Responsibility Accounting and Transfer Pricing

(C. Variable Costing & Segmented Reporting)

C. VARIABLE COSTING AND SEGMENTED REPORTING B. Profits fluctuate with sales

C. An idle facility variation is calculated
THEORIES: D. Product costs include “direct” (variable) administrative costs.
Direct costing
1. A basic tenet of direct costing is that period costs should be currently expensed. What is the 5. Which of the following is an argument against the use of direct (variable) costing?
rationale behind this procedure? A. Absorption costing overstates the balance sheet value of inventories.
A. Period costs are uncontrollable and should not be charged to a specific product. B. Variable factory overhead is a period cost.
B. Period costs are generally immaterial in amount and the cost of assigning the amounts to C. Fixed factory overhead is difficult to allocate properly.
specific products would outweigh the benefits. D. Fixed factory overhead is necessary for the production of a product.
C. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management. 10. Advocates of variable costing for internal reporting purposes do not rely on which of the following
D. Because period costs will occur whether or not production occurs, it is improper to allocate points?
these costs to production and defer a current costs of doing business. A. The matching concept
B. Price-volume relationships
17. In a variable costing system, product cost includes C. Absorption costing does not include selling and administrative expenses as part of
A. direct materials, direct labor, variable overhead inventoriable cost
B. direct materials, direct labor, fixed overhead D. Production influences income under absorption costing
C. direct labor, variable overhead, fixed overhead
D. direct materials, variable overhead, fixed overhead 13. Which costing method is not acceptable to the SFAS external reporting?
A. absorption costing C. full costing
2. Which of the following must be known about production process in order to institute a direct B. variable costing D. all of these are acceptable
costing system?
A. The variable and fixed components of all costs related to production. 16. Variable costing can be used for
B. The controllable and noncontrollable components of all costs related to production. A. external reporting
C. Standard production rates and times for all elements of production. B. internal reporting
D. Contribution margin and breakeven point for all goods in production. C. either external reporting or internal reporting
D. neither external reporting nor internal reporting
3. Under the direct costing concept, unit product cost would most likely be increased by
A. A decrease in the remaining useful life of factory machinery depreciated on the units-of- 12. Which of the following is not true of variable costing?
production method. A. Profits may increase though sales decrease.
B. A decrease in the number of units produced. B. Profits fluctuate with sales.
C. An increase in the remaining useful life of factory machinery depreciated on the sum-of-the- C. The cost of the product consists of all variable production costs.
years’-digits method. D. The income statement under variable costing does not include overhead volume
D. An increase in the commission paid to salesmen for each unit sold. variance.

4. Which of the following statements is true for a firm that uses variable (direct) costing? Contribution margin format income statement
A. The cost of a unit of product changes because of changes in the number of units 15. When variable costing is used, the income statement is usually prepared using
manufactured. A. a contribution margin format C. a functional format

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B. an operational format D. all of these 22. Net earnings determined using full absorption costing can be reconciled to net earnings
determined using direct costing by computing the difference between
Absorption costing A. Inventoried fixed costs in the beginning and ending inventories and any deferred over- or
8. Absorption costing of inventories, as required by GAAP, has been criticized for encouraging underapplied fixed factory overhead.
managers to increase year-end inventories in order to boost reported profits. Which of the B. Inventoried discretionary costs in the beginning and ending inventories.
following techniques is the most effective at resolving this problem? C. Gross margin (absorption costing method) and contribution margin (direct costing method).
A. Senior management control of inventory levels D. Sales as recorded under the direct costing method and sales as recorded under the
B. Adoption of just-in-time (JIT) production system absorption costing method.
C. Reward managers based upon the residual income approach
D. Use variable costing to determine income for bonus purposes 23. Net profit under absorption costing may differ from net profit determined under direct costing.
How is this difference calculated?
11. When absorption costing is used, all of the following costs are considered product costs except A. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
A. direct labor C. variable selling and administrative costs B. Change in the quantity of all units produced times the relevant fixed costs per unit.
B. variable overhead D. fixed overhead C. Change in the quantity of all units in inventory times the relevant variable cost per unit.
D. Change in the quantity of all units produced times the relevant variable cost per unit.
21. Unabsorbed fixed overhead costs in an absorption costing system are
A. Fixed factory costs not allocated to units produced. Sensitivity analysis
B. Variable overhead costs not allocated to units produced. 20. The level of production affects income under which of the following methods?
C. Excess variable overhead costs. A. absorption costing C. variable costing
D. Costs that should be controlled. B. both absorption and variable costing D. neither absorption nor variable costing

Variable costing vs. Absorption costing 18. Variable-costing income will usually exceed absorption costing income when
6. What is the primary difference between variable and absorption costing? A. sales exceed production C. production exceeds sales
A. inclusion of fixed selling expenses in product costs B. production and sales are equal D. none of these
B. inclusion of variable factory overhead in period costs
C. inclusion of variable selling expenses in product costs 19. Variable costing net income is
D. inclusion of fixed factory overhead in product costs A. higher than absorption net income when more units are sold than produced
B. lower than absorption net income when more units are produced than sold
7. Which of the following statements is true? C. the same as absorption net income when all units produced are sold
A. Absorption costing net income exceeds variable costing net income when units produced D. all of the above
and sold are equal.
B. Variable costing net income exceeds absorption costing net income when units produced 9. A manufacturing company prepares income statements using both absorption and variable
exceed units sold. costing methods. At the end of a period actual sales revenues, total gross profit, and total
C. Variable costing net income exceeds absorption costing net income when units produced contribution margin approximated budgeted figures, whereas net income was substantially
equal units sold. greater than the budgeted amount. There were no beginning or ending inventories. There most
D. Absorption costing net income exceeds variable costing net income when units produced likely explanation of the net income increase is that, compared to budget, actual
are greater than units sold. A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had decreased.

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C. Sales prices and variable costs had increased proportionately. A. 2, 3, 5, 6 C. 2, 3, 4, 5

D. Sales prices had declined proportionately less than variable costs. B. 1, 2, 4, 5 D. 1, 4, 5, 6

14. When variable costing is used, fixed manufacturing overhead is recognized as an expense when 28. Which of the following costs would continue to be incurred even if a segment is eliminated?
the A. direct fixed expenses
A. cost is incurred C. product is sold B. common fixed costs
B. product is completed D. product is inventoried C. variable cost of goods sold
D. variable selling and administrative expenses
Segment reporting
24. A segment is any part of an organization about which a manager seeks Cost allocation policy
A. cost data C. quantitative data 31. Which of the following is a good reason for allocating indirect costs to operating departments?
B. revenue data D. any of the above A. The company could lose money if the operating departments do not pay for the services
they use.
26. Which of the following could be considered a segment? B. To remind managers of the need to cover indirect costs.
A. division C. product line C. To encourage managers to use more services.
B. sales territory D. all of these D. To determine the true costs of operating departments.

25. The guideline(s) used in assigning costs to a segment include(s) whether 33. The cost allocation policy most likely to encourage use of a service is based on
A. costs are fixed C. costs are directly traceable A. budgeted total costs of the service department
B. costs are variable D. all of the above B. actual total costs of the service department
C. budgeted variable costs for the service department
27. Segment margin is equal to D. actual variable costs for the service department
A. sales less variable costs
B. sales less variable costs and direct fixed costs 32. The term “dual rates” refers to
C. sales less variable costs and indirect fixed costs A. allocating costs to several operating departments
D. sales less cost of goods sold B. allocating fixed costs based on capacity requirements and variable costs based on use
C. allocating both actual costs and budgeted costs
29. Revenue less variable costs and direct fixed costs equals D. using the budgeted rate to allocate some costs, the actual rate to allocate others
A. contribution margin C. income before taxes
B. segment margin D. income after taxes 34. The WORST method of allocating service department costs is to allocate
A. total actual costs based on actual use of the service
30. Indicate which of the following costs would be avoided if a segment is eliminated. B. total budgeted costs based on long-term expected use of the service
1. variable manufacturing costs C. total budgeted cost based on actual use of the service
2. direct fixed costs D. none of the above, because all the above are equally undesirable
3. common fixed costs
4. variable selling costs PROBLEMS:
5. direct fixed selling costs Variable costing
6. common fixed selling costs Ending inventory

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i. The following information pertains to Sharapova Corporation: were as follows

Beginning inventory 0 units Direct materials P10,000
Ending inventory 5,000 units Direct labor 20,000
Direct labor per unit P10 Variable manufacturing overhead 5,000
Direct materials per unit 8 Variable selling and general 3,000
Variable overhead per unit 2 Fixed manufacturing overhead 9,000
Fixed overhead per unit 5 Fixed selling and general 4,000
Variable selling costs per unit 6 Total P51,000
Fixed selling costs per unit 8 What are the unit costs under absorption and variable costing methods, respectively?
What is the value of ending inventory using the variable costing method? A. P5.10; P3.80 C. P4.40; P3.50
A. P155,000 C. P100,000 B. P3.80 P5.10 D. P3.50: P4.40
B. P125,000 D. P195,000
Difference in income
Absorption costing iv. Consider the following:
Gross margin Sales price, per unit P18 per unit
ii. A company manufactures a single product for its customers by contracting in advance of Standard absorption cost rate P12 per unit
production. Therefore, the company only produces units that will be sold by the end of each Standard variable cost rate P8 per unit
period. During the last period, the following sales were made and costs incurred: Variable selling expense rate P2 per unit
Sales P40,000 Fixed selling and administrative expenses P40,000
Direct materials 9,050 Fixed manufacturing overhead P60,000
Direct labor 6,000 Last period, 13,000 units were produced. In the current period, 15,000 units were produced.
Rent (9/10 factory, 1/10 office) 3,000 In each period, 13,000 units were sold. What is the difference in reported income under
Depreciation on factory equipment 2,000 absorption and variable costing for the current period?
Supervision (2/3 factory, 1/3 office) 1,500 A. The variable-costing income exceeded absorption-costing income by P4,000.
Salespeople’s salaries 1,300 B. The absorption-costing income exceeded variable-costing income by P8,000.
Insurance (2/3 factory, 1/3 office) 1,200 C. The variable-costing income exceeded absorption-costing income by P6,000.
Office supplies 750 D. Net income will not be different between the two methods.
Advertising 700
Depreciation on office equipment 500 v. The Blue Company has failed to reach its planned activity level during its first two years of
Interest on loan 300 operation. The following table shows the relationship between units produced, sales, and
Based on the above data, the gross margin percentage for the last period (rounded to nearest normal activity for these years and the projected relationship for Year 3. All prices and costs
percent) was have remained the same for the last two years and are expected to do so in Year 3. Income
A. 41% C. 46% has been positive in both Year 1 and Year 2.
B. 44% D. 49% Units Produced Sales Planned Activity
Year 1 90,000 90,000 100,000
Variable costing vs. Absorption costing Year 2 95,000 95,000 100,000
Unit costs Year 3 90,000 90,000 100,000
iii. During May, Roy Co. produced 10,000 units of Product X. Costs incurred by Roy during May

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Because Blue Company uses an absorption costing system, one would predict gross margin for
Year 3 to be ix. At its present level of operations, a small manufacturing firm has total variable costs equal to
A. Greater than Year 1. C. Equal to Year 1. 75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales
B. Greater than Year 2. D. Equal to Year 2. change by P1.00, income will change by
A. P 0.25 C. P 0.75
Reconciliation B. P 0.12 D. P 0.10
Income under absorption costing
vi. A company had income of P50,000 using direct costing for a given period. Beginning and ending Segmented Income Statement
inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring income Effect of dropping a department
taxes, if the fixed overhead application rate were P2.00 per unit, what would the income have x. Zambales Mining Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable
been using absorption costing? costs are P600,000 per ton, and fixed mining costs are P5,000,000. The segment margin for
A. P40,000 2005 was P(1,000,000). The management of Zambales Mining was considering dropping the
B. P50,000 mining of Gold Ore. Only one-half of the fixed expenses are direct and would be eliminated
C. P60,000 if the segment was dropped. If Gold Ore were dropped, net income for Zambales Mining
D. Cannot be determined from the information given. would
A. Increase by P1,000,000 C. Decrease by P1,000,000
Income under variable costing B. Increase by P1,500,00 D. Decrease by P1,500,000
vii. Luna Company had income of P65,000 using absorption costing for a given period. Beginning
and ending inventories for that period were 13,000 units and 18,000 respectively. xi. Aging Company plans to discontinue a segment with a P32,000 segment margin. Common
Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what would expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be
the income have been using variable costing? eliminated if the segment were closed. The effect of closing down the segment on Aging
A. P 77,500 C. P 52,500 Company’s before tax profit would be
B. P 60,000 D. P 20,000 A. P12,000 decrease C. P 7,000 decrease
B. P12,000 increase D. P 7,000 increase
Unit contribution margin
viii. The following information was extracted from the first year of absorption-based accounting Use this data to respond to questions 16 through 17.
records of Soulmate Co. Omid Publishing Company has three divisions: A, B, and C. The revenues of these divisions are
Total fixed costs incurred P100,000 P29,000, 48,000, and 63,000 respectively. Variable costs of these divisions amount to 57%, 59%,
Total variable costs incurred 50,000 and 64% of the given revenues. The divisions' short-term controllable fixed costs are P4,200, 5,200,
Total period costs incurred 70,000 and 6,200 respectively. The divisions' long-term controllable fixed costs amount to P3,800, 4,900,
Total variable period costs incurred 30,000 and 5,700 in the order given. The company's uncontrollable costs amount to P7,150, and income tax
Units produced 20,000 is at 20% of operating income.
Units sold 12,000
Unit sales Price P 12 xii. Long-term controllable margin for division A amounts to
Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its income A. P4,470 C. P12,470
before taxes would have been B. P8,270 D. P16,470
A. P 9.50 higher C. P11.00 higher
B. P 8.50 higher D. P 8.33 higher xiii. Short-term controllable margin for division B amounts to

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A. P9,580 C. P19,680 Over- and underapplied fixed manufacturing costs are deferred until year-end. Annual sales have
B. P14,480 D. P23,580 the following seasonal pattern:
Portion of Annual Sales
Comprehensive First quarter 10%
Questions 10 through 13 are based on the following annual flexible budget which has been Second quarter 20%
prepared for use in making decisions relating to Product X. Third quarter 30%
Budgeted units 100,000 150,000 200,000 Fourth quarter 40%
Sales Volume P800,000 P1,200,000 P1,600,000 100%
Manufacturing costs:
Variable P300,000 P 450,000 P 600,000 xiv. The amount of fixed factory costs applied to product during the first six months under absorption
Fixed 200,000 200,000 200,000 costing would be
P500,000 P 650,000 P 800,000 A. Overapplied by P20,000. C. Underapplied by P40,000.
Selling expenses: B. Equal to the fixed costs incurred. D. Underapplied by P80,000
Variable P200,000 P 300,000 P 400,000
Fixed 160,000 160,000 160,000 xv. Reported net income (or loss) for the first six months under absorption costing would be
P360,000 P 460,000 P 560,000 A. P160,000 C. P 80,000
Income (or loss) (P60,000) P 90,000 P 240,000 B. P 40,000 D. P (40,000)

The 200,000-unit budget has been adopted and will be used for allocating fixed manufacturing costs xvi. Reported net income (or loss) for the firs six months under direct costing would be
to units of Product X. At the end of the first six months the following information is available: A. P144,000. C. P 72,000
Units B. P0 D. P(36,000)
Production completed 120,000
Sales 60,000 xvii. Assuming that 90,000 units of Product X were sold during the first six months and that this is to
be used as a basis, the revised budget estimate for the total number of units to be sold during
All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred this year would be
coincide with the budget. A. 360,000. C. 240,000
B. 200,000. D. 300,000

i. Answer: C Cost of goods sold

Direct materials P 8 Direct materials P9,050
Direct labor 10 Direct labor 6,050
Variable overhead 2 Rent (0.9 x P3,000) 2,700
Total unit cost- variable costing P20 Depreciation 2,000
Value of ending inventory (5,000 x P20) P100,000 Supervision (2/3 x P1,500) 1,000
Insurance (2/3 x P1,200) 800 (21,600)
ii. Answer: C Gross margin P18,400
Sales P40,000 Gross margin percentage (P18,400 ÷ P40,000) 46%

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Total variable cost/unit P3.50

* Total variable costs – variable period cost
iii. Answer: C (selling & adm.) = variable product cost.
Direct materials P10,000
Direct labor 20,000 ix. Answer: A
Variable overhead 5,000 1.00 - (1.00 x .75) = P0.25
Total variable product cost P35,00
Variable unit cost (P35,000 ÷ 10,000) P3.50 x. Answer: A
Add Fixed overhead per unit (P9,000 ÷ 10,000) 0.90 The only relevant information to compute the effect of dropping the mining of gold ore is the
Absorption unit cost P4.40 negative segment margin. If the product line is dropped, the company can avoid the negative
margin of P1 million.
iv. Answer: B
Fixed overhead rate per unit: P12 – P8 P4 xi. Answer: C
Difference in income: 2,000 x P4 P8,000 Avoidable common expenses P 25,000
During the current year, the company’s production equaled the budgeted. The inventory Segment margin lost 32,000
increased. Therefore, absorption costing income is higher than the variable costing income. Decrease in profit P( 7,000)

v. Answer: C xii. Answer: A

The production and unit sales during year 3 matched with year 1. Revenues P29,000
Variable cost (P29,000 x 0.57) 16,530
vi. Answer: C Contribution margin 12,470
The income under absorption costing is higher by P10,000 because the amount of fixed Less Short-term controllable fixed cost 4,200
overhead that related to unsold units was deferred and was included as cost of finished goods Short-term controllable margin 8,270
inventory. The variable costing income statement immediately wrote the entire fixed overhead Long-term controllable fixed cost 3,800
that was incurred during the year as period cost. Long-term controllable margin P 4,470
Fixed overhead deferred as product cost: 5,000 x P2 P10,000
Absorption income (P50,000 + P10,000) P60,000 xiii. Answer: B
Revenues P48,000
vii. Answer: C Variable cost (P48,000 x 0.59) 28,320
Absorption income 65,000 Contribution margin 19,680
Less Fixed Overhead in decrease in inventory (18,000 – 15,000) x 2.50 12,500 Short-term controllable fixed cost 5,200
Income, Variable costing 52,500 Short-term controllable margin – Div B P14,480

viii. Answer: B xiv. Answer: A

CMR per unit = Selling Price – Unit variable cost Budgeted actual fixed overhead (0.5 x P200,000) P100,000
P8.50 = P12.00 – P3.50 Applied fixed overhead (120,000 x P1.00) 120,000
Variable Cost Per unit Overapplied fixed overhead (favorable volume variance) P 20,000
Product: (50,000 – 30,000) / 20,000 = P1.00
Selling & Adm. (variable period costs) 30,000/12,000 2.50
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Fixed selling and other expenses 80,000 180,000

xv. Answer: B Variable costing profit NIL
Sales (60,000 x P8) P480,000 CM per unit (P1.6M – P0.6M – P0.4M) ÷ 200,000) P3.00
Cost of goods sold (60,000 x P4) 240,000
Gross profit 240,000 xvii. Answer: D
Selling and other expenses (60,000 x 2) + P80,000 200.000 The sales pattern indicated that sales for the first semester was 30%. The assumption was that
Absorption profit P 40,000 the pattern was still valid. Therefore the assumed 90,000 units would be 30 percent of expected
annual sales.
xvi. Answer: B (90,000 ÷ 0.3) = 300,000 units
Total contribution margin (60,000 x P3) P180,000
Less: Fixed manufacturing OH P100,000

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