Chapter 08 5e

Chapter 8Absorption and Variable Costing, and Inventory Management
TRUE/FALSE
1. Variable costing and absorption costing income statements may differ because of their treatment of
fixed factory overhead.
ANS: T
PTS: 1
DIF: Difficulty: Easy
OBJ: LO: 8-1
NAT: BUSPROG: Analytic
STA: AICPA: FN-Measurement | IMA: Performance Measurement | ACBSP: APC-27-Managerial
Accounting Features/Costs
KEY: Bloom's: Knowledge
NOT: 1 min.
2. Inventory costs under variable costing include only direct materials, direct labor, and variable factory
overhead.
ANS: T
PTS: 1
OBJ: LO: 8-1
STA: AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-27-Managerial Accounting
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
3. Inventory under absorption costing includes only direct materials and direct labor.
ANS: F
Inventory under absorption costing includes direct materials, direct labor, variable factory overhead,
and fixed factory overhead.
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
4. If the number of units produced in a period is larger than the number of units sold in a period,
absorption costing income will be higher than variable costing income.
ANS: T
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
5. If the number of units produced in a period is smaller than the number of units sold in period,
absorption costing income will be higher than variable costing income.
ANS: F
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
6. Product cost includes all costs of the company.

ANS: F
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
7. On a segmented income statement, fixed costs are broken down into direct fixed costs and common
fixed costs.
ANS:
OBJ:
STA:
KEY:
T
PTS: 1
LO: 8-2
AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs
Bloom's: Knowledge
NOT: 1 min.
8. The costs of not having a product available when demanded by a customer are called stockout costs.
ANS: T
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial
NOT: 1 min.
9. Total inventory-related cost consists of ordering cost and carrying cost.
ANS: T
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
10. JIT relies on a push system to control finished good inventory.
ANS: F
JIT relies on a pull system to control finished good inventory.
PTS: 1
OBJ: LO: 8-3
NOT: 1 min.
11. A major drawback to the JIT inventory approach is that it increases carrying costs.
ANS: F
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP: APC-27-Managerial
NOT: 1 min.
MATCHING
Match the type of income statement to the costs it includes.

a. Variable costing income statement
b. Absorption costing income statement
c. Both types of income statements
1.
2.
3.
4.
5.
6.
7.
8.
Direct materials for units sold

Direct labor for units sold
Variable overhead for units sold
Fixed factory overhead for the period
Only fixed factory overhead for units sold
Variable selling expense
Fixed selling expense
Administrative expense
1. ANS: C
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
2. ANS: C
PTS: 1
OBJ: LO: 8-1
STA: AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-09-Financial Statements |
ACBSP: APC-27-Managerial Accounting Features/Costs
NOT: 1 min.
3. ANS: C
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
4. ANS: A
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
5. ANS: B
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
6. ANS: C
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
7. ANS: C
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
8. ANS: C
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
Match each statement with the correct item below.
a. the costs of not having a product available when demanded by a customer
b. the costs of carrying inventory
c. approach that maintains goods should be pulled through the system by present demand
d. the number of units in the order quantity that minimizes the total cost
e. the costs of placing and receiving an order
9.
10.
11.
12.
13.
Carrying costs
Economic order quantity
Just-in-time
Ordering costs
Stockout costs
9. ANS: B
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Measurement |AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP:
APC-27-Managerial Accounting Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
10. ANS: D
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-33-Incremental
analysis
NOT: 1 min.
11. ANS: C
PTS: 1
OBJ: LO: 8-3
NOT: 1 min.
12. ANS: E
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
13. ANS: A
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
COMPLETION
1. _______________ assigns all manufacturing costs to the product.
ANS: Absorption costing
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
2. When using _______________ a company only assigns variable manufacturing costs to the product.
ANS: variable costing

PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
3. Generally accepted accounting principles require ______________ for external reporting.
ANS: absorption costing
PTS: 1
DIF: Difficulty: Moderate
OBJ: LO: 8-1
STA: AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-27-Managerial Accounting
Features/Costs
NOT: 1 min.
4. The ___________________ income statement groups expenses according to function.
ANS: absorption-costing
PTS: 1
OBJ: LO: 8-1
Features/Costs
NOT: 1 min.
5. The _______________ income statement groups expenses according to cost behavior.
ANS: variable-costing
PTS: 1
OBJ: LO: 8-1
Features/Costs
NOT: 1 min.
6. Absorption costing treats fixed factory overhead as a ____________.
ANS: product cost.
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
7. Variable costing treats fixed factory overhead as a ______________.
ANS: period expense.
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
8. For internal reporting ________________ is an important managerial tool because it provides vital
cost information for decision making and control.
ANS: variable costing
PTS: 1
OBJ: LO: 8-1
NOT: 1 min.
9. Expenses that persist even if one of the segments to which they relate is eliminated are known as
________________.
ANS: common fixed expenses.
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
10. A ____________ is a subunit of a company of sufficient importance to warrant the production of
performance reports.
ANS: segment
PTS: 1
OBJ: LO: 8-2
Features/Costs
NOT: 1 min.
11. On a segmented income statement, fixed expenses are broken down into _____________ and
______________.
ANS:
direct fixed expenses, common fixed expense
common fixed expense, direct fixed expenses
PTS: 1
OBJ: LO: 8-2
STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-27Managerial Accounting Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
12. The profit contribution each segment makes toward covering a companys common fixed costs is
called ______________.
ANS: segment margin
PTS: 1
OBJ: LO: 8-2

Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
13. All ______________ expenses will vanish if a particular segment is eliminated.
ANS: direct fixed
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
14. Inventory taxes, obsolescence, and insurance are examples of _______________.
ANS: carrying costs.
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
15. Lost sales and costs of expediting shipments of goods are examples of _______________.
ANS: stockout costs.
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
16. The _______________________ is the number of units in the optimal size order quantity.
ANS: economic order quantity
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Measurement |AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP:
KEY:
Bloom's: Knowledge
NOT: 1 min.
17. ________________ is the time required to receive the economic order quantity once an order is
placed.
ANS: Lead time
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
18. When a company needs to place a new order for goods, they have reached the ___________.
ANS: reorder point
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
19. ______________ is computed by multiplying the lead time by the difference between the maximum
rate of usage and the average rate of usage.
ANS: Safety stock
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
20. The ______________ approach maintains that goods should be pulled through the system by present
demand rather than being pushed through on a fixed schedule based on anticipated demand.
ANS: just-in-time
PTS: 1
OBJ: LO: 8-3
NOT: 1 min.
MULTIPLE CHOICE
1. Which of the following types of costs is a product cost for absorption costing but a period cost for
variable costing?
a. direct materials
b. direct labor
c. fixed factory overhead per unit sold
d. variable selling expense
e. total administrative expense
ANS:
OBJ:
STA:
KEY:
C
PTS: 1
LO: 8-1
AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs
Bloom's: Knowledge
NOT: 1 min.
2. Which of the following is never included in product cost?

a. overhead
b. direct materials
c. variable selling expense
d. fixed factory overhead
e. direct labor
ANS: C
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
3. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for
external reporting?
a. absorption costing.
b. variable costing.
c. transfer price costing.
d. responsibility costing.
e. all of these are acceptable for GAAP.
ANS: A
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
4. Variable costing is
a. a good way to value inventories for the balance sheet.
b. used for external reporting purposes.
c. not useful for companies with multiple segments.
d. a useful tool for management decision making.
e. can only be used by start-up companies.
ANS: D
PTS: 1
OBJ: LO: 8-1
STA: AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP: APC-28-Variable and
Fixed Costs
NOT: 1 min.
5. A disadvantage of absorption costing is
a. that it is not a useful format for decision making.
b. that it assigns only manufacturing costs to the product.
c. All of these.
d. None of these.
ANS: A
PTS: 1
OBJ: LO: 8-1
STA: AICPA: BB-Industry | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting
Features/Costs
NOT: 1 min.
6. Gross margin is to absorption costing as ____ is to variable costing.
a. gross profit
b. contribution margin
c. income
d. territory margin
ANS: B
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
7. When monthly production volume is constant and sales volume is less than production, income
determined with variable costing procedures will
a. always be greater than income determined using absorption costing.
b. always be less than income determined using absorption costing.
c. be equal to income determined using absorption costing.
d. be equal to contribution margin per unit times units sold.
ANS: B
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Comprehension
NOT: 1 min.
8. When production is less than sales volume, income under absorption costing will be ____ income
using variable costing procedures.
a. greater than
b. less than
c. equal to
d. randomly different than
ANS: B
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 1 min.
9. Inventory values calculated using variable costing as opposed to absorption costing will generally be
a. equal.
b. less.
c. greater.
d. twice as much.
ANS: B
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
10. Which of the following statements is true?
a. Absorption costing income exceeds variable costing income when units produced and sold
are equal.
b. Variable costing income exceeds absorption costing income when units produced exceed
units sold.
c. Absorption costing income exceeds variable costing income when units produced are less
than units sold.
d. Absorption costing income exceeds variable costing income when units produced are
greater than units sold.
ANS: D
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
11. All of the following costs are included in inventory under absorption costing except
a. direct materials.
b. direct labor.
c. fixed selling expenses.
d. fixed factory overhead.
ANS: C
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
12. What is the primary difference between variable and absorption costing?
a. inclusion of fixed selling expenses in product costs
b. inclusion of variable factory overhead in period costs
c. inclusion of fixed selling expenses in period costs
d. inclusion of fixed factory overhead in product costs
ANS: D
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last
year were as follows:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Fixed administrative expense
$25,000
35,000
12,000
37,000
9,000
7,500
15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce
20,000 units.
13. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under absorption costing?
a. $5,480
b. $4,500
c. $10,900
d. $12,600
e. $5,750
ANS: C
Unit product cost = ($25,000 + $35,000 +
$12,000 + $37,000)/20,000 = $5.45
Ending inventory = $5.45 x 2,000 = $10,900
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Application
NOT: 2 min.
14. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under variable costing?
a. $3,300
b. $2,500
c. $5,000
d. $3,720
e. $7,200
ANS: E
Unit product cost = ($25,000 + $35,000 +
$12,000)/20,000 = $3.60
Ending inventory = $3.60 x 2,000 = $7,200
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 2 min.
15. Refer to Figure 8-1. What is operating income for last year under absorption costing?
a. $41,000
b. $67,520
c. $85,900
d. $111,300
e. $45,000
ANS: C
Sales
Less: COGS
Gross margin
Less:
Selling expenses
Admin. expenses
Operating income
216,000
98,100
117,900
16,500
15,500
85,900
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 3 min.
16. Refer to Figure 8-1. What is operating income for last year under variable costing?
a. $111,800
b. $91,780
c. $82,200
d. $78,400
e. $66,350
ANS: C
Sales
Less: variable expenses:
Variable COGS
Contribution margin
Less: fixed expenses:
Fixed admin. Expense
Operating income
216,000
64,800
9,000
142,200
37,000
7,500
15,500
82,200
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 3 min.
Figure 8-2.
Loring Company had the following data for the month:
Variable costs per unit:
Direct materials
Direct labor
Variable overhead
Variable selling expenses
$4.00
3.20
1.00
.40
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000
units. During the month, 2,000 units were produced. Loring started the month with 300 units in
beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100
units were sold during the month at price of $14. Selling and administrative expense for the month, all
fixed, totaled $3,600.
17. Refer to Figure 8-2. What is the unit product cost under absorption costing?
a. $8.60
b. $10.60
c. $8.20
d. $10.20
e. $7.20
ANS: D
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$ 4.00
3.20
1.00
2.00
$10.20
PTS: 1
OBJ: LO: 8-1
Features/Costs
NOT: 3 min.
KEY:
18. Refer to Figure 8-2. What is operating income under variable costing?
a. $3,540
b. $7,980
c. $11,340
d. $540
e. $3,740
ANS: E
Sales
Var. COGS
Var. Selling expense
Contribution margin
Fixed selling and admin. expense
Operating income
$29,400
17,220
840
$11,340
4,000
3,600
$ 3,740
Direct materials
Direct labor
Variable overhead
Total
$4.00
3.20
1.00
$8.20
2,100 units sold @ $14 = $29,400

2,100 units cost @ $8.20 = $17,220
2,100 units variable selling cost @.40 = $840
PTS: 1
OBJ: LO: 8-1
STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-27Managerial Accounting Features/Costs
KEY:
NOT: 3 min.
19. Refer to Figure 8-2. What is the unit product cost under variable costing?
a. $8.60
b. $10.60
c. $8.20
d. $10.20
e. $7.20
ANS: C
Direct materials
Direct labor
Variable overhead
Total
$4.00
3.20
1.00
$8.20
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 2 min.
20. Refer to Figure 8-2. What is operating income under absorption costing?
a.
b.
c.
d.
e.
$3,540
$7,980
$11,340
$540
$3,740
ANS: A
Sales
COGS
Gross margin
Fixed selling & admin. expense
Operating income
$29,400
21,420
$ 7,980
840
3,600
$ 3,540
Sales = $14 2,100

COGS = $10.20 2,100
Variable Selling expense = .40 2,100
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total
$ 4.00
$ 3.20
$ 1.00
$ 2.00
$10.20
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 3 min.
Figure 8-4.
The following information pertains to Mayberry Corporation:
Beginning inventory
Ending inventory
Direct labor per unit
Direct materials per unit
Variable overhead per unit
Fixed overhead per unit
Variable selling and admin. costs per unit
Fixed selling and admin. costs per unit
1,000 units
6,000 units
$40
20
10
30
6
14
21. Refer to Figure 8-4. What is the value of the ending inventory using the absorption costing method?
a. $240,000
b. $360,000
c. $600,000
d. $420,000
ANS: C
SUPPORTING CALCULATIONS:
($40 + $20 + $10 + $30) 6,000 = $600,000
PTS: 1
OBJ: LO: 8-1

KEY:
NOT: 2 min.
22. Refer to Figure 8-4. Absorption costing income would be ____ variable costing income.
a. $150,000 greater than
b. $150,000 less than
c. $240,000 less than
d. $240,000 greater than
ANS: A
Fixed overhead in beginning inventory
Fixed overhead in ending inventory
Difference
$ 30,000
180,000
$150,000
Since production exceeds sales, absorption costing income is larger by $150,000.

PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
Bloom's: Analysis
NOT: 2 min.
23. Refer to Figure 8-4. What is the value of the ending inventory using the variable costing method?
a. $240,000
b. $360,000
c. $350,000
d. $420,000
ANS: D
($40 + $20 + $10) 6,000 = $420,000
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 2 min.
Figure 8-5.
Sanders Company has the following information for last year:
Selling price
Variable production costs
Variable selling and admin. expenses
Fixed production costs
Fixed selling and admin. expenses
Units produced
Units sold
There were no beginning inventories.
$190 per unit

$52 per unit produced
$18 per unit sold
$240,000
$180,000
12,000
7,000
24. Refer to Figure 8-5. What is the value of ending inventory for Sanders using the absorption costing
method?
a. $360,000
b. $280,000
c. $220,000
d. $380,000
ANS: A
[($52 +( $240,000)/12,000))] x 5,000 = $360,000
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 2 min.
25. Refer to Figure 8-5. What is the income for Sanders using the absorption costing method?
a. $520,000
b. $480,000
c. $1,200,000
d. $500,000
ANS: A
[($190 - $72) x 7,000] - $180,000 - (7,000 x $18) = $520,000
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 3 min.
26. Refer to Figure 8-5. What is the cost of ending inventory for Sanders using the variable costing
method?
a. $300,000
b. $280,000
c. $120,000
d. $260,000
ANS: D
$52 x 5,000 = $260,000
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 2 min.
27. Refer to Figure 8-5. What is the income for Sanders using the variable costing method?
a. $420,000
b. $480,000
c. $520,000
d. $500,000
ANS: A
[($190 - $52 - $18) x 7,000] - $420,000 = $420,000
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 3 min.
Figure 8-6.
Bailey Company incurred the following costs in manufacturing desk calculators:
Direct materials
Indirect materials (variable)
Direct labor
Indirect labor (variable)
Other variable factory overhead
Variable selling expenses
Fixed selling expenses
$18
3
9
7
13
34
26
12
During the period, the company produced and sold 2,000 units.
28. Refer to Figure 8-6. What is the inventory cost per unit using absorption costing?
a. $104
b. $77
c. $84
d. $32
ANS: C
$50 + $34 = $84
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 2 min.
29. Refer to Figure 8-6. What is the inventory cost per unit using variable costing?
a. $52
b. $66
c. $72
d. $50
ANS: D
Direct materials
Direct labor
$18
3
9

Other variable factory overhead
Total
7
13
$50
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 2 min.
Figure 8-7.
Ramon Company reported the following units of production and sales for June and July:
Month
June
July
Units
Produced
100,000
100,000
Sold
90,000
105,000
Income under absorption costing for June was $40,000; income under variable costing for July was
$50,000. Fixed costs were $600,000 for each month.
30. Refer to Figure 8-7. How much was income for July using absorption costing?
a. $50,000
b. $20,000
c. $80,000
d. $40,000
ANS: B
($600,000/100,000) 5,000 = $30,000
Absorption costing is lower by $30,000. Therefore, $50,000 less $30,000 equals a profit of $20,000.
PTS: 1
OBJ: LO: 8-1
KEY:
Bloom's: Analysis
NOT: 2 min.
31. Refer to Figure 8-7. How much was income for June using variable costing?
a. $40,000
b. $20,000
c. $(40,000)
d. $(20,000)
ANS: D
($600,000/100,000) 10,000 = $60,000
Absorption costing is higher by $60,000. Therefore, $40,000 less $60,000 equals a loss of $20,000.
PTS: 1
OBJ: LO: 8-1
STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-27-
Managerial Accounting Features/Costs

NOT: 2 min.
KEY:
Bloom's: Analysis
Figure 8-8.
Steele Corporation has the following information for January, February, and March:
Units produced
Units sold
January
10,000
7,000
February
10,000
8,500
March
10,000
10,500
Production costs per unit (based on 10,000 units) are as follows:

Direct materials
Direct labor
Variable factory overhead
Fixed selling and admin. expenses
$12
8
6
4
10
4
There were no beginning inventories for January, and all units were sold for $50. Costs are stable over
the three months.
32. Refer to Figure 8-8. What is the February ending inventory for Steele Corporation using the absorption
costing method?
a. $39,000
b. $45,000
c. $135,000
d. $300,000
ANS: C
4,500 ($12 + $8 + $6 + $4) = $135,000
PTS: 1
OBJ: LO: 8-1
KEY:
Bloom's: Analysis
NOT: 2 min.
33. Refer to Figure 8-8. What is the January ending inventory for Steele Corporation using the variable
costing method?
a. $260,000
b. $78,000
c. $108,000
d. $90,000
ANS: B
3,000 ($12 + $8 + $6) = $78,000
PTS: 1
OBJ: LO: 8-1
KEY:
Bloom's: Analysis
NOT: 2 min.
34. Refer to Figure 8-8. What is the March ending inventory for Steele Corporation using the variable
costing method?
a. $120,000
b. $104,000
c. $260,000
d. $15,000
ANS: B
Units of beginning inventory
Units produced
Units sold
Units of ending inventory
January
0
10,000
7,000
3,000
February
3,000
10,000
8,500
4,500
March
4,500
10,000
10,500
4,000
4,000 $26 = $104,000

PTS: 1
OBJ: LO: 8-1
KEY:
Bloom's: Analysis
NOT: 2 min.
35. Refer to Figure 8-8. What is the February contribution margin for Steele Corporation using the
variable costing method?
a. $240,000
b. $170,000
c. $119,000
d. $204,000
ANS: C
8,500 ($50 $36) = $119,000
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 3 min.
Figure 8-9.
The following information pertains to Stark Corporation:
Beginning inventory
Ending inventory
Direct labor per unit
Direct materials per unit
Variable overhead per unit
Fixed overhead per unit
Variable selling costs per unit
Fixed selling costs per unit
0 units
5,000 units
$20
16
4
10
12
16
36. Refer to Figure 8-9. What is the value of ending inventory using the variable costing method?
a. $310,000
b. $250,000
c. $200,000
d. $390,000
ANS: C
($20 + $16 + $4) 5,000 = $200,000
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 2 min.
37. Refer to Figure 8-9. Absorption costing income would be ____ the variable costing income.
a. $50,000 greater than
b. $70,000 greater than
c. $70,000 less than
d. $50,000 less than
ANS: A
There is $50,000 more in fixed cost in ending inventory relative to beginning inventory. In addition,
production exceeds sales. Therefore, absorption costing income is larger by $50,000.
PTS: 1
OBJ: LO: 8-1
KEY:
Bloom's: Analysis
NOT: 2 min.
38. Refer to Figure 8-9. What is the value of ending inventory using the absorption costing method?
a. $310,000
b. $250,000
c. $200,000
d. $390,000
ANS: B
($20 + $16 + $4 + $10) 5,000 = $250,000
PTS: 1
OBJ: LO: 8-1
KEY:
NOT: 2 min.
39. Redding Company has two divisions with the following segment margins for the current year:
Northern, $200,000; Southern, $400,000. Common expenses of the company are $50,000. What is
Redding Company's income?
a. $150,000
b. $550,000
c. $600,000
d. $650,000
ANS: B
$200,000 + $400,000 $50,000 = $550,000
PTS: 1
OBJ: LO: 8-1 | LO: 8-2
Features/Costs
KEY:
NOT: 1 min.
40. Segment margin is equal to segment sales revenue minus
a. variable cost of goods sold, variable selling expense, and direct fixed costs.
b. variable cost of goods sold, variable selling expense, and common fixed costs.
c. variable cost of goods sold, total selling expense, and direct fixed costs.
d. variable cost of goods sold, variable selling expense, administrative expense, and direct
fixed costs.
e. cost of goods sold, variable selling expense, and fixed factory overhead.
ANS: A
PTS: 1
OBJ: LO: 8-2
KEY:
Bloom's: Knowledge
NOT: 1 min.
41. Which of the following could be considered a segment?
a. division
b. product-line
c. sales territory
d. All of these.
ANS: D
PTS: 1
OBJ: LO: 8-2
STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting
Features/Costs
NOT: 1 min.
42. Consider the following portion of a segmented income statement for the year just ended. Assume fixed
expenses of Division X include $30,000 of direct expenses and that the discontinuance of the
department will not affect the sales of the other departments nor reduce the common expenses.
Sales
Variable costs
Gross profit
Fixed expenses (direct and selling and administrative)
Operating income (loss)
What is X's divisional segment margin?
a. ($10,000)
b. $40,000
c. $10,000
d. $100,000
Division X
$100,000
60,000
$ 40,000
50,000
$ (10,000)
ANS: C
$40,000 $30,000 = $10,000
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 1 min.
43. Grass Valley Mining mines three products. Gold ore sells for $1,000 per ton, variable costs are $400
per ton, and fixed mining costs are $250,000. Last year the segment margin was $(100,000).
How many tons of gold ore did Grass Valley Mining sell last year?
a. 375 tons
b. 1,000 tons
c. 250 tons
d. 200 tons
ANS: C
Segment margin plus direct fixed costs equals contribution margin.
Therefore, ($100,000) + $250,000 = $150,000
$150,000/$600 = 250 tons
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 2 min.
Figure 8-10.
Nauman Company has the following information pertaining to its two divisions for last year:
Direct fixed expenses
Sales
Direct fixed selling and admin. expenses
Variable expenses
Division X
$ 70,000
35,000
200,000
30,000
40,000
Common expenses are $24,000 for the year.

44. Refer to Figure 8-10. What is the segment margin for Division Y?
a. $310,000
b. $210,000
c. $240,000
d. $40,000
ANS: D
$400,000 $90,000 $100,000 $70,000 $100,000 = $40,000
Division Y
$ 90,000
100,000
400,000
70,000
100,000
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 2 min.
45. Refer to Figure 8-10. What is the income for Nauman Company?
a. $65,000
b. $325,000
c. $300,000
d. $41,000
ANS: D
Segment income for Y: $400,000 $90,000 $100,000 $70,000 $100,000 = $40,000
Segment income for X: $200,000 $70,000 $35,000 $30,000 $40,000 = $25,000
Income for Nauman Company = $25,000 + $40,000 $24,000 = $41,000
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 3 min.
Figure 8-11.
Tyler Company has the following information pertaining to its two product lines for last year:

Sales
Variable expenses
Operating income
Product A
$38,000
19,500
250,000
38,000
42,000
$112,500
Product B
$31,000
34,500
210,000
22,000
31,000
$91,500
Common expenses are $105,000 for the year.

46. Refer to Figure 8-11. What is the segment margin for Product B?
a. $155,000
b. $105,000
c. $85,000
d. $91,500
ANS: D
$210,000 - $31,000 - $34,500 - $22,000 - $31,000 = $91,500
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 2 min.
47. Refer to Figure 8-11. What is the income for Tyler Company?
a. $101,000
b. $120,500
c. $99,000
d. $102,500
ANS: C
$112,500 + $91,500 - $105,000 = $99,000
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 3 min.
Figure 8-12.
Assume the following information for a product line:
Sales
Variable expenses
Variable selling and administrative expenses
$700,000
185,000
115,000
70,000
90,000
48. Refer to Figure 8-12. What is the contribution margin of the product line?
a. $400,000
b. $525,000
c. $445,000
d. $515,000
ANS: C
$700,000 - $185,000 - $70,000 = $445,000
PTS: 1
OBJ: LO: 8-2
Features/Costs
KEY:
NOT: 2 min.
49. Refer to Figure 8-12. What is the segment margin of the product line?
a. $200,000
b. $325,000
c. $350,000
d. $240,000
ANS: D
$445,000 - $205,000 = $240,000
PTS: 1
OBJ: LO: 8-2

Features/Costs
KEY:
NOT: 2 min.
50. The two major costs associated with inventory are
a. ordering costs and setup costs.
b. setup costs and stockout costs.
c. stockout costs and carrying costs.
d. ordering costs and carrying costs.
e. None of these.
ANS: D
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
51. The inventory cost that can include insurance, inventory taxes, and obsolescence is called
a. ordering cost.
b. carrying cost.
c. stockout cost.
d. setup cost.
e. storing cost.
ANS: B
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
52. The inventory cost that can include processing costs, cost of insurance for shipping, and unloading is
called
a. ordering cost.
b. carrying cost.
c. stockout cost.
d. setup cost.
e. storing cost.
ANS: A
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
53. The inventory cost that can include lost sales, cost of expediting, and cost of interrupted production is
called
a. ordering cost.
b. carrying cost.
c. stockout cost.
d. setup cost.
e. storing cost.
ANS: C
OBJ: LO: 8-3
PTS: 1

Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
54. Which of the following is not a traditional reason for carrying inventory?
a. to satisfy customer demand
b. to avoid shutting down manufacturing facilities
c. to buffer against unreliable production processes
d. to hedge against future price increases
e. all of these are traditional reasons for carrying inventory
ANS: E
PTS: 1
OBJ: LO: 8-3
NOT: 1 min.
55. The formula for ordering cost is the
a. number of orders per year cost of placing an order.
b. number of orders per year/cost of placing an order.
c. average number of units in inventory cost of carrying one unit in inventory.
d. average number of units in inventory/cost of carrying one unit in inventory.
e. ordering cost + carrying cost.
ANS: A
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
56. The formula for total carrying cost is
a. number of orders per year cost of placing an order.
b. number of orders per year/cost of placing an order.
c. average number of units in inventory cost of carrying one unit in inventory.
d. average number of units in inventory/cost of carrying one unit in inventory.
e. ordering cost + carrying cost.
ANS: C
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
57. The economic order quantity (EOQ) is the quantity that
a. minimizes total ordering cost.
b. maximizes total profit.
c. minimizes total inventory-related costs.
d. maximizes carrying costs.
e. maximizes ease of ordering.
ANS: C
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
58. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,600
and total carrying cost is $1,250. Which of the following statements is true?
a. The economic order quantity (EOQ) is 250.
b. The economic order quantity (EOQ) is more than 250.
c. The economic order quantity (EOQ) is less than 250.
d. Total inventory-related cost is lower than it would be at the economic order quantity
(EOQ).
e. None of these.
ANS: B
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
(EOQ).
e. None of these.
ANS: C
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
(EOQ).
e. None of these.
ANS: A
PTS: 1
OBJ: LO: 8-3
KEY:
Bloom's: Knowledge
NOT: 1 min.
61. When the economic order quantity (EOQ) model is applied to units produced within the company,
ordering costs become
a. setup costs.
b. stockout costs.
c. carrying costs.
d. safety-stock costs.
e. production costs.
ANS: A
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
Bloom's: Knowledge
NOT: 1 min.
62. Under a JIT system,
a. customer demand pulls units through the production line.
b. safety stock is set at relatively high levels.
c. stockouts are never a problem.
d. inventory levels are set at 10% of total production levels.
e. production is set at a level to maximize factory output.
ANS: A
PTS: 1
OBJ: LO: 8-3
NOT: 1 min.
63. JIT responds to the problems traditionally solved by carrying inventories by
a. ensuring that sufficient inventory is on hand to prevent stockouts.
b. purchasing extra materials when price discounts are offered.
c. negotiating long-term contracts with supplier to lock in low prices.
d. selecting an inventory level that minimizes the total of ordering and carrying costs.
e. choosing a wide number of suppliers to increase the chance of receiving quantity
discounts.
ANS: C
PTS: 1
OBJ: LO: 8-3
NOT: 1 min.
Figure 8-3.
Martin Company uses 625 units of a part each year. The cost of placing one order is $8; the cost of
carrying one unit in inventory for a year is $4.
64. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average
annual carrying cost of Martin's new policy?
a. $80
b. $60
c. $160
d. $4
e. $90
ANS: A
Annual carrying cost = (40/2) x $4 = $80
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
NOT: 1 min.
65. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average
annual ordering cost of Martin's new policy?
a. $190
b. $150
c. $125
d. $100
e. $145
ANS: C
Average annual order cost = (625/40) x $8 = $125
PTS: 1
OBJ: LO: 8-3
Features/Costs
KEY:
NOT: 1 min.
66. Refer to Figure 8-3. What is the EOQ for Martin?
a. 100
b. 50
c. 45
d. 30
e. 20
ANS: B
EOQ = [(2 x 625 x 8)/4] = 50
PTS: 1
OBJ: LO: 8-3
KEY: Bloom's: Application
NOT: 2 min.
PROBLEM
1. Last year, Baker Company produced 30,000 units and sold 28,000 units. Beginning inventory was
zero. During the period, the following costs were incurred:
Other variable overhead
Fixed manufacturing overhead
Fixed administrative expenses
Fixed selling expenses
Variable selling expenses, per unit
Direct labor, per unit
Direct materials, per unit
Required: Compute the dollar amount of ending inventory using:
A.
Absorption costing
B.
Variable costing
ANS:
$ 60,000
30,000
90,000
180,000
150,000
120,000
40
80
20
A.
B.
Variable costs:
Direct materials
Direct labor
Indirect labor
Indirect materials
Other variable overhead
Variable product costs per unit
Fixed manufacturing overhead
Total product costs per unit
Inventory units
Inventory value
$ 20.00
80.00
2.00
1.00
3.00
$ 106.00
6.00
$ 112.00
2,000
$224,000
Variable product costs per unit

Inventory units
Inventory value
$ 106.00
2,000
$212,000
PTS: 1
OBJ: LO: 8-1
Features/Costs
KEY:
NOT: 5 min.
2. During the most recent year, Boston Corp. had the following data:
Beginning inventory in units
Units produced
Units sold ($125 per unit)
Variable costs per unit:
Direct materials
Direct labor
Variable overhead
Fixed costs:
Fixed overhead per unit produced
Fixed selling and administrative
15,400
8,200
$
$
$
13
16
8
$
23
$ 185,000
Required:
A. How many units are in ending inventory?
B. Using absorption costing, calculate the per-unit product cost. What is the value of ending
inventory?
C. Using variable costing, calculate the per-unit product cost. What is the value of ending inventory?
D. Prepare an income statement using absorption costing.
E. Prepare an income statement using variable costing.
ANS:
A. Beginning units + units produced -units sold
7,200 units
B.
Direct materials
Direct labor
$
$
13
16
Variable overhead
Fixed overhead per unit produced
Total product cost
$
$
$
Ending inventory value = $60 x 7,200 =
8
23
60
432,000
C.
Direct materials
Direct labor
Variable overhead
Total product cost
Ending inventory value = $37 x 7,200 =
$
$
$
$
13
16
8
37
266,400
D.
Boston Corp.
Absorption-Costing Income Statement
For the Most Recent Year
Sales
Less: Cost of goods sold
Gross margin
Less: Selling and administrative expenses
Operating income
1,025,000
492,000
533,000
185,000
348,000
E.
Boston Corp.
Variable-Costing Income Statement
Sales
Less: Cost of goods sold
Gross margin
Less: fixed expenses:
Overhead
Selling and administrative expenses
Operating income
1,025,000
303,400
721,600
354,200
185,000
539,200
182,400
PTS: 1
DIF: Difficulty: Challenging
OBJ: LO: 8-1
KEY:
NOT: 10 min.
3. The variable costing income statement for Jackson Company for 2011 is as follows:
Sales (5,000 units)
$100,000
Variable expenses:
Cost of goods sold
Selling (10% of sales)
Contribution margin
Fixed expenses:
Manufacturing overhead
Administrative
Operating income
$30,000
10,000
40,000
$ 60,000
$24,000
14,400
38,400
$ 21,600
Selected data for 2011 concerning the operations of the company are as follows:
Beginning inventory
Units produced
-0- units
8,000 units
Manufacturing costs:
Direct labor
Direct materials
Variable overhead
$3.00 per unit

1.60 per unit
1.40 per unit
Required: Prepare an absorption costing income statement for 2011.

ANS:
Jackson Company
Absorption-Costing Income Statement
2011
Sales
Less cost of goods sold:
{5,000 [$3.00 + $1.60 + $1.40 + ($24,000/8,000)]}
Gross profit
Less operating expenses:
Selling expenses
Administrative expenses
Operating income
$100,000
45,000
$ 55,000
$10,000
14,400
24,400
$ 30,600
PTS: 1
DIF: Difficulty: Challenging
OBJ: LO: 8-1
STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-09-Financial Statements |
NOT: 10 min.
4. Prepare a segmented income statement for Mario Co. for the coming year, using variable costing.
Sales
Variable cost of goods sold
Direct fixed overhead
Leather jackets
450,000
134,000
29,000
Suede jackets
542,000
213,000
38,000
A sales commission of 2% of sales is paid for each of the two product lines. Direct fixed selling and
administrative expense was estimated to be $32,000 for the leather jackets and $66,000 for the suede
jackets. Common fixed overhead for the factory was estimated to be $83,000 and common selling and
administrative expense was estimated to be $14,000.
Required: Prepare a segmented income statement for Mario Co. for the coming year, using variable
costing.
ANS:
Mario Co.
Segmented Income Statement
For the Coming Year
Sales
Contribution margin
Less: direct fixed expenses:
Direct fixed overhead
Direct selling and administrative
Segment margin
Less: common fixed expenses:
Common fixed overhead
Common selling and administrative
Operating income
Leather jackets
450,000
134,000
9,000
307,000
Suede jackets
542,000
213,000
10,840
318,160
Total
992,000
347,000
19,840
625,160
29,000
32,000
246,000
38,000
66,000
214,160
67,000
98,000
460,160
83,000
14,000
363,160
PTS: 1
OBJ: LO: 8-2
KEY:
NOT: 15 min.
5. Mario Co. produces three products: LMC, DMC, KPC. For the coming year they expect to produce
160,000 units. Of these, 65,000 will be LMC, 40,000 will be DMC and 55,000 will be KPC. The
following information was provided for the coming year:
Price
Unit direct materials
Unit direct labor
Unit variable overhead
Unit variable selling expense
Total direct fixed overhead
LMC
550
250
180
60
45
240,000
DMC
860
405
210
72
60
425,000
KPC
$
625
300
205
55
58
400,000
Common fixed overhead is $984,000 and fixed selling and administrative expenses for Mario Co. is
$881,000 per year.
Required:
A. Calculate the unit variable cost under variable costing.
B. Calculate the unit variable product cost.
C. Prepare a segmented variable-costing income statement for next year.
D. Should Mario Co. keep all product lines?

ANS:
A.
Unit direct labor
Unit variable selling expense
Total variable cost
$
$
$
$
$
LMC
250
180
60
45
535
$
$
$
$
LMC
250
180
60
490
$
$
$
$
$
DMC
405
210
72
60
747
$
$
$
$
DMC
405
210
72
687
$
$
$
$
$
KPC
300
205
55
58
618
$
$
$
$
KPC
300
205
55
560
B.
Unit direct labor
Total unit variable product cost
C.
LMC
35,750,000
31,850,000
2,925,000
975,000
240,000
735,000
Sales
Contribution margin
Less: direct fixed overhead
Segment margin
Less: common fixed expenses:
Common fixed overhead
Common selling and administrative
Operating income
DMC
KPC
Total
34,400,000 34,375,000 104,525,000
27,480,000 30,800,000
90,130,000
2,400,000
3,190,000
8,515,000
4,520,000
385,000
5,880,000
425,000
400,000
1,065,000
4,095,000
(15,000)
4,815,000
984,000
881,000
2,950,000
D. The company should consider dropping the KPC product line because it has a negative segment
margin.
PTS: 1
OBJ: LO: 8-2
KEY:
NOT: 20 min.
6. Ellie Manufacturing Company produces three products: A, B, and C. The income statement for most
recent year is as follows:
Sales
Less: Variable cost
Contribution margin
Less fixed cost:
Manufacturing
Selling and administrative
$200,000
127,000
$ 73,000
$20,000
14,000
34,000
Operating income
$ 39,000
The sales, contribution margin ratios, and direct fixed expenses for the three types of products are as
follows:
Sales
Contribution margin ratio
Direct fixed expenses of products
A
$60,000
35%
$ 8,000
B
$40,000
30%
$ 5,000
C
$100,000
40%
$4,000
Required: Prepare income statements segmented by products. Include a column for the entire firm in
the statement.
ANS:
Sales
Less: Variable expenses
Contribution margin
Less: Direct fixed exp.
Product margin
Less: Common expenses
Ellie Manufacturing Company

Income Statement
A
B
$60,000
$40,000
39,000
28,000
$21,000
$12,000
8,000
5,000
$13,000
$ 7,000
C
$100,000
60,000
$ 40,000
4,000
$ 36,000
Total
$200,000
127,000
$ 73,000
17,000
$ 56,000
17,000
$ 39,000
PTS: 1
OBJ: LO: 8-2
STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-09-Financial Statements |
NOT: 15 min.
7. Laird Company uses 405 units of a part each year. The cost of placing one order is $5; the cost of
carrying one unit in inventory for a year is $2. Laird currently orders 81 units at a time.
A.
B.
C.
D.
E.
The annual ordering cost of Laird's current policy is $__________________.

The annual carrying cost of Laird's current policy is $__________________.
The total cost of Laird's current policy is $__________________.
What is the EOQ for Laird?
What is the total inventory-related cost at the EOQ?
ANS:
Laird Company uses 405 units of a part each year. The cost of placing one order is $5; the cost of
carrying one unit in inventory for a year is $2. Laird currently orders 81 units at a time.
A.
B.
C.
D.
E.
Annual ordering cost = (405/81) $5 = $25

Annual carrying cost = (81/2) $2 = $81
Total cost of Laird's current policy = $25 + $81= $106
EOQ = [(2 405 $5)/2] = 45
Total inventory-related cost = ($5 9) + [(45/2) $2] = $90
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Cost Management | ACBSP:
KEY:
NOT: 10 min.
8. Simon Company sells 900 units of its deluxe product each year. The cost of setting up for one
production run is $150; the cost of carrying one unit in inventory for a year is $3.
A.
B.
C.
D.
What is the economic order quantity?

What is the annual setup cost of the EOQ policy?
What is the annual carrying cost of the EOQ policy?
What is the total inventory-related cost of the EOQ policy?
ANS:
A.
B.
C.
D.
EOQ = [(2 900 $150)/3] = 300

Annual setup cost = (900/300) $150 = $450
Annual carrying cost = (300/2) $3= $450
Total cost of the EOQ policy = $450 + $450 = $900
PTS: 1
OBJ: LO: 8-3
NOT: 5 min.
9. Simon Company sells 900 units of its deluxe product each year. The cost of setting up for one
production run is $150; the cost of carrying one unit in inventory for a year is $3. Simon currently
produces 100 deluxe units in one production run.
A.
B.
C.
D.
What is the annual setup cost of the current policy?

What is the annual carrying cost of the current policy?
What is the total inventory-related cost of the current policy?
Do you suppose that the current production run is smaller or larger than the EOQ? Why?
ANS:
A.
B.
C.
D.
Annual setup cost = (900/100) $150 = $1,350

Annual carrying cost = (100/2) $3= $150
Total cost of the current policy = $1,350 + $150 = $1,500
The EOQ must be more than 100 units because the set up cost for batches of 100 units is
higher than the carrying cost.
PTS: 1
OBJ: LO: 8-3
STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP:
KEY:
Bloom's: Analysis
NOT: 5 min.
10. Rudd Company uses 40,000 micro-chips each year in its production of digital cameras. The cost of
placing an order is $75. The cost of holding one unit of inventory for one year is $8. Currently Rudd
places 20 orders of 2,000 units per order.
Required:
A. Compute the annual ordering cost.
B. Compute the annual carrying cost.
C. Compute the total cost of Rudd's current inventory policy.
D. Compute the economic order quantity.
E. Compute the order cost and the carrying cost for the EOQ.
F. How much money does using the EOQ policy save the company over the policy of purchasing 2,000
micro-chips per order?
ANS:
A. 20 orders x $75 per order = $1,500
B. $8 (2,000/2) = $8,000
C. Total cost = carrying cost + ordering cost
$1,500 + $8,000 = $9,500
D.
[(2 40,000 $75)/$8] = 866.02
E. 46.19 x $75 = $3,464 ordering cost

$8 (866/2) = $3,464 carrying cost
total cost = $3,464 + $3,4,64 = $6,928
F. $9,500 - $6,928 = $2,572 savings
PTS: 1
OBJ: LO: 8-3
KEY:
NOT: 10 min.
11. McKay Company produces curling irons. The plastic handles used to produce the curling irons are
purchased from an outside supplier. Each year, 45,000 handles are used at the rate of 150 handles per
day. Some days as many as 180 handles are used. On average it takes 4 days after an order is placed
for the inventory to arrive at McKay Company.
Required:
A. Calculate the reorder point without safety stock.
B. Calculate the amount of safety stock.
C. Calculate the reorder point with safety stock.
ANS:
A. Reorder point without safety stock = average daily rate x lead time
150 x 4 = 600
B. Safety stock = (maximum daily rate - average daily rate) x lead time
(180 - 150 ) x 4 = 120
C. Reorder point with safety stock = reorder point without safety stock + safety stock
600 + 120 = 720
PTS: 1
OBJ: LO: 8-3

KEY:
NOT: 3 min.
ESSAY
1. What is the difference between absorption-costing income and variable-costing income?
ANS:
The difference between absorption-costing income and variable-costing income is the treatment of
fixed factory overhead. Absorption costing attaches fixed factory overhead to each unit produced. If
the unit is sold, that portion of fixed factory overhead becomes part of Cost of Goods Sold. If the unit
goes into inventory, it takes that portion of fixed factory overhead into inventory with it. Variable
costing treats fixed factory overhead as a period expense, and does not include it in inventory.
PTS: 1
OBJ: LO: 8-1
NAT: BUSPROG: Communication
Features/Costs
KEY:
NOT: 5 min.
You decide
2. You have just become the controller for Artisan Industries. Artisan produces three different products
and upon review of their internal reports you notice that they have never prepared a segmented income
statement. Explain to the vice president what a segmented income statement consists of and why it
can be useful in decision making.
ANS:
In a segmented income statement fixed expenses are broken down into two classifications: direct fixed
expenses and common fixed expenses. Direct fixed expenses are expenses that are directly traceable
to a segment. Therefore these costs can be avoided because they would vanish if the segment was
eliminated. Common fixed expenses are jointly caused by two or more segments. These costs will
remain even if one of the segments is eliminated. If these costs are just allocated they can give a
distorted picture of segment profitability. With this type of break down the company can determine the
controllable costs and the noncontrollable costs which give managers the ability to evaluate each
segments contribution to overall firm performance. The profit contribution each segment makes
towards a firms common fixed costs is called the segment margin. A segment at the very least should
be able to cover both its own variable and direct fixed costs. If a segment has a negative segment
margin, or can only cover its own variable and direct fixed costs the company might consider dropping
the product line.
PTS: 1
OBJ: LO: 8-2
STA: AICPA: BB-Critical Thinking | IMA: Performance Measurement | ACBSP: APC-27-Managerial
KEY: Bloom's: Comprehension
NOT: 10 min.
3. List three problems inventory was meant to solve. How does the JIT producer handle these problems?
ANS:
Problems with inventory:
1. Ordering costs
2. Uncertainty in demand
3. Lower cost of inventory
The JIT firm:
1.
Handles unpredictable customer orders by reducing setup times so that goods can be madeto-order.
2.
Handles high ordering costs by developing close relationships with suppliers and using only
a few suppliers.
3.
Handles the need to purchase more to get quantity discounts by negotiating long-term
contracts with suppliers so that the price is locked in.
4.
Handles potential machine breakdowns by engaging in continual preventive maintenance.
PTS: 1
OBJ: LO: 8-3
KEY: Bloom's: Comprehension
NOT: 10 min.

Chapter 08 5e

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Chapter 08 5e

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Chapter 8Absorption and Variable Costing, and Inventory Management

6. Product cost includes all costs of the company.

Match the type of income statement to the costs it includes.

Direct materials for units sold

ANS: variable costing

OBJ: LO: 8-2

STA: AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-27-Managerial Accounting

2. Which of the following is never included in product cost?

2,100 units sold @ $14 = $29,400

Sales = $14 2,100

DIF: Difficulty: Moderate

OBJ: LO: 8-1

NAT: BUSPROG: Analytic

Since production exceeds sales, absorption costing income is larger by $150,000.

$190 per unit

Indirect labor (variable)

Managerial Accounting Features/Costs

Production costs per unit (based on 10,000 units) are as follows:

4,000 $26 = $104,000

Common expenses are $24,000 for the year.

Variable selling and admin. expenses

Common expenses are $105,000 for the year.

DIF: Difficulty: Easy

OBJ: LO: 8-2

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting

Variable product costs per unit

Ending inventory value = $60 x 7,200 =

$3.00 per unit

Required: Prepare an absorption costing income statement for 2011.

D. Should Mario Co. keep all product lines?

Ellie Manufacturing Company

The annual ordering cost of Laird's current policy is $__________________.

Annual ordering cost = (405/81) $5 = $25

What is the economic order quantity?

EOQ = [(2 900 $150)/3] = 300

What is the annual setup cost of the current policy?

Annual setup cost = (900/100) $150 = $1,350

[(2 40,000 $75)/$8] = 866.02

E. 46.19 x $75 = $3,464 ordering cost

DIF: Difficulty: Moderate

OBJ: LO: 8-3

NAT: BUSPROG: Analytic

Handles potential machine breakdowns by engaging in continual preventive maintenance.

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