CHAPTER 4

ABSORPTION VARRIABLE COSTING

1. Which of the following is a term more descriptive of the type of cost accounting often
called direct costing?

a. Out of pocket costing.

b. Viable costing.
c. Relevant costing
d. Prime costing.
(AICPA, adapted)

2. What costs are treated as product costs under viable costing?

a. Only direct costs.

b. Only variable production costs.
c. All variable costs.
d. All variable and fixed manufacturing costs.
(AICPA, adapted)

3. In the application of variable costing as a cost allocation process in

manufacturing.

a. Variable direct costs are treated as a period costs.

b. Non-variable indirect costs are treated as product costs.
c. Variable indirect costs are treated as a product costs.
d. Non-variable direct costs are treated as product costs.
(CIA, adapted)

4. Under the variable costing concept, unit product cost would most likely be increased
by

a. A decreased in the remaining useful life of factory machine depreciation

on the units of production method
b. A decreased in the number of units produced.
c. An increased in the remaining useful life of factory machinery decreased
on the sum-of-the-years’-digits method.
d. An increased in the commission paid to salesmen for each unit sold.
(AICPA, adapted)

5. A basic tenet of variable costing is that period costs should be currently expensed.
What is the rationale behind this procedure?

a. Period costs are uncontrollable and should not be charged to a specific

product.
 b. Period costs are usually immaterial in amount, ant the costs of assigning
them to specific products will outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous
decision by management.
d. Because period costs will occur whether or not production occurs, it is
improper to allocate these costs to production and defer a current cost of
doing business.
(AICPA, adapted)

6. In an income statement prepared as an internal report using the variable costing

method, which of the following terms should appear?

Gross profit
(Margin) Operating income
a. Yes Yes
b. Yes No
c. No No
d. No Yes
(AICPA, adapted)

7. When using variable costing system, the contribution margin (CM) discloses the
excess of

a. Revenues over fixed costs.

b. Projected revenues over the breakeven point.
c. Revenues over variable costs.
d. Variable costs over fixed costs.
(AICPA, adapted)

8. Which of the following statement is true for a firm that uses variable costing?

a. The cost of the unit of the product changes because of changes in number
of units manufactured.
b. Profits fluctuate with sales.
c. An idle facility variation is calculated.
d. Product costs include direct (variable) administrative costs.
(CMA, adapted)

9. Using absorption costing, fixed manufacturing overhead costs are best described as

a. Direct period costs.

b. Indirect period costs.
c. Direct product costs.
d. Indirect product costs.
(CIA, adapted)
10. Which one of the following statements is correct regarding absorption costing and
variable costing?
a. Overhead costs are treated in the same manner under both costing
methods.
b. If finished goods inventory increases, absorption costing results in higher
income.
c. Variable manufacturing costs are lower under variable costing.
d. Gross margins are the same under both costing methods.
(CMA, adapted)

11. The RED Company has failed to reach its planned activity level during its first 2
years of operation. The following table shows the relationship among units produced,
sales, and normal activity for these years and the projected relationship for 3 years.
All prices and costs have remained the same for the last 2 years and are expected to
do so in year 3. Income has been positive in both year 1 and year 2.

Units Produced Sales Planned Activity

Year 1 90,000 90,000 100,000
Year 2 95,000 95,000 100,000
Year 3 90,000 90,000 100,000
Because Red Company uses an absorption costing system, gross margin for year 3
should be

a. Greater than year 1.

b. Greater than year 2.
c. Equal to year 1.
d. Equal to year 2.
(CIA, adapted.)

12. Which of the following must be known about a production process to institute a
variable costing system?

a. The variable and fixed components of all costs related to production.

b. The controllable components of all costs related to production.
c. Standard production rates and times for all elements of production.
d. Contribution margin and breakeven point for all goods in production.
(AICPA, adapted)

13. Inventory under the variable costing method includes

a. Direct materials cost, direct labor cost, but no factory overhead cost.
b. Direct materials cost, direct labor cost, and variable factory overhead cost.
c. Prime cost but not conversion cost.
d. Prime cost and all conversion cost.
(AICPA, adapted)
14. DAY Co.’s 1998 fixed manufacturing overhead costs totaled P100,000, and variable
selling costs totaled P80,000. Under variable costing, how should these costs be
classified?

Period Costs Product Costs

a. P-0- P180, 000
b. P80, 000 P100, 000
c. P100, 000 P80, 000
d. P180, 000 P-0-
(AICPA, adapted)

15. Which costing method is properly classified as to its acceptability for both external
and internal reporting?

External Internal
Reporting Reporting
a. Activity-based costing Yes Yes
b. Job costing No Yes
c. Variable costing Yes No
d. Process costing No Yes
(CMA, adapted)

16. Which of the following is an argument against the use of variable costing?

a. Absorption costing overstates the balance sheet value of inventories.

b. Variable factory overhead is a period cost.
c. Fixed factory overhead is difficult to allocate properly.
d. Fixed factory overhead is necessary for the production of a product.
(CIA, adapted)

17. In an income statement prepared as an internal report using the variable costing
method, variable selling and administrative expenses are.

a. Not used.
b. Treated the same as fixed selling and administrative expenses.
c. Used in the computation of operating income but not in the computation of
the contribution margin.
d. Used in the computation of the contribution margin.
(AICPA, adapted)

18. In an income statement prepared as an internal report using the variable costing
method, fixed factory overhead would

a. Not be used.
 b. Be used in the computation of operating income but not in the
computation of the contribution margin.
c. Be used in the computation of the contribution margin.
d. Be treated the same as variable factory overhead.
(AICPA, adapted)

19. Which method of inventory costing treats direct manufacturing costs and
manufacturing overhead costs, both variable and fixed, as inventoriable costs?

a. Direct costing.
b. Variable costing.
c. Absorption costing.
d. Conversion costing.
(CMA, adapted)

20. When a firm prepares financial report by using absorption costing,

a. Profits will always increase with increases in sales.

b. Profits will always decrease with decreases in sales.
c. Profits may decrease with increased sales even if there is no change in
selling prices and costs.
d. Decreased output and constant sales result in increased profits
(CMA, adapted)

21. Absorption costing and variable costing are different methods of assigning costs to
units produced. Which cost item listed below is not correctly accounted for as a product
cost?
Part of Product
Cost Under
Absorption Variable
Cost Cost
a. Manufacturing supplies Yes Yes
b. Insurance on factory Yes No
c. Direct labor cost Yes Yes
d. Packaging and shipping cost Yes No
(CMA, adapted)

22. A company manufactures a single product for its customers by contracting in advance
of production. Thus, the company produces only units that will be sold by the end of each
period.
For the last period, the following dates were available:

Sales P40,000
Direct Materials 9,050
Direct Labor 6,050
 Rent (9/10 factory, 1/3 office) 3,000
Depreciation on factory equipment 2,000
Supervision (2/3 factory, 1/3 office) 1,500
Salespeople’s salaries 1,300
Insurance (2/3 factory, 1/3 office) 1,200
Office supplies 750
Advertising 700
Depreciation on office equipment 500
Interest on loan 300
The gross margin percentage (rounded) was

a. 41%
b. 44%
c. 46%
d. 51%
(CIA, adapted)

23. In an income statement prepared as an internal report, total fixed costs normally are
shown separately under
Absorption Costing Variable Costing
a. No No
b. No Yes
c. Yes Yes
d. Yes No
(AICPA, adapted)

24. A manufacturing company prepares income statements using both absorption and
variable costing methods. At the end of period, actual sales revenues, total gross margin,
and total contribution margin approximated budgeted figures whereas net income was
substantially below the budgeted amount. There were no beginnings or ending
inventories. The most likely explanation of net income shortfall is that, compared to
budget, actual

a. Sales price and variable costs had declined proportionately.

b. Sales price had declined proportionately more than variable costs.
c. Manufacturing fixed cost had increased.
d. Selling and administrative fixed expenses had increased.
(AICPA, adapted)

25. Dansen, Inc. pays bonuses to its manager based on operating income. The company
uses absorption costing, and overhead is applied on the basis of direct labor hours. To
increase bonuses,
Dancen’s managers may do all of the following except

a. Produce those products requiring the most direct labor.

b. Defer expenses such as maintenance to a future period.
 c. Increase production schedules independent of customer demands.
d. Decrease production of those items requiring the most direct labor.
(CMA, adapted)

26. Net earnings determined using full absorption costing can be reconciled to net
earnings determine using variable costing by computing the difference between

a. Inventoried fixed costs in the beginning and ending inventories and any deferred
over-or under-applied fixed factory overhead.
b. Inventoried discretionary costs in the beginning and ending inventories
c. Gross margin (absorption costing method) and contribution margin (variable
costing method).
d. Sales as recorded under the variable costing method and sales as recorded under
the absorption costing method.
(AICPA. Adapted)

27. The management of the company computes net income using both the absorption and
variable costing approaches to product costing.
In the current year, the net income under the variable costing approaches was greater than
the net income under the absorption costing approach. This difference is most likely the
result of

a. A decrease in the variable marketing expenses.

b. An increase in the finished goods inventory.
c. An excess of sales volume over production volume.
d. Inflationary effects on overhead costs.
(CIA, adapted)

28. Net profit under absorption costing may differ from net profit determined under
variable costing. This difference equals the change in the quantity of all units.

a. Inventory times the relevant fixed cost per unit.

b. Produced times the relevant fixed costs per unit.
c. In inventory times the relevant variable cost per unit.
d. Produced times the relevant variable cost per unit.
(AICPA, adapted)

29. A company’s net income recently increased by 30% while its inventory increased to
equal a full year’s sales requirements. Which of the following accounting methods would
be most likely to produce the favorable income results?

a. Absorption costing
b. Direct costing
c. Variable costing.
d. Standard direct costing.
(CIA, adapted)
30. When comparing absorption costing with variable costing, which of the following is
not true?

a. Absorption costing enables managers to increase operating profits in the short run
by increasing inventories.
b. When sales volume is more than production volume, variable costing will result
in higher operating profit.
c. A manager who is evaluated based on variable costing operating profit would be
tempted to increase production at the end of a period in order to get more
favorable review.
d. Under absorption costing, operating profit is a function of both sales volume and
production volume.
(CIA, adapted)

31. During May, Soy Co. produced 10,000 units of product X. Costs incurred by Soy
during May:

Direct materials P10, 000

Direct labor 20, 000
Variable manufacturing overhead 5, 000
Variable selling and general expenses 3, 000
Fixed manufacturing overhead 9, 000
Fixed selling and general expenses 4, 000
Total P51, 000

Under absorption costing, Product X’s unit cost was

a. P5.10
b. P4.40
c. P3.80
d. P3.50
(AICPA, adapted)

32. During the month of April, W Co. produced and sold 10,000 units of product.
Manufacturing and selling costs incurred during April were as follows:

Direct materials P400, 000

Variable manufacturing overhead 90, 000
Fixed manufacturing overhead 20, 000
Variable selling costs 10, 000

The product’s unit cost under variable costing was

a. P49.
b. P50.
c. P51.
d. P52.
 (AICPA, adapted)

33. Klim Co., a manufacturing operating at 95% of capacity, has been offered a new order
at P 7.25 per unit requiring 15% of capacity. No other use of the 5% current idle capacity
can be found. However, if the order were accepted, the subcontracting for the required
10% additional capacity would cost P 7.50 per unit. The variable cost of production for
Kirkin on a per unit basis follows:

Materials P3.50
Labor 1.50
Variable overhead 1.50
Total P6.50

In applying the contribution margin approach to evaluating whether to accept the new
order, assuming subcontracting, what is the average variable cost per unit?

a. P6.83.
b. P7.17.
c. P7.25.
d. P7.50.
(CIA, adapted)

34. Kayla Co., a manufacturer operating at 95% of capacity, has been offered a new order
at P7.25 per unit requiring 155 of capacity. No other use of the 5% current idle capacity
can be found. However, if the order were accepted, the subcontracting for the require
10% additional capacity would cost P7.50 per unit. The variable cost of production for
Kirkin on a per unit basis follows:

Materials P3.50
Labor 1.50
Variable overhead 1.50
Total P6.50

Assuming the average variable cost per unit of the new order is P7.17, the expected
contribution margin per unit of the new order is

a. P0.08.
b. P0.25.
c. P0.33.
d. P0.42.
(CIA, adapted)

35. A company manufactures and sells a single product. Planned and actual production in
1998, its first year of operation, was 100,000 units. Planned and actual costs in 1998 were
as follows:
 ManufacturingNon-manufacturing
Variable P600, 000 P500, 000
Fixed P400, 000 P300, 000

The company sold 85,000 units of product in 1998 at selling price of P30 per unit. Using
variable costing, the company’s operating income in 1998 would be

a. P750, 000.
b. P900, 000.
c. P975, 000.
d. P1, 020,000.
(CIA, adapted)

36. a company manufactures and sells a single product. Planned and actual production in
1998, its first year of operation, was 100,000 units. Planned and actual costs in 1998 were
as follow:

ManufacturingNon-manufacturing
Variable P600, 000 P500, 000
Fixed 400, 000 300, 000

The company sold 85,000 units of product in 1998 at selling price of P30 per unit. Using
variable costing, the company’s operating income in 1998 would be

a. P750, 000.
b. P840, 000.
c. P915, 000.
d. P975, 000.
(CIA, adapted)

37. During its first year of operations, a company produced 275,000 units and sold
250,000 units. The following costs were incurred during the year:

Variable cost per unit:

Direct materials P15.00
Direct labor 10.00
Manufacturing overhead 12.50
Selling and administrative 2.50

Total fixed costs:

Manufacturing overhead P2, 200,000
Selling and administrative 1,375,000
The difference between operating income calculated on the absorption costing basis and
on the variable costing basis is that absorption-costing operating income is

a. P200,000 greater
b. P220,000 greater
c. P325,000 greater
d. P62,500 less.
(CIA, adapted)

38. Teller Company a manufacturer of rivets uses absorption costing.

Teller’s manufacturing costs were as follows:

Direct materials and direct labor P800, 000
Depreciation of machines 100,000
Rent for factory building 60,000
Electricity to run machines 35,000

How much of these costs should be inventoried?

a. P800,000
b. P835,000
c. P935,000
d. P995,000
(AICPA, adapted)

39. Ortiz Company records for the year ended December 31 show that no finished goods
inventory existed at January 1 and no work was in process at the beginning or end of the
year. Other data are as follows:

Net sales P1, 400, 000

Cost of goods manufactured: Variable 630,000
Fixed 315,000
Operating expenses: Variable 98,000
Fixed 140,000
Units manufactured 70,000 units
Unit sold 60,000 units

What is Ortiz finished goods inventory cost at December 31 under the variable costing
method?
a. P90,000
b. P104,000
c. P105,000
d. P135,000
(AICPA, adapted)
40. Penchant Company’s record for the year ended December 31 show that no finished
goods inventory existed at January 1 and no work was in process at the beginning or end
of the year. Other data are as follows:

Net sales P1, 400,000

Cost of goods manufactured: Variable 630,000
Fixed 315,000
Operating expenses: Variable 98,000
Fixed 140,000
Units manufactured 70,000 units
Units sold 60,000 units
What would be Penchant’s finished goods inventory cost at December 31 under
absorption costing method?
a. P90, 000.
b. P104, 000.
c. P105, 000.
d. P135, 000.
(Author)

41. Naval Company’s records for the year ended December 31 show that no finished
goods inventory existed at January 1 and no work was in process at the beginning or end
of the year. Other data are as follows:
Net sales P1, 400,000
Cost of goods manufactured: Variable 630,000
Fixed 315,000
Operating expenses: Variable 98,000
Fixed 140,000
Units manufactured 70,000 units
Units sold 60,000 units
Under the absorption costing method, Navals operating income for year is:
a. P217,000
b. P307,000
c. P354,000
d. P762,000
(AICPA, adapted)

42. De Lara Company’s Records for the year ended December 31 show that no finished
goods inventory existed at January 1 and no work was in the process at the beginning or
end of the year. Other data are as follows:
Net sales P1, 400,000
Cost of goods manufactured: Variable 630,000
Fixed 315,000
Operating expenses: Variable 98,000
Fixed 140,000
Units manufactured 70,000 units
Units sold 60,000 units
Under the absorption costing method, De Lara’s operating income for year is:
a. P217, 000.
b. P307, 000.
c. P354, 000.
d. P762, 000.
(Author)

*Questions 43 through 46 are based on the following information. The annual flexible
budget below was prepared for use in making decisions relating to Product X:

100,000 150,000 200,000

units units units
Sales volume P 800,000 P1, 200,000 P1,600,00
Manufacturing costs:
Variable P 300,000 P 1,450,000 P 600,000
Fixed 200,000 200,000 200,000
P 500,000 P 650,000 P 800,000

Selling and other expenses:

Variable P 200,000 P 300,000 P 400,000
Fixed 160,000 160,000 160,000
P 360,000 P 460,000 P 560,000
Income or (loss) P (60,000) P 90,000 P 240,000

The 200,000-unit budget has been adopted and will be used for allocating fixed
manufacturing costs to units of Product X. At the end of the first 6 months, the following
information is available:

Units
Production completed 120,000
Sales 60,000

All fixed costs are budgeted and incurred uniformly throughout the year, and all costs
incurred coincide with the budget. Over-and under-applied fixed manufacturing costs are
differed until year-end. Annual sales have the following seasonal pattern:

Portion of Annual Sales

First quarter 10%

Second quarter 20%
Third quarter 30%
Fourth quarter 40%
43. The amount o fixed factory cost applied to product during the first 6 months under
absorption costing is
a. Over applied by P20,000
b. Equal to the fixed costs incurred
c. Under applied by P40, 000.
d. Under applied by P 80,000.
(AICPA, adapted)

44. Reported net income or (loss) for the first 6 months under absorption costing is
a. P 160,000
b. P 0
c. P 40,000
d. P(40,000)
(AICPA, adapted)

45. Reported net income or (loss) for the first 6 months under variable costing is
a. P 180,000
b. P 40,000
c. P 0
d. P (180,000)
(AICPA, adapted)

46. Assuming that 90,000 units of Product X were sold during the first 6 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 this year is

a. 360,000
b. 240,000
c. 200,000
d. 300,000
(AICPA, adapted)

*Questions 47 through 53 are based on the following information. Wylyn Corporation

employs an absorption costing system for internal reporting purposes; however, the
company is considering using variable costing. Data regarding Wylyn’s planned and
actual operation for the 1998 calendar year are presented below.

Planned Actual
Activity Activity

Beginning finished goods

Inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000
The planned per-unit cost figures shown in the schedule were based on production and
sale of 140,000 units in 1998. Wylyn uses a predetermined manufacturing overhead rate
for applying manufacturing overhead to its product; thus, a combined manufacturing
overhead rate of P9.00 per unit was employed for absorption costing purpose in 1998.
Any over or under-applied manufacturing overhead is closed to cost of goods sold at the
end of the reporting year.

Planned Costs Incurred

Per unit Total Costs
Direct material P12.00 P1, 680,000 P 1, 560, 00
Direct labor 9.00 1, 260,000 1,170,000
Variable manufacturing OH 4.00 560,000 520,000
Fixed manufacturing OH 5.00 700,000 715,000
Variable selling expenses 8.00 1, 120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Variable administrative expenses2 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000
Total P50.00 P7, 000,000 P6, 620,000

The 1998 beginning finished goods inventory for absorption costing purpose was valued
at the 1997 planned unit manufacturing cost, which was the same as the 1998 planned
unit manufacturing cost. There are no works in process inventories at either the beginning
or the end of the year. The planned and actual unit selling price for 1998 was P70.00 per
unit.

47. The value of Wylyn Corporation’s 1998 actual ending finished goods inventory on the
absorption costing basis was

a. P900,000
b. P1,200,000
c. P1,220,000
d. P2,000,000
(CMA, adapted)

48. The value of Wylyn Corporation’s 1998 actual ending finished goods inventory on the
variable costing basis was

a. P1,400,000
b. P1,200,000
c. P1,220,000
d. P2,000,000
(CMA, adapted)

49. Wylyn Corporation’s actual manufacturing contribution margin for 1998 calculated
on the variable costing basis was
 a. P4,375,000
b. P5,500,000
c. P4,910,000
d. P5,625,000
(CMA, adapted)

50. Wylyn Corporation’s total fixed cost in 1998 on the absorption costing basis were

a. P2,095,000
b. P2,120,000
c. P2,055,000
d. P4,550,000
(CMA, adapted)

51. The total variable costs expensed in 1998 by Wylyn Corporation on the variable
costing basis was

a. P4,375,000
b. P4,500,000
c. P4,325,000
d. P4,550,000
(CMA, adapted)

52. Wylyn Corporation’s absorption costing operating income in 1998 was

a. Higher than variable-costing operating income because actual production

exceeded actual sales.
b. Lower than variable-costing operating income because actual production
exceeded actual sales.
c. Lower than variable-costing operating income because actual production was less
than planned production.
d. Lower than variable-costing operating income because actual sales were less than
planned sales.
(CMA, adapted)

53. The difference between Wylyn Corporation’s 1998 operating income calculated on
the absorption costing basis and calculated on the variable costing basis was

a. P25,000
b. P45,000
c. P75,000
d. P100,000
(CMA, adapted)

*Queation 54 to 55 is based on the following information. The following data are taken
from the records of Friendlyn Company for the fiscal year ended November 30.
 Direct material P300, 000
Direct labor 100,000
Variable factor overhead 50,000
Fixed factory overhead 80,000
Sell. And admin. Costs-variable 40,000
Sales and admin. Cost-fixed 20,000

54. If Friendlyn Company uses variable costing, the inventoriable costs for current fiscal
year are

a. P400,000
b. P450,000
c. P490,000
d. P530,000
(CMA, adapted)

55. Using absorption (full) costing, inventoriable cost are

a. P400,000
b. P450,000
c. P530,000
d. P590,000
(CMA, adapted)

*Question 56 and 57 are based on the following information. Iwamoto, Inc. planned and
actually manufactured 200,000 units of its single product in 1998, its first year of
operations. Variable manufacturing costs were P30 per unit of product. Planned and
actual fixed manufacturing costs were P600, 000, and selling and administrative costs
totaled P400, 000 in 1998. Iwamoto sold 120,000 units of product in 1998 at a selling
price of P40 per unit.

56. Iwamoto’s 1998 operating income using absorption (full) costing is

a. P200,000
b. P440,000
c. P600,000
d. P840,000
(CMA, adapted)

57. Iwamoto’s 1998 operating income using variable costing is

a. P200,000
b. P440,000
c. P800,000
 d. P600,000
(CMA, adapted)

*Question 58 and 59 are based on the following information. A and B are autonomous
segments of a corporation. They have no beginning or ending inventories, and the number
of units produced is equal to the number of units sold. Following is financial information
relating to the two divisions.

Division A Division B
Sales P150, 000 P400, 000
Other revenue 10,000 15,000
Direct material 30,000 65,000
Direct labor 20,000 40,000
Variable factory overhead 5,000 15,000
Fixed factory overhead 25,000 55,000
Variable S & A expense 35,000 60,000
Central corporate 12,000 20,000
Expense (allocated)

58. What is the total contribution to corporate profits generated by segment A before
allocation of central corporate expense?

a. P18,000
b. P20,000
c. P30,000
d. P 90,000
(CIA, adapted)

59. What is the contribution margin of segment B?

a. P150,000
b. P205,000
c. P235,000
d. P265,000
(CIA, adapted)

60.If sales exceed production, one would expect net income under the variable costing
method to be

a. The same as net income under the absorption costing method.

b. Greater than net income under the absorption costing method.
c. Differing in as much as the difference between sales and production.
d. Less than net income under the absorption costing method (RPCPA, adapted)
61. Excellent Writer producer and sells boxes of signing pens for P1, 000 per box.
Direct materials are P400 per box and direct manufacturing labor average is P12,
500,000 per year. Administrative expenses, all fixed, run P4, 500, 000 per year, with
sales commissions of P100 per box. Production is expected to be P100, 000 boxes,
which is met every year. For the year just ended, 75, 000 boxes were sold. What is
the inventoriable cost per box using variable costing?

a. P770
b. P500
c. P475
d. P625
(RPCPA, adapted)

62. LY & Company completed its first year of operation during which time the following
information were generated:

Total units produced 100,000

Total units sold 80, 00 at P100 per unit
Work in process ending inventory costs:
Fixed costs
Factory costs
Factory overhead P1.2 million
Selling and administrative P0.7 million
Per unit variable costs
Raw materials P20.00
Direct labor 12.20
Factory overhead 7.50
Selling and administrative 10.00

If the company used the variable (direct) costing method, the operating income would
be

a. P.2, 100,000
b. P4,000,000
c. P2,480,000
d. P3,040,000
(RPCPA, adapted)

63. McDonut CO. reported the following per unit cost for the period just ended:

Direct materials P20

Direct labor 24
Variable overhead 2
Fixed overhead 14
Variable selling & administrative 4
Fixed selling 6
If the company were using the absorption approach to cost-plus pricing, and adds a 50%
markup to price its product, the selling price would be

a. P90
b. P105
c. P69
d. P75
(RPCPA, adapted)

64. Using absorption costing, the determination of the break-even point depends on
all of the following, except

a. The budgeted level of production

b. Achieving targeted production levels
c. The number of units sold during the period
d. The level of fixed manufacturing overhead
(RPCPA, adapted)

65. At the end KIKO Company’s first year of operation 1,000 units of inventory
remained on hand, Variable and fixed manufacturing costs per unit were P90 and P20,
respectively, if KIKO using absorption costing rather than direct (Variable) costing,
the result would be a higher pretax income of

a. P20,000
b. P70,000
c. P-0-
d. P90,000
(RPCPA, adapted)

66. The following information pertains to NORY Company

Cost-volume-profit relationship:
Break even point in unit solve 1,000
Variable costs per unit P500
Total fixed costs P150, 000

How much will be contributed to profit before income taxes by 1,001st unit sold?

a. P500
b. P150
c. P650
d. P-0-
(RPCPA, adapted)

67. CARE Company’s 1997 fixed manufacturing overhead costs totaled P100, 000
and variable selling costs totaled P80, 000.
 Under direct costing, how should these costs be classified?
Period costs Product costs
a. P0 P180, 000
b. P80, 000 P100, 000
c. P100, 000 P80, 000
d. P180, 000 P-0-
(RPCPA, adapted)

68. Reporting under the direct costing concept is accomplished by

a. Including only direct costs in the income statement

b. Matching variable costs against revenues and treating fixed costs as period costs
c. Treating all costs as period costs
d. Eliminating the work in process inventory accounting
(Author)

69. Which of the following costs allocation methods would be used to determine the
lowest price that could be quoted for a special order that would be utilized idle
capacity with in a production area?

a. Job order
b. Normal costing
c. Variable
d. Process
(Author)

70. Under direct costing procedures

a. An increase in inventory decreases marginal income

b. No overhead costs are changed to product
c. Inventory values tend to be overstated
d. Fixed costs are treated as period costs
(Author)

71. Other thing being equal, net income computed under the direct costing method
would exceed net income computed by an absorption cost method if

a. Unit sold were to exceed units produced

b. Fixed manufacturing costs were to increase
c. Units produce were to exceed units sold
d. Variable manufacturing cost were to increase
(Author)
72. Absorption costing differs from direct costing in the

a .Amount of cost assigned to individual units of product

b. Amount of net income that will be reported when there is no change in inventory
c. Amount of fixed costs that will be incurred
d. Kinds of activities for which they may be used for report
(Author)