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Chapter 8 - Absorption and Variable Costing, and Inventory Management
1. Which accounting method is used for external reporting?

a. absorption costing
b. variable costing
c. transfer price costing
d. responsibility costing
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 372
LEARNING OBJECTIVES: MACC.MOWE.15.8.1 - 8.1
NATIONAL STANDARDS: United States - AACSB Analytic
United States - IMA-Cost Management
KEYWORDS: Bloom's Higher order; classifying
2. Which of the following best defines variable costing?

a. a good way to value inventories for the balance sheet
b. a useful tool for external reporting purposes
c. not a useful tool for companies with multiple segments
d. a useful tool for management decision making
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 372
KEYWORDS: Bloom's Higher order; exemplifying
3. What is the primary difference between variable and absorption costing?

a. inclusion of fixed selling expenses in product costs
b. inclusion of variable factory overhead in period costs
c. inclusion of fixed selling expenses in period costs
d. inclusion of fixed factory overhead in product costs
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 372
United States - IMA-Decision Analysis
KEYWORDS: Bloom's Higher order; comparing
4. Which of the following costs is NOT included in inventory under absorption costing?
Copyright © 2015 Nelson Education Limited. 8-1

a. direct materials
b. direct labour
c. fixed selling expenses
d. fixed factory overhead
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 373
5. Which of the following types of costs is NOT included in product cost?

a. overhead
b. direct materials
c. variable selling expense
d. fixed factory overhead
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 373
6. Which of the following types of costs does NOT appear on a variable costing income statement?
a. direct materials
b. direct labour
c. opportunity cost
d. variable selling expense
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 375
7. Suppose production is less than sales volume. What is the relationship between net income under absorption costing
and profits when using variable-costing procedures?

a. Net income under absorption costing will be greater than profits when using variable costing.
b. Net income under absorption costing will be less than profits when using variable costing.
c. Net income under absorption costing will be equal to profits when using variable costing.
d. Net income under absorption costing will be randomly different from profits when using variable costing.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 377
KEYWORDS: Bloom's Higher order; inferring
8. Suppose monthly production volume is constant and sales volume is less than production. How will net income react
when using variable-costing procedures?
a. It will be greater than net income determined using absorption costing.
b. It will be less than net income determined using absorption costing.
c. It will be equal to net income determined using absorption costing.
d. It will be equal to contribution margin per unit times units sold.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 378
9. What is the general relationship between inventory values calculated using variable costing and inventory values
calculated using absorption costing?
a. They will be equal.
b. Inventory values calculated using variable costing will be less.
c. Inventory values calculated using variable costing will be greater.
d. Inventory values calculated using variable costing will be twice as much.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 379
10. What is the relationship between absorption costing net income and variable costing net income?
a. Absorption costing net income exceeds variable costing net income when units produced and sold are equal.
b. Variable costing net income exceeds absorption costing net income when units produced exceed units sold.
c. Absorption costing net income exceeds variable costing net income when units produced are less than units
sold.
d. Absorption costing net income exceeds variable costing net income when units produced are greater than units
sold.
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 379
11. Gross margin is to absorption costing as which of the following is to variable costing?
a. gross profit
b. contribution margin
c. net income
d. territory margin
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 380
12. What are the two major costs associated with inventory?
a. ordering costs and setup costs
b. setup costs and stockout costs
c. stockout costs and carrying cost
d. ordering costs and carrying costs
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
13. Which inventory cost can include insurance, inventory taxes, and obsolescence?
a. the ordering cost
b. the carrying cost
c. the stockout cost
d. the setup cost
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
14. Which inventory cost can include processing costs, cost of insurance for shipping, and unloading?
d. the setup cost
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
15. Which inventory cost can include lost sales, cost of expediting, and cost of interrupted production?
d. the setup cost
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
16. Which of the following is NOT a traditional reason for carrying inventory?
a. to satisfy customer demand

b. to avoid shutting down manufacturing facilities
c. to support a reliable production process
d. to hedge against future price increases
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 384
17. What is the formula to calculate ordering cost?

a. number of orders per year × cost of placing an order
b. number of orders per year/cost of placing an order
c. average number of units in inventory × cost of carrying one unit in inventory
d. average number of units in inventory/cost of carrying one unit in inventory
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
18. What is the formula to calculate total carrying cost?

a. number of orders per year × cost of placing an order
b. number of orders per year/cost of placing an order
c. average number of units in inventory × cost of carrying one unit in inventory
d. average number of units in inventory/cost of carrying one unit in inventory
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
19. What is the economic order quantity (EOQ)?

a. the quantity that minimizes total ordering cost
b. the quantity that maximizes total profit

c. the quantity that minimizes total inventory-related costs
d. the quantity that maximizes carrying costs
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 385
20. What costs do the ordering costs become when the economic order quantity (EOQ) model is applied to units produced
within the company?
a. setup costs
b. stockout costs
c. carrying costs
d. safety-stock costs
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 385
21. Lauren Company orders 250 units at a time and places 15 orders per year. Total ordering cost is $1,600, and total
carrying cost is $1,250. What is the economic order quantity?
a. The economic order quantity (EOQ) is 250.
b. The economic order quantity (EOQ) is more than 250.
c. The economic order quantity (EOQ) is less than 250.
d. The economic order quantity (EOQ) is 15.
ANSWER: b
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 385
KEYWORDS: Bloom's Higher order; differentiating
22. 2L1S Company orders 250 units at a time and places 15 orders per year. Total ordering cost is $1,100, and total
carrying cost is $1,750. What is the economic order quantity?
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 384
23. LaTiffa Company orders 250 units at a time and places 15 orders per year. Total ordering cost is $1,100, and total
carrying cost is $1,100. Which best describes the economic order quantity?
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 384
24. Consider the following portion of a segmented income statement for the year just ended. Assume fixed expenses of
Division A include $60,000 of direct expenses and that the discontinuance of the department will not affect the sales of
the other departments or reduce the common expenses.
Division A
Sales $200,000
Variable manufacturing costs 120,000
Gross profit $ 80,000
Fixed expenses (direct and allocated) 100,000
Operating income (loss) $ (20,000)
What is A’s divisional segment margin?
a. ($10,000)
b. $10,000
c. $40,000
d. $100,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: $80,000 − $60,000 = $20,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 387
KEYWORDS: Bloom's Higher order; implementing
25. Prairie Inc. mines three products. Gold ore sells for $1,000 per ton, variable costs are $600 per ton, and fixed mining
costs are $250,000. The segment margin for the year was ($100,000). The management of Prairie Mining was considering
dropping the mining of gold ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment
was dropped.
What were the sales in tons for the year?

a. 200 tons
b. 250 tons
c. 375 tons
d. 1,000 tons
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: Segment margin plus direct fixed costs equals contribution
margin. Therefore, ($100,000) + $250,000 = $150,000 $150,000/$400 = 375 tons
POINTS: 1
DIFFICULTY: Challenging
REFERENCES: p. 387
26. Shedding Company has two divisions with the following segment margins for the current year: Northern, $400,000;
Southern, $800,000. Common expenses of the company are $100,000. What is Shedding Company’s net income?
a. $300,000
b. $350,000
c. $700,000
d. $1,100,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $400,000 + $800,000 − $100,000 = $1,100,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 387
27. Segment sales revenue minus which of the following sets of costs is equal to segment margin?
a. variable cost of goods sold, variable selling expense, and direct fixed costs
b. variable selling expense, variable cost of goods sold, and common fixed costs
c. variable cost of goods sold, total selling expense, and direct fixed costs
d. variable selling expense, administrative expense, variable cost of goods sold, and direct fixed costs
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 387
28. Which of the following would NOT be considered a segment?

a. a division
b. a product line
c. a sales territory
d. a corporation
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 387
29. Which of the following occurs under a JIT system?

a. Customer demand pulls units through the production line.
b. Safety stock is set at relatively high levels.
c. Stockouts are never a problem.
d. Inventory levels are set at 10% of total production levels.
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 391
30. How does a JIT system respond to the problems traditionally solved by carrying inventories?
a. by ensuring that sufficient inventory is on hand to prevent stockouts
b. by purchasing extra materials when price discounts are offered

c. by negotiating long-term contracts with supplier to lock in low prices
d. by selecting an inventory level that minimizes the total of ordering and carrying costs
ANSWER: c
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 391
Last year, Ella Company produced 10,000 units and sold 9,000 units at a price of $9 per unit. Costs for last year were as
follows:
Direct materials $10,000
Direct labour 15,000
Variable factory overhead 5,000
Fixed factory overhead 20,000
Variable selling expense 7,200
Fixed selling expense 5,000
Fixed administrative expense 12,000
Fixed factory overhead is applied on the basis of expected production. Last year, Ella expected to produce 10,000 units.
31. Refer to the Figure. Assume that beginning inventory was zero. What is the value of ending inventory under
absorption costing?
a. $2,000
b. $3,000
c. $3,720
d. $5,000
ANSWER: d
RATIONALE: Unit product cost = ($10,000 + $15,000 + $5,000 + $20,000)/10,000 = $5 Ending inventory =
$5 × 1,000 = $5,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 375
32. Refer to the Figure. Assume that beginning inventory was zero. What is the value of ending inventory under variable
costing?
a. $2,000
b. $3,000
c. $3,720
d. $5,000
ANSWER: b
RATIONALE: Unit product cost = ($10,000 + $15,000 + $5,000)/10,000 = $3 Ending inventory = $3 × 1,000
= $3,000
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 375
33. Refer to the Figure. What is the operating income for last year under absorption costing?
a. $11,300
b. $11,800
c. $12,520
d. $36,000
ANSWER: b
RATIONALE: Sales $81,000
− COGS 45,000
Gross margin $36,000
− Selling expense 12,200
− Administrative expense 12,000
Operating income $11,800
Sales = 9,000 × $9 Unit product cost = ($10,000 + $15,000 + $5,000 + $20,000)/10,000 = $5
COGS = units × unit costs = 9,000 × $ = $45,000 Selling expense = $7,200 + $5,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
34. Refer to the Figure. What is the operating income for last year under variable costing?
a. $6,800
b. $9,000
c. $9,800
d. $11,800
ANSWER: c
− Variable COGS 27,000
− Variable selling expense 7,200
Contribution margin $46,800
− Fixed factory overhead 20,000
− Fixed selling expense 5,000
− Administrative expense 12,000
Operating income $ 9,800
Sales = selling price × unit cost = $9 × $9,000 = $81,000 COGS = variable costs × units sold
= $3 × 9,000 = $27,000 Unit product cost = ($10,000 + $15,000 + $5,000)/10,000 = $3
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Triple M Company had the following data for the month:

Variable costs per unit:
Direct materials $4.00
Direct labour 3.20
Variable overhead 1.00
Variable selling expenses 0.40
Fixed overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During
the month, 2,000 units were produced. Loring started the month with 300 units in beginning inventory, with unit product
cost equal to this month’s unit product cost. A total of 2,100 units were sold during the month at price of $14 per unit.
Selling and administrative expense for the month, all fixed, totalled $3,600.
35. Refer to the Figure. What is the unit product cost under absorption costing?
a. $7.20
b. $8.20
c. $8.60
d. $10.20
ANSWER: d
RATIONALE: Direct materials $ 4.00
Direct labour 3.20
Fixed overhead 2.00
Total $10.20
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 375
36. Refer to the Figure. What is the operating income under absorption costing?
a. ($540)
b. $3,540
c. $3,740
d. $7,980
ANSWER: b
− COGS 21,420
Gross margin $ 7,980
− Variable selling expense 840
− Fixed selling & administrative expense 3,600
Sales = $14 × 2,100 COGS = $10.20 × 2,100 Variable Selling expense = 0.40 × 2,100
Direct materials $ 4.00
Direct labour $ 3.20
Variable overhead $ 1.00
Fixed overhead $ 2.00
Total $10.20
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 375
37. Refer to the Figure. What is the operating income under variable costing?
a. ($540)
b. $3,540
c. $3,740
d. $7,980
ANSWER: c
− Variable COGS 17,220
− Variable selling expense 840
Contribution margin $11,340
− Fixed factory overhead 4,000
− Fixed selling and admin. expense 3,600
Direct materials $4.00
Direct labour 3.20
Total $8.20
2,100 units sold @ $14 = $29,400 2,100 units cost @ $8.20 = $17,220 2,100 units variable
selling cost @ 0.40 = $840
POINTS: 1
REFERENCES: p. 375
38. Refer to the Figure. What is the unit product cost under variable costing?
a. $7.20
b. $8.20
c. $8.60
d. $10.20
ANSWER: b
RATIONALE: Direct materials $4.00
Direct labour 3.20
Total $8.20
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Carmel Company uses 810 units of a part each year. The cost of placing one order is $10; the cost of carrying one unit in
inventory for a year is $4.
39. Refer to Carmel Company. Carmel has decided to begin ordering 60 units at a time. What is the average annual
carrying cost of Benton’s new policy?
a. $5
b. $30
c. $120
d. $180
ANSWER: c
RATIONALE: Annual carrying cost = (60/2) × $4 = $120
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
40. Refer to the Figure. Benton has decided to begin ordering 60 units at a time. What is the average annual ordering cost
of Benton’s new policy?
a. $60
b. $135
c. $150
d. $185
ANSWER: b
RATIONALE: Average annual order cost = (810/60) × $10 = $135.
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
41. Refer to the Figure. What is the EOQ for Benton?

a. 20
b. 30
c. 45
d. 162
ANSWER: c
RATIONALE: EOQ = [√(4 × 810 × 10)/4] = 90
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 385
The following information pertains to Nute Corporation:

Beginning inventory 1,000 units
Ending inventory 6,000 units
Direct labour per unit $40
Direct materials per unit 20
Variable overhead per unit 10
Fixed overhead per unit 30
Variable selling and administrative costs per unit 6
Fixed selling and administrative costs per unit 14
42. Refer to the Figure. What is the value of the ending inventory using the absorption costing method?
a. $240,000
b. $360,000
c. $420,000
d. $600,000
ANSWER: d

RATIONALE: SUPPORTING CALCULATIONS: ($40 + $20 + $10 + $30) × 6,000 = $600,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
43. Refer to the Figure. What is the relationship between absorption costing net income and variable costing net income?
a. Absorption costing net income is $150,000 less.
b. Absorption costing net income is $150,000 greater.
c. Absorption costing net income is $240,000 less.
d. Absorption costing net income is $240,000 greater.
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
Fixed overhead in beginning inventory $ 30,000
Fixed overhead in ending inventory 180,000
Difference $150,000
Since production exceeds sales, absorption costing net income is larger by $150,000.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p.375
44. Refer to the Figure. What is the value of the ending inventory using the variable costing method?
a. $240,000
b. $350,000
c. $360,000
d. $420,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($40 + $20 + $10) × 6,000 = $420,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p 375
Westwood Company has the following information the current year:

Selling price $300 per unit

Variable production costs $80 per unit produced
Variable selling and administrative expenses $32 per unit sold
Fixed production costs $400,000
Fixed selling and administrative expenses $280,000
Units produced 20,000 units
Units sold 16,000 units
Eastwood had no beginning inventories.
45. Refer to the Figure. What is the ending inventory for Westwood using the absorption costing method?
a. $80,000
b. $120,000
c. $180,000
d. $400,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: ($80 + $400,000/20,000) × 4,000 = $400,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
46. Refer to the Figure. What is the cost of ending inventory for Westwood using the variable costing method?
a. $80,000
b. $120,000
c. $180,000
d. $320,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $80 × 4,000 = $320,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
47. Refer to the Figure. What is the net income for Westwood using the absorption costing method?
a. $452,000
b. $480,000
c. $600,000
d. $2,088,000
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: [($300 − $120) × 16,000] − $280,000 − (16,000 × $32) =
$2,088,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
48. Refer to the Figure. What is the net income for Westwood using the variable costing method?
a. $412,000
b. $480,000
c. $600,000
d. $1,200,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: [($300 − $80 − $32) × 16,000] − $680,000 = $2,328,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Stosho Company incurred the following costs in manufacturing desk calculators:

Direct materials $28
Indirect materials (variable) 8
Direct labour 16
Indirect labour (variable) 12
Other variable factory overhead 20
Fixed factory overhead 56
Variable selling expenses 40
Fixed selling expenses 28
During the period, the company produced and sold 2,000 units.
49. Refer to the Figure. What is the inventory cost per unit using absorption costing?
a. $32
b. $84
c. $104
d. $140
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $84 + $56 = $140

POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
50. Refer to the Figure. What is the inventory cost per unit using variable costing?
a. $42
b. $52
c. $62
d. $84
ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS: $28 + $8 + $16 + $12 + $20 = $84
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Raymond Company reported the following units of production and sales for June and July:
Units
Month Produced Sold
June 100,000 90,000
July 100,000 105,000
Net income under absorption costing for June was $40,000; net income under variable costing for July was $50,000. Fixed
manufacturing costs were $600,000 for each month.
51. Refer to the Figure. What was the net income for July using absorption costing?
a. $20,000
b. $40,000
c. $50,000
d. $80,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($600,000/100,000) × 5,000 = $30,000 Absorption costing
is lower by $30,000. Therefore, $50,000 less $30,000 equals a profit of $20,000.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
52. Refer to the Figure. What was the net income for June using variable costing?
a. ($40,000)
b. ($20,000)
c. $20,000
d. $40,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($600,000/100,000) × 10,000 = $60,000 Absorption costing
is higher by $60,000. Therefore, $40,000 less $60,000 equals a loss of $20,000.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Theele Corporation has the following information for April, May, and June:
April May June
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500
Production costs per unit (based on 10,000 units) are as follows:
Direct materials $13
Direct labour 9
Variable factory overhead 7
Fixed factory overhead 5
Variable selling and administrative expenses 10
Fixed selling and administrative expenses 4
Theele Corporation had no beginning inventories for April, and all units were sold for $55 per unit. Costs are stable over
the three months.
53. Refer to the Figure. What is the May ending inventory for Theele Corporation when using the absorption costing
method?
a. $39,000
b. $45,000
c. $148,500
d. $300,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: 4,500 × ($13 + $8 + $7 + $5) = $148,500
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
54. Refer to the Figure. What is the April ending inventory for Theele Corporation when using the variable costing
method?
a. $87,000
b. $90,000
c. $108,000
d. $260,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: 3,000 × ($13 + $9 + $7) = $87,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
55. Refer to the Figure. What is the June ending inventory for Theele Corporation when using the variable costing
method?
a. $15,000
b. $116,000
c. $120,000
d. $260,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
April May June
Units of beginning inventory 0 3,000 4,500
Units produced 10,000 10,000 10,000
Units sold 7,000 8,500 10,500
Unit of ending inventory 3,000 4,500 4,000
4,000 × $29 = $116,000
POINTS: 1
REFERENCES: p. 375
56. Refer to the Figure. What is the May contribution margin for Theele Corporation when using the variable costing
method?
a. $136,000
b. $170,000
c. $204,000
d. $240,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: 8,500 × ($55 − $39) = $136,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
The following information pertains to Shark Corporation:

Beginning inventory 0 units
Ending inventory 6,000 units
Direct labour per unit $2022
Direct materials per unit 1618
Variable overhead per unit 48
Fixed overhead per unit 1012
Variable selling costs per unit 1214
Fixed selling costs per unit 1618
57. Refer to the Figure. What is the value of ending inventory when using the absorption-costing method?
a. $200,000
b. $348,000
c. $368,000
d. $390,000
ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS: ($22 + $18 + $6 + $12) × 6,000= $348,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
58. Refer to the Figure. What is the value of ending inventory when using the variable costing method?
a. $288,000
b. $320,000
c. $250,000
d. $390,000

ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($22 + $18 + $8) × 6,000 = $288,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
59. Refer to the Figure. What is the relationship between absorption-costing net income and variable-costing net income?
a. Absorption-costing net income is $72,000 less.
b. Absorption-costing net income is $70,000 less.
c. Absorption-costing net income is $72,000 greater.
d. Absorption-costing net income is $70,000 greater.
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: Shark Corporation has $72,000 more in fixed costs in
ending inventory relative to beginning inventory. In addition, production exceeds sales.
Therefore, absorption costing net income exceeds variable-costing net income by $72,000.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Operating Company has the following information pertaining to its two divisions for the current year:
South
North Division
Division
Variable selling and administrative expenses $ 70,000 $ 90,000
Direct fixed manufacturing expenses 35,000 100,000
Sales 300,000 500,000
Direct fixed selling and administrative expenses 30,000 70,000
Variable manufacturing expenses 40,000 100,000
Common expenses are $50,000 for the current year.
60. Refer to the Figure. What is the segment margin for Division South?
a. $140,000
b. $210,000
c. $240,000
d. $310,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $500,000 − $90,000 − $100,000 − $70,000 − $100,000 =
$140,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
61. Refer to the Figure. What is the net income for Operating Company?
a. $41,000
b. $65,000
c. $215,000
d. $325,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: $125,000 + $140,000 − $50,000 = $215,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Cara Company has the following information pertaining to its two divisions for the current year:
European American
Division Division
Variable selling and administrative expenses $ 40,000 $ 55,000
Direct fixed manufacturing expenses 22,000 60,000
Sales 120,000 220,000
Direct fixed selling and administrative expenses 18,000 45,000
Variable manufacturing expenses 25,000 55,000
Common expenses are $18,000 for the current year.
62. Refer to the Figure. What is the segment margin for American Division?
a. $5,000
b. $55,000
c. $105,000
d. $155,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $220,000 − $55,000 − $60,000 − $45,000 − $55,000 =
$5,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
63. Refer to the Figure. What is the net income for Cara Company?
a. $2,000
b. $32,500
c. $150,000
d. $300,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $15,000 + $5,000 − $18,000 = $2,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
Assume the following information for Green Bluff’s #1 Product Line:

Sales $600,000
Variable manufacturing expenses 120,000
Direct fixed manufacturing expenses 75,000
Variable selling and administrative expenses 65,000
Direct fixed selling and administrative expenses 60,000
64. Refer to the Figure. What is the contribution margin of the product line?
a. $215,000
b. $325,000
c. $415,000
d. $480,000
ANSWER: c
RATIONALE: SUPPORTING CALCULATIONS: $600,000 − $120,000 − $65,000 = $415,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
65. Refer to the Figure. What is the segment margin of the product line?
a. $280,000

b. $325,000
c. $350,000
d. $400,000
ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: $415,000 − $135,000 = $280,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
66. Product cost includes all costs of the company.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 372
67. Absorption costing income statements and variable costing income statements may differ because of their treatment of
fixed overhead costs.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
United States - IMA-Performance Measurement
68. Inventory costs under variable costing include only direct materials, direct labour, and fixed factory overhead.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 377

69. Inventory under absorption costing includes direct materials, direct labour, variable factory overhead, and fixed
factory overhead.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 377
70. If the number of units produced in a period is larger than the number of units sold in a period, absorption costing
income will be higher than variable costing income.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 380
71. If the number of units produced in a period is smaller than the number of units sold in period, absorption costing
income will be higher than variable costing income.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 380
72. The costs of NOT having a product available when demanded by a customer are called setup costs.
a. True
b. False
ANSWER: False

POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
73. Total inventory-related cost consists of ordering cost and carrying cost.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 384
74. On a segmented income statement, fixed costs are broken down into direct fixed costs and overall fixed costs.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 387
75. JIT relies on a push system to control finished goods inventory.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
REFERENCES: p. 391
76. A major advantage to the JIT inventory approach is that it decreases carrying costs.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 391
77. The variable costing income statement for Kilem Company for this year is as follows:
Sales (6,000 units) $120,000
Variable expenses:
Cost of goods sold $36,000
Selling (10% of sales) 12,000 48,000
Contribution margin $ 72,000
Fixed expenses:
Manufacturing overhead $32,000
Administrative 14,400 38,400
Net income $ 25,600
Selected data for this year concerning the operations of the company are as follows:
Beginning inventory -0- units
Units produced 8,000 units
Manufacturing costs:
Direct labour $3.00 per unit
Direct materials 1.40 per unit
Variable overhead 1.60 per unit
Required: Prepare an absorption costing income statement for this year.
ANSWER:
Sales $120,000
Less cost of goods sold:
{6,000 × [$3.00 + $1.40 + $1.60
60,000
+ ($32,000/8,000)]}
Gross profit $ 60,000
Less operating expenses:
Selling expenses $12,000
Administrative expenses 14,400 26,400
Net income $ 33,600
POINTS: 1
REFERENCES: p. 375
78. Darker Company produced 30,000 units and sold 28,000 units in the current year. Beginning inventory was zero.
During the period, the following costs were incurred:
Indirect labour $ 60,000
Indirect materials 30,000
Other 90,000
Fixed manufacturing overhead 180,000
Fixed administrative expenses 150,000
Fixed selling expenses 120,000
Variable selling expenses, per unit 40
Direct labour, per unit 80
Direct materials, per unit 20
Required: Compute the dollar amount of ending inventory using:
A. Absorption costing
B. Variable costing
ANSWER:
A. Variable costs:
Direct materials $ 20.00
Direct labour 80.00
Indirect labour 2.00
Indirect materials 1.00
Other variable overhead 3.00
Variable product costs per unit $ 106.00
Fixed manufacturing overhead 6.00
Total product costs per unit $ 112.00
Inventory units 1,000
Inventory value $112,000
B. Variable product costs per unit $ 106.00

Inventory units 1,000
Inventory value $106,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
79. Fellow’s Manufacturing Company produces three products: X, Y, and Z. The income statement for this year is as
follows:
Sales $200,000
Less: Variable expenses 127,000
Contribution margin $ 73,000
Less fixed expenses:
Manufacturing $20,000
Selling and administrative 14,000 34,000
Net income $ 39,000
The sales, contribution margin ratios, and direct fixed expenses for the three types of products are as follows:
X Y Z
Sales $60,000 $40,000 $100,000
Contribution margin ratio 35% 30% 40%
Direct fixed expenses of products $ 8,000 $ 5,000 $4,000
Required: Prepare income statements segmented by products. Include a column for the entire firm in the statement.
ANSWER:
Fellow’s Manufacturing Company
Income Statement
For this year
X Y Z Total
Sales $60,000 $40,000 $100,000 $200,000
Less: Variable expenses 39,000 28,000 60,000 127,000
Contribution margin $21,000 $12,000 $ 40,000 $ 73,000
Less: Direct fixed expenses 8,000 5,000 4,000 17,000
Product margin $13,000 $ 7,000 $ 36,000 $ 56,000
Less: Common expenses 17,000
$ 39,000
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375
80. Birdd Company uses 450 units of a part each year. The cost of placing one order is $10; the cost of carrying one unit
in inventory for a year is $2. Birdd currently orders 90 units at a time.
A. What is the annual ordering cost of Birdd’s current policy?
B. What is the annual carrying cost of Birdd’s current policy?
C. What is the total cost of Birdd’s current policy?
D. What is the EOQ for Birdd?
E. What is the total inventory-related cost at the EOQ?
ANSWER:
Birdd Company uses 450 units of a part each year. The cost of placing one order is $10; the
cost of carrying one unit in inventory for a year is $2. Birdd currently orders 90 units at a
time.
A. Annual ordering cost = (450/90) × $10 = $50
B. Annual carrying cost = (90/2) × $2 = $90
C. Total cost of Birdd’s current policy = $50 + $90= $140
D. EOQ = [√(2 × 450 × $10)/2] = 67 (rounded)
E. Total inventory-related cost = ($10 × 7) + [(67/2) × $2] = $137
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 384
81. Stimpson Company sells 900 units of its deluxe product each year. The cost of setting up for one production run is
$150; the cost of carrying one unit in inventory for a year is $3.
A. What is the economic order quantity?
B. What is the annual setup cost of the EOQ policy?
C. What is the annual carrying cost of the EOQ policy?
D. What is the total inventory-related cost of the EOQ policy?
ANSWER:
A. EOQ = [√(2 × 900 × $150)/3] = 300
B. Annual setup cost = (900/300) × $150 = $450
C. Annual carrying cost = (300/2) × $3= $450
D. Total cost of the EOQ policy = $450 + $450 = $900
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 384
82. Timber Company sells 900 units of its deluxe product each year. The cost of setting up for one production run is $150;
the cost of carrying one unit in inventory for a year is $3. Timber currently produces 100 deluxe units in one production
run.
A. What is the annual setup cost of the current policy?
B. What is the annual carrying cost of the current policy?
C. What is the total inventory-related cost of the current policy?
D. Do you suppose that the current production run is smaller or larger than the EOQ? Why?
ANSWER:
A. Annual setup cost = (900/100) × $150 = $1,350
B. Annual carrying cost = (100/2) × $3= $150
C. Total cost of the current policy = $1,350 + $150 = $1,500
The EOQ must be more than 100 units because the set up cost for batches of 100
D.
units is higher than the carrying cost.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 384
83. What is the difference between absorption-costing income and variable-costing income?
ANSWER:
The difference between absorption-costing income and variable-costing income is the
treatment of fixed factory overhead. Absorption costing attaches fixed factory overhead to
each unit produced. If the unit is sold, that portion of fixed factory overhead becomes part of
cost of goods sold. If the unit goes into inventory, it takes that portion of fixed factory
overhead into inventory with it. Variable costing treats fixed factory overhead as a period
expense, and does not include it in inventory.
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 375

NATIONAL STANDARDS: United States - AACSB Communication
84. What are the traditional reasons for carrying inventory?

ANSWER: 1. To balance ordering or setup costs and carrying costs
2. To satisfy customer demand (e.g., meet delivery dates)
POINTS: 1
85. To avoid shutting down manufacturing facilities because of:]

a. Machine failure
b. Defective parts
c. Unavailable parts
d. Late delivery of parts
4. To buffer against unreliable production processes
5. To take advantage of discounts
6. To hedge against future price increases
PTS: 1 DIF: Medium REF: p.384 OBJ: 8.1

NAT: IMA-Cost Management | AACSB Communication
3. List three problems that inventory is meant to solve. How does the JIT producer handle these problems?
ANSWER:
The JIT firm:
Handles unpredictable customer orders by reducing setup times so that goods can be
1.
made-to-order
Handles high ordering costs by developing close relationships with suppliers and using
2.
only a few suppliers
Handles the need to purchase more to get quantity discounts by negotiating long-term
3.
contracts with suppliers so that the price is locked in
Handles potential machine breakdowns by engaging in continual preventive

4.
maintenance
POINTS: 1
DIFFICULTY: Medium
REFERENCES: p. 382-383
NATIONAL STANDARDS: United States - AACSB Communication
On which type of income statement does each of the following costs appear?
a. Variable costing income statement
b. Absorption costing income statement
c. Both types of income statements
DIFFICULTY: Easy
REFERENCES: p. 375

86. Fixed factory overhead for units sold

ANSWER: b
POINTS: 1
87. Direct labour for units sold

ANSWER: c
POINTS: 1
88. Variable overhead for units sold

ANSWER: c
POINTS: 1
89. Administrative expense

ANSWER: c
POINTS: 1
90. Direct materials for units sold

ANSWER: c
POINTS: 1
91. Variable selling expense

ANSWER: c
POINTS: 1
92. Fixed selling expense

ANSWER: c
POINTS: 1
93. Fixed factory overhead for the period

ANSWER: a
POINTS: 1
Match each statement with the correct item below.

a. The costs of not having a product available when demanded by a customer
b. The costs of carrying inventory
c. Approach that maintains goods should be pulled through the system by present demand
d. The number of units in the order quantity that minimizes the total cost
e. The costs of placing and receiving an order
DIFFICULTY: Easy
REFERENCES: p. 384
MACC.MOWE.15.8.5 - 8.5
Test Bank for Cornerstones of Managerial Accounting 3rd Canadian by Mowen

94. Carrying costs

ANSWER: b
POINTS: 1
95. Economic order quantity

ANSWER: d
POINTS: 1
96. Just-in-time
ANSWER: c
POINTS: 1
97. Ordering costs

ANSWER: e
POINTS: 1
98. Stockout costs

ANSWER: a
POINTS: 1
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1. Which accounting method is used for external reporting?

2. Which of the following best defines variable costing?

3. What is the primary difference between variable and absorption costing?

Copyright © 2015 Nelson Education Limited. 8-1

5. Which of the following types of costs is NOT included in product cost?

Copyright © 2015 Nelson Education Limited. 8-2

Copyright © 2015 Nelson Education Limited. 8-5

17. What is the formula to calculate ordering cost?

18. What is the formula to calculate total carrying cost?

19. What is the economic order quantity (EOQ)?

Copyright © 2015 Nelson Education Limited. 8-6

What were the sales in tons for the year?

28. Which of the following would NOT be considered a segment?

29. Which of the following occurs under a JIT system?

Copyright © 2015 Nelson Education Limited. 8-10

Triple M Company had the following data for the month:

41. Refer to the Figure. What is the EOQ for Benton?

The following information pertains to Nute Corporation:

Copyright © 2015 Nelson Education Limited. 8-16

Westwood Company has the following information the current year:

Selling price $300 per unit

Stosho Company incurred the following costs in manufacturing desk calculators:

Copyright © 2015 Nelson Education Limited. 8-19

The following information pertains to Shark Corporation:

Copyright © 2015 Nelson Education Limited. 8-23

Assume the following information for Green Bluff’s #1 Product Line:

Copyright © 2015 Nelson Education Limited. 8-26

66. Product cost includes all costs of the company.

Copyright © 2015 Nelson Education Limited. 8-27

Copyright © 2015 Nelson Education Limited. 8-28

75. JIT relies on a push system to control finished goods inventory.

B. Variable product costs per unit $ 106.00

Copyright © 2015 Nelson Education Limited. 8-33

84. What are the traditional reasons for carrying inventory?

85. To avoid shutting down manufacturing facilities because of:]

PTS: 1 DIF: Medium REF: p.384 OBJ: 8.1

Handles potential machine breakdowns by engaging in continual preventive

Copyright © 2015 Nelson Education Limited. 8-34

86. Fixed factory overhead for units sold

87. Direct labour for units sold

88. Variable overhead for units sold

89. Administrative expense

90. Direct materials for units sold

91. Variable selling expense

92. Fixed selling expense

93. Fixed factory overhead for the period

Match each statement with the correct item below.

Chapter 8 - Absorption and Variable Costing, and Inventory Management

94. Carrying costs

95. Economic order quantity

97. Ordering costs

98. Stockout costs

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