Product Costing: Job and Process Operations: Learning Objectives - Coverage by Question

Module 17
Product Costing:
Job and Process Operations
Learning Objectives – coverage by question

True/False Multiple Choice Exercises Problems Essays
LO1 – Describe inventory

requirements and measurement
issues for service, 2 1, 2 1 1, 2
merchandising, and
manufacturing organizations.
LO2 – Explain the framework of

inventory costing for financial 1-7 1, 3-12, 25 2-4
reporting.
LO3 – Describe the production

environment as it relates to 13-18 3
product costing systems.
LO4 – Explain the operation of

8, 9 19-24, 26 5-8, 12, 13 1, 2 3
a job costing system.
LO5 – Explain the operation of 5, 9-12,

10, 11 27-38 3-6 3
a process costing system. 14, 15
Appendix 17A: Absorption

and Variable Costing
Basic Concepts 1-5 1-5 1, 2
Income Under Absorption and

6-8 6-10 1-8 1-5
Variable Costing
Evaluating Alternatives to
9 3
Inventory Valuation
©Cambridge Business Publishers, 2015

Test Bank, Module 17 17-1
Module 17: Product Costing: Job and Process Operations
True/False
Topic: Definition of Product Costing

LO: 2
1. The process of assigning cost to inventories as they are converted from raw material to finished
goods is called product costing.
Answer: True
Rationale: The textbook definition of the term “product costing” is: “all costs incurred in the
manufacturing of products.”
Topic: Manufacturing Inventories

LO: 1, 2
2. In a manufacturing organization, manufacturing supplies costs are recorded as expenses as they are
used.
Answer: False
Rationale: As manufacturing supplies are used in a manufacturing organization, their costs are
recorded as part of Work-in-Process Inventory.
Topic: Inventory Cost Flow

LO: 2
3. When goods are transferred from the factory to the finished goods warehouse, Work-In-Process is
reduced and Cost of Goods Sold Expense is recorded.
Answer: False
Rationale: When goods are transferred to the finished goods warehouse, Finished Goods Inventory is
increased and Work-in-Process Inventory is decreased. Cost of Goods Sold Expense is not recorded
until the finished inventory is sold.
Topic: Period versus Product Costs

LO: 2
4. In financial accounting, the term period costs refers to all expired costs not related to the
manufacturing function, and product costs refers to all costs incurred during the period related to the
manufacturing function.
Answer: True
Rationale: As manufacturing costs are incurred, they are added to the cost of manufactured
inventories, but as non-manufacturing costs expire, they are recorded as expenses of the period.

17-2 Financial & Managerial Accounting for MBAs, 4th Edition
Topic: Manufacturing Depreciation
LO: 2
5. All depreciation on factory assets is recorded as an expense of the period.
Answer: False
Rationale: Depreciation on factory assets is a product cost added to Work-in-Process Inventory. It is
expensed as part of Cost of Goods Sold expense when the product is completed and sold.
Topic: Predetermined Manufacturing Overhead Rate

LO: 2
6. One of the reasons for using a predetermined manufacturing overhead rate is that it smooths out
seasonal costs over the entire accounting period.
Answer: True
Rationale: By estimating total overhead costs for the accounting period (say, one year), the seasonal
costs that occur only in the winter months or only in the summer months are spread out over the
entire year.
Topic: Predetermined Manufacturing Overhead Rate

LO: 2
7. If costs are accurately estimated when establishing an annual predetermined overhead rate, there
should never be an overapplied or underapplied overhead balance.
Answer: False
Rationale: Even though costs are accurately estimated, total overhead costs can be over- or under-
applied if total estimated activity for the year is estimated inaccurately.
Topic: Job Costing

LO: 4
8. A job costing system is a cost system designed to accumulate the manufacturing costs of producing
unique jobs, such as building a house or a naval air craft carrier, but would not include producing a
batch of several identical units of product, such as 100 chairs in a furniture factory.
Answer: False
Rationale: A job costing system is often used for costing both unique products such as houses or
ships, but also for producing single batches of product that include several or many identical items of
product.
Topic: Job Costing

LO: 4
9. In a job costing system, costs are accumulated in a separate Work-in-Process account for each job.
Answer: True
Rationale: As each job is started, there will be a unique Work-in-Process account created for each
job, and that account will accumulate all costs for that job until it is completed.

Topic: Process Costing
LO: 5
10. Process costing is best suited for production environments where identical units of product are
produced on a continuous basis.
Answer: True
Rationale: Process costing is designed to accumulate costs for continuous processes as opposed to
unique production jobs.

LO: 5
11. In process costing, each accounting period is actually equivalent to a unique job in a job costing
system.
Answer: True
Rationale: In process costing, all costs for a continuous process are accumulated for each period,
and the average cost of producing a unit of cost during the period is calculated. In a similar fashion, a
job cost system accumulates costs over the entire production period for a given unit or batch of units
of product.

Multiple Choice
Topic: Inventory Cost

LO: 1, 2
1. Which of the following inventories results in recording an expense when its asset account is reduced
in the accounting system?
A) Raw materials
B) Work in process
C) Finished goods inventory
D) Both A and B
Answer: C
Rationale: When inventories are sold from finished goods, the account Finished Goods Inventory is
reduced and Cost of Goods Sold Expense is recorded.
Topic: Work-in-Process Inventory

LO: 1
2. Partially completed goods that are in the process of being converted into a finish product are defined
as:
A) Work-in-process inventories
B) Conversion inventories
C) Raw materials inventories
D) Operational inventories
Answer: A
Rationale: Goods in process that have not been completed are referred to as work-in-process
inventories.
Topic: Product Costs in Financial Reporting

LO: 2
3. Which of the following views of product costs is consistent with financial reporting requirements?
A) Product costs are all costs incurred in the process of manufacturing products, even if they are
only indirectly related to the production process.
B) Product costs are all labor and materials costs that are incurred in the process of manufacturing
products.
C) Product costs are all costs directly incurred in the manufacturing and selling of the product.
D) Product costs include all costs incurred throughout the value chain.
Answer: A
Rationale: Product costs in the financial statements include all cost related to the manufacturing
function, including both direct and indirect manufacturing costs. Non-manufacturing costs are
considered to be period costs.

Topic: Period Costs
LO: 2
4. Which of the following statements most accurately describes financial accounting’s view of period
costs?
A) Period costs are all costs incurred in the current financial reporting period.
B) Period costs are all direct costs incurred in the current financial reporting period.
C) Period costs are all non-manufacturing expenses incurred in the current financial reporting period.
D) Period costs are a component of fully absorbed costs.
Answer: C
Rationale: All non-manufacturing costs that expire during the accounting period are recorded as an
expense of the period, not as an increase in the cost of a product.
Topic: Manufacturing Depreciation

LO: 2
5. How is depreciation on the manufacturing building and equipment classified in financial reporting?
A) As an irrelevant cost because it has already been incurred
B) As a current expense
C) As part of the cost of the products produced
D) As a period cost
Answer: C
Rationale: Depreciation on manufacturing assets is recorded as a product cost as part of
manufacturing overhead.
Topic: Manufacturing Expense

LO: 2
6. When is the cost of manufacturing equipment recognized as an expense?
A) When equipment depreciation is recorded
B) When inventory processing is completed and finished goods are recorded
C) When finished goods inventory is sold
D) None of the above
Answer: C
Rationale: Depreciation on manufacturing equipment is a product cost that is recognized as an
expense as part of cost of goods sold only when the product produced by the equipment is sold
Topic: Product Costs

LO: 2
7. Which of the following costs are treated as part of the cost of product?
A) Wages of plant security guards
B) Insurance on the plant building and equipment
C) Depreciation on the kitchen sink in the plant cafeteria
D) All of the above are product costs
Answer: D
Rationale: All expired costs associated with the manufacturing function are treated as product costs.

Topic: Product Costs
LO: 2
8. Which of the following is not a period cost?
A) The president’s salary
B) Sales commissions
C) Depreciation on the mainframe computer in the Information Systems Department
D) Subsidy of the plant cafeteria
Answer: D
Rationale: Items A through C are not related to the manufacturing function; therefore, they are not a
product cost. The cafeteria in the plant is related to the manufacturing function, so the subsidy of the
cafeteria is a product cost.
Topic: Absorption Costing

LO: 2
9. The method of accounting for inventory that assigns all manufacturing costs to inventory is
sometimes referred to as:
A) Prime costing
B) FIFO
C) The weighted average cost method
D) Absorption costing
Answer: D
Rationale: Absorption costing is defined as the method of cost accounting by which all manufacturing-
related costs are assigned to inventory.
Topic: Components of Product Cost

LO: 2
10. Which of the following is one of the three major components of product costs?
A) Research and development expenses
B) Manufacturing overhead
C) Marketing costs related to specific products
D) Selling, general and administrative expenses
Answer: B
Rationale: The three major components of product cost are direct materials, direct labor, and
manufacturing overhead.
Topic: Predetermined Overhead Rates

LO: 2
11. What is the purpose for using predetermined overhead rates?
A) Delays in product costing can be avoided
B) Variation in cost assignment due to seasonality can be prevented
C) Variation in cost assignment due to short-term variations in volume can be prevented
D) Use of predetermined overhead rates serves all the above purposes
Answer: D
Rationale: As stated in the text, predetermined overhead rates serve to (a) enable accountants to
determine costs earlier than if using actual costs, (b) prevent variations in costs due to the uneven
occurrence of cost throughout the year, and (c) prevent short-term variations in unit cost due to
volume variations.

Topic: Direct Materials
LO: 2
12. Which of the following is the most reasonable cost driver for direct material costs?
A) The quantity of direct materials used
B) Purchasing department activity
C) Direct labor hours
D) Square footage of the warehouse used to store raw materials
Answer: A
Rationale: A cost driver is the thing that causes cost to be incurred. For direct materials, the cost
driver is quantity of materials used.

LO: 3
13. A single product produced by a continuous manufacturing process is an example of:
A) Process management
B) Job Costing
C) Process manufacturing
D) Process reengineering
Answer: C
Rationale: Process costing is the method of costing typically used when a company produces one or
more products in continuous processes.
Topic: Job Costing

LO: 3
14. When a job is completed in a job order costing system, the final cost of the job is determined by
summing up:
A) The work-in-process inventory subsidiary ledgers
B) The statement of costs of goods manufactured
C) The finished goods activities report
D) The various costs on the job cost sheet
Answer: D
Rationale: A job cost sheet is used in a job costing system to accumulate all of the costs incurred to
complete the job.
Topic: Job Order Production

LO: 3
15. Which of the following is an appropriate setting for job order production?
A) Products are produced in batches of identical units.
B) Products are produced in single units.
C) Neither A nor B are examples of job order production.
D) Both A and B are examples of job order production.
Answer: D
Rationale: Job costing can be used when either a unique unit of product (a house) is produced or
when a batch of identical units (a batch of shoes) is produced.

Topic: Job Order Records
LO: 3
16. Which of the following is not a record required for operating a job cost system?
A) Production orders
B) Job cost sheets
C) Equivalent units calculations
D) Materials requisition forms
Answer: C
Rationale: Job costs may be calculated without calculating equivalent units if process costing is not
used.
Topic: Job Order Costing

LO: 3
17. For which of the following products would job order costing be least likely to be used?
A) Residential building
B) Textbook printing
C) Mortgage loan processing
D) Newsprint paper Manufacturing
Answer: D
Rationale: A newsprint manufacturing facility produces continuous rolls of paper for newspapers and
uses process costing; whereas the cost of residential dwellings, textbooks, and mortgages tend are
more likely to be accounted for using a job order cost system.

LO: 3
18. For which of the following manufactured products would job costing be more appropriate than
process costing?
A) Paint
B) Designer dresses sold to celebrities
C) Chemicals
D) Liquid soap
Answer: B
Rationale: Designer dresses are more likely to use a job cost system because they are by nature
one-of-a-kind; whereas paint, chemicals, and soap are more likely to be produced in a continuous
process.
Topic: Job Costing

LO: 4
19. Which of the following tasks does not pertain to job-costing?
A) Computing equivalent units
B) Computing predetermined overhead rates
C) Computing cost of goods sold
D) Computing ending work-in-process inventory
Answer: A
Rationale: Equivalent units calculation is a characteristic of process costing, not job costing.

Topic: Statement of Cost of Goods Manufactured
LO: 4
20. The purpose of the statement of cost of goods manufactured is to:
A) Calculate the cost of goods transferred to finished goods inventory during the period.
B) Calculate cost of goods sold.
C) Calculate net income.
D) Both A and B
Answer: A.
Rationale: The statement of cost of goods manufactured is used by a manufacturing company to
calculate the cost of goods completed and transferred to finished goods inventory during the period.
Topic: Work-in-Process Inventory

LO: 4
21. Which of the following results in an increase in work-in-process inventory?
A) Purchasing raw materials
B) Using direct manufacturing labor hours
C) Finishing a job in process
D) Selling finished goods inventory
Answer: B
Rationale: The use of direct labor hours during the period is recorded as an increase in the balance
the Work-in-Process Inventory account. Direct materials used and factory overhead applied also
increase the account.
Topic: Sale of Finished Goods

LO: 4
22. When finished goods are sold, there is an increase in which of the following accounts?
A) Cost of Goods Sold
B) Cost of Goods Manufactured
C) Finished Goods Inventory
D) Work-in-Process
Answer: A
Rationale: The sale of finished goods is recorded as an increase in the Cost of Goods Sold account
balance and a decrease in the Finished Inventory Account balance.
Topic: Change in Raw Materials

LO: 4
23. Which of the following accounts increases when raw materials are used?
A) Finished Goods Inventory
B) Raw Materials Expense
C) Raw Materials Inventory
D) Work-in-Process Inventory
Answer: D
Rationale: Using raw materials is recorded as a decrease in Raw Materials Inventory and an increase
in Work-in-Process Inventory.

Topic: Calculating Raw Materials Used
LO: 4
24. Lin Corp. obtained the following information from the Raw Materials Inventory account and
purchasing records for the second quarter of the current year:
Beginning Raw Materials $10,000

Ending Raw Materials $9,000
April Purchases $8,000
May Purchases $4,000
June Purchases $4,000
The amount of Raw Materials used this period was:

A) $19,000
B) $18,000
C) $17,000
D) Some other amount
Answer: C
Rationale: Beginning Raw Materials ($10,000) + Purchases for the quarter ($8,000 + $4,000 +
$4,000) = Raw Materials Available ($26,000) – Ending Raw Materials ($9,000) = Raw Materials Used
($17,000)
Topic: Period Costs Calculation

LO: 2
25. Lincoln Corp. obtained the following information from its absorption costing accounting records:
Operating Income $48,000

Total Product Costs incurred during the period $37,000
Value of Beginning Work-in-Process and Finished Goods Inventories $0
Value of Ending Work-in-Process and Finished Goods Inventories $0
Sales $100,000
The total Period Costs incurred this period equals:

A) $15,000
B) $20,000
C) $48,000
D) $68,000
Answer: A
Rationale: Because there were no beginning or ending Work-in-Process or Finished Goods
Inventories, the total product costs of $37,000 also equals total cost of goods sold.
Sales ($100,000) – Cost of Goods Sold ($37,000) – Period Costs ($15,000) = Operating Income
($48,000)

Topic: Cost of Goods Manufactured Calculation
LO: 4
26. Bea Corp. obtained the following information from its accounting records:
Sales $38,000
Beginning Finished Goods Inventory $24,000
Ending Finished Goods Inventory $17,000
Cost of Goods Sold $18,000
The Cost of Goods Manufactured this period equals:

A) $11,000
B) $18,000
C) $12,000
D) $23,000
Answer: A
Rationale: Ending Finished Goods Inventory ($17,000) + Cost of Goods Sold ($18,000) – beginning
Finished Goods Inventory ($24,000) = Cost of Goods Manufactured ($11,000).
Topic: Weighted Average Method

LO: 5
27. When computing equivalent units of production, the method that averages the cost of partially
completed units in beginning inventory with current period production is the:
A) FIFO method
B) LIFO average method
C) Specific identification method
D) Weighted average method
Answer: D
Rationale: The weighted average method does not recognize any differences in costs for units
partially produced in one period and completed in another period.
Topic: Components of Work-in-Process

LO: 5
28. Which of the following is not included in work-in-process inventory?
A) Direct materials costs
B) Applied manufacturing overhead
C) Direct manufacturing labor costs
D) Sales commissions
Answer: D
Rationale: Direct materials, direct labor, and applied manufacturing overhead are all product costs
that are part of work-in-process. However, sales commissions cost is a period cost that is expensed
in the period incurred.

Topic: Cost per Equivalent Unit
LO: 5
29. The cost per equivalent unit for materials using the weighted average method is calculated as:
A) Total materials costs in process during the period divided by equivalent units in process for
materials
B) Materials costs added during the period divided by equivalent units in process for materials
C) Total materials costs to account for divided by the number of equivalent units completed for
materials
D) Materials costs added during the period divided by the number of equivalent units completed for
materials
Answer: A
Rationale: Under the weighted average method the cost per equivalent unit for Direct Materials is
calculated as Direct Materials Cost in Process (i.e., Direct Materials Cost in beginning inventory plus
Direct Materials Cost added during the period) divided by the equivalent units of direct materials in
process during the period.
Topic: Calculation of Equivalent Units

LO: 5
30. The following information pertains to the Clooney Company:
Units
Work-in-process, June 1 (35 percent complete) 8,000
Started in June 40,000
Work-in-process, June 30 12,000
Materials are added at the beginning of the process. If equivalent units in process for conversion
using the weighted average method were 39,800, ending work-in-process at June 30:
A) Was 15.0 percent complete

B) Was 31.7 percent complete
C) Was 25.0 percent complete
D) Was 97.5 percent complete
Answer: B
Rationale: Units in Process were 8,000 + 40,000 = 48,000, and units in ending inventory were 12,000
units; therefore, 36,000 (or 48,000 – 12,000) units were completed and transferred to finished goods.
Consequently, if the equivalent units in process were 39,800 and 36,000 were entirely completed
during the period, the difference of 3,800 represents the equivalent value of the 12,000 units in
ending inventory. 3,800 divided by 12,000 units equals 31.7% completed.

Topic: Costing for Services
LO: 5
31. Which of the following statements is not true regarding costing for services?
A) Generally, the use of process costing techniques for service organizations is easier than it is for
manufacturing organizations because services generally cannot be inventoried.
B) Process costing for services is similar to job costing for batches in that an average cost for
similar or identical services performed during a given time period.
C) The difficulty in many service situations is defining the appropriate cost objective.
D) In process costing, the amount of goods completed always increases finished goods inventory.
Answer: D
Rationale: Since services completed cannot be held in inventory from one period to the next, the cost
of services completed during the period is always accompanied by an increase in Cost of Goods
(Services) Sold, not an increase in Finished Goods Inventory.
Topic: Equivalent Units

LO: 5
32. The number of fully completed units that equates with a given number of partially completed units is
referred to as the:
A) Number of units in ending finished goods inventory
B) Equivalent completed units
C) The number of units sold this period
D) The number of units in ending Work-in-Process inventory
Answer: B
Rationale: Process costing calculates costs based on equivalent units of completed production, which
is the number of finished units this is equivalent to a given number of partially completed units. For
example, two units 50% completed are equivalent to 1 equivalent completed unit.
Topic: Weighted Average Equivalent Units

LO: 5
33. Using the weighted average method, whenever units in process are produced to a different
percentage of completion for materials and labor, this creates a condition where:
A) The number of equivalent units in process will invariably be different for materials and conversion
costs.
B) The cost per equivalent unit for materials and conversion will be equal.
C) It is inappropriate to use the process costing method.
Answer: A
Rationale: Anytime the percentage of completed is different for materials and conversion costs for the
units in process during the period, the equivalent completed units will be different for these two cost
components. Often all materials costs are added at the beginning of the process, but conversion
costs (labor and overhead) are added throughout the process, so it is common for the number of
equivalent units for materials cost to be larger than the equivalent units for conversion costs.

Topic: Process Service Costing
LO: 5
34. Process service costing measures the average cost of:
A) All services performed by the company in a given period
B) Identical or similar services performed by the company in a given period
C) Activities for activity based costing overhead rates
D) Services received from the company’s vendors
Answer: B
Rationale: In process costing, costs are averaged for a given period, as opposed to being calculated
for a given job or batch. Therefore, in costing services using process costing (such as a bank
calculating the cost of processing deposits or checks), the average cost per unit is calculated for all
such services performed during the period (week, month, etc.
Topic: Process Costing Environment

LO: 5
35. For which of the following manufactured products would process costing be more appropriate?
A) Modular homes
B) Luxury liners
C) Nylon fiber production
D) Special order printing
Answer: C
Rationale: Of the products listed, the only one likely to be produced in a continuous process is nylon
fiber production. The others are likely to use job costing.
Topic: Process Costing Environment

LO: 5
36. For which of the following manufactured products would process costing be more appropriate?
A) Bridge construction
B) Crude oil refining
C) Custom-made jewelry
D) High rise buildings
Answer: B
Rationale: Of the products listed, only crude oil refining is likely to be produced using a continuous
processing method. The others are likely to use job costing.

Topic: Equivalent Units Calculation
LO: 5
37. The following information is available:
Units in process, Nov. 1 (60 percent converted) 4,000 units

Units in process, Nov. 30 (30 percent converted) 2,000 units
Units started during the month 15,000 units
Materials are added at the beginning of the process.
How many equivalent units in process for conversion were there in November using the weighted
average method?
A) 18,000
B) 15,200
C) 17,600
D) 16,400
Answer: C
Rationale: During the period there were 19,000 actual units in process (4,000 beginning plus 15,000
started) at some stage of completion and there were 2,000 units in ending inventory; therefore,
17,000 of the 19,000 units were completed during the period. The 2,000 ending units were 30%
complete, representing 600 equivalent units in process, so the total equivalent units in process for
conversion were 17,000 units completed plus 600 equivalent ending units, for a total of 17,600
equivalent units in process.
Topic: Weighted Average Process Costing

LO: 5
38. Which of the following statements is true about the weighted average process costing method?
A) If all raw materials are added to production at the beginning of the process, the number of
equivalent units in process will equal the total number of individual units worked on during the
period.
B) The cost of the units in beginning work-in-process is accounted for separately from the units
started in the current period.
C) The method is applicable to any situation where the cost of a specific job is needed.
D) All the above statements are true.
Answer: A
Rationale: If all raw materials costs are incurred at the beginning of the process, all units in process
are 100% completed with regard to raw materials costs.

Exercises
Topic: Types of Inventories in Various Organizations

LO: 1
1. Indicate which of the following inventories are typically found in service, merchandising, and
manufacturing organizations:
 Supplies Inventories
 Merchandise Inventories
 Raw Materials Inventories
 Work-in-Process Inventories
 Finished Goods Inventories
Answer:
Service Organizations Merchandise Organizations Manufacturing Organizations
Supplies Inventories Supplies Inventories Supplies Inventories
Merchandise Inventories Raw Materials Inventories
Work-in-Process Inventories
Finished Goods Inventories
Topic: Product and Period Costs

LO: 2
2. Indicate whether each of the following costs, incurred by a manufacturer, are period or product costs.
1. Vice president of manufacturing salary

2. Vice president for human Resources salary
3. Plant janitorial costs
4. Corporate jet operating expense
5. Depreciation on the sales office
6. Depreciation on the production equipment
7. Manufacturing overhead
8. Direct materials
9. Advertising expense
10. Entertainment costs of vice president of manufacturing
Answer:
1. Vice president of manufacturing salary Product cost
2. Vice president for human Resources salary Period cost
3. Plant janitorial costs Product cost
4. Corporate jet operating expense Period cost
5. Depreciation on the sales office Period cost
6. Depreciation on the production equipment Product cost
7. Manufacturing overhead Product cost
8. Direct materials Product cost
9. Advertising expense Period cost
10. Entertainment costs of vice president of manufacturing Product cost

Topic: Calculation of Predetermined Overhead
LO: 2
3. Boxcar, Inc., which uses a predetermined overhead rate based on direct labor hours, estimated total
overhead for the year to be $10,000,000 and total direct labor hours to be 250,000 hours. Calculate
Boxcar’s predetermined overhead rate.
In March, Boxcar incurred actual overhead costs of $830,000 and used 20,000 hours. How much
was Boxcar’s over- or under-applied overhead for the month of March?
Answer:
Boxcar’s predetermined overhead rate is $10,000,000 / 250,000 = $40 per direct labor hour.
In March, Boxcar incurred actual overhead costs of $830,000 and applied $800,000 (20,000 × $40);
therefore, Boxcar had $30,000 (or $800,000 – $830,000) of under-applied overhead for the month of
March.
Topic: Product versus Period Costs

LO: 2
4. Classify the following costs incurred in the manufacturing of cookie bars as either (a) Product Cost-
Direct Materials, (b) Product Cost- Conversion, or (c) Period Cost.
Cost Incurred in Manufacturing of Cookies Classification

Depreciation on Automated Wrapping Machine
Cookie Dough
Peanut Butter
Plant Manager’s Salary of $85,000
Overtime Pay of Production Workers
Cost of Air Time for New Radio Advertising
Salary of Plant Security Guard
Salary of Company Controller
Depreciation on Computers in Legal Staff Office
Manufacturing Department’s Allocation of Cafeteria Costs
Answer:
Cost Incurred in Manufacturing of Cookies Classification
Depreciation on Automated Wrapping Machine (b) Product Cost-Conversion
Cookie Dough (a) Product Cost-Direct Materials
Peanut Butter (a) Product Cost-Direct Materials
Plant Manager’s Salary of $85,000 (b) Product Cost-Conversion
Overtime Pay of Production Workers (b) Product Cost-Conversion
Cost of Air Time for New Radio Advertising (c) Period Cost
Salary of Plant Security Guard (b) Product Cost-Conversion
Salary of Company Controller (c) Period Cost
Depreciation on Computers in Legal Staff Office (c) Period Cost
Manufacturing Department’s Allocation of Cafeteria Costs (b) Product Cost-Conversion

Topic: Job Order versus Process Costing
LO: 4, 5
5. For each of the following independent manufacturing situations, indicate whether job-order or process
costing is more appropriate and why.
A manufacturer of customized vans

A shoe manufacturer
A newsprint paper mill
A one-time order of 60,000 identical clips
A manufacturer of upscale men’s suits
A building contractor for $800,000 homes
A manufacturer of airplanes
A maker of commercial chemicals
A one-size-fits-all hosiery mill
A manufacturer of yarn for the hosiery mill
Answer:
A manufacturer of customized vans Job Order – each is unique
A shoe manufacturer Job Order – made in a batch for each size & style
A newsprint paper mill Process – a continuous manufacturing process
A one-time order of 60,000 identical clips Job Order – because made as a batch
A manufacturer of upscale men’s suits Job Order – made in a batch for each size and style
A building contractor for $800,000 homes Job Order – each house has its own cost and features
A manufacturer of airplanes Job Order – each plane has its own cost and features
A maker of commercial chemicals Process – a continuous manufacturing process
A one-size-fits-all hosiery mill Process – if made on a continuous basis
A manufacturer of yarn for the hosiery mill Process – a continuous manufacturing process

Topic: Calculation of Total Period Costs
LO: 4
6. End Corp obtained the following information from its absorption costing accounting records:
Operating Income $19,000

Total Product Costs incurred during the period $29,000
Value of Beginning Work-in-Process and Finished Goods Inventories $0
Value of Ending Work-in-Process and Finished Goods Inventories $0
Sales $60,000
Calculate the total Period Costs incurred this period.
Answer:
Since there were no beginning or ending inventories in work-in-process or finished goods, the total
product costs incurred during the period equals cost of goods sold for the period. The difference
between sales of $60,000 and operating income of $19,000 equals total product plus period costs of
the period of $41,000. With product costs of $29,000, total period costs equal $41,000 minus
$29,000, or $12,000.
Topic: Cost of Goods Manufactured

LO: 4
7. Southeast Corp. obtained the following information from its accounting records:
Sales $70,000
Ending Finished Goods Inventory $46,000
Ending Work-in-Process Inventory $30,000
Calculate the Cost of Goods Manufactured for the period.
Answer:
Plus Cost of Goods Manufactured 49,000
Goods available for sale 91,000
Less Ending Finished Goods Inventory - 46,000

Topic: Raw Materials Used Calculation
LO: 4
8. Rigby Corp. obtained the following information from the Raw Materials Inventory account and
purchasing records for the first quarter of the current year:
Beginning Raw Materials $20,000

Ending Raw Materials $24,000
Jan. Purchases $12,000
Feb. Purchases $8,000
Mar. Purchases $10,000
Calculate the amount of Raw Materials used for this quarter.
Answer:
Beginning Raw Materials Inventory $20,000
Purchases for this quarter 30,000
Raw materials available for sale 50,000
Ending Raw Materials Inventory - 24,000
Raw materials used during the quarter $26,000
Topic: Equivalent Units

LO: 5
9. Beginning inventory in March consisted of 20,000 units (60 percent converted) and ending inventory
consisted of 40,000 units (30 percent converted). In addition, 100,000 units were started during the
period.
How many equivalent units for conversion costs were in process March using the weighted average
method?
Answer:
If 20,000 units were in beginning inventory and 100,000 units were started, 120,000 units were
worked on during the period. Therefore, if 40,000 units were in ending inventory, there had to be
80,000 units completed. Ending inventory of 40,000 units @ 30% completed represented 12,000
equivalent units in process plus the 80,000 units completed equals 92,000 total equivalent units in
process during the period.

Topic: Units Completed Calculation
LO: 5
10. Zeus Company had the following data for the current fiscal period:
Units in process at the beginning of the month 12,000

Units in process at the end of the month 8,000
Units started during the month 40,000
Materials are added at the beginning of the process. Beginning work-in-process was 40 percent
complete as to conversion. Ending work-in-process was 70 percent complete as to conversion.
Calculate the number of units completed and transferred out during the period?
Answer:
Units in process at the beginning of the month 12,000
Units started during the month 40,000
Total units in process during the month 52,000
Units in process at the end of the month - 8,000
Units completed and transferred out during the month 44,000
Topic: Cost per Equivalent Unit Calculation

LO: 5
11. The following information is available for Jacqui, Inc. for the month of January:
Units Cost
Work-in-process, January 1 (70% complete) 10,000
Direct materials $ 24,000
Direct labor 12,000
Manufacturing overhead 16,000
Work-in-process, January 1 $ 52,000
Started in production during January 40,000

Cost Added:
Direct materials $ 72,000
Direct labor 32,000
Manufacturing overhead 40,400
Total costs added during January $144,400
Work-in-process, January 31 (80% complete) 4,000
Materials are added at the beginning of the process.

Calculate the cost per equivalent unit in process for conversion using the weighted average method.
(Round unit costs to 2 decimal places.)
Answer:
Equivalent units in process for conversion equals 46,000 units completed (10,000 + 40,000 – 4,000)
plus the equivalent units in ending inventory of 3,200 units (or 4,000 x 80%) equals 49,200 units.
Total conversion cost in process equals conversion cost in beginning inventory of $28,000 (or
$12,000 + $16,000) plus conversion cost added of $72,400 (or $32,000 + 40,400) for a total of
$100,400. Total conversion cost in process of $100,400 divided by equivalent units in process for
conversion of 49,200 equals $2.04 cost per equivalent unit in process for conversion.

Topic: Current Costs in Work-in-Process
LO: 4, 5
12. The Madeline Company has the following information for December of this year:
Raw materials purchases $60,000

Raw materials used 54,000
Direct labor 40,000
Actual manufacturing overhead 56,000
Cost of goods completed 120,000
Overhead rate is 150 percent of direct labor costs. The Madeline Company uses a process costing
system.
Calculate the total amount of cost added to Work-in-Process Inventory for December.
Answer:
Raw materials used $ 54,000
Direct labor 40,000
Manufacturing overhead applied (40,000 x 150%) 60,000
Total cost added to Work-in-Process $154,000
Topic: Cost of Completed Goods Calculation

LO: 4
13. The Madeline Company has the following information December of this year:
Raw materials purchases $60,000

Raw materials used 54,000
Direct labor 40,000
Actual manufacturing overhead 56,000
Work-in-Process, beginning 60,000
Work-in-Process, ending 59,000
The overhead rate is 150 percent of direct labor costs. The Madeline Company uses a job costing
system.
Prepare the journal entry to record the cost of goods completed and transferred to Finished Goods
Inventory.
Answer:
Raw materials used $ 54,000
Direct labor 40,000
Manufacturing overhead applied (40,000 × 150%) 60,000
Total cost added to Work-in-Process 154,000
Work-in-Process Inventory, beginning 60,000
Total cost in process 214,000
Work-in-Process Inventory, ending - 59,000
Cost of completed $155,000
Journal Entry:
Finished Goods Inventory 155,000
Work-in-Process Inventory 155,000
To record cost of inventory completed and transferred to Finished Goods.

Topic: Equivalent Units in Process Calculation
LO: 5
14. Florida Company manufactures a product through a process where all manufacturing costs are added
uniformly. Information for October beginning work-in-process follows.
Units (35 percent complete) 20,000

Direct materials $24,000
Direct labor $30,000
Overhead $10,000
Costs incurred during October: Direct materials $90,000

Direct labor 120,000
Overhead (applied) 30,000
During October, 100,000 units were completed. Also, 10,000 units that were 50 percent complete
remained in process at the end of the day on October 31.
Calculate the equivalent units in process and the total cost per equivalent unit using the weighted
average method.
Answer:
Equivalent units in process consisted of the 100,000 units completed plus the equivalent units in
ending inventory of 5,000 (or 10,000 x 50%), for a total of 105,000 units. Total cost in process
consisted of beginning inventory of $64,000 (or $24,000 + $30,000 + $10,000) and current costs were
$240,000 (or $90,000 + 120,000 + 30,000) for a total of $304,000. Total cost per equivalent unit in
process was $2.895 (or $304,000 / 105,000 units).
Topic: Process Costing Calculations

LO: 5
15. Florida Company manufactures a product through a process where all manufacturing costs are added
uniformly. Information for October beginning work-in-process follows.

Direct materials $24,000
Direct labor $30,000
Overhead $10,000
Costs incurred during October: Direct materials $90,000

Direct labor 120,000
Overhead (applied) 30,000
During October, 100,000 units were completed. Also, 10,000 units that were 50 percent complete
remained in process at the end of the day on October 31.
Calculate the cost of goods completed and the cost assigned to ending inventory.
Answer:
Equivalent units in process consisted of the 100,000 units completed plus the equivalent units in
ending inventory of 5,000 (or 10,000 x 50%), for a total of 105,000 units. Total cost in process
consisted of beginning inventory of $64,000 (or $24,000 + $30,000 + $10,000) and current costs were
$240,000 (or $90,000 + 120,000 + 30,000) for a total of $304,000. Total cost per equivalent unit in
process was $2.895 (rounded) (or $304,000 / 105,000 units). Cost assigned to goods completed is
$2.895 x 100,000 = $289,500, and the cost assigned to ending inventory is $2.895 x 5,000 = $14,475.

Problems
Topic: Cost of Goods Manufactured

LO: 4
1. Presented below is selected information from the Kudlick Company’s current period accounting
records (in $000s):
Sales $25,000
Raw Materials Used 5,500
Direct Labor Costs 2,000
Period Costs (Selling and Administrative) 5,000
Beginning Raw Material Inventory 600
Ending Raw Material Inventory 2,000
Net Income 600
Beginning Work-in-Process Inventory 0
Ending Work-in-Process Inventory 600
Beginning Finished Goods Inventory 1400
Ending Finished Goods Inventory 800
* NOTE: All raw materials used were direct materials.
Required: Determine the following (in dollars):

a. Raw Material Purchases
b. Gross Profit
c. Cost of Goods Manufactured
d. Manufacturing Overhead
Answer:
a. Beginning Raw Materials + Raw Material Purchases – Raw Materials Used = Ending Raw Materials
$600 + Raw Material Purchases – $5,500 = $2,000
Raw Materials Purchases = $6,900
b. Gross Profit – Period Costs = Net Income

Gross Profit – $5,000 = $600
Gross Profit = $5,600
c. Sales – Cost of Goods Sold = Gross Profit

And...
Cost of Goods Sold = Beg. Finished Goods + Cost of Goods Manufactured – End. Finished Goods
So,
Sales – Beg. Finished Goods – Cost of Goods Manufactured + End. Finished Goods = Gross Profit
$25,000 - $1,400 – Cost of Goods Manufactured + $800 = $5,600
Cost of Goods Manufactured = $18,800
d. Beg. Work-in-Process + Direct Raw Mat. Used + Direct Labor + Mfg. Overhead – Cost of Goods Mfg.
= Ending Work-in-Process
$0 + $5,500 + $2,000 + Mfg. Overhead – $18,800 = $600
Manufacturing Overhead = $11,900

Topic: Inventory and Cost of Sales Calculations
LO: 4
2. Information from The Chadwell Company is given below in $000s for this period:
Sales $700
Selling and administrative costs 52
Purchases of raw materials 18
Direct labor 22
Manufacturing overhead 210
Raw materials used (all direct cost) 22
Cost of goods manufactured 136
Beginning raw materials inventory 60
Beginning work-in-process inventory 206
Beginning finished goods inventory 180
Ending finished goods inventory 150
Required: Determine the following amounts in dollars:

a. Ending Raw Materials assuming all Raw Materials costs are classified as direct costs
b. Ending Work-in-Process Inventory
c. Cost of Goods Sold
Answer:
a. Beg. Raw Materials + Purchases – Raw Materials Used = End Raw Materials
$60 + $18 – $22 = $?
Ending Raw Materials = $56
b. Beg. Work-in-Process + Direct Materials Used + Direct Labor + Mfg. Overhead – Cost of Goods Mfg
= Ending Work-in-Process
$206 + 22 + $22 + $210 – $136 = $?
End Work-in-Process = $324
c. Beg. Finished Goods + Cost of Goods Mfg – Cost of Goods Sold = End Finished Goods
$180 + $136 – $? = $150
Cost of Goods Sold = $166
Topic: Equivalent Units Calculations

LO: 5
3. Jason Manufacturing Company began July with 50,000 units of inventory in process, 30 percent
completed. During the month, 250,000 units were completed and transferred to the finished goods
warehouse. Ending inventory consisted of 40,000 units, 70 percent completed. Materials were
added at the beginning of the process.
Required: Calculate the equivalent units in process for:

a. Materials equivalent units under the weighted average process cost method
b. Conversion equivalent units under the weighted average process cost method
Answer:
Materials Conversion
Units completed 250,000 250,000
Plus Equivalent units in ending inventory 40,000 28,000
Equals Equivalent units in process 290,000 278,000

Topic: Units in Process and Equivalent Units Calculations
LO: 5
4. Eastern Company manufactures a product that passes through two processes. The following
information is available for the first department for August:
 Beginning work-in-process consisted of 24,000 units that were 85 percent

complete with respect to conversion.
 Ending work-in-process consisted of 15,000 units that were 30 percent
complete with respect to conversion.
 141,000 units were started in process during the month.
 All materials are added at the beginning of the process.
Required:
a. Prepare a detailed summary of units in process during the month.
b. Compute equivalent units in process for Materials and Conversion using the weighted average
method.
Answer:
a. Summary of Units in Process:
Units in beginning work-in-process 24,000
Units started 141,000
Total units in process: 165,000
Units to account for:

Completed from beginning inventory 24,000
Both started and completed 126,000
Total completed and transferred 150,000
Units in ending work-in-process 15,000
Total units accounted for: 165,000
b. Equivalent units:
Units EWIP x fraction complete:
Materials (15,000 x 100 %) 15,000
Conversion (15,000 x 30%) ______ 4,500
Equivalent in process 165,000 154,500

Topic: Process Costing Calculations
LO: 5
5. Chaplin Corporation produces a product that passes through two departments. For October, the
following equivalent unit schedule was prepared for the first department:
Units EWIP x fraction complete:
Materials (24,000 x 100 percent) 24,000
Conversion (24,000 x 30 percent) _______ 7,200
Equivalent units in process 299,000 282,200
Costs assigned to beginning work-in-process:

Materials $77,490
Conversion 30,304
Manufacturing costs incurred during the month:

Materials $75,000
Conversion 60,000
Required:
a. Compute the unit cost for October using the weighted average method. (Round unit costs to 2
decimal places.)
b. Determine the cost of goods transferred out.
c. Determine the cost of ending work-in-process.
Answer:
a. Cost per equivalent unit:
Materials = ($77,490 + $75,000) / 299,000 = $0.51
Conversion = ($30,304 + $60,000) / 282,200 = $0.32
Total unit cost = $0.83 per equivalent unit in process
b. Cost of goods transferred out = $0.83 x 275,000 = $228,250
c. Cost of ending work-in-process = (24,000 × $0.51) + (7,200 × $0.32) = $12,240 + $2,304 = $14,544

LO: 5
6. Barnibus Company manufactures a product that passes through two processes: Mixing and
Packaging. The costs incurred for the Mixing Department for September follow:
Work-in-process, Sept. 1:
Direct materials 8,000
Direct labor 6,000
Overhead 4,002
During Sept., 150,000 units were completed and transferred to Packaging. The following costs were
incurred by the Mixing Department during September:
Direct materials 100,000

Direct labor 60,000
Overhead 24,000
There were 6,000 units that were 70 percent complete remaining in the Mixing Department at Sept. 30.
Use the weighted average method and round unit costs to 2 decimal places.
Required:
a. Determine the equivalent units in process for September.
b. Determine the Total Costs To Account For in September.
c. Determine the costs per equivalent unit assuming all costs are added uniformly during the mixing
process.
d. Determine the Accounting for Total Costs.
Answer:
a
Units accounted for: Physical Flow Equivalent Units
.
Units in EWIP (70 percent complete) 6,000 4,200
Total units in Process 156,000 154,200
b. Costs to account for:

Beginning work-in-process $ 18,002
Costs added 184,000
Total costs to account for: $202,002
c. Cost per equivalent unit in process:

Total costs to account for / Equivalent units in Process
$202,002 / 154,200 = $1.31
d. Accounting for total costs:

Transferred out (150,000 × $1.31) $196,500
Ending work-in-process (4,200 × $1.31) 5,502
Total cost accounted for $202,002

Essay Questions
Topic: Costing in Various Type Organizations

LO: 1
1. Compare the challenge of determining unit production costs among service, merchandising and
manufacturing organizations. Specifically, in which type of organizations is obtaining accurate
inventory costs a more important issue? In which type of organization does obtaining accurate
inventory costs present the greatest challenge?
Answer:
The ability to obtain accurate unit production costs is important for service, merchandising and
manufacturing organizations. Merchandising and manufacturing organizations typically have large
amounts of resources tied up in inventory; hence, inventory measurements are very important for
them because they comprise a large portion of total assets. The greatest challenges with inventory
costs certainly arise in manufacturing organizations, where judgments and estimates influence the
value of inventories. Also, manufacturing organizations maintain three separate inventory accounts
(raw materials, work-in-process, and finished goods), thereby adding to the complexity of costing
issues.
Topic: Types of Organizations

LO: 1
2. Briefly discuss and give examples of the three classifications of organizations discussed in this
module.
Answer:
Organizations may be classified generally as service, merchandising, or manufacturing organizations.
Service organizations perform work for others. Included in this category are Bank of America,
Supercuts hair salon, The Shriners’ Children’s Hospitals, Pizza Hut restaurants, the City of New York,
Delta Airlines, and others. Merchandising organizations buy and sell goods and include companies
such as Safeway grocery stores, L.L. Bean, Ace Hardware, and Wal-Mart. Manufacturing
organizations process raw materials into finished products for sale to others and include BMW,
Birmingham Steel, and Dell Computer.
Topic: Differences between Job-Order and Process Costing

LO: 3, 4, 5
3. Describe the difference between job-order and process costing in terms of the primary cost objective
and time period for which costs are accumulated.
Answer:
In a job-order costing system, costs are accumulated for each job during the entire life of the job, and
unit costs are determined when each job is finished. In process costing, costs are accumulated for
each department or process for each period (e.g., month or year), and average unit costs for the
department or process are determined at the end of each accounting period.

Appendix 17A: Absorption and Variable Costing
True/False
Topic: Costing for External Purposes

1. Variable costing is not accepted for external financial reporting.
Answer: True
Rationale: Generally Accepted Accounting Principles (GAAP) requires companies to use full
absorption costing for external reporting purposes.

2. Full Costing is another name for absorption costing.
Answer: True
Rationale: Absorption costing includes all variable and fixed manufacturing costs in the cost of the
product; therefore, it is often called “full” costing.
Topic: Variable Costing

3. Fixed non-manufacturing costs are classified as period costs under variable costing, but not under
absorption costing.
Answer: False
Rationale: Non-manufacturing costs are treated as period costs under both absorption and variable
costing.
Topic: Absorption/Variable Costing

4. Inventory values calculated using variable costing as opposed to absorption costing will generally be
higher.
Answer: False
Rationale: Inventory values are generally lower under variable costing because they do not include
any fixed overhead costs.
Topic: Variable Costing

5. Under variable costing, fixed manufacturing costs are classified a period expense.
Answer: True
Rationale: Variable costing treats all fixed costs a period expense.

Topic: Advantage of Variable Costing
6. The ability to present an income statement in a contribution format is one of the primary advantages
of the absorption costing approach.
Answer: False
Rationale: The variable costing approach classifies cost by cost behavior making it possible to
prepare a contribution income statement. The absorption approach combines variable and fixed costs
for cost of goods sold, making it impossible to prepare a contribution income statement.
Topic: Absorption/Variable Income Differences

7. When production is less than sales volume, net income under absorption costing will be greater than
net income using variable costing procedures.
Answer: False
Rationale: When production is less than sales volume, inventories are falling, and absorption costing
will have higher expense for cost of goods sold and lower net income than variable costing.
Topic: Fixed Costs as Expense

8. Variable assumes fixed overhead costs only expire when product is sold.
Answer: False
Rationale: Variable costing assumes fixed overhead costs expire in the period they are incurred.
Topic: Opponents of Variable Costing

9. Opponents of variable costing argue that in the long run all costs are variable.
Answer: True
Rationale: Opponents of variable costing argue that both variable and fixed manufacturing costs
should be included in the cost of the product, because in the long run they are all variable.

Multiple Choice

1. Which of the following types of costs are classified as period costs under absorption costing, but not
under variable costing?
A) All non-manufacturing costs
B) Only fixed non-manufacturing costs
C) The cost of purchasing long-lived assets for use in manufacturing
Answer: D
Rationale: There are no costs that are treated as period costs under absorption costing but not under
variable costing. However, fixed overhead costs are treated as period costs under variable costing
but not under absorption costing.
Topic: Absorption Costing Cost Components

2. All of the following costs are included in inventory under absorption costing except:
A) Direct materials
B) Direct labor
C) Fixed manufacturing expenses
D) Variable selling expenses
Answer: D
Rationale: Under absorption costing, all non-manufacturing expenses are treated as period costs and
are not assigned to inventory.
Topic: Variable Costing Cost Components

3. Under variable costing, which of the following costs are assigned to inventory?
A) Fixed manufacturing costs
B) Variable non-manufacturing costs
C) Variable manufacturing costs
Answer: C
Rationale: Variable costing inventory does not include any costs that are not related to manufacturing
or any fixed manufacturing costs.
Topic: Non-manufacturing Period Costs

4. Which of the following inventory valuation approaches treats nonmanufacturing costs as period
costs?
A) Absorption
B) Variable
C) Both absorption and variable
Answer: C
Rationale: Non-manufacturing costs are never treated as product costs of inventory.

Topic: Fixed Factory Overhead
5. Fixed manufacturing overhead is recorded initially as an asset (inventory) under ______________
costing but as an operating expense under ______________ costing.
A) Absorption; indirect
B) Variable; absorption
C) Absorption; variable
D) Variable; direct
Answer: C
Rationale: Fixed overhead is a product cost and is initially recorded as part of the asset Work-in-
Process Inventory under absorption costing, but it is a period expense under variable costing.
Topic: Changing Sales Volume Constant Production

6. When monthly production volume is constant and sales volume is less than production, net income
determined with variable costing procedures will:
A) Always be greater than net income determined using absorption costing
B) Always be less than net income determined using absorption costing
C) Be equal to net income determined using absorption costing
D) Be equal to contribution margin per unit times units sold
Answer: B
Rationale: When more units are produced than sold, variable costing expenses more fixed cost than
absorption costing resulting in less income under variable costing.
Topic: Inventory Calculation Under Variable Costing

7. The following information pertains to H. Higgins Corporation:
Beginning Inventory 2,000 units

Ending Inventory 12,000 units
Direct labor per unit $25
Direct materials per unit 10
Fixed overhead per unit 15
Fixed SG&A costs per unit 7
Variable overhead per unit 5
Variable SG&A costs per unit 3
What is the value of the ending inventory using the variable costing method?
A) $300,000
B) $480,000
C) $600,000
D) $516,000
Answer: B
Rationale: 12,000 x ($25 + $10 + $5) = $480,000

Topic: Inventory Calculation under Absorption Costing
8. The following information pertains to H. Higgins Corporation:

What is the value of the ending inventory using the absorption costing method?
A) $480,000
B) $660,000
C) $780,000
D) $696,000
Answer: B
Rationale: 12,000 x ($25 + $10 + $15 + $5) = $660,000
Topic: Absorption and Variable Costing Income Compared

9. Assuming sales prices and cost behavior remain unchanged, when variable costing is used, when
does net income change in response to changes in unit sales?
A) Only when number of units sold exceeds number of units produced
B) Only when number of units produced exceeds number of units sold
C) Only when number of units sold exactly equals number of units produced
D) Under all the above conditions
Answer: D
Rationale: Under variable costing, income always changes in response to sales, and never in
response to production.
Topic: Overproducing With Absorption Costing

10. Assuming sales prices and cost behavior remain unchanged, when absorption costing is used,
overproducing creates all of the following situations except?
A) A buildup of inventory levels
B) Higher net income
C) Less fixed costs on the income statement
D) Less variable cost on the balance sheet
Answer: D
Rationale: Overproducing when using absorption costing results in more variable and fixed cost in
inventory on the balance sheet.

Exercises
Topic: Absorption Costing Income

1. The following information pertains to Pepper Pipe Company:

Calculate the difference between absorption costing net income and variable costing net income.
Answer:
Absorption costing deferred into inventory $15 per unit fixed overhead assigned to the 9,000 units of
increase in inventory in the current period; whereas, variable costing expensed this fixed overhead.
Hence, variable costing income is less than absorption costing income by $135,000 (or 9,000 x $15).
Topic: Variable Costing Inventory Valuation

2. Wesley Corporation has the following information for October, November, and December of the
current year:
October November December
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 11,500
Production costs per unit (based on 10,000 units) are as follows:
Direct labor $8
Direct materials 12
Fixed factory overhead 4
Fixed SG&A expenses 4
Variable factory overhead 6
Variable SG&A expenses 10
There were no beginning inventories for October, and all units were sold for $50. Costs are stable
over the three months. Calculate Wesley’s December ending inventory using the variable costing
method.
Answer:
Units produced = 30,000; units sold – 27,000; ending inventory = 3,000 units
3,000 units x ($8 + $12 + $6) = $78,000

Topic: Absorption Costing Inventory Valuation
current year:

Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 11,500
Direct labor $8
Direct materials 12
over the three months. Calculate Wesley’s December ending inventory using the absorption costing
method.
Answer:
Units produced = 30,000; units sold = 27,000; ending inventory = 3,000 units
3,000 units x ($8 + $12 + $4 + $6) = 90,000
Topic: Absorption and Variable Costing Incomes

current year:

Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 11,500
Direct labor $8
Direct materials 12
over the three months. Calculate the difference between Wesley’s December income under
absorption and variable costing.
Answer:
Inventory decreased by 1,500 units in December; therefore, absorption costing expensed as cost of
goods sold, $4 per unit, or $6,000. That amount was expensed as a fixed expense in prior periods
under variable costing. Absorption costing income was lower by $6,000 than variable costing income
for December.
Topic: Variable Costing Cost Calculation
5. Weinachtsbaum Company incurred the following costs in manufacturing desk calculators:
Direct labor $15

Direct materials 14
Fixed selling expenses 14
Indirect labor (variable) 6
Indirect materials (variable) 4
Other variable factory overhead 10
Variable selling expenses 20
During the period, the company produced and sold 1,000 units.
Calculate the cost per unit using variable costing.
Answer:
Direct labor ($15) + Direct materials ($14) + Indirect labor ($6) + Indirect materials ($4) + Variable
factory overhead ($10) = Total variable costing inventory cost per unit ($49)
Topic: Absorption Costing Cost Calculation

6. Weinachtsbaum Company incurred the following costs in manufacturing desk calculators:
Direct labor $ 15
Direct materials 14
Fixed selling expenses 14
Indirect labor (variable) 6
Indirect materials (variable) 4
Other variable factory overhead 10
Variable selling expenses 20
During the period, the company produced and sold 1,000 units.
What is the cost per unit using absorption costing?
Answer:
Direct labor ($15) + Direct materials ($14) + Indirect labor ($6) + Indirect materials ($4) + Variable
factory overhead ($10) + Fixed factory overhead ($28) = Total absorption costing inventory cost per
unit ($77)

Topic: Variable Costing Income
7. LeoMetal Company reported the following units of production and sales for October and November of
this year:
Month Produced Sold

October 100,000 90,000
November 100,000 105,000
Net income under absorption costing for October was $45,000; net income under variable costing for
November was $55,000. Fixed manufacturing costs were $600,000 for each month.
Calculate net income for October using variable costing.
Answer:
Fixed overhead per unit is $600,000 / 100,000 = $6 per unit. Absorption income for October is more
than variable costing income by the amount of the increase in inventory units (10,000) times the fixed
cost per unit ($6), or a total of $60,000. Therefore, variable costing income (loss) in October is
$45,000 - $60,000 = $(15,000).
Topic: Absorption Costing Income
8. LeoMetal Company reported the following units of production and sales for October and November of
this year:
Month Produced Sold

October 100,000 90,000
November 100,000 105,000
Net income under absorption costing for October was $45,000; net income under variable costing for
November was $55,000. Fixed manufacturing costs were $600,000 for each month.
Calculate net income for November using absorption costing.
Answer:
Fixed overhead per unit is $600,000 / 100,000 = $6 per unit. Absorption income for November is less
than variable costing income by the amount of the decrease in inventory units (5,000) times the fixed
cost per unit ($6), or a total of $30,000. Therefore, absorption costing income in November is
$55,000 - $30,000 = $25,000.

Problems
Topic: Profit Comparisons: Absorption and Variable Costing

1. The Madison Corporation has two identical divisions: Eastern and Southern. Their sales, production
volume, and fixed manufacturing costs have been the same for both divisions for the last five years
and are as follows:
Year 1 Year 2 Year 3 Year 4 Year 5

Units produced 100,000 100,000 100,000 100,000 100,000
Units sold 80,000 90,000 110,000 100,000 115,000
Fixed manufacturing costs $500,000 $500,000 $500,000 $500,000 500,000
Eastern uses absorption costing and Southern uses variable costing. Both use FIFO inventory
methods. Variable manufacturing costs are $10 per unit. Both have identical selling prices and
selling and administrative expenses. There were no Year 1 beginning inventories.
Determine the difference in profits for each division for Years 1 through 5. Explain why profits differ
between the two divisions.
Answer:
Year 1 Year 2 Year 3 Year 4 Year 5
Fixed costs in beginning inventory $ 0 $100,000 $150,000
$100,000 $100,000
Fixed costs in ending inventory 100,000 150,000 100,000100,000 25,000
Amount by which absorption
income exceeds variable costing
income $100,000 $50,000 $(50,000) $0 $(75,000)
Fixed manufacturing per unit is $500,000 / 100,000 = $5 per unit

Eastern Division has the higher income when production units exceed sales units. This is the case
for Years 1 and 2. When sales units exceed production units, Southern Division has the higher
income, Years 3 and 5. When sales units equal production units, the incomes are the same, Year 4.

Topic: Absorption and Variable Inventory Calculations
2. Springbrook Company produced 30,000 units and sold 28,000 units during the current fiscal period.
Beginning inventory was zero. During the period, the following costs were incurred:

Variable selling expense per unit 40
Fixed administrative expenses 150,000
Fixed manufacturing overhead 180,000
Fixed selling expenses 120,000
Indirect labor (all variable) 60,000
Indirect materials (all variable) 30,000
Other variable overhead 90,000
Required: Compute the dollar amount of ending inventory using (a) absorption costing and (b)
variable costing.
Answer:
a. Variable costs:
Direct materials $ 25.00
Direct labor 100.00
Indirect labor 2.00
Indirect materials 1.00
Other variable overhead 3.00
Variable product costs per unit: $131.00
Variable product costs per unit $131.00

Fixed manufacturing overhead 6.00
Total product costs per unit $137.00
Total product costs per unit $ 137.00

Inventory units x 2,000
Inventory value $274,000
b. Variable product costs per unit $ 131.00

Inventory units x 2,000
Inventory value $262,000

Topic: Absorption and Variable Costing
3. Huron Corporation wants to change to the variable costing method of inventory valuation for making
internal decisions. The LIFO method is being used. The absorption statements of income for Years
1 and 2 are as follows:
Year 1 Year 2
Sales (5,000 units) $300,000 $300,000
Cost of Goods Sold 180,000 190,000
Gross Profit $120,000 $110,000
SG&A expenses* 50,000 50,000

Net Income $ 70,000 $ 60,000
*Selling and administrative expenses include variable costs of $2 per unit sold.
Production data are as follows:

Year 1 Year 2
Production units 8,000 6,000
Variable costs per unit $30 $30
Fixed overhead costs $48,000 $48,000
Required:
a. Compute the absorption cost per unit manufactured in Years 1 and 2.
b. Explain why the net income for Year 1 was higher than the net income for Year 2 when the same
number of units was sold in each year.
c. Prepare income statements for both years using variable costing.
d. Reconcile the absorption costing and variable costing net income figures for each year. Start with
variable costing net income.
Answer:
a. For Year 1, absorption costs per unit manufactured are $180,000 / 5,000 = $36
For Year 2, absorption costs per unit manufactured are $190,000 / 5,000 = $38
b. The cost per unit manufactured increased by $2 and total costs increased by $2 x 5,000 units, or
$10,000. This increase in costs was due to a reduction in units produced, which in turn caused
the fixed costs per unit to be greater by $2.
c.
Huron Corporation
Variable Costing Income Statements
For Years 1 and 2
Year 1 Year 2
Sales $300,000 $300,000
Variable manufacturing expenses 150,000 150,000
Variable SG&A expenses 10,000 10,000
Contribution Margin $140,000 $140,000
Fixed manufacturing overhead 48,000 48,000

Fixed SG&A expenses 40,000 40,000
Net income $ 52,000 $ 52,000
Continued next page

d. Year 1 Year 2
Variable Costing Net Income $ 52,000 $52,000
Fixed expenses in inventory* 18,000 8,000
Absorption Costing Net Income $70,000 $60,000
Note: Calculations assume no beginning inventory.

*Fixed manufacturing expenses in inventory were computed as (3,000 × $6) and (1,000 × $8).
Topic: Absorption Income Statement

4. The variable costing income statement for Jacqui Company for this quarter is as follows:
JACQUI CORPORATION
Variable Costing Income Statements
For the current quarter
Sales (5,000 units) $1,000,000
Cost of Goods Sold (variable) $300,000
Variable selling (10% of sales) 100,000 400,000
Contribution Margin $ 600,000
Fixed manufacturing overhead $240,000

Fixed administrative expenses 144,000 384,000
Net income $ 216,000
Selected data for the quarter concerning the operations of the company are as follows:
Beginning inventory 0 units

Units produced 10,000 units
Direct manufacturing labor $30 per unit
Direct manufacturing materials 16 per unit
Variable manufacturing overhead 14 per unit
Required: Prepare an absorption costing income statement for the quarter.
Answer:
JACQUI CORPORATION
Absorption Costing Income Statement
For the quarter just ended
Sales $1,000,000
Cost of Goods Sold* 420,000
Gross Profit 580,000
Selling Expenses $ 100,000

Administrative Expenses 144,000
Net Income $ 336,000
*COGS = 5,000 x [$30 + $16 + $14 + ($240,000 / 10,000)]

Topic: Absorption and Variable Costing Income Statements
5. Whitlock Company produced 10,000 cases of cookies this year. It sold 9,000 cases for $20 each.
There were no beginning inventories. Variable manufacturing costs were $60,000, and fixed
manufacturing expenses were $100,000. Selling and administrative expenses were $20,000, all
fixed.
Required:
a. Prepare income statements using the variable costing and absorption costing.
b. Reconcile the net income under absorption and variable costing.
Answer:
a.
WHITLOCK COMPANY
Variable Costing Income Statement
For the Year just ended
Sales (9,000 units) $180,000
Cost of Goods Sold (variable) 54,000
Contribution Margin $126,000
Fixed manufacturing overhead $100,000

Fixed administrative expenses 20,000 120,000
Net income $ 6,000
WHITLOCK COMPANY
Absorption Costing Income Statement
For the Year just ended
Sales (9,000 units) $180,000
Cost of Goods Sold (variable) 54,000
Cost of Goods Sold (fixed) 90,000 144,000
Gross Margin $36,000
Fixed administrative expenses 20,000
Net income $16,000
b. Variable costing net income $6,000

Increase in units in inventory 1,000
Fixed cost per unit in inventory x $10 10,000
Absorption costing net income $16,000

Essay Questions
Topic: Absorption and Variable Costing Compared

1. Compare and contrast absorption and variable costing.
Answer:
Absorption and variable costing methods are similar in that they both treat nonmanufacturing costs
incurred during the period, such as selling and administration costs, as expenses (period costs). The
difference between absorption and variable costing is how they treat manufacturing costs. Whereas
absorption costing treats both variable and fixed manufacturing costs as inventoriable product costs,
variable costing treats only variable manufacturing costs as inventoriable product costs; fixed
manufacturing costs are treated as period costs.
Topic: Fixed Cost as Period or Product Cost

2. Since fixed product costs are eventually recorded as expenses under both variable and absorption
costing by the time the inventory is sold, why does it matter whether fixed overhead is treated as a
product cost or a period cost?
Answer:
It matters whether fixed overhead is treated as a product cost or a period cost because the way it is
treated affects the measurement of income for a particular period as well as the valuation assigned to
inventory on the balance sheet at the end of the period. It could also have a behavioral effect on
management decisions.
Topic: Pros and Cons of Absorption and Variable Costing

3. Provide an argument in favor of using variable costing and an argument against the use of variable
costing.
Answer:
Variable costing essentially assumes that fixed manufacturing costs do not add value to products.
Rather fixed manufacturing costs are incurred to provide the capacity to produce during a given
period. Fixed manufacturing costs are not relevant based on the fact that these costs are incurred
regardless of the degree to which the available capacity was utilized. Likewise, inventory can be
viewed as valuable only to the extent that it eliminates incurrence of future costs. However, since
inventory levels do not affect the incurrence of fixed manufacturing costs, it follows that these costs
should not be reflected in inventory. On the other hand, fixed manufacturing costs are a necessary
condition for manufacturing the product. For this reason, it seems reasonable to match these costs to
products. Viewing the matter from a long-term perspective, all costs are variable. If these costs are
not reflected in the costs of products, over time product costs will be understated.


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Module 17

Learning Objectives – coverage by question

LO1 – Describe inventory

LO2 – Explain the framework of

LO3 – Describe the production

LO4 – Explain the operation of

LO5 – Explain the operation of 5, 9-12,

Appendix 17A: Absorption

Basic Concepts 1-5 1-5 1, 2

Income Under Absorption and

©Cambridge Business Publishers, 2015

Topic: Definition of Product Costing

Topic: Manufacturing Inventories

Topic: Inventory Cost Flow

Topic: Period versus Product Costs

©Cambridge Business Publishers, 2015

Topic: Predetermined Manufacturing Overhead Rate

Topic: Predetermined Manufacturing Overhead Rate

Topic: Job Costing

Topic: Job Costing

©Cambridge Business Publishers, 2015

Topic: Process Costing

©Cambridge Business Publishers, 2015

Topic: Inventory Cost

Topic: Work-in-Process Inventory

Topic: Product Costs in Financial Reporting

©Cambridge Business Publishers, 2015

Topic: Manufacturing Depreciation

Topic: Manufacturing Expense

Topic: Product Costs

©Cambridge Business Publishers, 2015

Topic: Absorption Costing

Topic: Components of Product Cost

Topic: Predetermined Overhead Rates

©Cambridge Business Publishers, 2015

Topic: Process Costing

Topic: Job Costing

Topic: Job Order Production

©Cambridge Business Publishers, 2015

Topic: Job Order Costing

Topic: Process Costing

Topic: Job Costing

©Cambridge Business Publishers, 2015

Topic: Work-in-Process Inventory

Topic: Sale of Finished Goods

Topic: Change in Raw Materials

©Cambridge Business Publishers, 2015

Beginning Raw Materials $10,000

The amount of Raw Materials used this period was:

Topic: Period Costs Calculation

Operating Income $48,000

The total Period Costs incurred this period equals:

©Cambridge Business Publishers, 2015

The Cost of Goods Manufactured this period equals:

Topic: Weighted Average Method

Topic: Components of Work-in-Process

©Cambridge Business Publishers, 2015

Topic: Calculation of Equivalent Units

A) Was 15.0 percent complete

©Cambridge Business Publishers, 2015

Topic: Equivalent Units

Topic: Weighted Average Equivalent Units

©Cambridge Business Publishers, 2015