Ch3And5

Student: ___________________________________________________________________________

1. Departmental overhead rates applied on the basis of a volume measure such as direct labor-hours or
machine-hours will eliminate any distortions in unit costs due to product diversity.
True False
2. Facility-level activities are activities that support specific products.
True False
3. An activity-based costing system is generally easier to set up and run than a traditional cost system.
True False
4. Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the
basis of direct labor-hours.
True False
5. In activity-based costing, a plantwide overhead rate is used to apply overhead to products.
True False
6. Unit-level activities are performed each time a unit is made.
True False
7. Costs classified as batch-level costs should depend on the number of batches processed rather than on
the number of units produced, the number of units sold, or other measures of volume.
True False
8. Activity rates in activity-based costing are computed by dividing costs from the first-stage cost
assignments by the activity measure for each activity cost pool.
True False
9. When a company changes from a traditional costing system to an activity-based costing system, the unit
product costs of high-volume products typically change more than the unit product costs of low-volume
products.
True False
10. When a company changes from a traditional costing system to an activity-based costing system, costs
will ordinarily shift from high-volume to low-volume products when the activity-based costing system
includes batch-level or product-level costs.
True False

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11. When a company changes from a traditional costing system to an activity-based costing system, the unit
product costs of low volume products typically increase more than the unit product costs of high volume
products decrease.
True False
12. In activity-based costing, manufacturing overhead is debited when overhead is applied to products using
activity rates.
True False
13. In activity-based costing, Work in Process is debited when overhead is applied to products using activity
rates.
True False
14. Which of the following activities would be classified as a batch-level activity?
A. Setting up equipment.
B. Designing a new product.
C. Training employees.
D. Milling a part required for the final product.
15. Which of the following would probably be the most accurate measure of activity to use for allocating the
costs associated with a factory's purchasing department?
A. Machine-hours
B. Direct labor-hours
C. Number of orders processed
D. Cost of materials purchased
16. Departmental overhead rates may not correctly assign overhead costs due to:
A. the use of direct labor hours in allocating overhead costs to products rather than machine time or
quantity of materials used.
B. the high correlation between direct labor-hours and the incurrence of overhead costs.
C. overreliance on volume as a basis for allocating overhead costs where products differ regarding the
number of units produced, lot size, or complexity of production.
D. difficulties associated with identifying cost pools for the first stage of the allocation process.
17. The labor time required to assemble a product is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
18. Testing a prototype of a new product is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.

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19. Material handling is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
20. Setting up a machine to fill an order for a particular product is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
21. Parts administration is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
22. The plant manager's salary is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
23. Providing employee recreational facilities is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Facility-level activity.
24. In activity-based costing, the activity rate for an activity cost pool is computed by dividing the total
overhead cost in the activity cost pool by:
A. the direct labor-hours required by the product.
B. the machine-hours required by the product.
C. the total activity for the activity cost pool.
D. the total direct labor-hours for the activity cost pool.
25. In activity-based costing, unit product costs computed for external financial reports do NOT include:
A. direct materials.
B. direct labor.
C. manufacturing overhead.
D. selling costs.
26. When switching from a traditional costing system to an activity-based costing system that contains some
batch-level costs:
A. the unit product costs of both high and low volume products typically increase.
B. the unit product costs of both high and low volume products typically decrease.
C. the unit product costs of high volume products typically increase and the unit product costs of low
volume products typically decrease.
D. the unit product costs of high volume products typically decrease and the unit product costs of low
volume products typically increase.

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27. Annika Company uses activity-based costing. The company has two products: A and B. The annual
production and sales of Product A is 4,000 units and of Product B is 1,000 units. There are three activity
cost pools, with estimated total cost and expected activity as follows:

The cost per unit of Product A under activity-based costing is closest to:
A. $20.40
B. $10.00
C. $18.15
D. $17.00
28. Dobles Corporation has provided the following data from its activity-based costing system:

The company makes 420 units of product D28K a year, requiring a total of 460 machine-hours, 80
orders, and 10 inspection-hours per year. The product's direct materials cost is $48.96 per unit and its
direct labor cost is $25.36 per unit.
According to the activity-based costing system, the unit product cost of product D28K is closest to:
A. $95.34 per unit
B. $93.60 per unit
C. $74.32 per unit
D. $89.93 per unit
29. Paparo Corporation has provided the following data from its activity-based costing system:

Data concerning the company's product Q79Y appear below:

According to the activity-based costing system, the unit product cost of product Q79Y is closest to:
A. $133.29 per unit
B. $85.03 per unit
C. $127.43 per unit
D. $129.94 per unit

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30. Kelly Company uses activity-based costing to compute product costs for external reports. The company
has three activity cost pools and applies overhead using predetermined overhead rates for each activity
cost pool. Estimated costs and activities for the current year are presented below for the three activity
cost pools:

Actual activity for the current year was as follows:

The amount of overhead applied for Activity 3 during the year was closest to:
A. $35,403.20
B. $34,880.00
C. $16,601.85
D. $34,810.00
31. Nick Company has two products: A and B. The company uses activity-based costing. The estimated total
cost and expected activity for each of the company's three activity cost pools are as follows:

The activity rate under the activity-based costing system for Activity 3 is closest to:
A. $525.00
B. $44.65
C. $105.00
D. $205.00
32. Millner Corporation has provided the following data from its activity-based costing accounting system:

The activity rate for the "designing products" activity cost pool is closest to:
A. $101 per product design hour
B. $1,372,448 per product design hour
C. $176 per product design hour
D. $57 per product design hour

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33. Data concerning three of the activity cost pools of Salcido LLC, a legal firm, have been provided below:

The activity rate for the "meeting with clients" activity cost pool is closest to:
A. $95 per meeting hour
B. $61 per meeting hour
C. $163 per meeting hour
D. $1,182,239 per meeting hour
34. Gould Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products:

Data concerning two products appear below:

How much overhead cost would be assigned to Product K91B using the activity-based costing system?
A. $9,097.41
B. $81,146.53
C. $4,961.04
D. $135.47
35. Hane Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products:

Data for one of the company's products follow:

How much overhead cost would be assigned to Product U94W using the activity-based costing system?
A. $42,176.55
B. $83.85
C. $7,784.21
D. $2,666.92

6
36. Activity rates from Lippard Corporation's activity-based costing system are listed below. The company
uses the activity rates to assign overhead costs to products:

Last year, Product H50E involved 9 customer orders, 666 assembly hours, and 77 batches. How much
overhead cost would be assigned to Product H50E using the activity-based costing system?
A. $60,979.68
B. $3,588.97
C. $5,778.31
D. $81.09
Addison Company has two products: A and B. The annual production and sales of Product A is 800
units and of Product B is 700 units. The company has traditionally used direct labor-hours as the basis
for applying all manufacturing overhead to products. Product A requires 0.2 direct labor-hours per unit
and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is
$71,286.
The company is considering switching to an activity-based costing system for the purpose of computing
unit product costs for external reports. The new activity-based costing system would have three overhead
activity cost pools–Activity 1, Activity 2, and General Factory–with estimated overhead costs and
expected activity as follows:

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)
37. The predetermined overhead rate under the traditional costing system is closest to:
A. $25.34
B. $22.60
C. $37.30
D. $122.91
38. The overhead cost per unit of Product B under the traditional costing system is closest to:
A. $22.38
B. $13.56
C. $73.74
D. $15.20
39. The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing
system is closest to:
A. $22.60
B. $54.84
C. $58.76
D. $36.73

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40. The overhead cost per unit of Product B under the activity-based costing system is closest to:
A. $73.74
B. $56.62
C. $22.38
D. $47.52
The controller of Hendershot Company estimates the amount of materials handling overhead cost that
should be allocated to the company's two products using the data that are given below:

The total materials handling cost for the year is expected to be $6,123.60.
41. If the materials handling cost is allocated on the basis of direct labor-hours, how much of the total
materials handling cost should be allocated to the wall mirrors? (Round off your answer to the nearest
whole dollar.)
A. $2,449
B. $4,144
C. $3,499
D. $3,062
42. If the materials handling cost is allocated on the basis of material moves, how much of the total materials
handling cost should be allocated to the specialty windows? (Round off your answer to the nearest whole
dollar.)
A. $1,021
B. $3,674
C. $3,062
D. $1,980
Merone Company allocates materials handling cost to the company's two products using the below data:

The total materials handling cost for the year is expected to be $218,790.
43. If the materials handling cost is allocated on the basis of direct labor-hours, how much of the total
materials handling cost should be allocated to the prefab barns? (Round off your answer to the nearest
whole dollar.)
A. $109,395
B. $48,620
C. $125,238
D. $68,640

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44. If the materials handling cost is allocated on the basis of material moves, how much of the total materials
handling cost should be allocated to the modular homes? (Round off your answer to the nearest whole
dollar.)
A. $182,325
B. $170,170
C. $93,552
D. $109,395
Brecket Corporation uses activity-based costing to determine product costs for external financial reports.
Activity rates computed at the beginning of the year are used to apply manufacturing overhead costs to
products. The company has provided the following data concerning its activity-based costing system.
The data used to develop activity rates were:

The actual activity for the year was:

The actual total manufacturing overhead cost incurred for the year was $1,736,700.
45. The activity rate computed at the beginning of the year for the batch setup activity cost pool is closest
to:
A. $60.80
B. $96.80
C. $158.00
D. $39.50
46. The total amount of overhead cost allocated to Product X during the year would be closest to:
A. $1,258,000
B. $790,000
C. $871,000
D. $986,500
47. The credits to the Manufacturing Overhead control account during the year (prior to closing out the
balance) would have totaled:
A. $1,655,800
B. $1,625,400
C. $1,686,200
D. $1,694,900

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48. The debits to the Manufacturing Overhead control account during the year (prior to closing out the
balance) would have totaled:
A. $1,736,700
B. $1,686,200
C. $1,655,800
D. $1,694,900
49. The manufacturing overhead for the year is underapplied (overapplied) by:
A. ($50,500)
B. $50,500
C. ($30,400)
D. $30,400
Arthur Company has two products: S and D. The company uses activity-based costing and has prepared
the following analysis showing the estimated total cost and expected activity for each of its three activity
cost pools:

The annual production and sales of Product S is 4,547 units. The annual production and sales of Product
D is 7,913.
50. The activity rate under the activity-based costing system for Activity 3 is closest to:
A. $33.33
B. $30.00
C. $29.32
D. $41.53
51. The overhead cost per unit of Product S under activity-based costing is closest to:
A. $5.00
B. $1.98
C. $10.00
D. $1.83
Abrams Company uses activity-based costing. The company has two products: A and B. The annual
production and sales of Product A is 300 units and of Product B is 1,000 units. There are three activity
cost pools, with estimated costs and expected activity as follows:

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52. The activity rate for Activity 3 is closest to:
A. $53.906
B. $138.67
C. $41.46
D. $18.71
53. The overhead cost per unit of Product A is closest to:
A. $41.60
B. $92.60
C. $12.44
D. $68.00
Andry Corporation uses activity-based costing to determine product costs for external financial reports.
The company has provided the following data concerning its activity-based costing system:

54. The activity rate for the batch setup activity cost pool is closest to:
A. $122.50
B. $226.80
C. $90.70
D. $64.80
55. Assuming that actual activity turns out to be the same as expected activity, the total amount of overhead
cost allocated to Product X would be closest to:
A. $613,000
B. $454,000
C. $428,800
D. $584,100

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 Albers Company uses activity-based costing to compute product costs for external reports. The company
has three activity cost pools and applies overhead using predetermined overhead rates for each activity
cost pool. Estimated costs and activities for the current year are presented below for the three activity
cost pools:

Actual costs and activities for the current year were as follows:

56. The total debits to the Manufacturing Overhead account during the year were closest to:
A. $96,254
B. $95,943
C. $96,034
D. $96,627
57. The total credits to the Manufacturing Overhead account during the year were closest to:
A. $96,254
B. $95,943
C. $96,034
D. $96,627

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58. Lionel Corporation manufactures two products, Product B and Product H. Product H is of fairly recent
origin, having been developed as an attempt to enter a market closely related to that of Product B.
Product H is the more complex of the two products, requiring two hours of direct labor time per unit to
manufacture compared to one hour of direct labor time for Product B. Product H is produced on an
automated production line.
Overhead is currently assigned to the products on the basis of direct labor-hours. The company estimated
it would incur $450,000 in manufacturing overhead costs and produce 7,500 units of Product H and
30,000 units of Product B during the current year. Unit costs for materials and direct labor are:

Required:
a. Compute the predetermined overhead rate under the current method of allocation and determine the
unit product cost of each product for the current year.
b. The company's overhead costs can be attributed to four major activities. These activities and the
amount of overhead cost attributable to each for the current year are given below:

Using the data above and an activity-based costing approach, determine the unit product cost of each
product for the current year.

13
59. Cabell Company manufactures two products, Product C and Product D. The company estimated it would
incur $99,590 in manufacturing overhead costs during the current period. Overhead currently is applied
to the products on the basis of direct labor-hours. Data concerning the current period's operations appear
below:

Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product
cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit product costs for
external financial reports instead of its traditional system based on direct labor-hours. The activity-based
costing system would use three activity cost pools. Data relating to these activities for the current period
are given below:

Determine the unit product cost of each product for the current period using the activity-based costing
approach.

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60. Darter Company manufactures two products, Product F and Product G. The company expects to produce
and sell 2,600 units of Product F and 6,000 units of Product G during the current year. The company
uses activity-based costing to compute unit product costs for external reports. Data relating to the
company's three activity cost pools are given below for the current year:

Required:
Using the activity-based costing approach, determine the overhead cost per unit for each product.

61. Kretlow Corporation has provided the following data from its activity-based costing accounting system:

Required:
Compute the activity rates for each of the three cost pools. Show your work!

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62. Data concerning three of Kilmon Corporation's activity cost pools appear below:

Required:
Compute the activity rates for each of the three cost pools. Show your work!

63. Doles Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products.

Data concerning two products appear below:

Required:
How much overhead cost would be assigned to each of the two products using the company's
activity-based costing system?

16
64. Desjarlais Corporation uses the following activity rates from its activity-based costing to assign
overhead costs to products.

Data concerning two products appear below:

Required:
a. How much overhead cost would be assigned to Product S96U using the company's activity-based
costing system? Show your work!
b. How much overhead cost would be assigned to Product Q06F using the company's activity-based
costing system? Show your work!

65. Archie Corporation uses the following activity rates from its activity-based costing to assign overhead
costs to products.

Last year, Product X26X involved 18 batches, 4 customer orders, and 103 assembly hours.
Required:
How much overhead cost would be assigned to Product X26X using the company's activity-based
costing system? Show your work!

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66. Erskine Company uses activity-based costing to compute product costs for external reports. The
company has three activity centers and applies overhead using predetermined overhead rates for each
activity center. Estimated costs and activities for the current year are presented below for the three
activity centers:

Actual costs and activities for the current year were as follows:

Required:
a. How much total overhead was applied to products during the year?
b. By how much was overhead overapplied or underapplied? (Be sure to clearly label your answer as to
whether the overhead was overapplied or underapplied.)

67. Within the relevant range, a change in activity results in a change in total variable cost and the per unit
fixed cost.
True False
68. The following costs are all examples of committed fixed costs: depreciation on buildings, advertising,
insurance, and management development and training.
True False
69. Contribution margin and gross margin mean the same thing.
True False
70. (Appendix 5A) When reconciling variable costing and absorption costing net operating income, fixed
manufacturing overhead costs released from inventory under absorption costing should be added to
variable costing net operating income to arrive at the absorption costing net operating income.
True False

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71. (Appendix 5A) When production exceeds sales for the period, absorption costing net operating income
will exceed variable costing net operating income.
True False
72. A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is
still within the relevant range. We would expect that:
A. The cost per unit of A has remained unchanged.
B. The cost per unit of B has decreased.
C. The cost per unit of A has decreased.
D. The cost per unit of B has remained unchanged.
73. Which costs will change with an increase in activity within the relevant range?
A. Unit fixed cost and total fixed cost
B. Unit variable cost and total variable cost
C. Unit fixed cost and total variable cost
D. Unit fixed cost and unit variable cost
74. Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts
receivable is an example of a:
A. fixed cost
B. step-variable cost
C. mixed cost
D. curvilinear cost
75. In the standard cost formula Y = a + bX, what does the "b" represent?
A. total cost
B. total fixed cost
C. total variable cost
D. variable cost per unit
76. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling
company?
A. the cost of advertising its products
B. the cost of fire insurance on its factory building
C. depreciation on its manufacturing equipment
D. both a and b above
77. Which of the following approaches to preparing an income statement calculates gross margin?

A.
B.
C.
D.

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78. (Appendix 5A) How would the following costs be classified (product or period) under variable costing at
a retail clothing store?

A.
B.
C.
D.
79. (Appendix 5A) Which of the following costs at a manufacturing company would be treated as a product
cost under the variable costing method?
A. direct material cost
B. property taxes on the factory building
C. sales manager's salary
D. All of these
80. (Appendix 5A) Assuming that direct labor is a variable cost, the primary difference between the
absorption and variable costing is that:
A. variable costing treats only direct materials and direct labor as product cost while absorption costing
treats direct materials, direct labor, and the variable portion of manufacturing overhead as product
costs.
B. variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead,
and an allocated portion of fixed manufacturing overhead as product costs while absorption costing
treats only direct materials, direct labor, and the variable portion of manufacturing overhead as
product costs.
C. variable costing treats only direct materials, direct labor, the variable portion of manufacturing
overhead, and the variable portion of selling and administrative expenses as product cost while
absorption costing treats direct materials, direct labor, the variable portion of manufacturing
overhead, and an allocated portion of fixed manufacturing overhead as product costs.
D. variable costing treats only direct materials, direct labor, and the variable portion of manufacturing
overhead as product costs while absorption costing treats direct materials, direct labor, the variable
portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as
product costs.
81. (Appendix 5A) When sales are constant, but the production level fluctuates, net operating income
determined by the variable costing method will:
A. fluctuate in direct proportion to changes in production.
B. remain constant.
C. fluctuate inversely with changes in production.
D. be greater than net operating income under absorption costing.
82. (Appendix 5A) Net operating income under variable and absorption costing will generally:
A. always be equal.
B. never be equal.
C. be equal only when production and sales are equal.
D. be equal only when production exceeds sales.
83. (Appendix 5A) When production exceeds sales, net operating income reported under variable costing
generally will be:
A. greater than net operating income reported under absorption costing.
B. less than net operating income reported under absorption costing
C. equal to net operating income reported under absorption costing.
D. higher or lower because no generalization can be made.

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84. (Appendix 5A) When sales are constant, but the production level fluctuates, net operating income
determined by the absorption costing method will:
A. tend to fluctuate in the same direction as fluctuations in the level of production.
B. tend to remain constant.
C. tend to fluctuate inversely with fluctuations in the level of production.
D. none of these
85. (Appendix 5A) A reason why absorption costing income statements are sometimes difficult for the
manager to interpret is that:
A. they omit variable expenses entirely in computing net operating income.
B. they shift portions of fixed manufacturing overhead from period to period according to changing
levels of inventories.
C. they include all fixed manufacturing overhead on the income statement each year as a period cost.
D. they ignore inventory levels in computing income charges.
86. Shipping cost at Junk Food Imports is a mixed cost with variable and fixed components. Past records
indicate total shipping cost was $18,000 for 16,000 pounds shipped and $22,500 for 22,000 pounds
shipped. Assuming that this activity is within the relevant range, if the company plans to ship 18,000
pounds next month, the expected shipping cost is:
A. $18,500
B. $20,400
C. $19,500
D. $24,000
87. Daar Corporation has provided the following production and total cost data for two levels of monthly
production volume. The company produces a single product.

The best estimate of the total monthly fixed manufacturing cost is:
A. $75,600
B. $390,600
C. $469,350
D. $548,100
88. Edde Corporation has provided the following production and total cost data for two levels of monthly
production volume. The company produces a single product.

The best estimate of the total variable manufacturing cost per unit is:
A. $127.70
B. $150.30
C. $22.60
D. $72.80

21
89. Farah Corporation has provided the following production and total cost data for two levels of monthly
production volume. The company produces a single product.

The best estimate of the total cost to manufacture 2,300 units is closest to:
A. $332,120
B. $379,500
C. $355,810
D. $360,960
90. Gamad Corporation is a wholesaler that sells a single product. Management has provided the following
cost data for two levels of monthly sales volume. The company sells the product for $131.00 per unit.

The best estimate of the total monthly fixed cost is:

A. $174,000
B. $533,100
C. $493,200
D. $573,000
91. Harada Corporation is a wholesaler that sells a single product. Management has provided the following
cost data for two levels of monthly sales volume. The company sells the product for $88.70 per unit.

The best estimate of the total variable cost per unit is:
A. $68.40
B. $79.60
C. $82.60
D. $82.00
92. The employees at Mobile Sun Lotion Company roam the beaches with a tank of premium suntan lotion
strapped on their backs. For a $2 charge, the employees will spray sunbathers with suntan lotion. Last
year, Mobile sprayed 250,000 customers and incurred the following costs:

Assuming that this activity is within the relevant range, what would Mobile's total contribution margin
have been last year if only 240,000 customers were sprayed?
A. $255,000
B. $262,000
C. $305,000
D. $312,000

22
93. The following costs are budgeted for Ghana Corporation for next year:

The costs above are based on a level of activity of 10,000 units. Assuming that this activity is within the
relevant range, what would total costs be for Ghana if the level of activity was 12,000 units?
A. $590,000
B. $638,000
C. $660,000
D. $708,000
94. The following costs are budgeted for Harlow Corporation for next year:

The costs above are based on a level of activity of 20,000 units. Assuming that this activity is within the
relevant range, what would total cost per unit be for Harlow if the level of activity was only 18,000
units?
A. $45.00
B. $46.50
C. $48.50
D. $50.00
95. Jackson, Inc., is preparing a budget for next year and requires a breakdown of the cost of steam used in
its factory into fixed and variable components. The following data on the cost of steam used and direct
labor hours worked are available for the last six months:

If Jackson uses the high-low method of analysis, the estimated variable cost of steam per direct labor
hour would be:
A. $4.00
B. $5.42
C. $5.82
D. $6.00

23
96. Shown below are units produced and total manufacturing costs for the past four months at Minga
Manufacturing Corporation:

What is Minga's cost formula for total manufacturing cost under the high-low method?
A. Y = $2,000 + $3,700X
B. Y = $3,700 + $2,000X
C. Y = $14,000 + $3,600X
D. Y = $62,000 + $3,200X
97. Stuart Company is a merchandising company. During the next month, the company expects to sell 450
units. The company has the following revenue and cost structure:

What is the expected contribution margin next month?

A. $66,420
B. $37,080
C. $50,500
D. $53,000
98. Cranbrook Company has the following data for the month of March:

Assume that direct labor is variable and all units are produced and sold in the same month. What was the
total contribution margin in March for Cranbrook Company?
A. $3,725
B. $8,875
C. $15,425
D. $16,125

24
99. (Appendix 5A) The following data pertain to last year's operations at Clarkson, Incorporated, a company
that produces a single product:

What was the absorption costing net operating income last year?
A. $44,000
B. $48,000
C. $50,000
D. $49,000
100.(Appendix 5A) A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

What is the net operating income for the month under variable costing?
A. $12,700
B. $5,600
C. $1,700
D. $14,400

25
101.(Appendix 5A) Swifton Company produces a single product. Last year, the company had net operating
income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000
units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income
using absorption costing?
A. $15,000
B. $25,000
C. $40,000
D. $55,000
102.(Appendix 5A) Bellue Inc. manufactures a variety of products. Variable costing net operating income
was $96,300 last year and ending inventory decreased by 2,600 units. Fixed manufacturing overhead
cost was $1 per unit. What was the absorption costing net operating income last year?
A. $2,600
B. $93,700
C. $96,300
D. $98,900
103.(Appendix 5A) Last year, Tinklenberg Corporation's variable costing net operating income was $52,400
and its ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost was $8 per unit.
What was the absorption costing net operating income last year?
A. $41,200
B. $11,200
C. $63,600
D. $52,400
Callaghan Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for $138.20
per unit.

104.The best estimate of the total monthly fixed cost is:

A. $176,400
B. $835,500
C. $784,800
D. $886,200
105.The best estimate of the total variable cost per unit is:
A. $83.20
B. $126.60
C. $101.40
D. $130.80
106.The best estimate of the total contribution margin when 6,300 units are sold is:
A. $73,080
B. $231,840
C. $46,620
D. $346,500

26
 Comparative income statements for Boggs Sports Equipment Company for the last two months are
presented below:

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that
the relevant range includes all of the activity levels mentioned in this problem.
107.If sales are projected to be 8,000 units in September, total expected selling and administrative expenses
would be:
A. $49,300
B. $41,600
C. $44,750
D. $46,600
Gasson Company is a merchandising firm. Next month the company expects to sell 800 units. The
following data describe the company's revenue and cost structure:

Assume that all activity mentioned in this problem is within the relevant range.
108.The expected gross margin next month is:
A. $17,600
B. $11,200
C. $14,400
D. $16,000
109.The expected contribution margin next month is:
A. $17,600
B. $11,200
C. $14,400
D. $16,000

27
110.The expected net operating income next month is:
A. $7,500
B. $5,100
C. $2,700
D. $11,200
Wilson Company's activity for the first six of the current year is as follows:

111.Using the high-low method, the variable cost per machine hour would be:
A. $0.67
B. $0.64
C. $0.40
D. $0.60
112.Using the high-low method, the fixed portion of the electrical cost each month would be:
A. $400
B. $760
C. $280
D. $190
An income statement for Crandall's Bookstore for the first quarter of the current year is presented
below:

On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining
selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder
being fixed.
113.The net operating income using the contribution approach for the first quarter is:
A. $240,000
B. $152,000
C. $44,000
D. $128,000

28
 (Appendix 5A) Hurlex Company produces a single product. Last year, Hurlex manufactured 15,000
units and sold 12,000 units. Production costs for the year were as follows:

Sales totaled $840,000 for the year, variable selling expenses totaled $60,000, and fixed selling and
administrative expenses totaled $180,000. There were no units in the beginning inventory. Assume that
direct labor is a variable cost.
114.Under absorption costing, the carrying value on the balance sheet of the ending inventory for the year
would be:
A. $135,000
B. $93,000
C. $105,000
D. $0
115.Under variable costing, the company's net operating income for the year would be:
A. $42,000 higher than under absorption costing
B. $30,000 higher than under absorption costing
C. $30,000 lower than under absorption costing
D. $42,000 lower than under absorption costing
(Appendix 5A) Abdi Company, which has only one product, has provided the following data concerning
its most recent month of operations:

116.The total contribution margin for the month under the variable costing approach is:
A. $91,000
B. $168,000
C. $105,000
D. $25,300

29
117.The total gross margin for the month under the absorption costing approach is:
A. $105,000
B. $124,800
C. $7,000
D. $91,000
118.What is the net operating income for the month under variable costing?
A. $2,700
B. $4,300
C. $7,000
D. $(12,800)
119.What is the net operating income for the month under absorption costing?
A. $7,000
B. $4,300
C. $(12,800)
D. $2,700
(Appendix 5A) Hopkins Company manufactures a single product. The following data pertain to the
company's operations last year:

At the beginning of the year there were no units in inventory. A total of 12,000 units were produced
during the year, and 10,000 units were sold.
120.The net operating income under variable costing would be:
A. $64,000
B. $60,000
C. $56,000
D. $52,000
121.The net operating income under absorption costing would be:
A. the same as the income under variable costing.
B. $8,000 greater than the income under variable costing.
C. $12,000 greater than the income under variable costing.
D. $8,000 less than the income under variable costing.

30
 (Appendix 5A) Phearsum Corporation manufactures a parachute. Shown below is Phearsum's cost
structure:

In its first year of operations, Phearsum produced and sold 4,000 parachutes. The parachutes sold for
$310 each.
122.Refer back to the original data. How would Phearsum's variable costing net operating income been
affected in its first year if 4,500 parachutes were produced instead of 4,000 and Phearsum still sold 4,000
parachutes?
A. net operating income would not have been affected
B. net operating income would have been $38,000 higher
C. net operating income would have been $57,000 higher
D. net operating income would have been $75,000 lower
(Appendix 5A) Feery Company, which has only one product, has provided the following data
concerning its most recent month of operations:

123.What is the net operating income for the month under variable costing?
A. $1,800
B. $16,700
C. $9,500
D. $18,500
124.What is the net operating income for the month under absorption costing?
A. $18,500
B. $1,800
C. $9,500
D. $16,700

31
 (Appendix 5A) Jarbo Company, which has only one product, has provided the following data concerning
its most recent month of operations:

The company produces the same number of units every month, although the sales in units vary from
month to month. The company's variable costs per unit and total fixed costs have been constant from
month to month.
125.What is the unit product cost for the month under variable costing?
A. $76
B. $103
C. $84
D. $111
126.What is the unit product cost for the month under absorption costing?
A. $84
B. $76
C. $103
D. $111
127.What is the net operating income for the month under variable costing?
A. $3,800
B. $24,400
C. $9,200
D. $8,100
128.What is the net operating income for the month under absorption costing?
A. $8,100
B. $9,200
C. $3,800
D. $24,400

32
 (Appendix 5A) Beach Corporation, which produces a single product, budgeted the following costs for its
first year of operations. These costs are based on a budgeted volume of 30,000 towels produced and
sold:

During the first year of operations, Beach Towel actually produced 30,000 towels but only sold 24,000
towels. Actual costs did not fluctuate from the cost behavior patterns described above. The 24,000
towels were sold for $16 per towel. Assume that direct labor is a variable cost.
129.What is the total cost that would be assigned to Beach Towel's finished goods inventory at the end of the
first year of operations under the variable costing method?
A. $43,200
B. $45,600
C. $55,200
D. $64,800
130.Under the absorption costing method, what is Beach Towel's actual net operating income for its first
year?
A. $60,000
B. $115,200
C. $117,600
D. $124,800
131.Assuming no change in cost structure, which of the following would have increased Beach Towel's net
operating income under the variable costing method in its first year of operations?
A. an increase in sales volume with no increase in production volume
B. an increase in production volume with no increase in sales volume
C. both A and B above
D. none of these

33
 (Appendix 5A) Blake Corporation, which produces a single product, has provided the following
absorption costing income statement for the month of June:

During June, the company's variable production costs were $10 per unit and its fixed manufacturing
overhead totaled $60,000. A total of 10,000 units were produced during June and the company had 1,000
units in the beginning inventory. The company uses the LIFO method to value inventories.
132.The contribution margin per unit during June was:
A. $20
B. $18
C. $16
D. $14
133.The carrying value on the balance sheet of the company's inventory on June 30 under the variable
costing method would be:
A. $10,000
B. $12,000
C. $15,000
D. $24,000
134.Net operating income under the variable costing method for June would be:
A. $36,000
B. $40,000
C. $53,000
D. $60,000
135.The break-even point in units for the month under variable costing would be:
A. 6,000 units
B. 6,750 units
C. 7,500 units
D. 9,000 units

34
 (Appendix 5A) Haaikon Company, which has only one product, has provided the following data
concerning its most recent month of operations:

136.The total contribution margin for the month under the variable costing approach is:
A. $56,100
B. $28,500
C. $95,700
D. $69,300
137.What is the net operating income for the month under variable costing?
A. $6,600
B. $(300)
C. $5,400
D. $1,200
(Appendix 5A) Ibarra Company, which has only one product, has provided the following data
concerning its most recent month of operations:

35
138.What is the net operating income for the month under variable costing?
A. $0
B. $(19,800)
C. $(3,000)
D. $3,000
(Appendix 5A) Yankee Company manufactures a single product. The company has the following cost
structure:

Last year, 4,000 units were produced and 3,500 units were sold. There were no beginning inventories.
139.The carrying value on the balance sheet of the ending finished goods inventory under variable costing
would be:
A. the same as under absorption costing
B. $1,500 less than under absorption costing
C. $2,000 higher than under absorption costing
D. $2,000 less than under absorption costing
140.Under absorption costing, the cost of goods sold for the year would be:
A. $28,000
B. $24,500
C. $17,500
D. $14,000
(Appendix 5A) Peterson Company produces a single product. Data from the company's records for last
year follow:

141.Under the absorption costing method, Peterson's net operating income would be:
A. $217,000
B. $307,000
C. $352,000
D. $374,500

36
 (Appendix 5A) McCoy Corporation manufactures a computer monitor. Shown below is McCoy's cost
structure:

In its first year of operations, McCoy produced 100,000 monitors but only sold 95,000. McCoy's gross
margin in this first year was $2,629,600. McCoy's contribution margin in this first year was $2,109,000.
142.Under the variable costing method, what is McCoy's net operating income for its first year?
A. $266,000
B. $741,000
C. $1,261,600
D. $2,173,600
143.Under the absorption costing method, what is McCoy's net operating income for its first year?
A. $266,000
B. $786,600
C. $1,261,600
D. $2,173,600
(Appendix 5A) Mediocre Manufacturing Company produces a single product. Management budgeted
the following costs for its first year of operations. These costs are based on a budgeted volume of 4,000
units produced and sold:

During the first year of operations, Mediocre actually produced 4,000 units but only sold 3,500 units.
Actual costs did not fluctuate from the cost behavior patterns described above. The 3,500 units were sold
for $72 per unit. Assume that direct labor is a variable cost.
144.What is the total cost that would be assigned to Mediocre's finished goods inventory at the end of the
first year of operations under the absorption costing method?
A. $12,250
B. $20,125
C. $23,000
D. $26,250

37
145.Under the variable costing method, what is Mediocre's actual net operating income for its first year?
A. $42,000
B. $54,250
C. $55,125
D. $63,000
146.Assuming no change in cost structure, which of the following would have increased Mediocre's net
operating income under the absorption costing method in its first year of operations?
A. an increase in sales volume with no increase in production volume
B. an increase in production volume with no increase in sales volume
C. both A and B above
D. None of these
(Appendix 5A) JV Company produces a single product that sells for $7.00 per unit. Last year, 100,000
units were produced and 80,000 units were sold. There were no beginning inventories. The company has
the following cost structure:

147.The net operating income under variable costing is:

A. $50,000
B. $80,000
C. $90,000
D. $120,000
(Appendix 5A) Gadepelli Company, which has only one product, has provided the following data
concerning its most recent month of operations:

38
148.The total contribution margin for the month under the variable costing approach is:
A. $54,600
B. $99,400
C. $93,800
D. $42,600
149.The total gross margin for the month under the absorption costing approach is:
A. $25,200
B. $54,600
C. $68,000
D. $93,800
(Appendix 5A) During its first year of operations, Carlos Manufacturing Company incurred the
following costs to produce 8,000 units of its product:

The company also incurred the following costs in the sale of 7,500 units of product during its first year:

Assume that direct labor is a variable cost.

150.If Carlos' absorption costing net operating income for this first year is $118,125, what would its variable
costing net operating income be for this first year?
A. $86,000
B. $90,000
C. $104,125
D. $146,250
(Appendix 5A) Kern Company produces a single product. Selected information concerning the
operations of the company follow:

Assume that direct labor is a variable cost.

39
151.Which costing method, absorption or variable costing, would show a higher operating income for the
year and by what amount?
A. Absorption costing net operating income would be higher than variable costing net operating income
by $2,500.
B. Variable costing net operating income would be higher than absorption costing net operating income
by $2,500.
C. Absorption costing net operating income would be higher than variable costing net operating income
by $5,500.
D. Variable costing net operating income would be higher than absorption costing net operating income
by $5,500.
(Appendix 5A) Crossbow Corp. produces a single product. Data concerning June's operations follow:

152.For the year in question, net operating income under variable costing will be:
A. higher than net operating income under absorption costing.
B. lower than net operating income under absorption costing.
C. the same as net operating income under absorption costing.
D. none of these
(Appendix 5A) Cloer Company, which has only one product, has provided the following data
concerning its most recent month of operations:

40
153.The total contribution margin for the month under the variable costing approach is:
A. $178,500
B. $71,700
C. $272,000
D. $170,000
154.The total gross margin for the month under the absorption costing approach is:
A. $200,000
B. $170,000
C. $8,500
D. $178,500
(Appendix 5A) Hirsch Company produces a single product. Variable manufacturing costs are $6 per
unit, and fixed manufacturing costs are $2 per unit based on 50,000 units produced each year. In the
current year, 50,000 units were produced, and 40,000 units were sold.
155.Under absorption costing, the amount of manufacturing cost (variable and fixed) deducted from revenue
in the current year would be:
A. $320,000
B. $400,000
C. $240,000
D. $300,000
156.Under variable costing, the amount of manufacturing cost (variable and fixed) deducted from revenue in
the current year would be:
A. $320,000
B. $240,000
C. $340,000
D. $400,000
(Appendix 5A) Osawa Inc. manufactured 200,000 units of its only product in its first year of operations.
Variable manufacturing costs were $30 per unit. Fixed manufacturing costs were $600,000 and selling
and administrative costs totaled $400,000. Osawa sold 120,000 units at a selling price of $40 per unit.
157.Osawa's net operating income using absorption costing would be:
A. $200,000
B. $440,000
C. $600,000
D. $840,000
158.Osawa's net operating income using variable costing would be:
A. $200,000
B. $440,000
C. $800,000
D. $600,000

41
 (Appendix 5A) Eldrick Company, which has only one product, has provided the following data
concerning its most recent month of operations:

159.What is the net operating income for the month under variable costing?
A. $10,100
B. $2,600
C. $15,000
D. $17,600
160.What is the net operating income for the month under absorption costing?
A. $17,600
B. $10,100
C. $15,000
D. $2,600

42
 (Appendix 5A) Kiefer Company, which has only one product, has provided the following data
concerning its most recent month of operations:

The company produces the same number of units every month, although the sales in units vary from
month to month. The company's variable costs per unit and total fixed costs have been constant from
month to month.
161.What is the net operating income for the month under variable costing?
A. $6,800
B. $9,600
C. $29,200
D. $11,600
162.What is the net operating income for the month under absorption costing?
A. $11,600
B. $6,800
C. $29,200
D. $9,600
(Appendix 5A) Norenberg Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:

163.What was the absorption costing net operating income last year?
A. $92,800
B. $88,600
C. $84,400
D. $76,700

43
164.What was the absorption costing net operating income this year?
A. $80,000
B. $100,500
C. $108,000
D. $112,200
(Appendix 5A) Rosal Corporation manufactures a variety of products. Variable costing net operating
income was $74,700 last year and was $82,300 this year. Last year, ending inventory increased by 2,600
units. This year, ending inventory decreased by 1,400 units. Fixed manufacturing overhead cost is $5 per
unit.
165.What was the absorption costing net operating income last year?
A. $61,700
B. $74,700
C. $80,700
D. $87,700
166.What was the absorption costing net operating income this year?
A. $75,300
B. $89,300
C. $76,300
D. $68,700
167.Stuart Manufacturing produces metal picture frames. The company's income statements for the last two
years are given below:

The company has no beginning or ending inventories.

Required:
a. Estimate the company's total variable cost per unit and its total fixed costs per year. (Remember that
this is a manufacturing firm.)
b. Compute the company's contribution margin for this year.

44
168.Selected data about Pitkin Company's manufacturing operations at two levels of activity are given
below:

Required:
Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that both
direct material and direct labor are variable costs.

169.(Appendix 5A) Miller Company produces a single product. The company had the following results for
its first two years of operation:

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the company
again sold 40,000 units, but increased production to 50,000 units. The company's variable production
cost is $5 per unit and its fixed manufacturing overhead cost is $600,000 a year. Fixed manufacturing
overhead costs are applied to the product on the basis of each year's unit production (i.e., a new fixed
overhead rate is computed each year). Variable selling and administrative expenses are $2 per unit sold.
Required:
a. Compute the unit product cost for each year under absorption costing and under variable costing.
b. Prepare an income statement for each year, using the contribution approach with variable costing.
c. Reconcile the variable costing and absorption costing income figures for each year.
d. Explain why the net operating income for Year 2 under absorption costing was higher than the net
operating income for Year 1, although the same number of units were sold in each year.

45
170.(Appendix 5A) Phinisee Corporation manufactures a variety of products. The following data pertain to
the company's operations over the last two years:

Required:
a. Determine the absorption costing net operating income for last year. Show your work!
b. Determine the absorption costing net operating income for this year. Show your work!

171.(Appendix 5A) Last year, Denogean Corporation's variable costing net operating income was $64,200
and ending inventory increased by 1,900 units. Fixed manufacturing overhead cost per unit was $4.
Required:
Determine the absorption costing net operating income for last year. Show your work!

46
 Ch3And5 Key
1. FALSE

2. FALSE

3. FALSE

4. FALSE

5. FALSE

6. TRUE

7. TRUE

8. TRUE

9. FALSE

10. TRUE

11. TRUE

12. FALSE

13. TRUE

14. A

15. C

16. C

17. A

18. C

19. B

20. B

21. C

22. D

23. D

24. C

25. D

26. D

27. C

28. A

29. A

30. A

1
31. C

32. C

33. C

34. A

35. C

36. C

37. D

38. C

39. A

40. B

41. C

42. A

43. D

44. A

45. D

46. D

47. C

48. A

49. A

50. B

51. A

52. C

53. B

54. D

55. D

56. A

57. D

2
58. a. The company expects to work 45,000 direct labor-hours during the current year, computed as follows:

Using these hours as a base, the predetermined overhead using direct labor-hours would be:
Predetermined overhead rate = $450,000 45,000 DLHs = $10.00/DLH
Using this overhead rate, the unit product cost of each product would be:

b. The overhead rates are computed as follows:

The overhead cost attributable to each product is:

Overhead cost per unit:

Product B: $189,236 30,000 units = $6.3079 per unit
Product H: $260,764 7,500 units = $34.7685 per unit
Using activity-based costing, the unit product cost of each product would be:

3
59. a. The expected total direct labor hours during the period are computed as follows:

Using these hours as a base, the predetermined overhead using direct labor hours would be:
Estimated overhead cost, $99,590 Estimated direct labor hours, 2,020 = $49.30 per DLH
Using this overhead rate, the unit product costs are:

b. The overhead rates for each activity center are as follows:

The overhead cost charged to each product is:

Overhead cost per unit:

Product C: $40,460 2,600 units = $15.56 per unit
Product D: $59,130 1,200 units = $49.28 per unit
Using activity based costing, the unit product cost of each product would be:

4
60. The overhead rates for each activity center are as follows:

The overhead cost charged to each product is:

Overhead cost per unit:

Product F: $64,580 2,600 units = $24.84 per unit
Product G: $99,600 6,000 units = $16.60 per unit

61.

62.

63.

64. a.

b.

65.

5
66. a.

The amount of overhead applied to production is determined as follows:

b.

67. TRUE

68. FALSE

69. FALSE

70. FALSE

71. TRUE

72. D

73. C

74. B

75. D

76. A

77. B

78. B

79. A

80. D

81. B

82. C

83. B

84. A

85. B

86. C

6
87. A

88. B

89. D

90. A

91. B

92. D

93. C

94. C

95. A

96. A

97. B

98. A

99. B

100. A

101. D

102. B

103. A

104. A

105. C

106. B

107. D

108. A

109. B

110. C

111. D

112. A

113. C

114. A

115. D

116. A

117. A

118. B

119. A

120. C

7
121. B

122. A

123. B

124. A

125. A

126. C

127. C

128. C

129. A

130. C

131. A

132. B

133. C

134. A

135. C

136. D

137. C

138. C

139. B

140. B

141. C

142. B

143. B

144. B

145. C

146. C

147. A

148. C

149. B

150. B

151. A

152. B

153. A

154. B

8
155. A

156. C

157. B

158. A

159. C

160. A

161. D

162. B

163. A

164. A

165. D

166. A

167. a. Variable component of cost of goods sold:

Variable cost = Change in costs/Change in units
Variable cost = ($710,000 - $550,000)/(70,000 - 50,000)
Variable cost = $8.00
Fixed cost:
High volume: $710,000 - $8.00×70,000 = $150,000
Low volume: $550,000 - $8.00×50,000 = $150,000
Variable component of selling and administrative expenses:
Variable cost = Change in costs/Change in units
Variable cost = ($190,000 - $150,000)/(70,000 - 50,000)
Variable cost = $2.00
Fixed cost:
High volume: $190,000 - $2.00×70,000 = $50,000
Low volume: $150,000 - $2.00×50,000 = $50,000
Total variable cost per unit:
$8.00 + $2.00 = $10.00
Total fixed cost:
$150,000 + $50,000 = $200,000
b.

9
168.

$18,000 ÷ 5,000 units = $3.60 per unit

Therefore, the cost formula for manufacturing overhead is $21,000 per period plus $3.60 per unit produced, or Y = $21,000 + $3.60X.

169. a. Cost per unit under absorption costing:

b. Income statements for each year under variable costing:

c. Reconciliation of absorption costing and variable costing net operating incomes:

d. The increase in production in Year 2, in the face of level sales, caused a buildup of inventory and a deferral of a portion of the overhead costs
of Year 2 to the next year. This deferral of cost relieved Year 2 of $120,000 of fixed manufacturing overhead. Income for Year 2 was $120,000
higher than income of Year 1, even though the same number of units was sold each year. By increasing production and building up inventory, the
company was able to increase profits without increasing sales. This is major criticism of the absorption costing approach.

10
170. a. and b.

171.

11
Ch3And5 Summary
Category # of Questions
AACSB: Analytic 143
AACSB: Reflective Thinking 28
AICPA BB: Critical Thinking 171
AICPA FN: Measurement 3
AICPA FN: Reporting 170
Brewer - Chapter 003 74
Brewer - Chapter 005 136
Learning Objective: 1 40
Learning Objective: 2 23
Learning Objective: 3 38
Learning Objective: 4 20
Learning Objective: 5 80
Level: Easy 21
Level: Hard 18
Level: Medium 132
Source: CMA, adapted 4
Source: CPA, adapted 4