Multiple Choice

1. Which of the following statements is true?

a. Absorption costing “absorbs” only variable manufacturing costs.
b. Variable costing includes all variable costs – both manufacturing and
nonmanufacturing – in
inventory.
c. The contribution-margin format of the income statement distinguishes manufacturing
costs.
d. A company may use absorption costing for external reports and still choose to use
throughput
costing for internal reports.
2. Which of the following statement is false?
a. Under both variable and absorption costing, all variable manufacturing costs are
inventoriable costs.
b. Determining the “right” level of capacity is one of the most strategic and difficult
decisions managers face.
c. Theoretical capacity is unattainable in the real world.
d. Under variable costing, managers can increase operating income by simply producing
more inventory at the end of the accounting period even if that inventory never gets
sold.
3. Absorption costing is required for all except
a. generally accepted accounting principles.
b. determining a competitive selling price.
c. external reporting to shareholders.
d. income tax reporting.
4. Variable costing
a. expenses administrative costs as of goods sold.
b. treats direct manufacturing costs as a product costs.
c. includes fixed manufacturing overhead as an inventoriable cost.
d. is required for external reporting to shareholders.
5. The only difference between variable and absorption costing is the expensing of
a. direct manufacturing costs.
b. variable marketing costs.
c. fixed manufacturing costs.
d. both a and c.
6. An unfavorable production-volume variance occurs when
a. production exceeds the denominator level.
b. the denominator level exceeds production.
c. production exceeds unit sales.
d. unit sales exceed production.
7. If the unit of inventory increases during an accounting period, then
a. less operating income will be reported under absorption costing than variable costing.
b. more operating income will be reported under absorption costing than variable
costing.
c. operating income will be the same under absorption costing and variable costing.
d. the exact effect on operating income cannot be determined.
8. The difference between operating income under variable costing and absorption costing
centers on how to account for
a. direct materials costs.
b. fixed manufacturing costs.
c. variable manufacturing costs.
d. both b and c
9. One possible means of determining the difference between operating incomes for absorption
costing and variable costing is
a. by subtracting sales of the previous period from sales of this period.
b. by subtracting fixed manufacturing overhead in beginning inventory from fixed
manufacturing overhead in ending inventory.
c. by multiplying the number of units produced by the budgeted fixed manufacturing cost
rate.
d. by adding fixed manufacturing costs to the production-volume variance.
10. When comparing the operating incomes between absorption costing and variable costing
and beginning finished inventory exceeds ending finished inventory, it may be assumed that
a. sales increased during the period.
b. variable cost per unit is less than fixed cost per unit.
c. there is an unfavorable production-volume variance.
d. variable costing operating income exceeds absorption costing operating income.
11. Companies have recently been able to reduce inventory levels because
a. there is better sharing of information between suppliers and manufacturers.
b. just-in-time production strategies are being implemented.
c. production quotas are being implemented.
d. both a and b.
12. Many companies have switched from absorption costing to variable costing for internal
reporting
a. to comply with external reporting requirements.
b. to increase bonuses for managers.
c. to reduce the undesirable incentive to build up inventories.
d. so the denominator level is more accurate.
13. Ways to “produce for inventory’’ that result in increasing operating income include
a. switching production to products that absorb the least amounts of fixed manufacturing
costs.
b. delaying items that absorb the greatest amount of fixed manufacturing costs.
c. deferring maintenance to accelerate production.
d. all of the above.
14. To discourage producing for inventory, management can
a. evaluate nonfinancial measures such as units in ending inventory compared to units in
sales.
b. evaluate performance over a three to five year period rather than a single year.
c. incorporate a carrying charge for inventory in the internal accounting system.
d. all of the above.
15. Under absorption costing, if a manager’s bonus is tied to operating income, then increasing
inventory levels compared to last year would result in
a. increasing the manager’s bonus.
b. decreasing the manager’s bonus.
 c. not affecting the manager’s bonus.
d. being unable to determine the manager’s bonus using only the above information.
16. Under variable costing, if a manager’s bonus is tied to operating income, then increasing
inventory levels compared to last year would result in
a. increasing the manager’s bonus.
b. decrease the manager’s bonus.
c. not affecting the manager’s bonus.
d. being unable to determine the manager’s bonus using only the above information.
17. Critics of absorption costing suggest to evaluate management on their ability to
a. exceed production quotas.
b. increase operating income.
c. decrease inventory costs.
d. do all of the above.
18. Which of the following statements is false?
a. Absorption costing allocates fixed manufacturing overhead to actual units produced
during the period.
b. Nonmanufacturing costs are expensed in the future under variable costing.
c. Fixed manufacturing costs in ending inventory are expensed in the future under
absorption costing.
d. Operating income under absorption costing is higher than operating income under
variable costing when production units exceed sales units.
19. Differences between absorption costing and variable costing are much smaller when
a. a large part of the manufacturing process is subcontracted out.
b. a just-in-time inventory strategy is implemented.
c. a significant portion of manufacturing costs are fixed.
d. both a and b.
20. All of the following are examples of drawbacks of using absorption costing except
a. management has the ability to manipulate operating income via production schedules.
b. manipulation of operating income may ultimately increase the company’s costs
incurred over the long run.
c. operating income solely reflects income from the sale of units and excludes the effects
of manipulating production schedules.
d. decreasing maintenance activities and increasing production result in increased
operating income.

The following information is for questions 21 and 22

Gabriel’s auto produces and sells an auto part for P30.00 per unit. In 2006, 100,000 parts were
produced and 75,000 units were sold. Other information for the year includes:
Direct materials P12.00 per unit
Direct manufacturing labor P2.25 per unit
Variable manufacturing costs P0.75 per unit
Sales commissions P3.00 per unit
Fixed manufacturing costs P375,000 per year
Administrative expense, all fixed P135,000 per year
21. What is the inventoriable cost per unit using variable costing?
a. P14.25
b. P15.00
c. P18.00
d. P21.75
22. What is the inventoriable cost per unit using absorption costing?
a. P15.00
b. P18.00
c. P18.75
d. P21.75

The following information pertain to questions 23 through 26:

Paige’s Pillows produces and sells a decorative pillow for P75.00 per unit. In the first month of
operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the
same as the amount budgeted for the month. Other information for the month includes:
Variable manufacturing costs P20.00 per unit
Variable marketing costs P3.00 per unit
Fixed manufacturing costs P7.00 per unit
Administrative expenses, all fixed P15.00 per unit
Ending inventories:
Direct materials -0-
WIP -0-
Finished goods 250 units

23. What is cost goods sold per unit using variable costing?
a. P20
b. P23
c. P30
d. P45
24. What is cost of goods sold using variable costing?
a. P35,000
b. P40,000
c. P47,250
d. P54,000
25. What is contribution margin using variable costing?
a. P96,250
b. P91,000
c. P104,000
d. P110,000
26. What is operating income using variable costing?
a. P52,500
b. P78,750
c. P65,750
d. P47,000
The following information pertains to questions 27 through 30.

Kacey Corporation incurred fixed manufacturing costs of P6,000 during 2016. Other information
for 2016 includes:
The budgeted denominator level is 1,000 units.
Units produced total 750 units.
Units sold total 600 units.
Beginning inventory was zero.
The company uses absorption costing and the fixed manufacturing cost rate is based on the
budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

27. Fixed manufacturing costs expensed on the income statement (excluding adjustments for
variances) total
a. P3,600
b. P4,800
c. P6,000
d. zero.
28. Fixed manufacturing costs included in ending inventory total
a. P1,200
b. P1,500
c. P900
d. zero
29. The production-volume variance is
a. P2,000
b. P1,500
c. P2,400
d. zero.
30. Operating income using absorption costing will be _______________ than operating income
if using variable costing.
a. P2,400 higher
b. P2,400 lower
c. P900 higher
d. P3,600 lower