MIDTERM EXAM_BSAIS 2B

Variable and Absorption Costing (15 items)

1. What is the costing method that treats all fixed costs as period costs?
a. Absorption costing c. Variable costing
b. Job-order costing d. Process costing
2. A basic tenet of direct costing is that period costs should be currently expensed. What is the
basic rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product
b. Period costs are generally immaterial in amount and the cost of assigning the amount to
specific products would outweigh the benefits
c. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management
d. Period costs will occur whether or not production occurs and so it is improper to allocate
these costs to production and defer a current cost of doing business
3. The Rainbow Company had the following costs for 2021:
Raw materials P 700,000 Rent for factory building P 50,000
Direct labor 100,000 Rent for sales office 30,000
Miscellaneous FOH (fixed) 80,000 Depreciation on store equipment 20,000
Depreciation on machines 40,000
How much of these costs should be inventoried under absorption (A) and variable (V) costing
methods?
a. (A) 1,020,000 (V) 880,000 c. (A) 970,000 (V) 800,000
b. (A) 1,000,000 (V) 880,000 d. (A) 930,000 (V) 800,000
4. The use of variable costing requires knowing
a. The controllable and non-controllable components of all costs
b. The number of units of each product produced during the period
c. The contribution margin and break-even point for all the units produced
d. The variable and fixed components of production costs
Items 5 and 6 are based on the following information
5. A company manufactures and sells a single product. Planned and actual production in its first
year of operation was 100,000 units. Planned and actual costs for that year were as follows:
Manufacturing Non-
manufacturing
Variable P 600,000 P 500,000
Fixed 400,000 300,000
The company sold 85,000 units of product at a selling price of P 30 per unit.
Using absorption costing, the company’s operating profit was
a. P 750,000 c. P 975,000
b. P 900,000 d. P 1,020,000
6. Using variable costing, the company’s operating profit was
a. P 750,000 c. P 915,000
b. P 840,000 d. P 975,000
7. Income under absorption costing may differ from income under variable costing. How is this
difference calculated?
a. Change in the quantity of units in inventory times the fixed factory overhead rate per
unit
b. Number of units produced during the period times the fixed factory overhead rate
per unit
c. Change in the quantity of units in inventory times the variable manufacturing cost
per unit
d. Number of units produced during the period times the variable manufacturing cost
per unit

8. When production exceeds sales, fixed manufacturing overhead costs

 a. Are released from inventory under absorption costing
b. Are deferred in inventory under absorption costing
c. Are released from inventory under variable costing
d. Are deferred in inventory under variable costing
9. Lavender Company’s income under absorption costing was P 3,600 lower than its income under
variable costing. The company sold 10,000 units during the year, and its variable costs were P
9 per unit, P 1 of which represents the variable selling expense. If production cost was P 11 per
unit under absorption costing, then how many units did the company produce during the year?
a. 8,200 units c. 11,200 units
b. 8,800 units d. 11,800 units
10. Absorption costing and variable costing differ in that
a. Standards can be used with absorption costing, but not with variable costing.
b. Absorption costing inventories are more correctly valued.
c. Production influences income under absorption costing, but
not under variable costing.
c. Companies using absorption costing have lower fixed costs.
11. Violet Company manufactures a single product. Unit variable production costs are P 20 & fixed
production costs are P 150,000. Violet uses a normal activity of 10,000 units to set its standard
costs. Violet began the year with no inventory, produced 11,000 units, & sold 10,500 units.
What is the ending inventory under absorption costing?
a. P 10,000 c. P 17,500
b. P 15,000 d. P 20,000
12. It is the expected market price for a product or service, considering the consumers’ perception
of value and the competitors’ responses.
a. Transfer price c. Cost-based price
b. Target price d. Selling price
13. XYZ Company plans to introduce a new product. To compete effectively, the product could not
be priced at more than P30. The company requires a return on investment of 15% on all new
products. The plan is to produce and sell 25,000 units a year. If the product requires a P
500,000 investment, then target cost should be:
a. P 27.00 c. P 21.50
b. P 23.00 d. P 20.00
14. Based on sales of 500 units per year, a new product has estimated traceable costs of P 990,000.
What is the target price to obtain a 15% profit margin on sales?
a. P 2,329 c. P 1,980
b. P 2,227 d. P 1,935
15. Fury Co. signed a government construction contract providing for a formula price of actual cost
plus 10%. In addition, Fury was to receive one-half of any savings resulting from the formula
price being less than the target price of P2,200,000. Fury’s actual costs incurred were P
1,920,000. How much should Fury receive from the contract?
a. P 2,060,000 c. P 2,156,000
b. P 2,112,000 d. P 2,200,000

Part II. CVP Analysis (From Reviewer in MAS 2016, Roque)

For. No. 16 - 18

16.
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18.

For No. 19 -20

Part III. Relevant Costing (From RESA)

 21. Yemen Company manufactures 20,000 units of a certain component per year. This
component is used in the production of a main product. The following are the costs to make
the component per unit:

Direct materials P 11
Direct labor 14
Variable overhead 8
Fixed overhead 9
If Yemen buys the component from outside supplier the company can rent out the released
facilities for P 20,000 a year. The cost of the component per unit as quoted by the supplier is P36.
60% of the fixed overhead applied in the manufacture of the component will continue regardless
of what decision is made. For all purchases made by the company, freight and handling costs are
applied at 1% of the purchase price. The direct materials cost is exclusive of the freight and
handling cost.

What is the economic advantage or disadvantage of buying the component? (NOTE: the relevant
cost to buy both DM and component must include 1% handling cost based on the purchase price)

a. P 24,800 advantage
b. P 27,000 advantage
c. P 27,000 disadvantage
d. P 63,000 advantage
22. Given the following target selling price for a unit of product:

Direct materials P 18
Direct labor 7
Overhead (20% variable) 15*
Cost of manufacture 40
Desired markup – 30% 12
Regular selling price P 52
* Based on 25,000 units produced each year

A customer has offered to purchase 5,000 units at a special price of P 38 per unit. The
company is selling only 20,000 units per year so it has idle capacity. Variable selling costs
associated with the special-order would be P 2 per unit. If the special order is accepted,
what will be the effect on the company’s overall net income?

a. Increase by P 40,000 c. Increase by P50,000

b. Decrease by P 10,000 d. Decrease by P 70,000

23. Mumbai Co. is a manufacturer of industrial components. One of their products used as a
subcomponent in manufacturing is KB-96. This product has the following financial structure
per unit:

Selling price P 150

Direct materials P 20
Direct labor 15
Variable manufacturing overhead 12
 Fixed manufacturing overhead 30
Shipping and handling 3
Fixed selling and administrative 10
Total costs P 90
Mumbai has received a special, one-time, order for 1,000 KB-96 parts. Assume that
Mumbai is operating at full capacity and that the contribution margin of the output that
would be displaced by the special order is P 10,000. The
minimum price that is acceptable, using the original data, for this one-time special order is
in excess of
a. P 60 c. P 87
b. P 70 d. P 100
24. Dhabi Company’s regular selling price for its product is P 10 per unit. Variable costs are P 6 per
unit. Fixed costs total P 1 per unit based on 100,000 units and remain constant within the
relevant range of 50,000 units to a total capacity of 200,000 units. After sales of 80,000 units
were projected for 2021, a special order was received for an additional 10,000 units. To
increase its operating income by a total of P 10,000, what price per unit should Dhabi charge
for this special order?
a. P 7.00 c. P 10.00
b. P 8.00 d. P 11.00
25. In deciding whether or not to eliminate a branch or division, which of the following is
considered relevant?
a. All variable costs of the branch c. All direct costs of the branch
b. All fixed costs of the branch d. All indirect costs of the branch
26. Lebanon plans to discontinue a division with a P 20,000 contribution margin. Overhead
allocated to the division is P50,000, of which P 5,000 cannot be eliminated. What is the effect
on Lebanon’s pretax income by this plan?
a. P 5,000 decrease c. P 25,000 increase
b. P 20,000 decrease d. P 30,000 increase
27. The income statement of product Pabigat, one of the products being sold by Palugi Company
is reproduced below:
Sales P 80,000
Costs and expenses 92,000
Net loss (P 12,000)
P 37,600 of the costs and expenses above are fixed, of which P 21,600 is unavoidable
regardless of whether the product will be dropped or not. What is the product elimination
(shutdown) point?
a. P 16,000 c. P 54,400
b. P 50,000 d. P 70,400
28. Desert Company produces three products from a joint process costing P 100,000. The
following information is available:
Units Sales Price (Split-Off) Cost to Process Further Sales Price (After Further)
A 10,000 P 35 P 60,000 P 40
B 20,000 P 40 20,000 P 45
C 30,000 P 20 90,000 P 25
Which products should be processed further?
a. A only c. B and C
b. A and B d. A, B and C
29. Aladdin Company has 100 units of obsolete part. The variable cost to produce them was P 40
per unit. They could now be sold for P 30 each and it would cost P 60 to make them now. The
parts can be reworked for P 80 each and sold for P 170. What is the monetary advantage of
reworking the parts over the next-best action?
a. P 3,000 c. P 6,000
b. P 5,000 d. P 10,000
30. When a multiproduct plant operates at full capacity, quite often decisions must be made as
to which products to emphasize. These decisions are frequently made with a short-run focus.
In making such decisions, managers should select products with the
a. Highest sales price per unit
b. Highest sales volume potential
c. Highest individual unit contribution margin
d. Highest contribution margin per unit of the constraining resource