ch08

Student: ___________________________________________________________________________

1. Fixed manufacturing overhead is not inventoried under absorption costing.

True False
2. Variable manufacturing overhead becomes part of a unit's cost when variable costing is used.
True False
3. Absorption costing is required for tax purposes.
True False
4. When units sold exceed units produced, absorption-costing income will be lower than variable-costing
income.
True False
5. For external-reporting purposes, generally accepted accounting principles require that net income be
based on variable costing.
True False
6. Under variable costing, fixed manufacturing overhead is:
A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process Inventory.
E. treated in the same manner as variable manufacturing overhead.
7. All of the following are inventoried under variable costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. items "C" and "D" above.
8. All of the following are expensed under variable costing except:
A. variable manufacturing overhead.
B. fixed manufacturing overhead.
C. variable selling and administrative costs.
D. fixed selling and administrative costs.
E. items "C" and "D" above.
9. All of the following costs are inventoried under absorption costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.
10. All of the following are inventoried under absorption costing except:
A. direct labor.
B. raw materials used in production.
C. utilities cost consumed in manufacturing.
D. sales commissions.
E. machine lubricant used in production.
11. The underlying difference between absorption costing and variable costing lies in the treatment of:
A. direct labor.
B. variable manufacturing overhead.
C. fixed manufacturing overhead.
D. variable selling and administrative expenses.
E. fixed selling and administrative expenses.
12. Which of the following costs would be treated differently under absorption costing and variable costing?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
Lone Star has computed the following unit costs for the year just ended:

13. Under variable costing, each unit of the company's inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. some other amount.
14. Under absorption costing, each unit of the company's inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. some other amount.
Roma Corporation has computed the following unit costs for the year just ended:

15. Under absorption costing, each unit of the company's inventory would be carried at:
A. $49.
B. $54.
C. $72.
D. $104.
E. some other amount.
16. Under variable costing, each unit of the company's inventory would be carried at:
A. $49.
B. $54.
C. $72.
D. $104.
E. some other amount.
17. Santa Fe Corporation has computed the following unit costs for the year just ended:

Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and
absorption costing?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
18. Delaware has computed the following unit costs for the year just ended:

Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and
absorption costing?
A. Variable, $85; absorption, $105.
B. Variable, $85; absorption, $116.
C. Variable, $103; absorption, $105.
D. Variable, $103; absorption, $116.
E. Some other combination of figures not listed above.
Indiana Company incurred the following costs during the past year when planned production and actual
production each totaled 20,000 units:

19. If Indiana uses variable costing, the total inventoriable costs for the year would be:
A. $400,000.
B. $460,000.
C. $560,000.
D. $620,000.
E. $660,000.
20. Indiana's per-unit inventoriable cost under variable costing is:
A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.
21. If Indiana uses absorption costing, the total inventoriable costs for the year would be:
A. $400,000.
B. $460,000.
C. $560,000.
D. $620,000.
E. $660,000.
22. Indiana's per-unit inventoriable cost under absorption costing is:
A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.
23. Consider the following comments about absorption- and variable-costing income statements:
I. A variable-costing income statement discloses a firm's contribution margin.
II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
III. The amount of variable selling and administrative cost is the same on absorption- and variable-costing
income statements.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
24. Consider the following comments about absorption- and variable-costing income statements:
I. A variable-costing income statement discloses a firm's gross margin.
II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
III. The amount of variable selling and administrative cost is the same on absorption- and variable-costing
income statements.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
Roberts Corp., which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
25. The gross margin that the company would disclose on an absorption-costing income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
26. The contribution margin that the company would disclose on a variable-costing income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.
McArthur Corp., which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 38,000 units at $15 per unit
Production costs:
Variable: $5 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
27. The gross margin that the company would disclose on an absorption-costing income statement is:
A. $0.
B. $133,000.
C. $166,500.
D. $342,000.
E. some other amount.
28. The contribution margin that the company would disclose on a variable-costing income statement is:
A. $0.
B. $120,000.
C. $166,500.
D. $342,000.
E. some other amount.
29. Chino began business at the start of the current year. The company planned to produce 25,000 units, and
actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were:

If there were no variances, the company's absorption-costing income would be:

A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
E. some other amount.
30. Which of the following statements pertain to variable costing?
A. This method must be used for external financial reporting.
B. Fixed manufacturing overhead is attached to each unit produced.
C. The income statement discloses a company's contribution margin.
D. Variable manufacturing overhead becomes part of a unit's cost.
E. Statements "C" and "D" both pertain to variable costing.
31. Which of the following statements pertain to both variable costing and absorption costing?
A. The income statement discloses the amount of gross margin generated during the reporting period.
B. Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing
overhead.
C. Both variable and absorption costing can be used for external financial reporting.
D. Variable selling costs are written-off as expenses of the accounting period.
E. Fixed manufacturing overhead is attached to each unit produced.
32. Variable costing of inventory and absorption costing of inventory is relevant for which of the following
types of businesses:
A. Manufacturing firms.
B. Not-for-profit companies.
C. Governmental units.
D. Service firms.
E. All of these.
33. Which of the following product-costing systems is/are required for tax purposes?
A. Absorption costing.
B. Variable costing.
C. Throughput costing.
D. Either absorption or variable costing.
E. Either absorption, variable costing, or throughput costing.
34. Springstein began business at the start of the current year. The company planned to produce 40,000 units,
and actual production conformed to expectations. Sales totaled 37,000 units at $42 each. Costs incurred
were:

If there were no variances, the company's variable-costing income would be:

A. $155,000.
B. $212,000.
C. $240,500.
D. $592,000.
E. some other amount.
35. Springer began business at the start of the current year. The company planned to produce 40,000 units,
and actual production conformed to expectations. Sales totaled 37,000 units at $42 each. Costs incurred
were:

If there were no variances, the company's absorption-costing income would be:

A. $155,000.
B. $230,000.
C. $240,500.
D. $592,000.
E. some other amount.
36. The following data relate to Lebeaux Corporation for the year just ended:

Which of the following statements is correct?

A. Lebeaux 's variable-costing income statement would reveal a gross margin of $270,000.
B. Lebeaux 's variable costing income statement would reveal a contribution margin of $330,000.
C. Lebeaux 's absorption-costing income statement would reveal a contribution margin of $330,000.
D. Lebeaux 's absorption costing income statement would reveal a gross margin of $330,000.
E. Lebeaux 's absorption-costing income statement would reveal a gross margin of $145,000.
Franz began business at the start of this year and had the following costs: variable manufacturing cost per
unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and
fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data
follow.

There were no variances.

37. The income (loss) under absorption costing is:
A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.
38. The income (loss) under variable costing is:
A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
E. some other amount.
39. Income reported under absorption costing and variable costing is:
A. always the same.
B. typically different.
C. always higher under absorption costing.
D. always higher under variable costing.
E. always the same or higher under absorption costing.
40. Garcia's inventory increased during the year. On the basis of this information, income reported under
absorption costing:
A. will be the same as that reported under variable costing.
B. will be higher than that reported under variable costing.
C. will be lower than that reported under variable costing.
D. will differ from that reported under variable costing, the direction of which cannot be determined from
the information given.
E. will be less than that reported in the previous period.
41. Which of the following conditions would cause absorption-costing income to be lower than variable-
costing income?
A. Units sold exceeded units produced.
B. Units sold equaled units produced.
C. Units sold were less than units produced.
D. Sales prices decreased.
E. Selling expenses increased.
42. Which of the following conditions would cause absorption-costing income to be higher than variable-
costing income?
A. Units sold exceeded units produced.
B. Units sold equaled units produced.
C. Units sold were less than units produced.
D. Sales prices decreased.
E. Selling expenses increased.
43. Which of the following situations would cause variable-costing income to be lower than absorption-
costing income?
A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by $7 per unit during the accounting period.
E. Selling expenses increased by 10% during the accounting period.
44. Which of the following situations would cause variable-costing income to be higher than absorption-
costing income?
A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by $7 per unit during the accounting period.
E. Selling expenses increased by 10% during the accounting period.
45. Consider the following statements about absorption- and variable-costing income:
I. Yearly income reported under absorption costing will differ from income reported under variable
costing if production and sales volumes differ.
II. In the long-run, total income reported under absorption costing will often be close to that reported
under variable costing.
III. Differences in income under absorption and variable costing can often be reconciled by multiplying
the change in inventory (in units) by the variable manufacturing overhead cost per unit.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
46. Which of the following formulas can often reconcile the difference between absorption- and variable-
costing income?
A. Change in inventory units × predetermined variable-overhead rate per unit.
B. Change in inventory units ÷ predetermined variable-overhead rate per unit.
C. Change in inventory units × predetermined fixed-overhead rate per unit.
D. Change in inventory units ÷ predetermined fixed-overhead rate per unit.
E. (Absorption-costing income - variable-costing income) × fixed-overhead rate per unit.
47. Moneka reported $65,000 of income for the year by using absorption costing. The company had no
beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard
variable manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was
$100,000. If there were no variances, income under variable costing would be:
A. $15,000.
B. $55,000.
C. $65,000.
D. $75,000.
E. $115,000.
48. Carter reported $106,000 of income for the year by using variable costing. The company had no
beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard
variable manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was
$150,000. If there were no variances, income under absorption costing would be:
A. $52,000.
B. $97,000.
C. $106,000.
D. $115,000.
E. $160,000.
49. Consider the following statements about absorption costing and variable costing:
I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
II. Absorption costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.
50. Consider the following statements about absorption costing and variable costing:
I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
II. Variable costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.
51. For external-reporting purposes, generally accepted accounting principles require that net income be
based on:
A. absorption costing.
B. variable costing.
C. direct costing.
D. semivariable costing.
E. activity-based costing.
52. Under throughput costing, the cost of a unit typically includes:
A. selling costs.
B. fixed manufacturing overhead.
C. the direct costs incurred whenever a unit is manufactured.
D. administrative costs.
E. all of these.
53. Which of the following methods defines product cost as the unit-level cost incurred each time a unit is
manufactured?
A. Throughput costing.
B. Indirect costing.
C. Process costing.
D. Absorption costing.
E. Back-flush costing.
54. Ortego's management recently committed to incurring direct labor and all manufacturing overhead
charges regardless of the number of units produced. Under throughput costing, the company's cost of
goods sold would include charges for:
A. selling and administrative costs.
B. direct materials.
C. direct labor and manufacturing overhead.
D. direct materials, direct labor, and manufacturing overhead.
E. direct materials, direct labor, manufacturing overhead, and selling and administrative costs.
55. Highway Company reported the following costs for the year just ended:

If Highway uses throughput costing and had sales revenues for the period of $950,000, which of the
following choices correctly depicts the company's cost of goods sold and income?
(delete "Net", below; just say "Income.")

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E
56. Consider the statements that follow.
1. Variable selling costs are expensed when incurred.
2. The income statement discloses a company's contribution margin.
3. Fixed manufacturing overhead is attached to each unit produced.
4. Direct labor becomes part of a unit's cost.
5. Sales revenue minus cost of goods sold equals contribution margin.
6. This method must be used for external financial reporting.
7. Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing
overhead.
8. This method is sometimes called full costing.
9. This method requires the calculation of a fixed manufacturing cost per unit.
Required:
Determine which of the nine statements:
A. Relate only to absorption costing.
B. Relate only to variable costing.
C. Relate to both absorption costing and variable costing.
D. Relate to neither absorption costing nor variable costing.

57. The table that follows denotes selected characteristics of absorption costing and/or variable costing.

Changes to grid above:

Lower income when inventories rise (NOT "net" income)
External financial statement USE (NOT "users")
Required:
Evaluate each product-cost, period-cost, and income-statement/disclosure characteristic and determine
whether it relates to absorption costing, variable costing, or both methods. Place an "X" in the proper
column.
58. Information taken from Giles Corporation's May accounting records follows.

Required:
A. Assuming the use of variable costing, compute the inventoriable costs for the month.
B. Compute the month's inventoriable costs by using absorption costing.
C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units were sold
during May. Determine the amount of fixed manufacturing overhead and fixed selling and administrative
costs that would be expensed for the month under (1) variable costing and (2) absorption costing.
D. Assume the same data as in requirement "C." Compute the contribution margin that would be reported
on a variable-costing income statement.

59. Webster, Inc. began operations at the start of the current year, having a production target of 60,000 units.
Actual production totaled 60,000 units, and the company sold 95% of its manufacturing output at $50 per
unit. The following costs were incurred:

Required:
A. Assuming the use of variable costing, compute the cost of Webster's ending finished-goods inventory.
B. Compute the company's contribution margin. Would Webster disclose the contribution margin on a
variable-costing income statement or an absorption-costing income statement?
C. Assuming the use of absorption costing, how much fixed selling and administrative cost would
Webster include in the ending finished-goods inventory?
D. Compute the company's gross margin.
60. The following data relate to Ventura Company, a new corporation, during a period when the firm
produced and sold 100,000 units and 90,000 units, respectively:

The company met its original planned production target of 100,000 units. There were no variances during
the period, and the firm's selling price is $15 per unit.
Required:
A. What is the cost of Ventura's end-of-period finished-goods inventory under the variable-costing
method?
B. Calculate the company's variable-costing income.
C. Calculate the company's absorption-costing income.

61. The following data relate to Horatio, Inc., a new company:

There were no variances during the period.

Required:
A. Determine the number of units in the ending finished-goods inventory.
B. Calculate the cost of the ending finished-goods inventory under (1) variable costing and (2) absorption
costing.
C. Determine the company's variable-costing income.
D. Determine the company's absorption-costing income.
62. Kim, Inc. began business at the start of the current year and maintains its accounting records on an
absorption-cost basis. The following selected information appeared on the company's income statement
and end-of-year balance sheet:

Kim achieved its planned production level for the year. The company's fixed manufacturing overhead
totaled $141,000, and the firm paid a 10% commission based on gross sales dollars to its sales force.
Required:
A. How many units did Kim plan to produce during the year?
B. How much fixed manufacturing overhead did the company apply to each unit produced?
C. Compute Kim's cost of goods sold.
D. How much variable cost did the company attach to each unit manufactured?

63. Hirsch Company has per-unit fixed and variable manufacturing costs of $40 and $15, respectively.
Variable selling and administrative costs are $9 per unit. Consider the two independent cases that follow
for the firm.
Case A: Variable-costing income, $110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing income, $178,000; sales, 7,500 units; production, 7,100 units
Required:
A. From a product-costing perspective, what is the basic difference between absorption costing and
variable costing?
B. Compute Hirsch's absorption-costing income in Case A.
C. Compute Hirsch's absorption-costing income in Case B.
64. Beach Bum Corporation has fixed manufacturing cost of $12 per unit. Consider the three independent
cases that follow.
Case A: Absorption- and variable costing income each totaled $240,000 in a period when the firm
produced 18,000 units.
Case B: Absorption-costing income totaled $320,000 in a period when finished-goods inventory levels
rose by 7,000 units.
Case C: Absorption-costing income and variable-costing income respectively totaled $220,000 and
$250,000 in a period when the beginning finished-goods inventory was 14,000 units.
Required:
A. In Case A, how many units were sold during the period?
B. In Case B, how much income would Beach Bum report under variable costing?
C. In Case C, how many units were in the ending finished-goods inventory?

65. Coastal Corporation, which uses throughput costing, began operations at the start of the current year.
Planned and actual production equaled 20,000 units, and sales totaled 17,500 units at $95 per unit. Cost
data for the year were as follows:

The company classifies direct materials as a throughput cost.

Required:
A. Compute the company's total cost for the year.
B. How much of this cost would be held in year-end inventory under (1) absorption costing, (2) variable
costing, and (3) throughput costing?
C. How much of the company's total cost for the year would appear on the period's income statement
under (1) absorption costing, (2) variable costing, and (3) throughput costing?
D. Compute the year's throughput-costing income.
66. Krell Corporation, which uses throughput costing, began operations at the start of the current year (20x1).
Planned and actual production equaled 40,000 units, and sales totaled 35,000 units at $80 per unit. Cost
data for 20x1 were as follows:

The company classifies direct materials as a throughput cost.

Required:
A. What is meant by the term "throughput costing"?
B. Compute the cost of the company's year-end inventory.
C. Prepare Krell's income statement for the year.

67. Absorption and variable costing are two different methods of measuring income and costing inventory.
Required:
A. Product costs are defined as costs associated with the manufacturing process. How does the
operational definition of product cost differ between absorption costing and variable costing?
B. An absorption-costing income statement will report gross profit or gross margin whereas a variable-
costing income statement will report contribution margin. What is the difference between these terms?

68. The difference in income between absorption and variable costing can be explained by the change in
finished-goods inventory (in units) multiplied by the standard fixed manufacturing overhead rate.
Required:
Explain why this calculation accounts for the difference noted.
 ch08 Key
1. FALSE

2. TRUE

3. TRUE

4. TRUE

5. FALSE

6. A

7. D

8. A

9. E

10. D

11. C

12. E

13. B

14. D

15. C

16. A

17. A

18. A

19. C

20. C

21. E

22. D

23. E

24. D

25. C

26. D

27. B

28. D

29. C

30. E

31. D

32. A

33. A

34. B

35. B

36. B
37. D

38. B

39. B

40. B

41. A

42. C

43. A

44. C

45. D

46. C

47. B

48. D

49. E

50. E

51. A

52. C

53. A

54. B

55. A

D. 5
C. 1, 4
B. 2, 7
56. A. 3, 6, 8, 9

External financial statement USE (NOT "users")

Lower income when inventories rise (NOT "net" income)
Changes to grid above:

57.
Contribution margin: $625,000 - [(18,000 × $13) + $51,000] = $340,000
Variable manufacturing costs per unit: $260,000 ÷ 20,000 units = $13
D. Variable manufacturing costs: $150,000 + $80,000 + $30,000 = $260,000
Fixed selling and administrative costs: $60,000
2. Fixed manufacturing overhead: ($100,000 ÷ 20,000 units) × 18,000 units = $90,000
Fixed selling and administrative costs: $60,000
C. 1. Fixed manufacturing overhead: $100,000

58.

D. The cost of a unit would increase by $10 ($600,000 ÷ 60,000 units) because of the addition of fixed manufacturing overhead. Thus:
C. None. All fixed selling and administrative cost is treated as a period cost and expensed against revenue.
The contribution margin is disclosed on a variable-costing income statement.

B.
59. A. Variable production costs total $1,080,000 ($240,000 + $480,000 + $360,000), or $18 per unit ($1,080,000 ÷ 60,000 units). Since 3,000
units remain in inventory [0 + 60,000 - (60,000 × 95%)], the ending finished goods totals $54,000 (3,000 × $18).
Absorption cost per unit: $7.20 + $2.50 = $9.70
C. Predetermined fixed overhead rate: $250,000 ÷ 100,000 units = $2.50

B.
Ending inventory: 10,000 units × $7.20 = $72,000
Variable cost per unit produced: $720,000 ÷ 100,000 units = $7.20 per unit

Inventoriable costs under variable costing:

60. A. Ending finished-goods inventory (units): 0 + 100,000 - 90,000 = 10,000

30,000 units × ($18.00 + $4.20) = $666,000

Predetermined fixed overhead rate: $840,000 ÷ 200,000 units = $4.20;
Absorption costing:
B. Variable costing: 30,000 units × $18 = $540,000
61. A. Ending finished-goods inventory: 0 + 200,000 - 170,000 = 30,000 units
$156,000 ÷ 12,000 units = $13

The same $13 figure can be obtained by studying the ending finished-good inventory:

D. Kim attached $13 to each unit. This figure can be derived by analyzing cost of goods sold:

C.
B. Because planned and actual production figures are the same, Kim applied $3 to each unit ($141,000 ÷ 47,000 units).
62. A. Sales (35,000 units) + ending finished-goods inventory (12,000 units) = production (47,000 units). Note: There is no beginning finished-
goods inventory.

C. With sales of 7,500 units and production of 7,100 units, income computed under absorption costing includes $16,000 (400 units × $40) of prior-
period fixed manufacturing overhead. Absorption income is therefore $162,000 ($178,000 - $16,000).
B. Since the number of units sold equals the number of units produced, variable- and absorption-income figures are the same: $110,000.
63. A. The difference between absorption costing and variable costing lies in the treatment of fixed manufacturing overhead. Under absorption
costing, fixed manufacturing overhead is a product cost and attached to each unit produced. In contrast, under variable costing, it is written off
(expensed) as a period cost.

C. The $30,000 difference in income ($250,000 - $220,000) is explained by the change in inventory units, multiplied by the fixed overhead per
unit. Thus, the inventory changed by 2,500 units ($30,000 ÷ $12). Given that absorption income is less than income computed by the variable-
costing method, inventory levels must have decreased, resulting in an ending inventory level of 11,500 units (14,000 - 2,500).
B. The difference between absorption-costing income and variable-costing income is $84,000 (7,000 units × $12). Given that inventories are
rising, variable-costing income will amount to $236,000 ($320,000 - $84,000).
64. A. Absorption- and variable costing income will be the same amount when inventory levels are unchanged. Thus, sales totaled 18,000 units.
D. Throughput income: Sales revenue (17,500 units × $95) - $1,525,000 = $137,500
Throughput costing: $1,570,000 - $45,000 = $1,525,000
Variable costing: $1,570,000 - $100,000 = $1,470,000
Absorption costing: $1,570,000 - $142,500 = $1,427,500
C. The total costs would be allocated between the current period's income statement and the year-end inventory on the balance sheet. Thus:

B. The year-end inventory of 2,500 units (20,000 - 17,500) is costed as follows:

65. A.

C.
B. Ending inventory: 0 + 40,000 units - 35,000 units = 5,000 units; 5,000 units × $20 = $100,000
66. A. Throughput costing is a technique that assigns only the unit-level spending amounts for direct manufacturing costs as the cost of products or
services. In this case, direct materials is the only item that qualifies as a throughput cost.

B. Gross profit (gross margin) is the difference between sales and cost of goods sold. Cost of goods sold includes variable and fixed manufacturing
costs. Contribution margin, on the other hand, is the difference between sales and variable expenses, namely, variable cost of goods sold and
variable operating expenses. Fixed costs are ignored when calculating the contribution margin.
67. A. The sole difference between the two methods is that fixed manufacturing overhead costs are defined as a product cost under absorption
costing and as a period cost under variable costing.

68. The only difference between the two methods is the treatment of fixed manufacturing overhead. Such amounts are expensed under variable
costing whereas with absorption costing, a predetermined amount is attached to each unit manufactured. This applied overhead moves back and
forth between the balance sheet and the income statement depending on what happens to inventory during the period (i.e., increase or decrease).
Because of this situation, the change in inventory multiplied by the fixed manufacturing overhead per unit corresponds with the difference in
reported income between absorption costing and variable costing.
 ch08 Summary
Category # of Questions
AACSB: Analytic 31
AACSB: Reflective Thinking 37
AICPA BB: Critical Thinking 68
AICPA FN: Measurement 31
AICPA FN: Reporting 4
AICPA FN: Research 33
Blooms: A 27
Blooms: A, N 2
Blooms: N 10
Blooms: RC 17
Blooms: RC, A 3
Blooms: RC, N 9
Difficulty: Easy 24
Difficulty: Hard 24
Difficulty: Medium 20
Hilton - Chapter 08 74
Learning Objective: 08- 35
01 Explain the accounting treatment of fixed manufacturing overhead under absorption and variable costing.
Learning Objective: 08-02 Prepare an income statement under absorption costing. 22
Learning Objective: 08-03 Prepare an income statement under variable costing. 19
Learning Objective: 08-04 Reconcile reported income under absorption and variable costing. 15
Learning Objective: 08-05 Explain the implications of absorption and variable costing for cost-volume-profit analysis. 2
Learning Objective: 08-06 Evaluate absorption and variable costing. 6
Learning Objective: 08-07 Explain the rationale behind throughput costing. 6
Learning Objective: 08-08 Prepare an income statement under throughput costing. 2