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CHAPTER 5

Variable Costing
Summary of Questions by Objectives and Blooms Taxonomy
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True-False Statements
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Multiple Choice Questions
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Exercises
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Challenge Exercises
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Short-Answer Essays
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5-2

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

TRUE-FALSE
1.

The cost of ending inventory using variable costing is always greater than or equal to full costing
ending inventory.

2.

The cost of goods sold is always greater using variable costing than when full costing is used.

3.

During pPeriods in which inventory levels increase, sales revenue will be larger when using full
costing than if variable costing is used.

4.

Absorption costing is another name for variable costing.

5.

If a company has no fixed costs, variable costing income will equal full costing income, regardless
of any increase or decrease in inventory levels during the period.

6.

Variable costing income is more useful for decision making because costs are separated by function.

7.

Absorption costing is required for external reporting under generally accepted accounting principles.

8.

Under full costing, all fixed costs of production are included in Finished Goods Inventory and
remain there until all inventory units are sold.

9.

The total amount reported on an income statement for selling and administrative expense, reported
on the income statement, adds to is the same amount using regardless if variable of full costing is
used. as determined if by using full costing is used.

10.

In variable costing, fixed manufacturing overhead is considered a period cost.

11.

Income statements of manufacturing firms prepared for external purposes use variable costing
because it provides higher profits for making decisions.

12.

Under full costing, ending inventory includes both fixed and variable manufacturing and
nonmanufacturing costs.

13.

Under variable costing, ending inventory reported on a companys balance sheet includes variable
production costs and variable selling and administrative costs.

14.

Contribution margin is reported on an absorption costing income statement.

15.

If the number of units sold is equal to the number of units produced, then contribution margin will
equal gross margin.

16.

Full costing income can be increased by decreasing production even though the additional inventory
items will not be sold during the current period.

17.

When the number of units produced exceeds the number of units sold, variable costing yields a
lower net income than if full costing had been used.

18.

Under variable costing, net income can be increased by increasing production without increasing
sales.

Chapter 5 Variable Costing

5-3

19.

The inventoriable cost per unit can be reduced, under variable costing, by decreasing the number of
units produced.

20.

When the number of units produced is greater than the number of units sold, variable costing yields
higher income than full costing.

21.

A full costing income statement will display a higher net income than variable costing as long as
inventory levels continue to increase.

22.

If a company increases production levels without increasing its units sold, both its full costing
income and cash flows will be larger than if production were at a lower level.

23.

Just-in-time (JIT) inventory management systems cause the difference between variable costing
income and full costing income to be much greater than if standard inventory levels had been
maintained by the company.

24.

The use of variable costing encourages management of earnings by adjusting production volume.

25.

Variable costing facilitates CVP analysis.

Answers
1
2
3
4
5

F
F
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F
T

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F
T
F
T
T

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19
20

F
T
F
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25

T
F
F
F
T

5-4

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

MULTIPLE CHOICE
26.

Full costing
A.
is another name for variable costing.
B.
considers fixed manufacturing overhead as an inventory cost.
C.
often provides the information needed for CVP analysis.
D.
considers fixed production cost as period cost..

27.

Which of the following is accounted for differently in full costing compared to variable costing?
A.
Direct material
B.
Fixed manufacturing overhead
C.
Direct labor
D.
Variable manufacturing overhead

28.

Which of the following is accounted for as a product cost in variable costing?


A.
Product delivery costs to customers
B.
Variable manufacturing overhead
C.
Fixed manufacturing overhead
D.
Product advertising costs

29.

Which of the following is treated as a product cost in full costing?


A.
Sales commissions
B.
Product advertising
C.
Depreciation on factory machines
D.
Security at corporate headquarters

30.

Full costing is
A.
more useful for decision making than variable costing because it treats all costs of
production as an inventory cost.
B.
required for financial reporting under generally accepted accounting principles.
C.
less likely to enable managers to manipulate income by increasing production.
D.
based on cost behavior.

31.

In variable costing, when does fixed manufacturing overhead become an expense?


A.
Never
B.
In the period when the product is sold
C.
In the period when the expense is incurred
D.
At the time when units are produced

32.

In full costing, when does fixed manufacturing overhead become an expense?


A.
In the period when all other fixed costs are expensed
B.
In the period when the product is sold
C.
In the period when the expense is incurred
D.
At the time units when are produced

33.

In variable costing, which of the following will be included as part of inventory on a companys
balance sheet?
A.
Fixed production cost
B.
Variable selling cost
C.
Fixed selling costs
D.
None of the answer choices will be part of inventory in variable costing.

Chapter 5 Variable Costing

5-5

34.

In full costing, which of the following will be included as part of inventory on a companys balance
sheet?
A.
Fixed production cost
B.
Variable selling cost
C.
Fixed selling costs
D.
None of the answer choices will be in inventory in full costing.

35.

Rango Enterprises manufacturing costs for 2014 are as follows:


Direct materials
Direct labor
Manufacturing supplies
Depreciation of factory equipment
Other fixed manufacturing overhead

$ 65,000
118,000
9,000
22,000
43,000

What amount should be considered as product costs for external reporting purposes?
A.
$183,000
B.
$192,000
C.
$257,000
D.
$248,000
36.

Sticker Creations fixed manufacturing overhead costs totaled $68,000 and its variable selling costs
totaled $45,000. Under full costing, how should these costs be classified?
A.
B.
C.
D.

37.

Period Costs
$68,000
$113,000
$0
$45,000

Product Costs
$45,000
$0
$113,000
$68,000

Diecast Tools manufacturing costs for 2014 are as follows:


Direct materials
Direct labor
Depreciation of factory equipment
Production supervisors salary
Other fixed manufacturing overhead

$100,000
120,000
30,000
72,000
50,000

What amount should be considered product costs for external reporting purposes?
A.
$220,000
B.
$293,000
C.
$402,000
D.
$372,000
38.

Robley Companys fixed manufacturing overhead costs totaled $235,000 and fixed corporate
operating costs totaled $116,000. Under full costing, how should these costs be classified?
A.
B.
C.
D.

Period Costs
$235,000
$0
$351,000
$116,000

Product Costs
$116,000
$351,000
$0
$235,000

5-6

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

39.

Cold City Blowers produces snow blowers. The selling price per snow blower is $80. Costs involved
in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

22
15
6
206,400

In addition, the company has fixed selling and administrative costs of $88,000 per year. During the
year, Cold City Blowers produced 8,600 snow blowers and sold 8,000 snow blowers. There is no
beginning inventory. Ignoring taxes, how much will full costing net income differ from variable
costing net income?
A.
$15,480
B.
$14,400
C.
$206,400
D.
$192,000
40.

Which of the following items appears on a variable costing income statement but not on a full
costing income statement?
A.
Sales
B.
Gross margin
C.
Net income
D.
Contribution margin

41.

Variable costing income is a function of


A.
only units sold.
B.
only units produced.
C.
both units sold and units produced.
D.
neither units sold nor units produced.

42.

Which of the following items on a variable costing income statement will change in direct
proportion to a change in sales?
A.
Sales, contribution margin, and net income
B.
Sales, variable costs, and contribution margin
C.
Sales, variable costs, contribution margin, fixed costs, and net income
D.
Sales, variable costs, and fixed costs

43.

If a companys income is positive and fixed costs exist, which of the following items will increase or
decrease at a greater rate than the change in the amount of sales on a variable costing income
statement?
A.
Variable costs
B.
Fixed costs
C.
Contribution margin
D.
Net income

Chapter 5 Variable Costing

44.

5-7

Ranger Productions experienced the following costs in 2014:


Direct materials
Direct labor
Variable manufacturing overhead
Variable selling costs
Fixed manufacturing overhead
Fixed selling costs
Fixed administrative costs

$1.50 per unit


$2.60 per unit
$1.20 per unit
$4.40 per unit
$84,000
$32,000
$15,000

During 2014, the company manufactured 65,000 units and sold 62,000 units. The unit cost is the
same throughout the year. Beginning inventory is zero. How much will the company report as total
variable product costs on its 2014 contribution income statement?
A.
$328,600
B.
$601,400
C.
$344,500
D.
$630,500
45.

Anders Supply experienced the following costs in May:


Direct materials
Direct labor
Manufacturing overhead costs
Variable
Fixed
Selling & administrative costs
Variable selling costs
Fixed selling costs
Fixed administrative costs

$6.50 per unit


$2.20 per unit
$3.10 per unit
$44,000
$1.50 per unit
$21,000
$16,000

During May, the company manufactured 22,000 units and sold 24,000 units. Beginning inventory
totaled 3,400 units. If the average selling price per unit was $28, how much is the companys
contribution margin?
A.
$327,400
B.
$352,800
C.
$323,400
D.
$344,800
46.

Roger Excavating Company experienced the following costs in 2014:


Direct materials
Direct labor
Variable manufacturing overhead
Variable selling
Fixed manufacturing overhead
Fixed selling
Fixed administrative

$1.75 per unit


$2.00 per unit
$2.50 per unit
$0.75 per unit
$50,000
$15,000
$5,000

During 2014, the company manufactured 100,000 units and sold 80,000 units. If the average selling
price per unit was $22.65, what is the amount of the companys contribution margin per unit?
A.
$16.40
B.
$15.65
C.
$18.90
D.
$13.65

5-8

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

47.

Data from Rannier Metals for 2014 is as follows:


Sales
Variable cost of goods sold
Fixed manufacturing overhead
Variable selling & administrative costs
Fixed selling & administrative costs

$20 per unit


??
$85,000
??
$150,000

The company produced 145,000 units during the year and sold 130,000 units. Variable production
costs per unit and fixed costs have remained constant all year. Net income for the year was
$1,000,000. How much was the companys contribution margin?
A.
$765,000
B.
$1,235,000
C.
$1,365,000
D.
Not enough information is provided to determine the answer
48.

During the past year, Waxman Electronics manufactured 25,000 speakers during 2014 and sold
26,000 speakers. Production costs during the year were as follows:
Fixed manufacturing overhead
Variable manufacturing overhead
Direct labor
Direct materials

$546,000
234,000
312,000
780,000

Sales totaled $3,120,000, variable selling and administrative costs totaled $182,000, and fixed
selling and administrative costs totaled $114,000. There were 2,200 speakers in beginning inventory.
How much is the contribution margin per unit?
A.
$48.00
B.
$69.00
C.
$62.00
D.
None of these answer choices are correct.
49.

Cold City Blowers produces snow blowers. The selling price per snow blower is $100. Costs
involved in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

22
15
6
23,400

In addition, the company has fixed selling and administrative costs of $9,360 per year. During the
year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers. Beginning
inventory consisted of 50 snow blowers. How much is variable cost of goods sold?
A.
$34,400
B.
$33,540
C.
$29,600
D.
None of these answer choices are correct.

Chapter 5 Variable Costing

50.

5-9

Cold City Blowers produces snow blowers. The selling price per snow blower is $100. Costs
involved in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

22
15
6
23,400

In addition, the company has fixed selling and administrative costs of $9,360 per year. During the
year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers. Beginning
inventory consisted of 50 snow blowers. How much is net income using variable costing?
A.
$11,700
B.
$12,240
C.
$12,840
D.
$45,600
51.

The following information relates to Charlin Industries for the year ending December 31, 2014, the
companys first year of operations:
Units produced
Units sold
Units in ending inventory
Fixed manufacturing overhead

100,000
80,000
20,000
$650,000

How much fixed manufacturing overhead would be expensed in 2014 using variable costing?
A.
$520,000
B.
$130,000
C.
$650,000
D.
$0
52.

Sol Enterprises contribution income statement utilizing variable costing appears below:
Sol Enterprises
Income Statement
For the Year ended December 31, 2014
Sales ($12 per unit)
Less variable costs:
Cost of goods sold
$100,000
Selling & administrative costs
18,000
Contribution margin
Less fixed costs:
Manufacturing overhead
60,900
Selling & administrative costs
15,000
Net income

$240,000
118,000
122,000
75,900
$ 46,100

Sol produced 21,000 units during the year. Variable costs per unit and fixed production costs have
remained constant the entire year. There were no beginning inventories. How much is the dollar
value of the ending inventory using variable costing?
A.
$5,000
B.
$7,900
C.
$8,800
D.
$2,900

5-10

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

53.

Acosta Supplies experienced the following costs in 2014:


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

$1.50 per unit


$4.50 per unit
$2.00 per unit
$1.00 per unit
$70,000
$80,000

During 2014, the company manufactured 4,000 units and sold 4,200 units. Assume the same unit
costs in all years. Beginning inventory consists of 800 units. How much are total variable costs on
the companys 2014 contribution margin income statement?
A.
$37,800
B.
$36,000
C.
$33,600
D.
$32,000
54.

Beiber Boxers contribution income statement utilizing variable costing for 2014 appears below:
Sales ($12 per unit)
Less variable costs:
Cost of goods sold
Selling & administrative
Contribution margin
Less fixed costs:
Manufacturing overhead
Selling & administrative costs
Net income

$78,000
$26,000
9,750
12,600
14,950

35,750
42,250
27,550
$ 14,700

The company produced 7,000 units during the year. Variable and fixed production costs have
remained constant the entire year. There were no beginning inventories. How much is the dollar
value of the ending inventory using full costing?
A.
$2,000
B.
$2,900
C.
$3,850
D.
None of these answer choices are correct.
55.

When the number of units sold is equal to the number of units produced, the net income be using
absorption costing will be
A.
greater than net income using variable costing.
B.
equal to net income using variable costing.
C.
less than net income using variable costing.
D.
None of the answer choices is always correct.

56.

If the number of units sold is greater than the number of units produced,
A.
full costing and variable costing will yield the same net income.
B.
variable costing will assign some fixed manufacturing costs to the units in ending inventory.
C.
net income will be higher under variable costing than under full costing.
D.
inventory levels will increase.

Chapter 5 Variable Costing

57.

5-11

Meow Foods had 2,000 25-pound bags of cat food in beginning inventory. During 2014, the
company manufactured 16,000 bags and sold 15,000 units. Assume the same unit costs in all years.
Each bag of food is sold for $17. The company experienced the following costs:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling
Fixed manufacturing overhead
Fixed selling
Fixed administrative

$4.50 per unit


$2.10 per unit
$1.90 per unit
$1.00 per unit
$48,000
$24,000
$30,000

If the company uses full costing, how much will be reported as inventory on the December 31, 2014
balance sheet?
A.
$9,000
B.
$25,500
C.
$28,500
D.
$34,500
58.

Meow Foods had 2,000 25-pound bags of cat food in beginning inventory. During 2014, the
company manufactured 16,000 bags and sold 15,000 units. Each bag of food is sold for $17. Assume
the same unit costs in all years. The company experienced the following costs:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling
Fixed manufacturing overhead
Fixed selling
Fixed administrative

$4.50 per unit


$2.10 per unit
$1.90 per unit
$1.00 per unit
$48,000
$24,000
$30,000

If the company uses variable costing, at what amount is the ending inventory for the year valued?
A.
$25,500
B.
$28,500
C.
$34,500
D.
$9,000
59.

Macho Enterprises experienced the following costs in 2014:


Direct materials
Direct labor
Variable manufacturing overhead
Variable selling
Fixed manufacturing overhead
Fixed selling
Fixed administrative

$2.65 per unit


$1.80 per unit
$3.25 per unit
$1.15 per unit
$94,000
$35,000
$10,000

During the year, the company manufactured 47,000 units and sold 40,000 units. How much is the
unit product cost using full costing?
A.
$7.70
B.
$9.70
C.
$8.85
D.
$10.85

5-12

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

60.

Ranger Roadsters experienced the following costs in 2014 (Assume the same unit costs in all years):
Direct materials
Direct labor
Manufacturing overhead costs
Variable
Fixed
Selling & administrative costs
Variable selling
Fixed selling
Fixed administrative

$4.85 per unit


$2.10 per unit
$2.25 per unit
$75,075
$0.95 per unit
$8,000
$2,000

There were 6,000 units in beginning inventory. During the year, the company manufactured 45,500
units and sold 48,000 units. If net income using variable costing was $82,500, how much is net
income using full costing?
A.
$78,375
B.
$86,625
C.
$76,725
D.
$88,275
61.

The Crab Shack experienced the following costs in 2014 (Assume the same unit costs in all years):
Direct materials
$2.25 per unit
Direct labor
$1.50 per unit
Manufacturing overhead costs
Variable
$1.10 per unit
Fixed
$60,000
Selling & administrative costs
Variable selling
$0.80 per unit
Fixed selling
$9,000
Fixed administrative
$13,000
There were 1,800 units in beginning inventory. During the year, the company manufactured 24,000
units and sold 25,000 units. If net income using variable costing was $76,250, how much is net
income using full costing?
A.
$5,880
B.
$79,250
C.
$73,750
D.
$74,350

62.

If a companys levels of total fixed costs and unit variable costs remain unchanged from one year to
the next, under which costing method is it possible for managers to manipulate net income through
production?
A.
Variable costing
B.
Full costing
C.
Both variable and full costing
D.
Neither variable nor full costing

63.

Full costing income is a function of


A.
units sold only.
B.
units produced only.
C.
both units sold and units produced.
D.
neither units sold nor units produced.

Chapter 5 Variable Costing

64.

Which of the following is true when units produced exceed units sold?
A.
Full costing and variable costing will yield the same net income.
B.
Full costing will assigns some a portion of the fixed manufacturing costs to the units in
ending inventory.
C.
Net income will be higher under variable costing than under full costing.
D.
Inventory levels will decrease.

65.

Futon Delight experienced the following costs in 2014 (Assume the same unit costs in all years):
Direct materials
Direct labor
Manufacturing Overhead Costs:
Variable
Fixed

5-13

$2.00 per unit


$1.00 per unit
$1.50 per unit
$45,000

There were 600 units in beginning inventory. During the year, the company manufactured 18,000
units and sold 17,600 units. If net income for the year was $54,000 using full costing, how much will
net income be if the company uses variable costing?
A.
$53,000
B.
$50,000
C.
$55,000
D.
More information is needed to determine the answer.
66.

Radial Fuel Cells experienced the following costs in 2014 (Assume the same unit costs in all years):
Direct materials
Direct labor
Manufacturing Overhead Costs
Variable
Fixed
Selling & Administrative Costs
Fixed selling
Variable selling
Fixed administrative

$4 per unit
$8 per unit
$2 per unit
$150,000
$30,000
$1 per unit
$20,000

During the year, the company manufactured 50,000 units and sold 45,000 units. Beginning inventory
is zero. If net income for the year was $265,000 using full costing, what would net income be if the
company used variable costing?
A.
$250,000
B.
$265,000
C.
$270,000
D.
$450,000
67.

If a company employs JIT inventory techniques, which statement is true?


A.
Variable and full costing income will differ very little since there is almost no inventory on
hand.
B.
Variable and full costing income will differ very little since there are almost no fixed costs
incurred on production.
C.
Variable and full costing income will differ greatly since actual costs are difficult to
determine.
D.
Variable and full costing income will differ greatly since there will be a large difference
between gross margin and contribution margin.

5-14

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

68.

Waterloo Skyline experienced the following costs in 2014:


Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead

$3.15 per unit


$2.80 per unit
$1.45 per unit
$12.60 per unit

There was no beginning inventory. During the year, the company sold 190,000 units. If net income
using full and variable costing was $939,020 and $905,000, respectively, how many units did the
company produce in 2014?
A.
192,700
B.
2,700
C.
187,300
D.
46,951
69.

Which is most consistent with cost-volume-profit analysis?


A.
Variable costing
B.
Full costing
C.
Absorption costing
D.
JIT

70.

Which method provides an incentive for managers to produce more units in order to increase income
for performance evaluations?
A.
Full costing
B.
Variable costing
C.
Both full costing and variable costing
D.
Neither full costing nor variable costing

71.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at
a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials,
$32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling
and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units.
What is Brand Products net income using variable costing?
A.
$125,960
B.
$149,960
C.
$169,740
D.
$124,240

72.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at
a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials,
$32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling
and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units.
What is Brand Products net income using full costing?
A.
$124,240
B.
$125,960
C.
$169,740
D.
$149,960

Chapter 5 Variable Costing

5-15

73.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at
a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials,
$32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling
and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units.
Brand Products uses variable costing. How much will the companys contribution margin increase if
sales increase 10%?
A.
$16,974
B.
$23,000
C.
$14,996
D.
$12,420

74.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at
a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials,
$32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling
and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units.
Brand Products uses full costing. How much will the companys gross margin increase if sales
increase 10%?
A.
Less than 10%
B.
More than 10%
C.
10%
D.
It depends on other factors not given.

75.

Affinity makes a single product, pool pumps. Information for 2014 appears below:
Sales in units
Production in units
Beginning inventory
Variable production cost per unit
Variable selling cost per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit
How much is the contribution margin per unit of inventory?
A.
$29.00
B.
$24.00
C.
$23.00
D.
$18.00

5,800
6,200
1,500
$46.00
$6.00
$31,000
$24,000
$75.00

5-16

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

76.

Affinity makes a single product, pool pumps. Information for 2014 appears below (Assume the same
unit costs in all years):
Sales in units
Production in units
Beginning inventory
Variable production cost per unit
Variable selling cost per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit

5,800
6,200
1,500
$46.00
$6.00
$31,000
$24,000
$75.00

How much is the full cost per unit of inventory?


A.
$46.00
B.
$51.00
C.
$57.00
D.
$52.00
77.

Affinity makes a single product, pool pumps. Information for 2014 appears below (Assume the same
unit costs in all years):
Sales in units
Production in units
Beginning inventory
Variable production cost per unit
Variable selling cost per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit

5,800
6,200
1,500
$46.00
$6.00
$31,000
$24,000
$75.00

How much is net income for the year under variable costing?
A.
$78,400
B.
$87,600
C.
$80,400
D.
None of these answer choices are correct.
78.

Affinity makes a single product, pool pumps. Information for 2014 appears below (Assume the same
unit costs in all years):
Sales in units
Production in units
Beginning inventory
Variable production cost per unit
Variable selling cost per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit
How much is net income for the year under full costing?
A.
$78,400
B.
$80,400
C.
$87,600
D.
None of these answer choices are correct.

5,800
6,200
1,500
$46.00
$6.00
$31,000
$24,000
$75.00

Chapter 5 Variable Costing

79.

5-17

Affinity makes a single product, pool pumps. Information for 2014 appears below (Assume the same
unit costs in all years):
Sales in units
Production in units
Beginning inventory
Variable production cost per unit
Variable selling cost per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit

5,800
6,200
1,500
$46.00
$6.00
$31,000
$24,000
$75.00

Under which method will net income be larger?


A.
Variable costing
B.
Full costing
C.
Net income under both the variable and full costing methods will be the same.
D.
The answer cCannot be determined from the information provided.
80.

Affinity makes a single product, pool pumps. Information for 2014 appears below (Assume the
same unit costs in all years):
Sales in units
Production in units
Beginning inventory
Variable production cost per unit
Variable selling cost per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit

5,800
6,200
1,500
$46.00
$6.00
$31,000
$24,000
$75.00

How much will be reported for inventory on the balance sheet if variable costing is used?
A.
$87,400
B.
$96,900
C.
$108,300
D.
$118,400
81.

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the
same unit costs in all years):
Selling price
Variable costs:
Production
Selling
Fixed Costs:
Production
Selling and administrative

$23.00 per backpack


$11.00 per backpack
$2.00 per backpack
$900,000 per year
$540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning
inventory, and costs throughout the year were stable. How much is the cost of ending inventory
under variable costing?
A.
$550,000
B.
$650,000
C.
$730,000
D.
$1,450,000

5-18

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

Chapter 5 Variable Costing

82.

5-19

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the
same unit costs in all years):
Selling price
Variable costs:
Production
Selling
Fixed Costs:
Production
Selling and administrative

$23.00 per backpack


$11.00 per backpack
$2.00 per backpack
$900,000 per year
$540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning
inventory, and costs throughout the year were stable. How much is the cost of ending inventory
under full costing?
A.
$730,000
B.
$550,000
C.
$650,000
D.
$938,000
83.

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the
same unit costs in all years):
Selling price
Variable costs:
Production
Selling
Fixed Costs:
Production
Selling and administrative

$23.00 per backpack


$11.00 per backpack
$2.00 per backpack
$900,000 per year
$540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning
inventory, and costs throughout the year were stable. How much is net income under variable
costing?
A.
$740,000
B.
$848,000
C.
$560,000
D.
$2,000,000

5-20

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

84.

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the
same unit costs in all years):
Selling price
Variable costs:
Production
Selling
Fixed Costs:
Production
Selling and administrative

$23.00 per backpack


$11.00 per backpack
$2.00 per backpack
$900,000 per year
$540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning
inventory, and costs throughout the year were stable. How much is net income under full costing?
A.
$560,000
B.
$380,000
C.
$340,000
D.
$740,000
85.

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the
same unit costs in all years):
Selling price
Variable costs:
Production
Selling
Fixed Costs:
Production
Selling and administrative

$23.00 per backpack


$11.00 per backpack
$2.00 per backpack
$900,000 per year
$540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning
inventory, and costs throughout the year were stable. How much higher or lower will variable
costing be than full costing income?
A.
$180,000 higher
B.
$320,000 higher
C.
$320,000 lower
D.
$180,000 lower

Chapter 5 Variable Costing

86.

5-21

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the
same unit costs in all years):
Selling price
Variable costs:
Production
Selling
Fixed costs:
Production
Selling and administrative

$23.00 per backpack


$11.00 per backpack
$2.00 per backpack
$900,000 per year
$540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning
inventory, and costs throughout the year were stable. What would be the difference in income
between variable costing income and full costing income if the company had produced 215,000
backpacks instead of 250,000?
A.
$62,791
B.
$54,000
C.
$46,400
D.
$77,400
87.

WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it
sells for $8.00 each. The following information is available (Assume the same unit costs in all
years):

5-22

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

87.

WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it
sells for $8.00 each. The following information is available (Assume the same unit costs in all
years):
Variable costs:
Product royalty fees
DVD production
Selling and admin costs
Fixed costs:
Production
Selling and administration

$3.30 per DVD


$1.20 per DVD
$0.80 per DVD
$128,000 per month
$130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in
beginning inventory. How much is net income per month under variable costing?
A.
$143,600
B.
$130,800
C.
$130,640
D.
None of these answer choices are correct.

Chapter 5 Variable Costing

88.

5-23

WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it
sells for $8.00 each. The following information is available (Assume the same unit costs in all
years):
Variable costs:
Product royalty fees
DVD production
Selling and admin costs
Fixed Costs:
Production
Selling and administration

$3.30 per DVD


$1.20 per DVD
$0.80 per DVD
$128,000 per month
$130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in
beginning inventory. How much is net income per month under full costing?
A.
$143,600
B.
$130,640
C.
$130,800
D.
None of these answer choices are correct.
89.

WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it
sells for $8.00 each. The following information is available (Assume the same unit costs in all
years):
Variable costs:
Product royalty fees
DVD production
Selling and admin costs
Fixed Costs:
Production
Selling and administration

$3.30 per DVD


$1.20 per DVD
$0.80 per DVD
$128,000 per month
$130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in
beginning inventory. How much is inventory at the end of the month under variable costing?
A.
$72,000
B.
$148,500
C.
$174,900
D.
$84,800

5-24

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

90.

WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it
sells for $8.00 each. The following information is available (Assume the same unit costs in all
years):
Variable costs:
Product royalty fees
DVD production
Selling and admin costs
Fixed Costs:
Production
Selling and administration

$3.30 per DVD


$1.20 per DVD
$0.80 per DVD
$128,000 per month
$130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in
beginning inventory. How much is inventory at the end of the month under full costing?
A.
$72,000
B.
$148,500
C.
$174,900
D.
$84,800
91.

Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2014:
Selling price
Variable costs:
Production (manufacturing costs)
Selling & administration
Fixed costs:
Production (manufacturing costs)
Selling & administration

$15.00 per t-shirt


$3.00 per t-shirt
$1.00 per t-shirt
$1,000,000 per year
$2,000,000 per year

During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there
was no beginning inventory. How much is the net income under variable costing?
A.
$975,000
B.
$1,400,000
C.
$850,000
D.
$2,250,000
92.

Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2014:
Selling price
Variable costs:
Production (manufacturing costs)
Selling & administration
Fixed costs:
Production (manufacturing costs)
Selling & administration

$15.00 per t-shirt


$3.00 per t-shirt
$1.00 per t-shirt
$1,000,000 per year
$2,000,000 per year

During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there
was no beginning inventory. How much is the net income under full costing?
A.
$975,000
B.
$1,400,000
C.
$850,000
D.
$2,250,000

Chapter 5 Variable Costing

93.

5-25

Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2014:
Selling price
Variable costs:
Production (manufacturing costs)
Selling & administration
Fixed costs:
Production (manufacturing costs)
Selling & administration

$15.00 per t-shirt


$3.00 per t-shirt
$1.00 per t-shirt
$1,000,000 per year
$2,000,000 per year

During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there
was no beginning inventory. How much is the inventory under variable costing at December 31,
2014?
A.
$150,000
B.
$275,000
C.
$200,000
D.
$325,000
94.

Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2014:
Selling price
Variable costs:
Production (manufacturing costs)
Selling & administration
Fixed costs:
Production (manufacturing costs)
Selling & administration

$15.00 per t-shirt


$3.00 per t-shirt
$1.00 per t-shirt
$1,000,000 per year
$2,000,000 per year

During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there
was no beginning inventory. How much is the inventory under full costing at December 31, 2014?
A.
$150,000
B.
$275,000
C.
$200,000
D.
$325,000

5-26

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

95.

Brislin Gifts makes ceramic mugs and has the following amounts for 2014 (Assume the same unit
costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per month
$60,000 per month

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
44,000
46,000
Inventory at January 1, 2014 consisted of 1,000 mugs. How much is net income for January using
variable costing?
A.
$89,600
B.
$77,600
C.
$67,480
D.
None of these answer choices are correct.
96.

Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same
unit costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per month
$60,000 per month

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
50,000
45,000
Inventory at January 1, 2014 consisted of 1,000 mugs. How much is net income for February using
full costing?
A.
$70,500
B.
$83,000
C.
$183,000
D.
None of these answer choices are correct.

Chapter 5 Variable Costing

97.

5-27

Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same
unit costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per month
$60,000 per month

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
50,000
45,000
Inventory at January 1, 2014 consisted of 1,000 mugs. During which months will ending inventory
be the same if variable costing is used?
A.
January and February
B.
February and March
C.
January and March
D.
No two months would have the same ending inventory

5-28

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

98.

Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same
unit costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per month
$60,000 per month

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
50,000
45,000
Inventory at January 1, 2014 consisted of 1,000 mugs. Which two months would have the same net
income under full costing?
A.
January and February
B.
February and March
C.
January and March
D.
No two months would have the same net income.

Chapter 5 Variable Costing

99.

5-29

Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same
unit costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per year
$60,000 per year

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
50,000
45,000
Inventory at January 1, 2014 consisted of 1,000 mugs. How many units will remain in inventory at
the end of February?
A.
2,000
B.
0
C.
7,000
D.
6,000

5-30

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

100.

Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same
unit costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per year
$60,000 per year

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
50,000
45,000
Inventory at January 1, 2014 consisted of 1,000 mugs. How much is the inventory cost per unit
under full costing during March?
A.
$4.50
B.
$4.00
C.
$2.50
D.
$5.10

Chapter 5 Variable Costing

101.

5-31

Brislin Gifts makes ceramic mugs and has the following amounts during 2014 (Assume the same
unit costs in all years):
Selling price
Variable production cost
Variable selling cost
Fixed production cost
Fixed selling and administrative cost

$9.00 per mug


$2.50 per mug
$1.10 per mug
$100,000 per year
$60,000 per year

Production and sales in units for the first three months of 2014 are as follows:
Year
Production
Sales
January
50,000
44,000
February
40,000
45,000
March
50,000
45,000
Inventory at January 1, 2014 consisted of 1,000 mugs. How much is the inventory cost per unit
under variable costing during March?
A.
$4.50
B.
$3.60
C.
$2.50
D.
$5.60
102.

A company with fixed manufacturing costs of $500,000 produces 100,000 units in 2014 and 125,000
units in 2015. The company sells 90,000 units each in both years. Other costs and selling price are
unchanged for 2014 and 2015. Assume that there was no beginning inventory in 2014. Which of the
following is true?
A.
Variable costing income will be greater in 2014 than in 2015.
B.
The dollar amount of ending inventory will be greater in 2014 than in 2015.
C.
Variable costing income will be the same in 2015 and 2014.
D.
All of these answer choices are correct.

5-32

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

103.

Zintec has fixed manufacturing costs of $400,000 and produces 10,000 and sells 8,000 wagons
during the year. There is no beginning inventory. Which of the following conclusions can be drawn?
A.
Variable costing income will be $80,000 higher than full costing income.
B.
Full costing income will be $80,000 higher than variable costing income.
C.
Variable and full costing income will be the same.
D.
There is not enough information to draw a conclusion.

104.

Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved
in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

20
12
10
148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the
year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no
beginning inventory. What is the value of ending inventory using full costing?
A.
$679,500
B.
$630,000
C.
$652,500
D.
$780,000
105.

Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved
in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

20
12
10
148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the
year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no
beginning inventory. What is the value of ending inventory using variable costing?
A.
$679,500
B.
$630,000
C.
$652,500
D.
$780,000
106.

Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved
in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

20
12
10
148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the
year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no
beginning inventory. How much is the cost of goods sold using full costing?
A.
$1,359,000
B.
$1,260,000

Chapter 5 Variable Costing

C.
D.
107.

5-33

$2,038,500
$1,408,500

Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved
in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

20
12
10
148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the
year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no
beginning inventory. How much is net income using full costing?
A.
$1,641,000
B.
$1,590,000
C.
$1,441,500
D.
$1,491,000

5-34

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

108.

Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved
in production are:
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year

20
12
10
148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the
year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. Beginning inventory
consists of no units. How much fixed manufacturing overhead is in ending inventory under full
costing?
A.
$0
B.
$49,500
C.
$148,500
D.
$99,000
109.

The following information relates to Winslee Widgets during the companys first year of operations:
Units produced
Units sold
Units in ending inventory
Fixed manufacturing overhead

11,000
10,000
1,000
$220,000

How much fixed manufacturing overhead will be expensed during the year using full costing?
A.
$220,000
B.
$20,000
C.
$200,000
D.
$0

Chapter 5 Variable Costing

5-35

Multiple Choice Answers


26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

B
B
B
C
B
C
B
D
A
C
D
D
D
B
D

41
42
43
44
45
46
47
48
49
50
51
52
53
54
55

A
B
D
A
B
B
B
C
A
C
C
A
A
B
B

56
57
58
59
60
61
62
63
64
65
66
67
68
69
70

C
D
A
B
A
C
B
C
B
A
A
A
A
A
A

71
72
73
74
75
76
77
78
79
80
81
82
83
84
85

D
B
A
B
C
B
A
B
B
A
A
A
C
D
D

86
87
88
89
90
91
92
93
94
95
96
97
98
99
100

A
B
A
B
C
C
A
A
B
B
A
C
D
A
A

101
102
103
104
105
106
107
108
109

C
C
B
A
B
A
D
B
B

5-36

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

EXERCISES
110.

Arctic AC Company is a small manufacturer of window air conditioners. The units sell for $180
each. In 2014, the company produced 1,000 units and sold 940 units. Beginning inventory was zero.
Below is the variable costing income statements for 2014:
Arctic AC Company
Variable Costing Income Statement
For the Year Ending December 31, 2012
Sales
Less variable costs:
Variable cost of goods sold
Variable selling expense
Contribution margin
Less fixed costs:
Fixed manufacturing expense
Fixed selling expense
Fixed administrative expense
Net income
a.
b.

$26,320
12,220
21,000
6,580
4,700

How much net income will be reported under full costing?


Reconcile the difference in profit between the two income amounts.

Answer
a. Fixed manufacturing overhead
Divided by units produced
Fixed manufacturing overhead per unit
Sales
Less cost of goods sold
Gross margin
Less selling and administrative expense
Selling expense
Net income
b.

$169,200

Variable costing net income


Add: Fixed costs deferred in inventory ($21 60)
Full costing net income

$21,000
1,000
$ 21.00
$169,200
46,060
$123,140
23,500
$99,640
$98,380
1,260
$99,64
0

38,540
130,660

32,280
$98,380

Chapter 5 Variable Costing

111.

5-37

The following information is available for Trailblazer, a manufacturer of four-wheel all-terrain


vehicles:
Vehicles produced
Vehicles sold

2014
20,000
18,000

2015
16,000
18,000

Selling price per unit


Direct material per unit
Direct labor per unit

$8,000
$1,600
$3,000

$8,000
$1,600
$3,000

$600
$4,800,000
$3,000,000

$600
$4,800,000
$3,000,000

Variable manufacturing overhead per unit


Fixed manufacturing overhead per year
Fixed selling and administrative expense per year

In the companys second year, the company needed to get rid of excess inventory (the extra units
produced but not sold in 2014), so it cut back production to 16,000 units.
a.
b.
c.

Calculate profit for both years using variable costing.


How much is reported as ending inventory when using variable costing?
Does variable costing profit present a more realistic view of performance during the two
years? Explain.

Answer
a.
Variable manufacturing costs per unit
Sales ($8,000 18,000 units)
Less cost of goods sold:
($5,200 18,000 units)
Contribution margin
Less fixed costs:
Manufacturing
Selling and administrative
Net income

2014
$5,200

2015
$5,200

$144,000,000

$144,000,000

93,600,000
50,400,000

93,600,000
50,400,000

4,800,000
3,000,000
$ 42,600,000

4,800,000
3,000,000
$ 42,600,000

Total

$85,200,000

b.

Ending inventory

$10,400,000
$0
($5,200 2,000 units) ($5,200 0 units)

c.

Variable costing presents a more realistic view of firm performance in that income is the
same in both years, which is consistent with the firm having the same cost structure and
level of sales in both years.

5-38

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

112.

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead per year

$11 per unit


15 per unit
12 per unit
$448,000

In addition, the company has selling and administrative costs:


Fixed selling costs per year
Fixed administrative costs per year
Variable selling and administrative costs per year

$175,000
75,000
$6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800
units. Assume the same unit costs in all years. What is the value of ending inventory using variable
costing?
Answer
Ending inventory in units = 1,800 + 28,000 29,400 = 400 units
Ending inventory under variable costing: ($11 + $15 + $12) 400 = $15,200
113.

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead per year

$11 per unit


15 per unit
12 per unit
$448,000

In addition, the company has selling and administrative costs:


Fixed selling costs per year
Fixed administrative costs per year
Variable selling and administrative costs per year

$175,000
75,000
$6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800
units. Assume the same unit costs in all years. How much is net income using variable costing?
Answer
Sales ($80 29,400)
Less variable cost of goods sold ($38 29,400)
Less variable selling and administrative costs ($6 29,400)
Contribution margin
Less Fixed manufacturing overhead
$448,000
Selling expense
175,000
Administrative expense
75,000
Net income

$2,352,000
1,117,200
176,400
1,058,400
698,000
$ 360,400

Chapter 5 Variable Costing

114.

5-39

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead per year

$11 per unit


15 per unit
12 per unit
$448,000

In addition, the company has selling and administrative costs:


Fixed selling costs per year
Fixed administrative costs per year
Variable selling and admin costs per year

$175,000
75,000
$6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800
units. Assume the same unit costs in all years.
a.
b.
Answer
a.

How much is net income using full costing?


How much fixed manufacturing overhead is in ending inventory under full costing?
Sales ($80 29,400)
Less cost of goods sold ($54 29,400)*
Gross margin
Less selling and administrative expenses:
Fixed selling and administrative expense
$250,000
Variable selling and admin expenses ($6 29,400) 176,400
Net income

$2,352,000
1,587,600
764,400
426,400
$ 338,000

* Fixed manufacturing cost per unit = $448,000 28,000 = $16 per unit
Product cost per unit = $11 + $15 + $12 + $16 = $54
b.

Units in ending inventory = 1,800 + 28,000 29,400 = 400


Fixed manufacturing cost per unit = $448,000 28,000 = $16 per unit
Cost of ending inventory = $16 400 = $6,400

5-40

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

115.

Below is a variable costing income statement for Hops Dollar Store. The budget for 2014 follows:
Hops Dollar Store
Budgeted Variable Costing Income Statement
For the Year Ending December 31, 2014
Sales
Less variable costs:
Cost of goods sold
Selling expense
Contribution margin
Less fixed costs:
Manufacturing expense
Selling expense
Administrative expense
Net income

$15,000,000
$5,000,000
4,000,000
2,300,000
1,200,000
2,000,000

9,000,000
6,000,000

5,500,000
$ 500,000

For the coming year, the company is considering hiring two additional sales representatives at
$80,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates
that each sales representative will generate $900,000 of incremental sales. Calculate the impact on
profit of the proposed hiring decision. Should the company hire the two additional sales
representatives?
Answer
Contribution margin Sales = Contribution margin ratio
$6,000,000 $15,000,000 = 0.40 = 40.00%
(Incremental sales CMR) Salaries Commission = Incremental profit
($1,800,000 .40) $160,000 ($1,800,000 .05) = $470,000 profit increase
Since profit increases, Hops Dollar Store should hire the two additional sales representatives.

Chapter 5 Variable Costing

116.

5-41

Perfect Buy produces electronic garage door openers. Information on the first three years of business
follows:
Units sold
Units produced
Fixed production costs
Variable production costs per unit
Selling price per unit
Fixed selling and administrative
expense
a.
b.

2014
20,000
20,000
$500,000
$100
$200

2015
20,000
25,000
$500,000
$100
$200

2016
20,000
15,000
$500,000
$100
$200

$150,000

$150,000

$150,000

Calculate net income and the value of ending inventory for each year using variable costing.
Explain why, using variable costing, profit does not fluctuate from year to year.

Answer
a.
Units sold
Selling price per unit
Sales
Less variable cost of goods sold:
($100 20,000)
Contribution margin
Less fixed costs:
Production
Selling and administrative
Net income
Ending inventory ($100 5,000)

2014
20,000
$
200
4,000,000

2015
20,000
$
200
4,000,000

2016
20,000
$
200
4,000,000

2,000,000
2,000,000

2,000,000
2,000,000

2,000,000
2,000,000

500,000
150,000
$1,350,000

500,000
150,000
$1,350,000

500,000
150,000
$1,350,000

$0

$500,000

$0

b. Under variable costing system, profit remains the same each period because fixed manufacturing
overhead is treated as a period cost and expensed each year even if units produced differ from
the units sold.

5-42

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

117.

The following information is available for Trailblazer, a manufacturer of four-wheel all-terrain


vehicles for its first two years of operation:
2014
2015
Vehicles produced
1,000
1,400
Vehicles sold
900
1,200
Selling price per unit
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year
Variable selling and administrative expense per unit
Fixed selling and administrative expense per year

$1,200
$350
$220

$1,200
$350
$220

$40
$112,000
$20
$35,000

$40
$112,000
$20
$35,000

Calculate net income for 2015 using full costing.


Answer
Sales ($1,200 1,200)
Less cost of goods sold ($690 1,200)*
Gross margin
Less selling and administrative expenses:
Fixed selling and administrative expense
Variable selling and admin expenses ($20 1,200)
Net income

$1,440,000
828,000
612,000
$35,000
24,000

* Fixed manufacturing cost per unit = $112,000 1,400 = $80 per unit
Product cost per unit = $350 + $220 + $40 + $80 = $690

59,000
$ 553,000

Chapter 5 Variable Costing

118.

5-43

The following information relates to Markley Mattresses for fiscal year 2014, the companys first
year of operations:
Units produced
Units sold
Selling price per unit
Direct material per unit
Direct labor per unit
Variable manufacturing overhead per unit
Variable selling cost per unit
Annual fixed manufacturing overhead
Annual fixed selling and administrative expense
a.
b.

20,000
17,000
$30
$5
$5
$2
$3
$160,000
$80,000

Prepare an income statement using full costing.


Prepare an income statement using variable costing.

Answer
a.
Markley Mattresses
Full Costing Income Statement
For the Year Ending December 31, 2014
Sales ($30 17,000)
Less cost of goods sold ($20 17,000)*
Gross margin
Less selling and administrative expenses
Fixed selling and administrative expense
Variable selling expenses ($3 17,000)
Profit

$510,000
340,000
170,000
$80,000
51,000

131,000
$ 39,000

* Product cost per unit: $5 + $5 + $2 + $8 ($160,000 20,000) = $20


b.
Markley Mattresses
Variable Income Statement
For the Year Ending December 31, 2014
Sales ($30 17,000)
Less variable expenses
Production costs ($12 17,000)
Selling costs ($3 17,000)
Contribution margin
Less fixed expenses
Manufacturing overhead
Selling and administrative expense
Profit

$510,000
$204,000
51,000
160,000
80,000

255,000
255,000
240,000
$ 15,000

5-44

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

119.

Adam Tools produces screwdrivers and had 1,700 in inventory at the beginning of the year. It has a
variable manufacturing cost of $5.00 per unit, a variable selling cost of $0.75 per unit; a fixed
manufacturing cost of $45,000 per year; and a fixed selling and administrative cost of $24,000 per
year. The selling price is $14.00 per screwdriver. During the year, 18,000 screwdrivers were
produced and 18,400 were sold. Assume the same unit costs in all years.
a.
b.
c.
d.

Answer:
a.

$5.00

b.

$5.00 + ($45,000 18,000) = $7.50

c.

Sales (18,400 $14)


Variable manufacturing cost (18,400 $5)
Variable selling cost (18,400 $0.75)
Contribution margin
Fixed production costs
Fixed selling & administrative costs
Net income

d.

120.

What is the product cost per screwdriver using variable costing?


What is the product cost per screwdriver using full costing?
Prepare an income statement using variable costing. Omit the statement heading.
Prepare an income statement using full costing. Omit the statement heading.

$257,600
$92,000
13,800
45,000
24,000

Sales (18,400 $14)


Cost of goods sold (18,400 $7.50)
Gross margin
Selling & administrative [$24,000 + ($0.75 18,400)]
Net income

105,800
151,800
69,000
$ 82,800
$257,600
138,000
119,600
37,800
$ 81,800

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead per year

$11 per unit


15 per unit
12 per unit
$448,000

In addition, the company has selling and administrative costs:


Fixed selling costs per year
Fixed administrative costs per year
Variable selling and admin costs per year

$175,000
75,000
$6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800
units. Assume the same unit costs in all years. What is the value of ending inventory using full
costing?
Answer
Ending inventory in units = 1,800 + 28,000 29,400 = 400 units
Fixed manufacturing cost per unit = $448,000 28,000 = $16 per unit
Product cost per unit = $11 + $15 + $12 + $16 = $54
Ending inventory under full costing: $54 400 units = $21,600

Chapter 5 Variable Costing

121.

5-45

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are:
Direct material
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead per year

$11 per unit


15 per unit
12 per unit
$448,000

In addition, the company has selling and administrative costs:


Fixed selling costs per year
Fixed administrative costs per year
Variable selling and admin costs per year

$175,000
75,000
$6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800
units. Assume the same unit costs in all years. How much is gross margin per unit and in total?
Answer
Fixed manufacturing cost per unit = $448,000 28,000 = $16
Gross margin per unit = $80.00 $11.00 $15.00 $12.00 $16.00 = $26.00
Total gross margin = $26 29,400 = $764,400
122.

Last month, Toro Tools produced 6,000 wheelbarrows and sold 6,200 at a price of $62 each. Toro
had 900 wheelbarrows in beginning inventory. Manufacturing costs consisted of direct materials of
$84,000, direct labor of $27,300, variable manufacturing overhead of $21,000, and fixed
manufacturing overhead of $120,000. General and administrative fixed costs totaled $32,000.
Variable selling costs were $1 per wheelbarrow. Assume the same unit costs in all years.
a.
b.

Answer
a.

b.

Calculate Toro Tools net income using full costing.


Calculate Toro Tools net income using variable costing.
Net income using full costing approach:
Revenue = 6,200 $62 = $384,400
Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) 6,000 = $22.05
Fixed manufacturing cost per unit = $120,000 6,000 = $20.00
Cost of goods sold = ($42.05 6,200) = $260,710
Variable selling costs = $1 6,200 = $6,200
Net income = $384,400 $260,710 $32,000 $6,200 = $85,490
Net income using variable costing approach:
Revenue = 6,200 $62 = $384,400
Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) 6,000 = $22.05
Variable selling costs = $1 6,200 = $6,200
Net income = $384,400 ($22.05 6,200) $120,000 $32,000 $6,200 = $89,490

5-46

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

123.

Assess Digital produces digital controls. Information on its first three years of business is as follows:
Units sold
Units produced
Fixed production costs
Variable production costs per unit
Selling price per unit
Fixed selling and administrative exp.

2014
20,000
20,000
$500,000
$100
$200
$150,000

2015
20,000
25,000
$500,000
$100
$200
$150,000

2016
20,000
15,000
$500,000
$100
$200
$150,000

Total
60,000
60,000

a. Calculate net income and the value of ending inventory for each year using full costing.
b.
Explain why profit fluctuates from year to year even though the number of units sold, the
selling price, and the cost structure remain constant.
Answer
2014
$500,000
20,000
$25.00
100.00
$ 125.00

2015
$500,000
25,000
$20.00
100.00
$ 120.00

2016
$500,000
15,000
$33.33
100.00
$ 133.33

Sales ($200 20,000 units)


$4,000,000
Less cost of goods sold:
($125 20,000)
2,500,000
($120 20,000)
($120 5,000) + ($133.33 15,000)

$4,000,000

$4,000,000

Gross margin
Less selling and admin expense
Net income

1,500,000
150,000
$1,350,000

1,600,000
150,000
$1,450,000

1,400,050
150,000
$1,250,050

$0

$600,000

$0

Fixed production overhead


Divided by units produced
Fixed production overhead per unit
Variable production costs per unit
Full cost per unit

Ending inventory ($120 5,000)


b.

2,400,000
2,599,950

Even though sales revenue amounts are the same in each period, profit fluctuates. This results
because different quantities are produced each period which affects the fixed manufacturing
overhead included in cost of goods sold versus ending inventory.

Chapter 5 Variable Costing

124.

5-47

Wise Company began operations in 2014. A company has $8.00 per unit in variable production costs
and $3.00 per unit in variable selling and administrative costs. The annual fixed production cost is
$180,000. The annual fixed selling and administrative cost is $20,000.
a.

Complete the table below for the number of units and dollar value of ending inventory under
variable costing for each year.
Units produced
Units sold
Units in ending inventory

2014
60,000
55,000

2015
70,000
72,000

2016
80,000
82,000

2017
90,000
91,000

Ending inventory using variable


costing

b.

Assume that the selling price and cost structure stayed the same over the 4-year period. How
would the total net income compare for the entire period between variable and full costing?

Answer
a.
2014
Units produced
60,000
Units sold
55,000
Units in ending inventory
5,000
Ending inventory using variable costing
$8 5,000 =
$40,000
$8 3000 =
$8 1,000 =
b.

2015
70,000
72,000
3,000

2016
80,000
82,000
1,000

2017
90,000
91,000
0

$8,000

$0

$24,000

Since sales equals production for the 4-year period, net income will remain be the same.

5-48

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

CHALLENGE EXERCISES
125.

ABT makes a single product, bucket stoppers. During 2014, 155,000 units were sold and 150,000
units were produced. Information for 2014 appears below:
Beginning inventory in units
Variable production cost per unit
Variable operating costs per unit
Fixed production cost per year
Fixed selling and administrative cost per year
Selling price per unit
a.
b.
c.

Answer
a.

b.

How much is the contribution margin for 2014 under variable costing?
How much is the gross margin for 2014 under full costing?
Explain why variable and full costing produce different results.
Sales ($6 155,000)
Variable cost of production ($1.20 155,000)
Variable operating costs ($0.80 155,000)
Contribution margin

$930,000
186,000
124,000
$620,000

Fixed cost per unit = $127,500 150,000 = $0.85


Full cost per unit = $0.85 + $1.20 = $2.05
Sales ($6 155,000)
Cost of goods sold ($2.05 155,000)
Gross margin

c.

6,000
$1.20
$0.80
$127,500
$32,000
$6.00

$930,000
317,750
$612,250

Under full costing, a proportional share of the fixed manufacturing overhead costs is
attached to each unit produced. The fixed costs associated with the extra units are reported
on the balance sheet as ending inventory, rather than on the income statement as an expense.
The entire fixed manufacturing cost is expensed under variable costing, making income
smaller than if only part of the fixed cost was expensed.

Chapter 5 Variable Costing

126.

5-49

Bucket Zone had 2,200 buckets in its beginning inventory. It manufactured 23,000 buckets and sold
23,400 buckets during the year. Costs involved in production are $3 for direct materials, $2 for direct
labor, and $1.20 for variable overhead, each on a per unit basis. The company has annual fixed
selling and administrative costs of $78,000 and fixed annual manufacturing overhead costs totaling
$86,250. Operating income using variable costing is $33,000.
a.
b.
c.

Answer
a.

b.

Determine the amount by which net income will differ under absorption costing compared to
variable costing.
Determine operating income under absorption costing.
How would the difference between variable and full costing be impacted if the company
switched to a JIT system? Explain.
Change in inventory level = 23,400 23,000 = 400 units decrease
Fixed manufacturing cost per unit = $86,250 23,000 = $3.75 per unit
Difference = $3.75 400 units = $1,500
Variable costing operating income
Less fixed costs difference
Absorption costing operating income

$33,000
(1,500)
$31,500

c.Companies that use JIT inventory systems have very low inventory levels since they dont produce
until they are ready to sell products. Units they produce are approximately equal to those they
sell, so the change in the inventory level is very close to zero. Since the difference in variable
and full costing income is due to the change in inventory units, the net income difference will
be close to zero as well.
SHORT-ANSWER ESSAYS
127.

Explain the significant difference between variable costing and full costing.

Answer
The significant difference between variable costing and full costing is the treatment of fixed
manufacturing overhead. In variable costing, fixed manufacturing overhead is treated as a period
cost and expensed as it is incurred. In full costing, fixed manufacturing overhead is considered a cost
that becomes part of inventory and is not expensed until the goods are sold.
128.

Why is a variable costing income statement more useful for internal purposes?

Answer
The format separates fixed and variable costs facilitating cost-volume-profit analysis. Also, it
discourages over-production since managers cannot increase income by increasing production.

5-50

Test Bank to accompany Jiambalvo Managerial Accounting 5th Edition

129.

Under full costing, how does increasing production increase income? Does this work under variable
costing? Why or why not?

Answer
Since fixed production costs are included in the unit product cost using full costing, increasing
production will reduce the fixed cost per unit. When these reduced costs are included in cost of
goods sold, income will be higher. Variable costing treats fixed production costs as a period cost, and
expenses the full amount regardless of production. Thus, income is unaffected by increasing
production.
130.

Can a company continue to increase income indefinitely by using full costing?

Answer
It is possible that a growing company can do this. The only way to do this is to produce more than is
sold in each year. This will result in a continuous buildup of inventory. For most companies, that
would not be a good strategy as it would lead to expensive cash outflow for buildups of inventories
along with all the associated carrying costs.
131.

What is the implication of a company using JIT with full costing versus using JIT with variable
costing?

Answer
JIT companies have very little inventory and so there is very little difference between full and
variable costing income.