totaled $180,000. There were no units in the beginning
inventory. Assume that direct labor is a variable cost.
51. The contribution margin per unit would be:
A) $25
B) $39
C) $34
D) $35
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Unit selling price ($840,000 12,000)..................
Less direct materials ($150,000 15,000)............
Less direct labor ($180,000 15,000)...................
Less variable manufacturing overhead ($135,000
15,000)............................................................
Less variable selling and administrative ($60,000
12,000)............................................................
Contribution margin..............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$70
$10
12
9
5

36
$34

7-29

52. Under absorption costing, the carrying value on the balance sheet of the ending
inventory for the year would be:
A) $135,000
B) $93,000
C) $105,000
D) $0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Unit fixed manufacturing overhead = $210,000 15,000 = $14
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= $10 + $12 + $9 + $14 = $45
Carrying value = Unit product cost Ending inventory in units
= $45 (15,000 12,000) = $45 3,000 = $135,000
53. Under variable costing, the company's net operating income for the year would be:
A) $42,000 higher than under absorption costing
B) $30,000 higher than under absorption costing
C) $30,000 lower than under absorption costing
D) $42,000 lower than under absorption costing
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead Change in inventory in units
= $14 (15,000 12,000) = $14 3,000 = $42,000
Since the units produced are greater than the units sold (inventory increased), net
income under absorption costing will be higher than net income under variable
costing.

Use the following to answer questions 54-61:


Abdi Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$81

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
7,300
7,000
300

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$20
$30
$7
$11

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$65,70
0
$21,00
0

54. What is the unit product cost for the month under variable costing?
A) $77
B) $66
C) $68
D) $57
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Direct materials + Direct labor + Variable manufacturing overhead
= $20 + $30 + $7 = $57

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-31

55. What is the unit product cost for the month under absorption costing?
A) $66
B) $77
C) $57
D) $68
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $65,700 7,300 = $9
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $20 + $30 + $7 + $9 = $66
56. The total contribution margin for the month under the variable costing approach is:
A) $91,000
B) $168,000
C) $105,000
D) $25,300
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit selling price...................................................
Less unit variable costs:
Direct materials..................................................
Direct labor.........................................................
Variable manufacturing overhead......................
Variable selling and administrative....................
Contribution margin..............................................
Total contribution margin = $13 7,000 = $91,000

$81
$20
30
7
11

68
$13

57. The total gross margin for the month under the absorption costing approach is:
A) $105,000
B) $124,800
C) $7,000
D) $91,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead = $9
Unit product cost under absorption costing = $20 + $30 + $7 + $9 = $66
$567,00
Sales revenue ($81 7,000)..................................
0
462,00
Cost of goods sold ($66 7,000)..........................
0
$105,00
Gross margin..........................................................
0
58. What is the total period cost for the month under the variable costing approach?
A) $65,700
B) $163,700
C) $98,000
D) $86,700
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Variable selling and administrative cost + Fixed costs
= ($11 7,000) + ($65,700 + $21,000)
= $77,000 + $86,700 = $163,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-33

59. What is the total period cost for the month under the absorption costing approach?
A) $98,000
B) $65,700
C) $21,000
D) $163,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Variable selling and administrative cost + Fixed selling and administrative cost
= $11 7,000 + $21,000
= $77,000 + $21,000 = $98,000
60. What is the net operating income for the month under variable costing?
A) $2,700
B) $4,300
C) $7,000
D) $(12,800)
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$567,00
0

Sales revenue ($81 7,000)..................................


Variable costs:
Product cost ($57 7,000).................................
Variable selling and administrative ($11
7,000)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Contribution margin..............................................

$399,00
0
77,000
$ 65,700
21,000

476,000
91,000
86,700
$ 4,300

61. What is the net operating income for the month under absorption costing?
A) $7,000
B) $4,300
C) $(12,800)
D) $2,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Sales revenue ($81 7,000)..................................
Cost of goods sold ($66 7,000)..........................
Gross margin..........................................................
Selling and administrative expenses:
Variable selling and administrative ($11
7,000)..............................................................
Fixed selling and administrative.........................
Net operating income.............................................

$567,00
0
462,000
105,000
$77,000
21,000

98,000
$ 7,000

Use the following to answer questions 62-65:


Hopkins Company manufactures a single product. The following data pertain to the
company's operations last year:
Selling price per unit..................................
Variable costs per unit:
Production...............................................
Selling and administration......................
Fixed costs in total:
Production...............................................
Selling and administration......................

$24
$8
$2
$48,00
0
$36,00
0

At the beginning of the year there were no units in inventory. A total of 12,000 units were
produced during the year, and 10,000 units were sold.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-35

62. Under variable costing, the unit product cost is:


A) $8.00
B) $10.00
C) $12.00
D) $14.00
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Production cost = $8
63. Under absorption costing, the unit product cost is:
A) $8.00
B) $10.00
C) $12.00
D) $15.00
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $48,000 12,000 = $4
Unit product cost = $8 + $4 = $12

64. The net operating income under variable costing would be:
A) $64,000
B) $60,000
C) $56,000
D) $52,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Sales revenue ($24 10,000)................................
Variable costs:
Variable cost of goods sold ($8 10,000).........
Variable selling and administrative ($2
10,000)............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$240,00
0
$80,000
20,000
$48,000
36,000

100,000
140,000
84,000
$ 56,000

65. The net operating income under absorption costing would be:
A) the same as the income under variable costing.
B) $8,000 greater than the income under variable costing.
C) $12,000 greater than the income under variable costing.
D) $8,000 less than the income under variable costing.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead Change in number of units in ending inventory =
$4 (12,000 10,000) = $4 2,000
= $8,000 greater than the income under variable costing since inventory increased

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-37

Use the following to answer questions 66-68:


Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost structure:

Manufacturing cost..................
Selling and administrative.......

Variable cost per


parachute
$160
$10

Total fixed cost


for the year
$342,000
$171,000

In its first year of operations, Phearsum produced and sold 4,000 parachutes. The parachutes
sold for $310 each.
66. If Phearsum would have sold only 3,800 parachutes in its first year, what total amount
of cost would have been assigned to the 200 parachutes in finished goods inventory
under the variable costing method?
A) $28,000
B) $32,000
C) $34,000
D) $49,100
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = $160
Total cost of ending finished goods inventory = $160 200 = $32,000

67. Refer back to the original data. How would Phearsum's absorption costing net
operating income been affected in its first year if only 3,800 parachutes were sold
instead of 4,000?
A) net operating income would have been $2,350 lower
B) net operating income would have been $10,900 lower
C) net operating income would have been $12,900 lower
D) net operating income would have been $28,000 lower
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Hard
Solution:
Unit fixed manufacturing overhead = $342,000 4,000 = $85.50
Unit product cost under absorption costing = $160 + $85.50 = $245.50
Unit gross margin = $310 $245.50 = $64.50
Cost savings ($10 200)....................................
$ 2,000
Less: decrease in gross margin ($64.50 200)...
12,900
Net operating income increase (decrease).......... ($10,900)
68. Refer back to the original data. How would Phearsum's variable costing net operating
income been affected in its first year if 4,500 parachutes were produced instead of
4,000 and Phearsum still sold 4,000 parachutes?
A) net operating income would not have been affected
B) net operating income would have been $38,000 higher
C) net operating income would have been $57,000 higher
D) net operating income would have been $75,000 lower
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-39

Use the following to answer questions 69-72:


Feery Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$110

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
3,800
3,700
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$32
$34
$6
$11

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$68,40
0
$14,80
0

69. What is the unit product cost for the month under variable costing?
A) $72
B) $90
C) $83
D) $101
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Direct materials + Direct labor + Variable manufacturing overhead
= $32 + $34 + $6 = $72

70. What is the unit product cost for the month under absorption costing?
A) $83
B) $90
C) $72
D) $101
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $68,400 3,800 = $18
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $32 + $34 + $6 + $18 = $90
71. What is the net operating income for the month under variable costing?
A) $1,800
B) $16,700
C) $9,500
D) $18,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$407,00
0

Sales revenue ($110 3,700)................................


Variable costs:
Variable cost of goods sold ($72 3,700).........
Variable selling and administrative ($11
3,700)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$266,40
0
40,700
$ 68,400
14,800

307,100
99,900
83,200
$ 16,700

7-41

72. What is the net operating income for the month under absorption costing?
A) $18,500
B) $1,800
C) $9,500
D) $16,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Sales revenue ($110 3,700)................................
Cost of goods sold ($90 3,700)..........................
Gross margin..........................................................
Selling and administrative expenses costs:
Variable selling and administrative ($11
3,700)..............................................................
Fixed selling and administrative.........................
Net operating income.............................................

$407,00
0
333,000
74,000
$40,700
14,800

55,500
$ 18,500

Use the following to answer questions 73-76:


Jarbo Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$129

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

500
3,600
3,800
300

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$13
$59
$4
$8

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$97,20
0
$64,60
0

The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.
73. What is the unit product cost for the month under variable costing?
A) $76
B) $103
C) $84
D) $111
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $13 + $59 + $4 = $76

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-43

74. What is the unit product cost for the month under absorption costing?
A) $84
B) $76
C) $103
D) $111
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Unit fixed manufacturing overhead = $97,200 3,600 = $27
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $13 + $59 + $4 + $27 = $103
75. What is the net operating income for the month under variable costing?
A) $3,800
B) $24,400
C) $9,200
D) $8,100
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$490,20
0

Sales revenue ($129 3,800)................................


Variable costs:
Variable cost of goods sold ($76 3,800).........
Variable selling and administrative ($8
3,800)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$288,80
0
30,400
$ 97,200
64,600

319,200
171,000
161,800
$ 9,200

76. What is the net operating income for the month under absorption costing?
A) $8,100
B) $9,200
C) $3,800
D) $24,400
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Sales revenue ($129 3,800)................................
Cost of goods sold ($103 3,800)........................
Gross margin..........................................................
Selling and administrative expenses costs:
Variable selling and administrative ($8
3,800)..............................................................
Fixed selling and administrative.........................
Net operating income.............................................

$490,20
0
391,400
98,800
$30,400
64,600

95,000
$ 3,800

Use the following to answer questions 77-79:


Beach Corporation, which produces a single product, budgeted the following costs for its first
year of operations. These costs are based on a budgeted volume of 30,000 towels produced
and sold:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Fixed manufacturing overhead..................
Variable selling and administrative...........
Fixed selling and administrative................

$96,00
0
$48,00
0
$72,00
0
$60,00
0
$12,00
0
$36,00
0

During the first year of operations, Beach Towel actually produced 30,000 towels but only
sold 24,000 towels. Actual costs did not fluctuate from the cost behavior patterns described
above. The 24,000 towels were sold for $16 per towel. Assume that direct labor is a variable
cost.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-45

77. What is the total cost that would be assigned to Beach Towel's finished goods
inventory at the end of the first year of operations under the variable costing method?
A) $43,200
B) $45,600
C) $55,200
D) $64,800
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead) 30,000 units = ($96,000 + $48,000 + $72,000) 30,000 = $7.20
Total cost of ending finished goods inventory = Unit product cost Ending inventory
= $7.20 (30,000 24,000) = $7.20 6,000 = $43,200
78. Under the absorption costing method, what is Beach Towel's actual net operating
income for its first year?
A) $60,000
B) $115,200
C) $117,600
D) $124,800
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead) 30,000 units
= ($96,000 + $48,000 + $72,000 + $60,000) 30,000 = $9.20
Unit variable selling and administrative cost = $12,000 30,000 = $0.40
$384,00
Sales revenue ($16 24,000)................................
0
Cost of goods sold ($9.20 24,000).....................
220,800
Gross margin..........................................................
163,200
Selling and administrative expenses:
Variable selling and administrative ($0.40
24,000)............................................................
$ 9,600
Fixed selling and administrative.........................
36,000
45,600
$117,60
Net operating income.............................................
0

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-47

79. Assuming no change in cost structure, which of the following would have increased
Beach Towel's net operating income under the variable costing method in its first year
of operations?
A) an increase in sales volume with no increase in production volume
B) an increase in production volume with no increase in sales volume
C) both A and B above
D) none of the above
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Use the following to answer questions 80-83:
Blake Corporation, which produces a single product, has provided the following absorption
costing income statement for the month of June:
Blake Corporation
Income Statement
For the month ended June 30
Sales (9,500 units)....................................
Cost of goods sold:
Beginning inventory..............................
Add cost of goods manufactured..........
Goods available for sale........................
Less ending Inventory...........................
Cost of goods sold....................................
Gross margin............................................
Selling and administrative expenses:
Fixed.....................................................
Variable.................................................
Net operating income...............................

$285,00
0
$ 16,000
160,000
176,000
24,000
152,000
133,000
$ 75,000
19,000

94,000
$ 39,000

During June, the company's variable production costs were $10 per unit and its fixed
manufacturing overhead totaled $60,000. A total of 10,000 units were produced during June
and the company had 1,000 units in the beginning inventory. The company uses the LIFO
method to value inventories.

80. The contribution margin per unit during June was:


A) $20
B) $18
C) $16
D) $14
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Selling price ($285,000 9,500)...........................
Less variable product cost.....................................
Less unit variable selling and administrative
($19,000 9,500)...............................................
Unit contribution margin

$30
10
2
$18

81. The carrying value on the balance sheet of the company's inventory on June 30 under
the variable costing method would be:
A) $10,000
B) $12,000
C) $15,000
D) $24,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Ending inventory = Beginning inventory + Units produced Units sold
= 1,000 + 10,000 9,500 = 1,500
Carrying value = Ending inventory in units Variable production cost
= 1,500 $10 = $15,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-49

82. Net operating income under the variable costing method for June would be:
A) $36,000
B) $40,000
C) $53,000
D) $60,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Sales revenue (9,500 units)....................................
Variable costs:
Variable cost of goods sold ($10 9,500).........
Variable selling and administrative....................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$285,00
0
$95,000
19,000
$60,000
75,000

114,000
171,000
135,000
$ 36,000

83. The break-even point in units for the month under variable costing would be:
A) 6,000 units
B) 6,750 units
C) 7,500 units
D) 9,000 units
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Sales revenue (9,500 units)....................................
Variable costs:
Variable cost of goods sold ($10 9,500).........
Variable selling and administrative....................
Contribution margin..............................................

$285,00
0
$95,000
19,000

114,00
0
$171,00
0

Fixed costs Unit contribution margin = (Fixed manufacturing overhead + Fixed


selling and administrative) Unit contribution margin = ($60,000 + $75,000)
($171,000 9,500) = $135,000 $18 per unit = 7,500 units

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-51

Use the following to answer questions 84-87:


Haaikon Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price...............................................

$86

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
3,400
3,300
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$17
$39
$1
$8

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$40,80
0
$23,10
0

84. What is the unit product cost for the month under variable costing?
A) $77
B) $57
C) $69
D) $65
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = Direct materials + Direct Labor + Variable manufacturing
overhead = $17 + $39 + $1 = $57

85. The total contribution margin for the month under the variable costing approach is:
A) $56,100
B) $28,500
C) $95,700
D) $69,300
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$283,80
0

Sales revenue ($86 3,300)..................................


Variable costs:
Variable cost of goods sold ($57 3,300).........

$188,10
0

Variable selling and administrative ($8


3,300)..............................................................

26,40
0

Contribution margin..............................................

214,50
0
$
69,300

86. What is the total period cost for the month under the variable costing approach?
A) $40,800
B) $90,300
C) $49,500
D) $63,900
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= ($8 3,300) + $40,800 + $23,100
= $26,400 + $40,800 + $23,100 = $90,300

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-53

87. What is the net operating income for the month under variable costing?
A) $6,600
B) $(300)
C) $5,400
D) $1,200
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$283,80
0

Sales revenue ($86 3,300)..................................


Variable costs:
Variable cost of goods sold ($57 3,300).........
Variable selling and administrative ($8
3,300)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$188,10
0
26,400
$ 40,800
23,100

214,500
69,300
63,900
$ 5,400

Use the following to answer questions 88-89:


Ibarra Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$81

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
6,900
6,600
300

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$22
$28
$6
$5

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$69,00
0
$66,00
0

88. What is the unit product cost for the month under variable costing?
A) $71
B) $66
C) $56
D) $61
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $22 + $28 + $6 = $56

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-55

89. What is the net operating income for the month under variable costing?
A) $0
B) $(19,800)
C) $(3,000)
D) $3,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$534,60
0

Sales revenue ($81 6,600)..................................


Variable costs:
Variable cost of goods sold ($56 6,600).........
Variable selling and administrative ($5
6,600)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$369,60
0
33,000
$ 69,000
66,000

402,600
132,000
135,000
$ (3,000)

Use the following to answer questions 90-92:


Yankee Company manufactures a single product. The company has the following cost
structure:
Variable costs per unit:
Production...................................
Selling and administrative..........
Fixed costs in total:
Production...................................
Selling and administrative..........

$4
$1
$12,00
0
$8,000

Last year, 4,000 units were produced and 3,500 units were sold. There were no beginning
inventories.

90. Under variable costing, the unit product cost would be:
A) $4
B) $5
C) $7
D) $8
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Production cost = $4
91. The carrying value on the balance sheet of the ending finished goods inventory under
variable costing would be:
A) the same as under absorption costing
B) $1,500 less than under absorption costing
C) $2,000 higher than under absorption costing
D) $2,000 less than under absorption costing
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Unit fixed manufacturing overhead = $12,000 4,000 = $3
Difference in carrying value of ending finished goods inventory = Unit fixed
manufacturing overhead Change in inventory in units
= $3 (4,000 3,500)
= $1,500 less than under absorption costing

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7-57

92. Under absorption costing, the cost of goods sold for the year would be:
A) $28,000
B) $24,500
C) $17,500
D) $14,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead = $12,000 4,000 = $3
Product cost = $4 + $3 = $7
Cost of goods sold = $7 3,500 = $24,500
Use the following to answer questions 93-94:
Peterson Company produces a single product. Data from the company's records for last year
follow:
Units in beginning inventory.....................
Units produced...........................................
Units sold...................................................
Sales...........................................................
Manufacturing costs:
Variable..................................................
Fixed.......................................................
Selling and administrative expenses:
Variable..................................................
Fixed.......................................................

0
70,000
60,000
$1,400,00
0
$630,000
$315,000
$98,000
$140,000

93. The carrying value on the balance sheet of the ending finished goods inventory under
variable costing would be:
A) $90,000
B) $104,000
C) $105,000
D) $135,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted
Solution:
Unit variable product cost = $630,000 70,000 = $9
Change in inventory in units = 70,000 60,000 = 10,000
Carrying value of ending inventory = $9 10,000 = $90,000
94. Under the absorption costing method, Peterson's net operating income would be:
A) $217,000
B) $307,000
C) $352,000
D) $374,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Product cost = $9 + $4.50 = $13.50
Sales revenue......................................................
Cost of goods sold ($13.50 60,000).................
Gross margin.......................................................
Selling and administrative expenses:
Variable selling and administrative.................
Fixed selling and administrative......................
Net operating income..........................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$1,400,000
810,000
590,000
$ 98,000
140,000

238,000
$ 352,000

7-59

Use the following to answer questions 95-97:


McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost
structure:
Variable cost
Total fixed cost
per monitor
for the year
Manufacturing cost........................
$75.20
$912,000
Selling and administrative.............
$14.60
$456,000
In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000.
McCoy's gross margin in this first year was $2,629,600. McCoy's contribution margin in this
first year was $2,109,000.
95. Under the variable costing method, what is McCoy's net operating income for its first
year?
A) $266,000
B) $741,000
C) $1,261,600
D) $2,173,600
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$2,109,000
$912,00
0
456,00
0

1,368,000
$ 741,000

96. Under the absorption costing method, what is McCoy's net operating income for its
first year?
A) $266,000
B) $786,600
C) $1,261,600
D) $2,173,600
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Gross margin........................................................
Selling and administrative expenses:
Variable selling and administrative ($14.60
95,000)...........................................................
Fixed selling and administrative.......................
Net operating income...........................................

$2,629,600
$1,387,000
456,000

1,843,000
$ 786,600

97. If McCoy produces 100,000 monitors and sells 100,000 monitors in the second year of
operations, which of the following statements will be true? (Assume no change in cost
structure or selling price.)
A) McCoy's variable costing net operating income in its second year will be greater
than its absorption costing net operating income
B) McCoy's absorption costing unit product cost will decrease in the second year
C) McCoy's gross margin will be equal to its contribution margin in its second year
D) Both A and B above
E)
none of the above
Ans: E AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-61

Use the following to answer questions 98-100:


Mediocre Manufacturing Company produces a single product. Management budgeted the
following costs for its first year of operations. These costs are based on a budgeted volume of
4,000 units produced and sold:
Direct materials..............................
Direct labor....................................
Manufacturing overhead:
Variable......................................
Fixed...........................................
Selling and administrative:
Variable......................................
Fixed...........................................

$28,00
0
$14,00
0
$56,00
0
$63,00
0
$7,000
$42,00
0

During the first year of operations, Mediocre actually produced 4,000 units but only sold
3,500 units. Actual costs did not fluctuate from the cost behavior patterns described above.
The 3,500 units were sold for $72 per unit. Assume that direct labor is a variable cost.
98. What is the total cost that would be assigned to Mediocre's finished goods inventory at
the end of the first year of operations under the absorption costing method?
A) $12,250
B) $20,125
C) $23,000
D) $26,250
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead +
Fixed manufacturing overhead
= $28,000 + $14,000 + $56,000 + $63,000 = $161,000
Unit product cost = $161,000 4,000 = $40.25
Total cost of ending finished goods inventory = Unit product cost Ending inventory
in units = $40.25 (4,000 3,500) = $20,125

99. Under the variable costing method, what is Mediocre's actual net operating income for
its first year?
A) $42,000
B) $54,250
C) $55,125
D) $63,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead) 4,000 units = ($28,000 + $14,000 + $56,000) 4,000 = $24.50
Sales revenue ($72 3,500)..................................
Variable costs:
Variable cost of goods sold ($24.50 3,500)....

$252,00
0
$85,750

Variable selling and administrative ($1.75


3,500)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................

$63,000

Fixed selling and administrative.........................

42,000

6,125

Net operating income.............................................

91,87
5
160,125
105,00
0
$
55,125

100. Assuming no change in cost structure, which of the following would have increased
Mediocre's net operating income under the absorption costing method in its first year
of operations?
A) an increase in sales volume with no increase in production volume
B) an increase in production volume with no increase in sales volume
C) both A and B above
D) none of the above
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-63

Use the following to answer questions 101-102:


JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000 units
were produced and 80,000 units were sold. There were no beginning inventories. The
company has the following cost structure:
Raw materials................................
Direct labor....................................
Factory overhead...........................
Selling and administrative.............

Fixed Costs
Variable Costs
-- $1.50 per unit produced
-- $1.00 per unit produced
$150,000 $0.50 per unit produced
$80,000
$0.50 per unit sold

101. The unit product cost under absorption costing is:


A) $2.50
B) $3.00
C) $3.50
D) $4.50
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted
Solution:
Unit fixed overhead = $150,000 100,000 = $1.50
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= $1.50 + $1.00 + $0.50 + $1.50 = $4.50

102. The net operating income under variable costing is:


A) $50,000
B) $80,000
C) $90,000
D) $120,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $1.50 + $1 + $0.50 = $3
$560,00
0

Sales revenue ($7 80,000)..................................


Variable costs:
Variable cost of goods sold ($3 80,000).........
Variable selling and administrative ($0.50
80,000)............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$240,00
0
40,00
0
150,000
80,00
0

280,00
0
280,000
230,00
0
$
50,000

7-65

Use the following to answer questions 103-106:


Gadepelli Company, which has only one product, has provided the following data concerning
its most recent month of operations:
Selling price...............................................

$106

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory...........................

0
1,600
1,400
200

Variable costs per unit:


Direct materials.......................................
Direct labor.............................................
Variable manufacturing overhead...........
Variable selling and administrative........

$15
$14
$6
$4

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$51,20
0
$23,80
0

103. The total contribution margin for the month under the variable costing approach is:
A) $54,600
B) $99,400
C) $93,800
D) $42,600
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1,2 Level: Medium
Solution:
Unit product cost = $15 + $14 + $6 = $35
Sales revenue ($106 1,400)................................
Variable costs:
Variable cost of goods sold ($35 1,400).........
Variable selling and administrative ($4
1,400)..............................................................

$148,40
0
$49,000
5,600
54,60

Contribution margin..............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

0
$
93,800

7-67

104. The total gross margin for the month under the absorption costing approach is:
A) $25,200
B) $54,600
C) $68,000
D) $93,800
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead = $51,200 1,600 = $32
Unit product cost = $15 + $14 + $6 + $32 = $67
Sales revenue ($106 1,400)...............................
Cost of goods sold ($67 1,400).........................
Gross margin........................................................

$148,400
93,800
$ 54,600

105. What is the total period cost for the month under the variable costing approach?
A) $75,000
B) $80,600
C) $29,400
D)

$51,200

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= $4 1,400 + $51,200 + $23,800
= $5,600 + $51,200 + $23,800 = $80,600

106. What is the total period cost for the month under the absorption costing approach?
A) $29,400
B) $80,600
C) $23,800
D) $51,200
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
Solution:
Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $4 1,400 + $23,800 = $29,400
Use the following to answer questions 107-109:
During its first year of operations, Carlos Manufacturing Company incurred the following
costs to produce 8,000 units of its product:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Fixed manufacturing overhead..................

$7 per unit
$3 per unit
$18 per unit
$450,000 in total

The company also incurred the following costs in the sale of 7,500 units of product during its
first year:
Variable selling and administrative........... $2 per unit
Fixed selling and administrative................ $60,000 in total
Assume that direct labor is a variable cost.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-69

107. What is the total cost that would be assigned to Carlos' finished goods inventory at the
end of the first year of operations under the absorption costing method?
A) $15,000
B) $42,125
C) $44,000
D) $47,125
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $450,000 8,000 = $56.25
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $7 + $3 + $18 + $56.25 = $84.25
Total cost of ending finished goods inventory = Unit product cost Ending inventory
in units = $84.25 (8,000 7,500) = $84.25 500 = $42,125
108. What is the total cost that would be assigned to Carlos' finished goods inventory at the
end of the first year of operations under the variable costing method?
A) $15,000
B) $42,125
C) $44,000
D) $14,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $7 + $3 + $18 = $28
Total cost of ending finished goods inventory = Unit product cost Ending inventory
in units = $28 (8,000 7,500) = $28 500 = $14,000

109. If Carlos' absorption costing net operating income for this first year is $118,125, what
would its variable costing net operating income be for this first year?
A) $86,000
B) $90,000
C) $104,125
D) $146,250
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Variable costing net income = Absorption costing net income (Unit fixed
manufacturing overhead Change in inventory in units)
= $118,125 ($56.25 500) = $118,125 $28,125 = $90,000
Use the following to answer questions 110-111:
Kern Company produces a single product. Selected information concerning the operations of
the company follow:
Units in beginning inventory.................................
Units produced.......................................................
Units sold...............................................................
Direct materials......................................................
Direct labor
Variable factory overhead.....................................
Fixed factory overhead..........................................
Variable selling and administrative expenses........
Fixed selling and administrative expenses............

0
10,000
9,000
$40,00
0
$20,00
0
$12,00
0
$25,00
0
$4,500
$30,00
0

Assume that direct labor is a variable cost.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-71

110. The carrying value on the balance sheet of the ending finished goods inventory under
variable costing would be:
A) $7,200
B) $7,650
C) $8,000
D) $9,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted
Solution:
Unit product cost = ($40,000 + $20,000 + $12,000) 10,000
= $72,000 10,000 = $7.20
Ending inventory = Units produced Units sold = 10,000 9,000 = 1,000
Carrying value of ending finished goods inventory = Unit product cost Units in
ending inventory = $7.20 1,000 = $7,200
111. Which costing method, absorption or variable costing, would show a higher operating
income for the year and by what amount?
A) Absorption costing net operating income would be higher than variable costing
net operating income by $2,500.
B) Variable costing net operating income would be higher than absorption costing
net operating income by $2,500.
C) Absorption costing net operating income would be higher than variable costing
net operating income by $5,500.
D) Variable costing net operating income would be higher than absorption costing
net operating income by $5,500.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium Source: CPA, adapted
Solution:
Unit fixed manufacturing overhead = $25,000 10,000 = $2.50
Difference between absorption costing net income and variable costing net income =
Unit fixed manufacturing overhead Change in ending inventory in units = $2.50
(10,000 9,000) = $2,500
Since inventory has increased (production exceeds sales), absorption costing net
income would be higher than variable costing net income.

Use the following to answer questions 112-113:


Lina Co. produced 100,000 units of its single product during the month of June. Costs
incurred during June were as follows:
Direct materials......................................................
Direct labor............................................................
Variable manufacturing overhead.........................
Fixed manufacturing overhead..............................
Variable selling and administrative expenses........
Fixed selling and administrative expenses............

$100,00
0
$80,000
$40,000
$50,000
$12,000
$45,000

Assume that direct labor is a variable cost.


112. The unit product cost under absorption costing would be:
A) $3.27
B) $2.70
C) $2.20
D) $1.80
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead
= ($100,000 + $80,000 + $40,000 + $50,000) 100,000
= $270,000 100,000 = $2.70

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-73

113. The unit product cost under variable costing would be:
A) $2.82
B) $2.70
C) $2.32
D) $2.20
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CPA, adapted
Solution:
Unit product cost = (Direct materials + Direct labor + Variable manufacturing
overhead) 100,000 units = ($100,000 + $80,000 + $40,000) 100,000 = $220,000
100,000 = $2.20
Use the following to answer questions 114-115:
Bauxar Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$98

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
2,200
2,100
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$29
$17
$5
$9

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$33,00
0
$29,40
0

114. What is the unit product cost for the month under variable costing?
A) $75
B) $66
C) $51
D) $60
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Direct materials + Direct labor + Variable manufacturing overhead
= $29 + $17 + $5 = $51
115. What is the unit product cost for the month under absorption costing?
A) $66
B) $51
C) $60
D) $75
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $33,000 2,200 = $15
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $29 + $17 + $5 + $15 = $66

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-75

Use the following to answer questions 116-118:


Crossbow Corp. produces a single product. Data concerning June's operations follow:
Units in beginning inventory.........
Units produced...............................
Units sold.......................................

0
6,000
5,000

Variable costs per unit:


Manufacturing............................
Selling and administrative..........

$7
$3

Fixed costs in total:


Manufacturing............................
Selling and administrative..........

$12,00
0
$3,000

116. Under variable costing, ending inventory on the balance sheet would be valued at:
A) $10,000
B) $7,000
C) $9,000
D) $12,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = $7
Ending inventory = Beginning inventory + Units produced Units sold
= 0 + 6,000 5,000 = 1,000
Value of ending inventory = Unit product cost Units in ending inventory
= $7 1,000 = $7,000

117. Under absorption costing, ending inventory on the balance sheet would be valued at:
A) $10,000
B) $7,000
C) $9,000
D) $12,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Unit fixed manufacturing overhead = $12,000 6,000 = $2
Unit product cost = $7 + $2 = $9
Value of ending inventory = Unit product cost Units in ending inventory
= $9 1,000 = $9,000
118. For the year in question, net operating income under variable costing will be:
A) higher than net operating income under absorption costing.
B) lower than net operating income under absorption costing.
C) the same as net operating income under absorption costing.
D) none of these
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-77

Use the following to answer questions 119-120:


Dearne Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$67

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
5,200
4,900
300

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$20
$16
$3
$4

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$41,60
0
$73,50
0

119. What is the total period cost for the month under the variable costing approach?
A) $41,600
B) $93,100
C) $115,100
D) $134,700
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Period cost = Variable selling and administrative cost + Fixed manufacturing overhead
+ Fixed selling and administrative cost
= $4 4,900 + $41,600 + $73,500
= $19,600 + $41,600 + $73,500 = $134,700

120. What is the total period cost for the month under the absorption costing approach?
A) $93,100
B) $73,500
C) $134,700
D) $41,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Hard
Solution:
Period cost = Variable selling and administrative cost + Fixed selling and
administrative cost = $4 4,900 + $73,500 = $93,100
Use the following to answer questions 121-122:
Tat Corporation produces a single product and has the following cost structure:
Number of units produced each year.....................
Variable costs per unit:
Direct materials..................................................
Direct labor.........................................................
Variable manufacturing overhead......................
Variable selling and administrative expenses.....
Fixed costs per year:
Fixed manufacturing overhead...........................
Fixed selling and administrative expenses.........

7,000
$77
$89
$5
$3
$532,00
0
$574,00
0

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-79

121. The unit product cost under absorption costing is:


A) $247
B) $166
C) $332
D) $171
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $532,000 7,000 = $76
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $77 + $89 + $5 + $76 = $247
122. The unit product cost under variable costing is:
A) $169
B) $171
C) $247
D) $174
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $77 + $89 + $5 = $171

Use the following to answer questions 123-124:


Caruso Inc., which produces a single product, has provided the following data for its most
recent month of operations:
Number of units produced....................................
Variable costs per unit:
Direct materials.................................................
Direct labor.......................................................
Variable manufacturing overhead.....................
Variable selling and administrative expense.....
Fixed costs:
Fixed manufacturing overhead..........................
Fixed selling and administrative expense.........

4,000
$39
$71
$5
$8
$220,00
0
$308,00
0

There were no beginning or ending inventories.


123. The unit product cost under absorption costing was:
A) $170
B) $115
C) $255
D) $110
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit fixed manufacturing overhead = $220,000 4,000 = $55
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
+ Fixed manufacturing overhead = $39 + $71 + $5 + $55 = $170

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-81

124. The unit product cost under variable costing was:


A) $115
B) $123
C) $118
D) $170
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
= $39 + $71 + $5 = $115
Use the following to answer questions 125-126:
Cloer Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$95

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
8,900
8,500
400

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$10
$48
$5
$11

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$106,80
0
$68,000

125. The total contribution margin for the month under the variable costing approach is:
A) $178,500
B) $71,700
C) $272,000
D) $170,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit product cost = $10 + $48 + $5 = $63
$807,50
0

Sales revenue ($95 8,500)..................................


Variable costs:
Variable cost of goods sold ($63 8,500).........

$535,50
0

Variable selling and administrative ($11


8,500)..............................................................

93,50
0

Contribution margin..............................................

629,00
0
$178,50
0

126. The total gross margin for the month under the absorption costing approach is:
A) $200,000
B) $170,000
C) $8,500
D) $178,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead = $106,800 8,900 = $12
Unit product cost = $10 + $48 + $5 + $12 = $75
Sales revenue ($95 8,500).................................
Cost of goods sold ($75 8,500).........................
Gross margin........................................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$807,500
637,500
$ 170,000

7-83

Use the following to answer questions 127-128:


Hirsch Company produces a single product. Variable manufacturing costs are $6 per unit, and
fixed manufacturing costs are $2 per unit based on 50,000 units produced each year. In the
current year, 50,000 units were produced, and 40,000 units were sold.
127. Under absorption costing, the amount of manufacturing cost (variable and fixed)
deducted from revenue in the current year would be:
A) $320,000
B) $400,000
C) $240,000
D) $300,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total manufacturing cost deducted from revenue = Total per unit product cost Units
sold = ($6 + $2) 40,000 = $320,000
128. Under variable costing, the amount of manufacturing cost (variable and fixed)
deducted from revenue in the current year would be:
A) $320,000
B) $240,000
C) $340,000
D) $400,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Total fixed cost = Per unit fixed cost Units produced
Total fixed cost = $2 50,000 = $100,000
Total manufacturing cost deducted from revenue = (Variable per unit product cost
Units sold) + Total fixed cost
= ($6 40,000) + $100,000
= $240,000 + $100,000 = $340,000

Use the following to answer questions 129-130:


Osawa Inc. manufactured 200,000 units of its only product in its first year of operations.
Variable manufacturing costs were $30 per unit. Fixed manufacturing costs were $600,000
and selling and administrative costs totaled $400,000. Osawa sold 120,000 units at a selling
price of $40 per unit.
129. Osawa's net operating income using absorption costing would be:
A) $200,000
B) $440,000
C) $600,000
D) $840,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium Source: CMA, adapted
Solution:
Unit fixed manufacturing cost = $600,000 200,000 = $3
Unit product cost = $30 + $3 = $33
Sales revenue ($40 120,000)............................. $4,800,000
Cost of goods sold ($33 120,000).....................
3,960,000
Gross margin........................................................
840,000
Selling and administrative expenses cost.............
400,000
Net operating income........................................... $ 440,000

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7-85

130. Osawa's net operating income using variable costing would be:
A) $200,000
B) $440,000
C) $800,000
D) $600,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium Source: CMA, adapted
Solution:
Sales revenue ($40 120,000)..............................
Variable cost of goods sold ($30 120,000).........
Contribution margin..............................................
Fixed costs:
Fixed manufacturing costs..................................
Selling and administrative..................................
Net operating income.............................................

$4,800,000
3,600,000
1,200,000
$600,000
400,000

1,000,000
$ 200,000

Use the following to answer questions 131-132:


Eldrick Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$85

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
4,500
4,400
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$29
$13
$7
$5

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$117,00
0
$4,400

131. What is the net operating income for the month under variable costing?
A) $10,100
B) $2,600
C) $15,000
D) $17,600
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit product cost = $29 + $13 + $7 = $49
$374,00
0

Sales revenue ($85 4,400)..................................


Variable costs:
Variable cost of goods sold ($49 4,400).........
Variable selling and administrative ($5
4,400)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$215,60
0
22,00
0
$117,00
0
4,40
0

237,60
0
136,400

121,40
0
$
15,000

7-87

132. What is the net operating income for the month under absorption costing?
A) $17,600
B) $10,100
C) $15,000
D) $2,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead = $117,000 4,500 = $26
Unit product cost = $29 + $13 + $7 + $26 = $75
Sales revenue ($85 4,400)..................................
Cost of goods sold ($75 4,400).........................
Gross margin........................................................
Selling and administrative expenses:
Variable selling and administrative ($5
4,400).............................................................
Fixed selling and administrative.......................
Net operating income...........................................

$374,000
330,000
44,000
$22,000
4,400

26,400
$ 17,600

Use the following to answer questions 133-134:


Kiefer Company, which has only one product, has provided the following data concerning its
most recent month of operations:
Selling price...............................................

$133

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

600
6,600
6,800
400

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$34
$52
$2
$11

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$158,40
0
$61,200

The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.

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7-89

133. What is the net operating income for the month under variable costing?
A) $6,800
B) $9,600
C) $29,200
D) $11,600
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
$904,40
0

Sales revenue ($133 6,800)................................


Variable costs:
Variable cost of goods sold ($88 6,800).........
Variable selling and administrative ($11
6,800)..............................................................
Contribution margin..............................................
Fixed costs:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

$598,40
0
74,80
0
$158,40
0
61,20
0

673,20
0
231,200

219,60
0
$
11,600

134. What is the net operating income for the month under absorption costing?
A) $11,600
B) $6,800
C) $29,200
D) $9,600
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Unit fixed manufacturing overhead= $24
Unit product cost = $34 + $52 + $2 + $24 = $112
Sales revenue ($133 6,800)...............................
Cost of goods sold ($112 6,800).......................
Gross margin........................................................
Selling and administrative expenses:
Variable selling and administrative ($11
6,800).............................................................
Fixed selling and administrative.......................
Net operating income...........................................

$904,400
761,600
142,800
$74,800
61,200

136,000
6,800

Use the following to answer questions 135-136:


Danahy Corporation manufactures a variety of products. The following data pertain to the
company's operations over the last two years:
Variable costing net operating income, last year.............
Variable costing net operating income, this year............
Fixed manufacturing overhead costs released from
inventory under absorption costing, last year..............
Fixed manufacturing overhead costs deferred in
inventory under absorption costing, this year..............

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$52,00
0
$68,00
0
$4,000
$6,000

7-91

135. What was the absorption costing net operating income last year?
A) $50,000
B) $48,000
C) $52,000
D) $56,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Absorption costing net income = Variable costing net operating income Fixed
manufacturing overhead released = $52,000 $4,000 = $48,000
136. What was the absorption costing net operating income this year?
A) $62,000
B) $74,000
C) $70,000
D) $66,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $68,000 + $6,000 = $74,000
Use the following to answer questions 137-138:
Helmers Corporation manufactures a variety of products. Variable costing net operating
income last year was $86,000 and this year was $103,000. Last year, $32,000 in fixed
manufacturing overhead costs were released from inventory under absorption costing. This
year, $12,000 in fixed manufacturing overhead costs were deferred in inventory under
absorption costing.

137. What was the absorption costing net operating income last year?
A) $106,000
B) $86,000
C) $54,000
D) $118,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Absorption costing net income = Variable costing net operating income Fixed
manufacturing overhead released = $86,000 $32,000 = $54,000
138. What was the absorption costing net operating income this year?
A) $81,000
B) $83,000
C) $115,000
D) $123,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $103,000 + $12,000 = $115,000
Use the following to answer questions 139-140:
Norenberg Corporation manufactures a variety of products. The following data pertain to the
company's operations over the last two years:
Variable costing net operating income, last year.............
$88,600
Variable costing net operating income, this year............
$96,100
Increase in ending inventory, last year............................
600 units
Decrease in ending inventory, this year........................... 2,300 units
Fixed manufacturing overhead cost per unit...................
$7

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-93

139. What was the absorption costing net operating income last year?
A) $92,800
B) $88,600
C) $84,400
D) $76,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Fixed manufacturing overhead deferred = 600 $7 = $4,200
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $88,600 + $4,200 = $92,800
140. What was the absorption costing net operating income this year?
A) $80,000
B) $100,500
C) $108,000
D) $112,200
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Fixed manufacturing overhead released = 2,300 $7 = $16,100
Absorption costing net income = Variable costing net operating income Fixed
manufacturing overhead released = $96,100 $16,100 = $80,000
Use the following to answer questions 141-142:
Rosal Corporation manufactures a variety of products. Variable costing net operating income
was $74,700 last year and was $82,300 this year. Last year, ending inventory increased by
2,600 units. This year, ending inventory decreased by 1,400 units. Fixed manufacturing
overhead cost is $5 per unit.

141. What was the absorption costing net operating income last year?
A) $61,700
B) $74,700
C) $80,700
D) $87,700
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Fixed manufacturing overhead deferred = $5 2,600 = $13,000
Absorption costing net income = Variable costing net operating income + Fixed
manufacturing overhead deferred = $74,700 + $13,000 = $87,700
142. What was the absorption costing net operating income this year?
A) $75,300
B) $89,300
C) $76,300
D) $68,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Fixed manufacturing overhead released = $5 1,400 = $7,000
Absorption costing net income = Variable costing net operating income Fixed
manufacturing overhead released = $82,300 $7,000 = $75,300

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-95

Essay Questions
143. Lehne Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price...............................................

$112

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

500
2,600
3,000
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$13
$49
$6
$10

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$80,60
0
$15,00
0

The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.
Required:
a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the
variable costing method.
d. Prepare an income statement for the month using the absorption costing method.
e. Reconcile the variable costing and absorption costing net operating incomes for
the month.

Ans:
a. & b. Unit product costs
Variable costing:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Unit product cost.......................................

$1
3
49
6
$6
8

Absorption costing:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Fixed manufacturing overhead..................
Unit product cost.......................................

$1
3
49
6
31
$9
9

c. & d. Income statements


Variable costing income statement
Sales.......................................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory........................................
Add variable manufacturing costs...................
Goods available for sale..................................
Less ending inventory.....................................
Variable cost of goods sold................................
Variable selling and administrative....................
Contribution margin..............................................
Less fixed expenses:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................
Absorption costing income statement
Sales.......................................................................
Cost of goods sold:
Beginning inventory...........................................
Add cost of goods manufactured........................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$336,000
$ 34,000
176,800
210,800
6,800
204,000
30,000
80,600
15,000

234,000
102,000
95,600
$ 6,400
$336,000

$ 49,500
257,400

7-97

Goods available for sale.....................................


Less ending inventory.........................................
Gross margin..........................................................

306,900
9,900

297,000
39,000

Selling and administrative expenses expenses:


Variable selling and administrative....................
Fixed selling and administrative.........................
Net operating income.............................................

30,000
15,000

e. Reconciliation
Variable costing net operating income............................
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing.....................
Absorption costing net operating income........................

45,000
$( 6,000)
$ 6,400
(12,400)
$(6,000)

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Hard
144. Maffei Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price...............................................

$138

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
7,200
7,000
200

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$42
$32
$1
$8

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$280,80
0
$98,000

Required:
a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the
variable costing method.
d. Prepare an income statement for the month using the absorption costing method.
e. Reconcile the variable costing and absorption costing net operating incomes for

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-99

the month.

Ans:
a. & b. Unit product costs
Variable costing:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Unit product cost.......................................
Absorption costing:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Fixed manufacturing overhead..................
Unit product cost.......................................

$42
32
1
$75
$ 42
32
1
39
$11
4

c. & d. Income statements


Variable costing income statement
Sales.......................................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory........................................
Add variable manufacturing costs...................
Goods available for sale..................................
Less ending inventory.....................................
Variable cost of goods sold................................
Variable selling and administrative....................
Contribution margin..............................................
Less fixed expenses:
Fixed manufacturing overhead...........................
Fixed selling and administrative.........................
Net operating income.............................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$966,000
$
0
540,000
540,000
15,000
525,000
56,000
280,800
98,000

581,000
385,000
378,800
$ 6,200

7-101

Absorption costing income statement....................


Sales.......................................................................
Cost of goods sold:
Beginning inventory...........................................
Add cost of goods manufactured........................
Goods available for sale.....................................
Less ending inventory.........................................
Gross margin..........................................................
Selling and administrative expenses expenses:
Variable selling and administrative....................
Fixed selling and administrative.........................
Net operating income.............................................
e. Reconciliation
Variable costing net operating income............................
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing..............................
Absorption costing net operating income........................

$966,000
$
0
820,800
820,800
22,800
56,000
98,000

$ 6,200
7,800
$14,00
0

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Medium

798,000
168,000
154,000
$ 14,000

145. The Dean Company produces and sells a single product. The following data refer to
the year just completed:
Beginning inventory........................................................
Units produced.................................................................
Units sold.........................................................................

0
20,000
19,000

Selling price per unit........................................................


Selling and administrative expenses:
Variable per unit...........................................................

$350

Fixed (total)..................................................................
Manufacturing costs:
Direct materials cost per unit........................................
Direct labor cost per unit..............................................
Variable manufacturing overhead cost per unit............
Fixed manufacturing overhead (total)..........................

$10
$225,00
0
$190
$40
$25
$250,00
0

Assume that direct labor is a variable cost.


Required:
a. Compute the cost of a single unit of product under both the absorption costing and
variable costing approaches.
b. Prepare an income statement for the year using absorption costing.
c. Prepare an income statement for the year using variable costing.
d. Reconcile the absorption costing and variable costing net operating income figures
in (b) and (c) above.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-103

Ans:
a. Cost per unit under absorption costing:
Direct materials...................................................
Direct labor..........................................................
Variable overhead...............................................
Fixed overhead ($250,000 / 20,000)...................
Total cost per unit................................................

$190.0
0
40.00
25.00
12.50
$267.5
0

Cost per unit under variable costing:


Direct materials...................................................
Direct labor..........................................................
Variable overhead...............................................
Total cost per unit................................................
b
.

$190.0
0
40.00
25.00
$255.0
0

Absorption costing income statement:


Sales.................................................................................
Cost of goods sold:
Beginning inventory.....................................................
Add cost of goods manufactured (20,000 @ $267.50).
Cost of goods available................................................
Less ending inventory (1,000 @ $267.50)...................
Gross profit......................................................................
Selling and administrative expenses expenses:

$6,650,00
0
$
0
5,350,000
5,350,000
267,500

5,082,500
1,567,500
415,00
0
$1,152,50
0

[($10 19,000) + $225,000]........................................


Net operating income.......................................................
c. Variable costing income statement:

$6,650,00
0

Sales.................................................................................
Cost of goods sold:
$
Beginning inventory.....................................................
Cost of goods manufactured (20,000 @ $255)............
Cost of goods available................................................

0
5,100,000
5,100,000

Less ending inventory (1,000 @ $255)........................


Variable cost of goods sold.............................................
Variable selling and administrative expenses:
(19,000 @ $10).............................................................
Contribution margin........................................................
Less fixed expenses:
Manufacturing overhead...............................................
Selling and administrative............................................
Net operating income......................................................

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

255,000
4,845,000
190,000
250,000
225,00
0

5,035,000
1,615,000
475,00
0
$1,140,00
0

7-105

d
.

Net operating income under variable costing..................


Add fixed manufacturing overhead costs deferred in
inventory under absorption costing (1,000 @ $12.50)
Net operating income under absorption costing..............

$1,140,00
0
12,50
0
$1,152,50
0

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Medium
146. Pacht Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price...............................................

$121

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

400
6,800
6,900
300

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$35
$36
$3
$4

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$197,20
0
$96,600

The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.
Required:
a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)

Ans:
a. Variable costing unit product cost
Direct materials.......................................
Direct labor..............................................
Variable manufacturing overhead...........
Unit product cost.....................................
b
.

Variable costing income statement


Sales........................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory.........................
Add variable manufacturing costs....
Goods available for sale....................
Less ending inventory.......................
Variable cost of goods sold..................
Variable selling and administrative.....
Contribution margin................................
Less fixed expenses:
Fixed manufacturing overhead............
Fixed selling and administrative..........
Net operating income..............................

$3
5
36
3
$7
4

$834,900
$ 29,600
503,200
532,800
22,200
510,600
27,600
197,200
96,600

538,200
296,700
293,800
$ 2,900

c. Computation of absorption costing net operating income


Fixed manufacturing overhead per unit................................
Change in inventories (units)................................................
Variable costing net operating income..................................
Deduct fixed manufacturing overhead costs released from
inventory under absorption costing...................................
Absorption costing net operating income..............................

$29.00
(100)
$2,900
(2,900)
$
0

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-107

147. Qin Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price...............................................

$77

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
6,700
6,500
200

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$27
$13
$5
$7

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$100,50
0
$58,500

Required:
a. What is the unit product cost for the month under variable costing?
b. Prepare an income statement for the month using the contribution format and the
variable costing method.
c. Without preparing an income statement, determine the absorption costing net
operating income for the month. (Hint: Use the reconciliation method.)

Ans:
a. Variable costing unit product cost
Direct materials.......................................
Direct labor..............................................
Variable manufacturing overhead...........
Unit product cost.....................................
b
.

Variable costing income statement


Sales........................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory.........................
Add variable manufacturing costs....
Goods available for sale....................
Less ending inventory.......................
Variable cost of goods sold..................
Variable selling and administrative.....
Contribution margin................................
Less fixed expenses:
Fixed manufacturing overhead............
Fixed selling and administrative..........
Net operating income..............................

$2
7
13
5
$4
5

$500,500
$
0
301,500
301,500
9,000
292,500
45,500
100,500
58,500

338,000
162,500
159,000
$ 3,500

c. Computation of absorption costing net operating income


Fixed manufacturing overhead per unit...............................
Change in inventories (units)...............................................
Variable costing net operating income................................
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing..................................
Absorption costing net operating income............................

$15.0
0
200
$3,50
0
3,00
0
$6,50
0

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 1,2,3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-109

148. Olguin Corporation produces a single product and has the following cost structure:
Number of units produced each year.....................
Variable costs per unit:
Direct materials..................................................
Direct labor.........................................................
Variable manufacturing overhead......................
Variable selling and administrative expenses.....
Fixed costs per year:
Fixed manufacturing overhead...........................
Fixed selling and administrative expenses.........

4,000
$15
$13
$7
$5
$328,00
0
$324,00
0

Required:
a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!
Ans:
a. Absorption Costing:

Unit product cost..................................................................................

$ 1
5
13
7
35
82
$11
7

Variable Costing:
Direct materials....................................................................................
Direct labor..........................................................................................
Variable manufacturing overhead........................................................
Unit product cost..................................................................................

$15
13
7
$35

Direct materials....................................................................................
Direct labor..........................................................................................
Variable manufacturing overhead........................................................
Total variable production cost..............................................................
Fixed manufacturing overhead ($328,000/4,000 units of product).....

b
.

AACSB: Analytic AICPA BB: Critical Thinking


LO: 1 Level: Easy

AICPA FN: Reporting

149. Quates Corporation produces a single product and has the following cost structure:
Number of units produced each year...............................
Variable costs per unit:
Direct materials............................................................
Direct labor...................................................................
Variable manufacturing overhead................................
Variable selling and administrative expenses...............
Fixed costs per year:
Fixed manufacturing overhead.....................................
Fixed selling and administrative expenses...................

3,000
$27
$96
$1
$4
$219,00
0
$153,00
0

Required:
Compute the unit product cost under absorption costing. Show your work!
Ans:
Direct materials.................................................................................
Direct labor.......................................................................................
Variable manufacturing overhead....................................................
Total variable production cost..........................................................
Fixed manufacturing overhead ($219,000/3,000 units of product). .
Unit product cost..............................................................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$ 2
7
96
1
124
7
3
$19
7

AICPA FN: Reporting

7-111

150. Davitt Corporation produces a single product and has the following cost structure:
Number of units produced each year...............................
Variable costs per unit:
Direct materials............................................................
Direct labor...................................................................
Variable manufacturing overhead................................
Variable selling and administrative expenses...............
Fixed costs per year:
Fixed manufacturing overhead.....................................
Fixed selling and administrative expenses...................

1,000
$57
$20
$2
$3
$88,00
0
$24,00
0

Required:
Compute the unit product cost under variable costing. Show your work!
Ans:
Direct materials................................................................
Direct labor......................................................................
Variable manufacturing overhead...................................
Unit product cost.............................................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1 Level: Easy

$5
7
20
2
$7
9

AICPA FN: Reporting

151. Murphy Inc., which produces a single product, has provided the following data for its
most recent month of operation:
Number of units produced...............................................
Variable costs per unit:
Direct materials............................................................
Direct labor...................................................................
Variable manufacturing overhead................................
Variable selling and administrative expenses...............
Fixed costs:
Fixed manufacturing overhead.....................................
Fixed selling and administrative expenses...................

7,000
$37
$43
$5
$1
$84,000
$119,00
0

The company had no beginning or ending inventories.


Required:
a. Compute the unit product cost under absorption costing. Show your work!
b. Compute the unit product cost under variable costing. Show your work!
Ans:
a. Absorption costing:
Direct materials..............................................................................
Direct labor....................................................................................
Variable manufacturing overhead..................................................
Total variable production cost........................................................
Fixed manufacturing overhead ($84,000/7,000 units of product).
Unit product cost............................................................................
b
.

Variable costing:
Direct materials..............................................................................
Direct labor....................................................................................
Variable manufacturing overhead..................................................
Unit product cost............................................................................

AACSB: Analytic AICPA BB: Critical Thinking


LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$37
43
5
85
12
$97

$37
43
5
$85

AICPA FN: Reporting

7-113

152. Vancott Inc., which produces a single product, has provided the following data for its
most recent month of operation:
Number of units produced...............................................
Variable costs per unit:
Direct materials............................................................
Direct labor...................................................................
Variable manufacturing overhead................................
Variable selling and administrative expenses...............
Fixed costs:
Fixed manufacturing overhead.....................................
Fixed selling and administrative expenses...................

6,000
$93
$58
$1
$1
$192,00
0
$348,00
0

The company had no beginning or ending inventories.


Required:
Compute the unit product cost under absorption costing. Show your work!
Ans:
Direct materials..................................................................................
Direct labor.........................................................................................
Variable manufacturing overhead......................................................
Total variable production cost............................................................
Fixed manufacturing overhead ($192,000/6,000 units of product)....
Unit product cost................................................................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1 Level: Easy

$ 93
58
1
152
32
$18
4

AICPA FN: Reporting

153. Schlenz Inc., which produces a single product, has provided the following data for its
most recent month of operation:
Number of units produced...............................................
Variable costs per unit:
Direct materials............................................................
Direct labor...................................................................
Variable manufacturing overhead................................
Variable selling and administrative expenses...............
Fixed costs:
Fixed manufacturing overhead.....................................
Fixed selling and administrative expenses...................

6,000
$12
$34
$4
$2
$486,00
0
$522,00
0

The company had no beginning or ending inventories.


Required:
Compute the unit product cost under variable costing. Show your work!
Ans:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead.............
Unit product cost.......................................

$1
2
34
4
$5
0

AACSB: Analytic AICPA BB: Critical Thinking


LO: 1 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

7-115

154. Miller Company produces a single product. The company had the following results for
its first two years of operation:

Sales...........................................................
Cost of goods sold.....................................
Gross margin..............................................
Selling and administrative expenses..........
Net operating income.................................

Year 1
$1,200,00
0
800,000
400,000
300,000
$ 100,000

Year 2
$1,200,00
0
680,000
520,000
300,000
$ 220,000

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2,
the company again sold 40,000 units, but increased production to 50,000 units. The
company's variable production cost is $5 per unit and its fixed manufacturing
overhead cost is $600,000 a year. Fixed manufacturing overhead costs are applied to
the product on the basis of each year's unit production (i.e., a new fixed overhead rate
is computed each year). Variable selling and administrative expenses are $2 per unit
sold.
Required:
a. Compute the unit product cost for each year under absorption costing and under
variable costing.
b. Prepare an income statement for each year, using the contribution approach with
variable costing.
c. Reconcile the variable costing and absorption costing income figures for each
year.
d. Explain why the net operating income for Year 2 under absorption costing was
higher than the net operating income for Year 1, although the same number of
units were sold in each year.

Ans:
a. Cost per unit under absorption costing:
Variable production cost per unit........................
Fixed manufacturing overhead cost:
($600,000/40,000)...............................................
($600,000/50,000)...............................................
Unit product cost.................................................

Year 1 Year 2
$5
$5
15
$20

12
$17

Cost per unit under variable costing:


Year 1 Year 2
Variable production cost per unit........................
$5
$5
b. Income statements for each year under variable costing:
Sales.......................................................................
Cost of goods sold ($5 40,000)..........................
Variable selling and administrative expense
($2 40,000)......................................................
Contribution margin..............................................
Fixed expenses:
Fixed manufacturing overhead...........................
Fixed selling and administrative expense...........
Net operating income.............................................

Year 1
$1,200,00
0
200,000

Year 2
$1,200,00
0
200,000

80,000
920,000

80,000
920,000

600,000
220,000
$ 100,000

600,000
220,000
$ 100,000

c. Reconciliation of absorption costing and variable costing net operating incomes:

Net operating income under variable costing...................


Fixed manufacturing overhead deferred in (released
from) inventory: Year 2 (10,000 units $12 per unit).
Net operating income under absorption costing...............

Year 1
$100,00
0
$100,00
0

Year 2
$100,00
0
120,00
0
$220,00
0

d. The increase in production in Year 2, in the face of level sales, caused a buildup of
inventory and a deferral of a portion of the overhead costs of Year 2 to the next
year. This deferral of cost relieved Year 2 of $120,000 of fixed manufacturing
overhead. Income for Year 2 was $120,000 higher than income of Year 1, even
though the same number of units was sold each year. By increasing production and
building up inventory, the company was able to increase profits without increasing
sales. This is major criticism of the absorption costing approach.
AACSB: Analytic

AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

7-117

LO: 2,3,4

Level: Medium

155. Neukirchen Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price...............................................

$140

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

300
4,300
4,500
100

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$25
$51
$7
$6

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$150,50
0
$72,000

The company produces the same number of units every month, although the sales in
units vary from month to month. The company's variable costs per unit and total fixed
costs have been constant from month to month.
Required:
a. Prepare an income statement for the month using the contribution format and the
variable costing method.
b. Prepare an income statement for the month using the absorption costing method.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-119

Ans:
a. Variable costing income statement
Sales...........................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory............................
Add variable manufacturing costs.......
Goods available for sale......................
Less ending inventory.........................
Variable cost of goods sold.................
Variable selling and administrative........
Contribution margin..................................
Less fixed expenses:
Fixed manufacturing overhead...............
Fixed selling and administrative.............
Net operating income.................................

$630,00
0
$ 24,900
356,900
381,800
8,300
373,500
27,000
150,500
72,000

400,500
229,500
222,500
$ 7,000

b. Absorption costing income statement


Sales...........................................................
Cost of goods sold:
Beginning inventory...............................
Add cost of goods manufactured............
Goods available for sale.........................
Less ending inventory.............................
Gross margin..............................................
Selling and administrative expenses
expenses:
Variable selling and administrative........
Fixed selling and administrative.............
Net operating income.................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Hard

$630,00
0
$ 35,400
507,400
542,800
11,800

531,000
99,000

27,000
72,000
$

99,000
0

AICPA FN: Reporting

156. Oates Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price...............................................

$120

Units in beginning inventory.....................


Units produced...........................................
Units sold...................................................
Units in ending inventory..........................

0
7,600
7,400
200

Variable costs per unit:


Direct materials......................................
Direct labor.............................................
Variable manufacturing overhead..........
Variable selling and administrative........

$15
$48
$7
$10

Fixed costs:
Fixed manufacturing overhead...............
Fixed selling and administrative.............

$228,00
0
$66,600

Required:
a. Prepare an income statement for the month using the contribution format and the
variable costing method.
b. Prepare an income statement for the month using the absorption costing method.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

7-121

Ans:
a. Variable costing income statement
Sales...........................................................
Less variable expenses:
Variable cost of goods sold:
Beginning inventory............................
Add variable manufacturing costs.......
Goods available for sale......................
Less ending inventory.........................
Variable cost of goods sold....................
Variable selling and administrative........
Contribution margin..................................
Less fixed expenses:
Fixed manufacturing overhead...............
Fixed selling and administrative.............
Net operating income.................................

$888,000
$
0
532,000
532,000
14,000
518,000
74,000
228,000
66,600

592,000
296,000
294,600
$ 1,400

b. Absorption costing income statement


Sales.......................................................................
Cost of goods sold:
Beginning inventory...........................................
Add cost of goods manufactured........................
Goods available for sale.....................................
Less ending inventory.........................................
Gross margin..........................................................
Selling and administrative expenses expenses:
Variable selling and administrative....................
Fixed selling and administrative.........................
Net operating income.............................................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Medium

$888,00
0
$
0
760,000
760,000
20,000
74,000
66,600

740,000
148,000
140,600
$ 7,400

AICPA FN: Reporting

157. Succulent Juice Company manufactures and sells premium tomato juice by the gallon.
Succulent just finished its first year of operations. The following data relates to this
first year:
Number of gallons produced...........................................
Number of gallons sold....................................................
Sales price........................................................................
Unit product cost under variable costing.........................
Total contribution margin................................................
Total fixed manufacturing overhead cost........................
Total fixed selling and administrative expense...............

75,000
70,000
$3.00 per gallon
$1.45 per gallon
$84,000
$63,000
$10,500

Required:
Using the absorption costing method, prepare Succulent Juice Company's income
statement for the year.
Ans:
Sales (70,000 $3.00)....................................................
Cost of goods sold:
Beginning inventory....................................................
Add cost of goods manufactured (75,000 $2.29*).. .
Goods available for sale...............................................
Less ending inventory (5,000 $2.29)........................
Gross margin...................................................................
Selling and administrative expenses**...........................
Net operating income......................................................

$210,00
0
$
0
171,750
171,750
11,450

160,300
49,700
35,000
$ 14,700

* $1.45 + ($63,000/75,000)
** Total variable cost = $210,000 - $84,000 = $126,000;
Variable selling and administrative = $126,000 - ($1.45 70,000) = $24,500
Total selling and administrative = $24,500 + $10,500
AACSB: Analytic AICPA BB: Critical Thinking
LO: 2 Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

AICPA FN: Reporting

7-123

158. Worrel Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:
Variable costing net operating income, last year.............
Variable costing net operating income, this year............
Fixed manufacturing overhead costs deferred in
inventory under absorption costing, last year..............
Fixed manufacturing overhead costs released from
inventory under absorption costing, this year..............

$71,00
0
$92,00
0
$2,000
$11,00
0

Required:
a. Determine the absorption costing net operating income last year. Show your work!
b. Determine the absorption costing net operating income this year. Show your work!
Ans:
a. and b.
Variable costing net operating income.....................
Add fixed manufacturing overhead costs deferred
in inventory under absorption costing...................
Deduct fixed manufacturing overhead costs
released from inventory under absorption costing
Absorption costing net operating income.................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy

Last Year
$71,000

This Year
$92,000

2,000

0
$73,000

(11,000)
$81,000

AICPA FN: Reporting

159. Corbett Corporation manufactures a variety of products. Last year, variable costing net
operating income was $72,000. The fixed manufacturing overhead costs deferred in
inventory under absorption costing amounted to $29,000.
Required:
Determine the absorption costing net operating income last year. Show your work!
Ans:
Variable costing net operating income............................
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing..............................
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing.....................
Absorption costing net operating income........................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy

$72,000
29,000
0
$101,00
0

AICPA FN: Reporting

160. Last year, Rasband Corporation's variable costing net operating income was $57,000.
The fixed manufacturing overhead costs deferred in inventory under absorption
costing amounted to $30,000.
Required:
Determine the absorption costing net operating income last year. Show your work!
Ans:
Variable costing net operating income............................
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing..............................
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing.....................
Absorption costing net operating income........................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$57,00
0
30,000
0
$87,00
0

AICPA FN: Reporting

7-125

161. Phinisee Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:
Variable costing net operating income, last year.............
Variable costing net operating income, this year............
Increase in ending inventory, last year............................
Decrease in ending inventory, this year...........................
Fixed manufacturing overhead cost per unit...................

$82,70
0
$87,80
0
900
3,100
$2

Required:
a. Determine the absorption costing net operating income for last year. Show your
work!
b. Determine the absorption costing net operating income for this year. Show your
work!
Ans:
a. and b.
Change in units in ending inventory..........................
Fixed manufacturing overhead cost per unit..............
Change in fixed manufacturing overhead in ending
inventory.................................................................
Variable costing net operating income.......................
Add fixed manufacturing overhead costs deferred in
inventory under absorption costing........................
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing...............
Absorption costing net operating income..................
AACSB: Analytic AICPA BB: Critical Thinking
LO: 3 Level: Medium

Last Year
$900
$2

This Year
($3,100)
$2

$1,800

($6,200)

$82,700

$87,800

1,800

0
$84,500

(6,200)
$81,600

AICPA FN: Reporting

162. Last year, Denogean Corporation's variable costing net operating income was $64,200
and ending inventory increased by 1,900 units. Fixed manufacturing overhead cost per
unit was $4.
Required:
Determine the absorption costing net operating income for last year. Show your work!
Ans:
Change in units in ending inventory.....................................
Fixed manufacturing overhead cost per unit........................
Change in fixed manufacturing overhead in ending
inventory...........................................................................

$1,900
$4

Variable costing net operating income.................................


Add fixed manufacturing overhead costs deferred in
inventory under absorption costing...................................
Deduct fixed manufacturing overhead costs released from
inventory under absorption costing...................................
Absorption costing net operating income.............................

$64,200

AACSB: Analytic AICPA BB: Critical Thinking


LO: 3 Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$7,600

7,600
0
$71,800

AICPA FN: Reporting

7-127