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
D. Because period costs will occur whether or not production occurs, it is improper to following points?
allocate 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- C. The cost of the product consists of all variable production costs.
the-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
Absorption costing determined using direct costing by computing the difference between
8. Absorption costing of inventories, as required by GAAP, has been criticized for encouraging A. Inventoried fixed costs in the beginning and ending inventories and any deferred over- or
managers to increase year-end inventories in order to boost reported profits. Which of the underapplied fixed factory overhead.
following techniques is the most effective at resolving this problem? B. Inventoried discretionary costs in the beginning and ending inventories.
A. Senior management control of inventory levels C. Gross margin (absorption costing method) and contribution margin (direct costing
B. Adoption of just-in-time (JIT) production system method).
C. Reward managers based upon the residual income approach D. Sales as recorded under the direct costing method and sales as recorded under the
D. Use variable costing to determine income for bonus purposes absorption costing method.

11. When absorption costing is used, all of the following costs are considered product costs 23. Net profit under absorption costing may differ from net profit determined under direct costing.
except How is this difference calculated?
A. direct labor C. variable selling and administrative costs A. Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B. variable overhead D. fixed overhead B. Change in the quantity of all units produced times the relevant fixed costs per unit.
C. Change in the quantity of all units in inventory times the relevant variable cost per unit.
21. Unabsorbed fixed overhead costs in an absorption costing system are D. Change in the quantity of all units produced times the relevant variable cost per unit.
A. Fixed factory costs not allocated to units produced.
B. Variable overhead costs not allocated to units produced. Sensitivity analysis
C. Excess variable overhead costs. 20. The level of production affects income under which of the following methods?
D. Costs that should be controlled. A. absorption costing C. variable costing
B. both absorption and variable costing D. neither absorption nor variable costing
Variable costing vs. Absorption costing
6. What is the primary difference between variable and absorption costing? 18. Variable-costing income will usually exceed absorption costing income when
A. inclusion of fixed selling expenses in product costs A. sales exceed production C. production exceeds sales
B. inclusion of variable factory overhead in period costs B. production and sales are equal D. none of these
C. inclusion of variable selling expenses in product costs
D. inclusion of fixed factory overhead in product costs 19. Variable costing net income is
A. higher than absorption net income when more units are sold than produced
7. Which of the following statements is true? B. lower than absorption net income when more units are produced than sold
A. Absorption costing net income exceeds variable costing net income when units C. the same as absorption net income when all units produced are sold
produced and sold are equal. D. all of the above
B. Variable costing net income exceeds absorption costing net income when units
produced exceed units sold. 9. A manufacturing company prepares income statements using both absorption and variable
C. Variable costing net income exceeds absorption costing net income when units costing methods. At the end of a period actual sales revenues, total gross profit, and total
produced equal units sold. contribution margin approximated budgeted figures, whereas net income was substantially
D. Absorption costing net income exceeds variable costing net income when units greater than the budgeted amount. There were no beginning or ending inventories. There
produced are greater than units sold. most likely explanation of the net income increase is that, compared to budget, actual

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A. Manufacturing fixed costs had increased. 5. direct fixed selling costs

B. Selling and administrative fixed expenses had decreased. 6. common fixed selling costs
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 28. Which of the following costs would continue to be incurred even if a segment is eliminated?
when 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:

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Variable costing Unit costs

Ending inventory iii. During May, Roy Co. produced 10,000 units of Product X. Costs incurred by Roy during May
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

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Year 2 95,000 95,000 100,000 income before taxes would have been
Year 3 90,000 90,000 100,000 A. P 9.50 higher C. P11.00 higher
Because Blue Company uses an absorption costing system, one would predict gross margin B. P 8.50 higher D. P 8.33 higher
for Year 3 to be
A. Greater than Year 1. C. Equal to Year 1. ix. At its present level of operations, a small manufacturing firm has total variable costs equal to
B. Greater than Year 2. D. Equal to Year 2. 75% of sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales
change by P1.00, income will change by
Reconciliation A. P 0.25 C. P 0.75
Income under absorption costing B. P 0.12 D. P 0.10
vi. A company had income of P50,000 using direct costing for a given period. Beginning and
ending inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring Segmented Income Statement
income taxes, if the fixed overhead application rate were P2.00 per unit, what would the Effect of dropping a department
income have been using absorption costing? x. Zambales Mining Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable
A. P40,000 costs are P600,000 per ton, and fixed mining costs are P5,000,000. The segment margin
B. P50,000 for 2005 was P(1,000,000). The management of Zambales Mining was considering
C. P60,000 dropping the mining of Gold Ore. Only one-half of the fixed expenses are direct and would
D. Cannot be determined from the information given. be eliminated if the segment was dropped. If Gold Ore were dropped, net income for
Zambales Mining would
Income under variable costing A. Increase by P1,000,000 C. Decrease by P1,000,000
vii. Luna Company had income of P65,000 using absorption costing for a given period. B. Increase by P1,500,00 D. Decrease by P1,500,000
Beginning and ending inventories for that period were 13,000 units and 18,000 respectively.
Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what xi. Aging Company plans to discontinue a segment with a P32,000 segment margin. Common
would the income have been using variable costing? expenses allocated to the segment amounted to P45,000, of which P20,000 cannot be
A. P 77,500 C. P 52,500 eliminated if the segment were closed. The effect of closing down the segment on Aging
B. P 60,000 D. P 20,000 Company’s before tax profit would be
A. P12,000 decrease C. P 7,000 decrease
Unit contribution margin B. P12,000 increase D. P 7,000 increase
viii. The following information was extracted from the first year of absorption-based accounting
records of Soulmate Co. Use this data to respond to questions 16 through 17.
Total fixed costs incurred P100,000 Omid Publishing Company has three divisions: A, B, and C. The revenues of these divisions are
Total variable costs incurred 50,000 P29,000, 48,000, and 63,000 respectively. Variable costs of these divisions amount to 57%, 59%,
Total period costs incurred 70,000 and 64% of the given revenues. The divisions' short-term controllable fixed costs are P4,200,
Total variable period costs incurred 30,000 5,200, and 6,200 respectively. The divisions' long-term controllable fixed costs amount to P3,800,
Units produced 20,000 4,900, and 5,700 in the order given. The company's uncontrollable costs amount to P7,150, and
Units sold 12,000 income tax is at 20% of operating income.
Unit sales Price P 12
Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its xii. Long-term controllable margin for division A amounts to
A. P4,470 C. P12,470

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B. P8,270 D. P16,470 100%

xiii. Short-term controllable margin for division B amounts to xiv. The amount of fixed factory costs applied to product during the first six months under
A. P9,580 C. P19,680 absorption costing would be
B. P14,480 D. P23,580 A. Overapplied by P20,000. C. Underapplied by P40,000.
B. Equal to the fixed costs incurred. D. Underapplied by P80,000
Comprehensive
Questions 10 through 13 are based on the following annual flexible budget which has been xv. Reported net income (or loss) for the first six months under absorption costing would be
prepared for use in making decisions relating to Product X. A. P160,000 C. P 80,000
Budgeted units 100,000 150,000 200,000 B. P 40,000 D. P (40,000)
Sales Volume P800,000 P1,200,000 P1,600,000
Manufacturing costs: xvi. Reported net income (or loss) for the firs six months under direct costing would be
Variable P300,000 P 450,000 P 600,000 A. P144,000. C. P 72,000
Fixed 200,000 200,000 200,000 B. P0 D. P(36,000)
P500,000 P 650,000 P 800,000
Selling expenses: xvii. Assuming that 90,000 units of Product X were sold during the first six months and that this is
Variable P200,000 P 300,000 P 400,000 to be used as a basis, the revised budget estimate for the total number of units to be sold
Fixed 160,000 160,000 160,000 during this year would be
P360,000 P 460,000 P 560,000 A. 360,000. C. 240,000
Income (or loss) (P60,000) P 90,000 P 240,000 B. 200,000. D. 300,000

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 six months the following information is available: i. Answer: C
Units Direct materials P 8
Production completed 120,000 Direct labor 10
Sales 60,000 Variable overhead 2
Total unit cost- variable costing P20
All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred Value of ending inventory (5,000 x P20) P100,000
coincide with the budget.
ii. Answer: C
Over- and underapplied fixed manufacturing costs are deferred until year-end. Annual sales have Sales P40,000
the following seasonal pattern: Cost of goods sold
Portion of Annual Sales Direct materials P9,050
First quarter 10% Direct labor 6,050
Second quarter 20% Rent (0.9 x P3,000) 2,700
Third quarter 30% Depreciation 2,000
Fourth quarter 40% Supervision (2/3 x P1,500) 1,000
Insurance (2/3 x P1,200) 800 (21,600)

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Gross margin P18,400 Variable Cost Per unit

Gross margin percentage (P18,400 ÷ P40,000) 46% Product: (50,000 – 30,000) / 20,000 = P1.00
Selling & Adm. (variable period costs) 30,000/12,000 2.50
iii. Answer: C Total variable cost/unit P3.50
Direct materials P10,000 * Total variable costs – variable period cost
Direct labor 20,000 (selling & adm.) = variable product cost.
Variable overhead 5,000
Total variable product cost P35,00 ix. Answer: A
Variable unit cost (P35,000 ÷ 10,000) P3.50 1.00 - (1.00 x .75) = P0.25
Add Fixed overhead per unit (P9,000 ÷ 10,000) 0.90
Absorption unit cost P4.40 x. Answer: A
The only relevant information to compute the effect of dropping the mining of gold ore is the
iv. Answer: B negative segment margin. If the product line is dropped, the company can avoid the
Fixed overhead rate per unit: P12 – P8 P4 negative margin of P1 million.
Difference in income: 2,000 x P4 P8,000
During the current year, the company’s production equaled the budgeted. The inventory xi. Answer: C
increased. Therefore, absorption costing income is higher than the variable costing income. Avoidable common expenses P 25,000
Segment margin lost 32,000
v. Answer: C Decrease in profit P( 7,000)
The production and unit sales during year 3 matched with year 1.
xii. Answer: A
vi. Answer: C Revenues P29,000
The income under absorption costing is higher by P10,000 because the amount of fixed Variable cost (P29,000 x 0.57) 16,530
overhead that related to unsold units was deferred and was included as cost of finished goods Contribution margin 12,470
inventory. The variable costing income statement immediately wrote the entire fixed overhead Less Short-term controllable fixed cost 4,200
that was incurred during the year as period cost. Short-term controllable margin 8,270
Fixed overhead deferred as product cost: 5,000 x P2 P10,000 Long-term controllable fixed cost 3,800
Absorption income (P50,000 + P10,000) P60,000 Long-term controllable margin P 4,470

vii. Answer: C xiii. Answer: B

Absorption income 65,000 Revenues P48,000
Less Fixed Overhead in decrease in inventory (18,000 – 15,000) x 2.50 12,500 Variable cost (P48,000 x 0.59) 28,320
Income, Variable costing 52,500 Contribution margin 19,680
Short-term controllable fixed cost 5,200
viii. Answer: B Short-term controllable margin – Div B P14,480
CMR per unit = Selling Price – Unit variable cost
P8.50 = P12.00 – P3.50 xiv. Answer: A

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Budgeted actual fixed overhead (0.5 x P200,000) P100,000

Applied fixed overhead (120,000 x P1.00) 120,000
Overapplied fixed overhead (favorable volume variance) P 20,000

xv. Answer: B
Sales (60,000 x P8) P480,000
Cost of goods sold (60,000 x P4) 240,000
Gross profit 240,000
Selling and other expenses (60,000 x 2) + P80,000 200.000
Absorption profit P 40,000

xvi. Answer: B
Total contribution margin (60,000 x P3) P180,000
Less: Fixed manufacturing OH P100,000
Fixed selling and other expenses 80,000 180,000
Variable costing profit NIL
CM per unit (P1.6M – P0.6M – P0.4M) ÷ 200,000) P3.00

xvii. Answer: D
The sales pattern indicated that sales for the first semester was 30%. The assumption was
that the pattern was still valid. Therefore the assumed 90,000 units would be 30 percent of
expected annual sales.
(90,000 ÷ 0.3) = 300,000 units

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