Chapter 8-Absorption and Variable Costing, and Inventory Management

Chapter 8—Absorption and Variable Costing, and Inventory Management
MULTIPLE CHOICE
1. Which of the following types of costs is a product cost for absorption costing but a period cost for
variable costing?
a. direct materials
b. direct labor
c. fixed factory overhead per unit sold
d. variable selling expense
e. total administrative expense
ANS: C PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 8-1 NAT: BUSPROG: Analytic
STA: AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-28-Variable and Fixed Costs
KEY: Bloom's: Knowledge NOT: 1 min.
2. Which of the following is never included in product cost?

a. overhead
b. direct materials
c. variable selling expense
d. fixed factory overhead
e. direct labor
STA: AICPA: FN-Measurement | IMA: Cost Management | ACBSP: APC-27-Managerial Accounting
Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
3. Generally Accepted Accounting Principles (GAAP) require the use of which accounting method for
external reporting?
a. absorption costing.
b. variable costing.
c. transfer price costing.
d. responsibility costing.
e. all of these are acceptable for GAAP.
ANS: A PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
4. Variable costing is
a. a good way to value inventories for the balance sheet.
b. used for external reporting purposes.
c. not useful for companies with multiple segments.
d. a useful tool for management decision making.
e. can only be used by start-up companies.
ANS: D PTS: 1 DIF: Difficulty: Moderate
STA: AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP: APC-28-Variable and
Fixed Costs KEY: Bloom's: Knowledge NOT: 1 min.
5. A disadvantage of absorption costing is

a. that it is not a useful format for decision making.
b. that it assigns only manufacturing costs to the product.
c. All of these.
d. None of these.
ANS: A PTS: 1 DIF: Difficulty: Moderate
STA: AICPA: BB-Industry | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting
Features/Costs KEY: Bloom's: Knowledge NOT: 1 min.
6. Gross margin is to absorption costing as ____ is to variable costing.

a. gross profit
b. contribution margin
c. income
d. territory margin
ANS: B PTS: 1 DIF: Difficulty: Moderate
STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting
NOT: 1 min.
7. When monthly production volume is constant and sales volume is less than production, income
determined with variable costing procedures will
a. always be greater than income determined using absorption costing.
b. always be less than income determined using absorption costing.
c. be equal to income determined using absorption costing.
d. be equal to contribution margin per unit times units sold.
Features/Costs KEY: Bloom's: Comprehension
NOT: 1 min.
8. When production is less than sales volume, income under absorption costing will be ____ income
using variable costing procedures.
a. greater than
b. less than
c. equal to
d. randomly different than
Features/Costs KEY: Bloom's: Comprehension
NOT: 1 min.
9. Inventory values calculated using variable costing as opposed to absorption costing will generally be
a. equal.
b. less.
c. greater.
d. twice as much.
NOT: 1 min.
10. Which of the following statements is true?

a. Absorption costing income exceeds variable costing income when units produced and sold
are equal.
b. Variable costing income exceeds absorption costing income when units produced exceed
units sold.
c. Absorption costing income exceeds variable costing income when units produced are less
than units sold.
d. Absorption costing income exceeds variable costing income when units produced are
greater than units sold.
ANS: D PTS: 1 DIF: Difficulty: Moderate
NOT: 1 min.
11. All of the following costs are included in inventory under absorption costing except
a. direct materials.
b. direct labor.
c. fixed selling expenses.
d. fixed factory overhead.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NOT: 1 min.
12. What is the primary difference between variable and absorption costing?
a. inclusion of fixed selling expenses in product costs
b. inclusion of variable factory overhead in period costs
c. inclusion of fixed selling expenses in period costs
d. inclusion of fixed factory overhead in product costs
ANS: D PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
Figure 8-1.
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last
year were as follows:
Direct materials $25,000

Direct labor 35,000
Variable factory overhead 12,000
Fixed factory overhead 37,000
Variable selling expense 9,000
Fixed selling expense 7,500
Fixed administrative expense 15,500
Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce
20,000 units.
13. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under absorption costing?
a. $5,480
b. $4,500
c. $10,900
d. $12,600
e. $5,750
ANS: C
Unit product cost = ($25,000 + $35,000 +
$12,000 + $37,000)/20,000 = $5.45
Ending inventory = $5.45 x 2,000 = $10,900
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

NAT: BUSPROG: Analytic
Features/Costs KEY: Bloom's: Application
NOT: 2 min.
14. Refer to Figure 8-1. Assuming that beginning inventory was zero, what is the value of ending
inventory under variable costing?
a. $3,300
b. $2,500
c. $5,000
d. $3,720
e. $7,200
ANS: E
Unit product cost = ($25,000 + $35,000 +
$12,000)/20,000 = $3.60
Ending inventory = $3.60 x 2,000 = $7,200

NOT: 2 min.
15. Refer to Figure 8-1. What is operating income for last year under absorption costing?
a. $41,000
b. $67,520
c. $85,900
d. $111,300
e. $45,000
ANS: C
Sales 216,000
Less: COGS 98,100
Gross margin 117,900
Less:
Selling expenses 16,500
Admin. expenses 15,500
Operating income 85,900

STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-27-
Managerial Accounting Features/Costs KEY: Bloom's: Application
NOT: 3 min.
16. Refer to Figure 8-1. What is operating income for last year under variable costing?
a. $111,800
b. $91,780
c. $82,200
d. $78,400
e. $66,350
ANS: C
Sales 216,000
Less: variable expenses:
Variable COGS 64,800
Variable selling expense 9,000
Contribution margin 142,200
Less: fixed expenses:
Fixed factory overhead 37,000
Fixed selling expense 7,500
Fixed admin. Expense 15,500
Operating income 82,200

STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Cost Management | ACBSP: APC-27-
NOT: 3 min.
Figure 8-2.
Loring Company had the following data for the month:
Variable costs per unit:

Direct materials $4.00
Direct labor 3.20
Variable overhead 1.00
Variable selling expenses .40
Fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000
units. During the month, 2,000 units were produced. Loring started the month with 300 units in
beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100
units were sold during the month at price of $14. Selling and administrative expense for the month, all
fixed, totaled $3,600.
17. Refer to Figure 8-2. What is the unit product cost under absorption costing?
a. $8.60
b. $10.60
c. $8.20
d. $10.20
e. $7.20
ANS: D
Direct materials $ 4.00
Direct labor 3.20
Fixed overhead 2.00
Total $10.20

NOT: 3 min.
18. Refer to Figure 8-2. What is operating income under variable costing?
a. $3,540
b. $7,980
c. $11,340
d. $540
e. $3,740
ANS: E
Sales $29,400
 Var. COGS 17,220
 Var. Selling expense 840
Contribution margin $11,340
 Fixed factory overhead 4,000
 Fixed selling and admin. expense 3,600
Operating income $ 3,740

Direct labor 3.20
Total $8.20
2,100 units sold @ $14 = $29,400
2,100 units cost @ $8.20 = $17,220
2,100 units variable selling cost @.40 = $840
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

STA: AICPA: FN-Measurement |AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-27-
NOT: 3 min.
19. Refer to Figure 8-2. What is the unit product cost under variable costing?
a. $8.60
b. $10.60
c. $8.20
d. $10.20
e. $7.20
ANS: C
Direct labor 3.20
Total $8.20

NOT: 2 min.
20. Refer to Figure 8-2. What is operating income under absorption costing?
a. $3,540
b. $7,980
c. $11,340
d. $540
e. $3,740
ANS: A
Sales $29,400
 COGS 21,420
Gross margin $ 7,980
 Variable selling expense 840
 Fixed selling & admin. expense 3,600
Operating income $ 3,540
Sales = $14  2,100

COGS = $10.20  2,100
Variable Selling expense = .40  2,100
Direct materials $ 4.00

Direct labor $ 3.20
Variable overhead $ 1.00
Fixed overhead $ 2.00
Total $10.20

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

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

Features/Costs KEY: Bloom's: Analysis
NOT: 2 min.
23. Refer to Figure 8-4. What is the value of the ending inventory using the variable costing method?
a. $240,000
b. $360,000
c. $350,000
d. $420,000
ANS: D
($40 + $20 + $10)  6,000 = $420,000

NOT: 2 min.
Figure 8-5.
Sanders Company has the following information for last year:
Selling price $190 per unit

Variable production costs $52 per unit produced
Variable selling and admin. expenses $18 per unit sold
Fixed production costs $240,000
Fixed selling and admin. expenses $180,000
Units produced 12,000
Units sold 7,000
There were no beginning inventories.
24. Refer to Figure 8-5. What is the value of ending inventory for Sanders using the absorption costing
method?
a. $360,000
b. $280,000
c. $220,000
d. $380,000
ANS: A
[($52 +( $240,000)/12,000))] x 5,000 = $360,000

NOT: 2 min.
25. Refer to Figure 8-5. What is the income for Sanders using the absorption costing method?
a. $520,000
b. $480,000
c. $1,200,000
d. $500,000
ANS: A
[($190 - $72) x 7,000] - $180,000 - (7,000 x $18) = $520,000

NOT: 3 min.
26. Refer to Figure 8-5. What is the cost of ending inventory for Sanders using the variable costing
method?
a. $300,000
b. $280,000
c. $120,000
d. $260,000
ANS: D
$52 x 5,000 = $260,000

NOT: 2 min.
27. Refer to Figure 8-5. What is the income for Sanders using the variable costing method?
a. $420,000
b. $480,000
c. $520,000
d. $500,000
ANS: A
[($190 - $52 - $18) x 7,000] - $420,000 = $420,000

NOT: 3 min.
Figure 8-6.
Bailey Company incurred the following costs in manufacturing desk calculators:
Direct materials $18

Indirect materials (variable) 3
Direct labor 9
Indirect labor (variable) 7
Other variable factory overhead 13
Fixed factory overhead 34
Variable selling expenses 26
Fixed selling expenses 12
During the period, the company produced and sold 2,000 units.
28. Refer to Figure 8-6. What is the inventory cost per unit using absorption costing?
a. $104
b. $77
c. $84
d. $32
ANS: C
$50 + $34 = $84

NOT: 2 min.
29. Refer to Figure 8-6. What is the inventory cost per unit using variable costing?
a. $52
b. $66
c. $72
d. $50
ANS: D
Indirect materials (variable) 3
Direct labor 9
Indirect labor (variable) 7
Other variable factory overhead 13
Total $50

NOT: 2 min.
Figure 8-7.
Ramon Company reported the following units of production and sales for June and July:
Units
Month Produced Sold
June 100,000 90,000
July 100,000 105,000
Income under absorption costing for June was $40,000; income under variable costing for July was
$50,000. Fixed costs were $600,000 for each month.
30. Refer to Figure 8-7. How much was income for July using absorption costing?
a. $50,000
b. $20,000
c. $80,000
d. $40,000
ANS: B
($600,000/100,000)  5,000 = $30,000
Absorption costing is lower by $30,000. Therefore, $50,000 less $30,000 equals a profit of $20,000.

Managerial Accounting Features/Costs KEY: Bloom's: Analysis
NOT: 2 min.
31. Refer to Figure 8-7. How much was income for June using variable costing?
a. $40,000
b. $20,000
c. $(40,000)
d. $(20,000)
ANS: D
($600,000/100,000)  10,000 = $60,000
Absorption costing is higher by $60,000. Therefore, $40,000 less $60,000 equals a loss of $20,000.

NOT: 2 min.
Figure 8-8.
Steele Corporation has the following information for January, February, and March:
January February March

Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500
Production costs per unit (based on 10,000 units) are as follows:

Direct labor 8
Variable factory overhead 6
Fixed factory overhead 4
Variable selling and admin. expenses 10
Fixed selling and admin. expenses 4
There were no beginning inventories for January, and all units were sold for $50. Costs are stable over
the three months.
32. Refer to Figure 8-8. What is the February ending inventory for Steele Corporation using the absorption
costing method?
a. $39,000
b. $45,000
c. $135,000
d. $300,000
ANS: C
4,500  ($12 + $8 + $6 + $4) = $135,000

NOT: 2 min.
33. Refer to Figure 8-8. What is the January ending inventory for Steele Corporation using the variable
costing method?
a. $260,000
b. $78,000
c. $108,000
d. $90,000
ANS: B
3,000  ($12 + $8 + $6) = $78,000

NOT: 2 min.
34. Refer to Figure 8-8. What is the March ending inventory for Steele Corporation using the variable
costing method?
a. $120,000
b. $104,000
c. $260,000
d. $15,000
ANS: B
January February March
Units of beginning inventory 0 3,000 4,500
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500
Units of ending inventory 3,000 4,500 4,000
4,000  $26 = $104,000

NOT: 2 min.
35. Refer to Figure 8-8. What is the February contribution margin for Steele Corporation using the
variable costing method?
a. $240,000
b. $170,000
c. $119,000
d. $204,000
ANS: C
8,500  ($50  $36) = $119,000

NOT: 3 min.
Figure 8-9.
The following information pertains to Stark Corporation:
Beginning inventory 0 units

Ending inventory 5,000 units
Direct labor per unit $20
Direct materials per unit 16
Variable overhead per unit 4
Fixed overhead per unit 10
Variable selling costs per unit 12
Fixed selling costs per unit 16
36. Refer to Figure 8-9. What is the value of ending inventory using the variable costing method?
a. $310,000
b. $250,000
c. $200,000
d. $390,000
ANS: C
($20 + $16 + $4)  5,000 = $200,000

NOT: 2 min.
37. Refer to Figure 8-9. Absorption costing income would be ____ the variable costing income.
a. $50,000 greater than
b. $70,000 greater than
c. $70,000 less than
d. $50,000 less than
ANS: A
There is $50,000 more in fixed cost in ending inventory relative to beginning inventory. In addition,
production exceeds sales. Therefore, absorption costing income is larger by $50,000.

NOT: 2 min.
38. Refer to Figure 8-9. What is the value of ending inventory using the absorption costing method?
a. $310,000
b. $250,000
c. $200,000
d. $390,000
ANS: B
($20 + $16 + $4 + $10)  5,000 = $250,000

NOT: 2 min.
39. Redding Company has two divisions with the following segment margins for the current year:
Northern, $200,000; Southern, $400,000. Common expenses of the company are $50,000. What is
Redding Company's income?
a. $150,000
b. $550,000
c. $600,000
d. $650,000
ANS: B
$200,000 + $400,000  $50,000 = $550,000
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1 | LO: 8-2

NOT: 1 min.
40. Segment margin is equal to segment sales revenue minus

a. variable cost of goods sold, variable selling expense, and direct fixed costs.
b. variable cost of goods sold, variable selling expense, and common fixed costs.
c. variable cost of goods sold, total selling expense, and direct fixed costs.
d. variable cost of goods sold, variable selling expense, administrative expense, and direct
fixed costs.
e. cost of goods sold, variable selling expense, and fixed factory overhead.
Managerial Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
41. Which of the following could be considered a segment?

a. division
b. product-line
c. sales territory
d. All of these.
STA: AICPA: FN-Reporting | IMA: Decision Analysis | ACBSP: APC-27-Managerial Accounting
Features/Costs KEY: Bloom's: Knowledge NOT: 1 min.
42. Consider the following portion of a segmented income statement for the year just ended. Assume fixed
expenses of Division X include $30,000 of direct expenses and that the discontinuance of the
department will not affect the sales of the other departments nor reduce the common expenses.
Division X
Sales $100,000
Variable costs 60,000
Gross profit $ 40,000
Fixed expenses (direct and selling and administrative) 50,000
Operating income (loss) $ (10,000)
What is X's divisional segment margin?

a. ($10,000)
b. $40,000
c. $10,000
d. $100,000
ANS: C
$40,000  $30,000 = $10,000

NOT: 1 min.
43. Grass Valley Mining mines three products. Gold ore sells for $1,000 per ton, variable costs are $400
per ton, and fixed mining costs are $250,000. Last year the segment margin was $(100,000).
How many tons of gold ore did Grass Valley Mining sell last year?
a. 375 tons
b. 1,000 tons
c. 250 tons
d. 200 tons
ANS: C
Segment margin plus direct fixed costs equals contribution margin.
Therefore, ($100,000) + $250,000 = $150,000
$150,000/$600 = 250 tons

NOT: 2 min.
Figure 8-10.
Nauman Company has the following information pertaining to its two divisions for last year:
Division X Division Y
Variable selling and admin. expenses $ 70,000 $ 90,000
Direct fixed expenses 35,000 100,000
Sales 200,000 400,000
Direct fixed selling and admin. expenses 30,000 70,000
Variable expenses 40,000 100,000
Common expenses are $24,000 for the year.
44. Refer to Figure 8-10. What is the segment margin for Division Y?
a. $310,000
b. $210,000
c. $240,000
d. $40,000
ANS: D
$400,000  $90,000  $100,000  $70,000  $100,000 = $40,000

NOT: 2 min.
45. Refer to Figure 8-10. What is the income for Nauman Company?
a. $65,000
b. $325,000
c. $300,000
d. $41,000
ANS: D
Segment income for Y: $400,000  $90,000  $100,000  $70,000  $100,000 = $40,000
Segment income for X: $200,000  $70,000  $35,000  $30,000  $40,000 = $25,000
Income for Nauman Company = $25,000 + $40,000  $24,000 = $41,000

NOT: 3 min.
Figure 8-11.
Tyler Company has the following information pertaining to its two product lines for last year:
Product A Product B
Variable selling and admin. expenses $38,000 $31,000
Direct fixed expenses 19,500 34,500
Sales 250,000 210,000
Direct fixed selling and admin. expenses 38,000 22,000
Variable expenses 42,000 31,000
Operating income $112,500 $91,500
Common expenses are $105,000 for the year.
46. Refer to Figure 8-11. What is the segment margin for Product B?
a. $155,000
b. $105,000
c. $85,000
d. $91,500
ANS: D
$210,000 - $31,000 - $34,500 - $22,000 - $31,000 = $91,500

NOT: 2 min.
47. Refer to Figure 8-11. What is the income for Tyler Company?
a. $101,000
b. $120,500
c. $99,000
d. $102,500
ANS: C
$112,500 + $91,500 - $105,000 = $99,000

NOT: 3 min.
Figure 8-12.
Assume the following information for a product line:
Sales $700,000
Variable expenses 185,000
Direct fixed expenses 115,000
Variable selling and administrative expenses 70,000
Direct fixed selling and admin. expenses 90,000
48. Refer to Figure 8-12. What is the contribution margin of the product line?
a. $400,000
b. $525,000
c. $445,000
d. $515,000
ANS: C
$700,000 - $185,000 - $70,000 = $445,000

NOT: 2 min.
49. Refer to Figure 8-12. What is the segment margin of the product line?
a. $200,000
b. $325,000
c. $350,000
d. $240,000
ANS: D
$445,000 - $205,000 = $240,000

NOT: 2 min.
50. The two major costs associated with inventory are

a. ordering costs and setup costs.
b. setup costs and stockout costs.
c. stockout costs and carrying costs.
d. ordering costs and carrying costs.
e. None of these.
NOT: 1 min.
51. The inventory cost that can include insurance, inventory taxes, and obsolescence is called
a. ordering cost.
b. carrying cost.
c. stockout cost.
d. setup cost.
e. storing cost.
ANS: B PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
52. The inventory cost that can include processing costs, cost of insurance for shipping, and unloading is
called
a. ordering cost.
b. carrying cost.
c. stockout cost.
d. setup cost.
e. storing cost.
NOT: 1 min.
53. The inventory cost that can include lost sales, cost of expediting, and cost of interrupted production is
called
a. ordering cost.
b. carrying cost.
c. stockout cost.
d. setup cost.
e. storing cost.
NOT: 1 min.
54. Which of the following is not a traditional reason for carrying inventory?
a. to satisfy customer demand
b. to avoid shutting down manufacturing facilities
c. to buffer against unreliable production processes
d. to hedge against future price increases
e. all of these are traditional reasons for carrying inventory
ANS: E PTS: 1 DIF: Difficulty: Moderate
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial
Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
55. The formula for ordering cost is the

a. number of orders per year  cost of placing an order.
b. number of orders per year/cost of placing an order.
c. average number of units in inventory  cost of carrying one unit in inventory.
d. average number of units in inventory/cost of carrying one unit in inventory.
e. ordering cost + carrying cost.
NOT: 1 min.
56. The formula for total carrying cost is

a. number of orders per year  cost of placing an order.
b. number of orders per year/cost of placing an order.
c. average number of units in inventory  cost of carrying one unit in inventory.
d. average number of units in inventory/cost of carrying one unit in inventory.
e. ordering cost + carrying cost.
NOT: 1 min.
57. The economic order quantity (EOQ) is the quantity that

a. minimizes total ordering cost.
b. maximizes total profit.
c. minimizes total inventory-related costs.
d. maximizes carrying costs.
e. maximizes ease of ordering.
STA: AICPA: FN-Measurement |AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP:
APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
58. Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,600
and total carrying cost is $1,250. Which of the following statements is true?
a. The economic order quantity (EOQ) is 250.
b. The economic order quantity (EOQ) is more than 250.
c. The economic order quantity (EOQ) is less than 250.
d. Total inventory-related cost is lower than it would be at the economic order quantity
(EOQ).
e. None of these.
NOT: 1 min.
(EOQ).
e. None of these.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NOT: 1 min.
(EOQ).
e. None of these.
NOT: 1 min.
61. When the economic order quantity (EOQ) model is applied to units produced within the company,
ordering costs become
a. setup costs.
b. stockout costs.
c. carrying costs.
d. safety-stock costs.
e. production costs.
NOT: 1 min.
62. Under a JIT system,

a. customer demand pulls units through the production line.
b. safety stock is set at relatively high levels.
c. stockouts are never a problem.
d. inventory levels are set at 10% of total production levels.
e. production is set at a level to maximize factory output.
STA: AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP: APC-27-Managerial
NOT: 1 min.
63. JIT responds to the problems traditionally solved by carrying inventories by

a. ensuring that sufficient inventory is on hand to prevent stockouts.
b. purchasing extra materials when price discounts are offered.
c. negotiating long-term contracts with supplier to lock in low prices.
d. selecting an inventory level that minimizes the total of ordering and carrying costs.
e. choosing a wide number of suppliers to increase the chance of receiving quantity
discounts.
STA: AICPA: FN-Decision Modeling | IMA: Cost Management | ACBSP: APC-27-Managerial
NOT: 1 min.
Figure 8-3.
Martin Company uses 625 units of a part each year. The cost of placing one order is $8; the cost of
carrying one unit in inventory for a year is $4.
64. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average
annual carrying cost of Martin's new policy?
a. $80
b. $60
c. $160
d. $4
e. $90
ANS: A
Annual carrying cost = (40/2) x $4 = $80

NOT: 1 min.
65. Refer to Figure 8-3. Martin has decided to begin ordering 40 units at a time. What is the average
annual ordering cost of Martin's new policy?
a. $190
b. $150
c. $125
d. $100
e. $145
ANS: C
Average annual order cost = (625/40) x $8 = $125

NOT: 1 min.
66. Refer to Figure 8-3. What is the EOQ for Martin?

a. 100
b. 50
c. 45
d. 30
e. 20
ANS: B
EOQ = [(2 x 625 x 8)/4] = 50

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial
Accounting Features/Costs KEY: Bloom's: Application
NOT: 2 min.

Chapter 8-Absorption and Variable Costing, and Inventory Management

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Chapter 8-Absorption and Variable Costing, and Inventory Management

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Chapter 8—Absorption and Variable Costing, and Inventory Management

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

5. A disadvantage of absorption costing is

6. Gross margin is to absorption costing as ____ is to variable costing.

10. Which of the following statements is true?

Direct materials $25,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

Variable costs per unit:

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

Direct materials $4.00

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

Sales = $14  2,100

Direct materials $ 4.00

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

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

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

Selling price $190 per unit

There were no beginning inventories.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

Direct materials $18

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

January February March

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

Direct materials $12

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

4,000  $26 = $104,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

Beginning inventory 0 units

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-1 | LO: 8-2

40. Segment margin is equal to segment sales revenue minus

41. Which of the following could be considered a segment?

What is X's divisional segment margin?

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-2

Therefore, ($100,000) + $250,000 = $150,000

$150,000/$600 = 250 tons

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-2

Common expenses are $24,000 for the year.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-2

Income for Nauman Company = $25,000 + $40,000  $24,000 = $41,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-2

Common expenses are $105,000 for the year.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-2

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 8-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 8-2

50. The two major costs associated with inventory are