Quiz Chapter 7 - Solution

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1 Quiz Chapter 7 - Solution 1. In an income statement prepared as an internal report using the variable costing method, variable selling and administrative expenses would: A) not be used. B) be treated the same as fixed selling and administrative expenses. C) be used in the computation of net operating income but not in the computation of the contribution margin. D) be used in the computation of the contribution margin. The answer is d. All variable costs and expenses are subtracted from Sales Revenue to produce the contribution margin. 2. If the number of units produced exceeds the number of units sold, then net operating income under absorption costing will: A) be equal to the net operating income under variable costing. B) be greater than net operating income under variable costing. C) be equal to the net operating income under variable costing plus total fixed manufacturing costs. D) be equal to the net operating income under variable costing less total fixed manufacturing costs. The answer is b. The amount by which the operating income reported under absorption costing exceeds the operating income reported under variable costing is given by the following formula. Fixed Factory Overhead Per Unit x Unsold Units Page 1

2 Use the following to answer questions 3-6: Janos Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price... $111 Units in beginning inventory Units produced... 2,000 Units sold... 2,200 Units in ending inventory Variable costs per unit: Direct materials... $29 Direct labor Variable manufacturing overhead... 4 Variable selling and administrative... 9 Fixed costs: Fixed manufacturing overhead... $34,000 Fixed selling and administrative... 39,600 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. 3. What is the unit product cost for the month under variable costing? A) $63 B) $80 C) $72 D) $89 Variable costing only includes variable manufacturing costs in the cost of a product. ($29 + $ = $63). 4. What is the unit product cost for the month under absorption costing? A) $80 B) $72 C) $63 D) $89 Absorption costing includes all manufacturing costs in the cost of a product. This would include all of the variable manufacturing costs ($63) plus the fixed manufacturing cost per unit of $17. ($34,000/2,000 units produced). That is $80. Page 2

3 5. What is the net operating income for the month under variable costing? A) $8,800 B) $12,200 C) $1,700 D) $24,800 The answer is b. Sales Revenue: $244,200 ($111 x 2,200) Less Variable Costs: Variable COGS: $138,600 ($63 x 2,200) Var. S,G&Adm: 19,800 ($9 x 2,200) -158,400 Contribution Margin: $85,800 Less Fixed Costs: Fixed Manf. Costs: $34,000 Fixed S,G&Adm: 39,600-73,600 Operating Profit $12, What is the net operating income for the month under absorption costing? A) $8,800 B) $24,800 C) $1,700 D) $12,200 You could do an absorption costing income statement or you could use the formula that I showed you in class: Fixed Manufacturing Overhead Per Unit x Unsold Units: $17 x -200 = -$3,400 The fact that you dipped into inventory (sold more than you produced) means that variable costing operating is higher than absorption costing operating profit. That is why it is shown as negative numbers. $12,200 - $3,400 = $8,800 Page 3

4 Use the following to answer questions 7-10: Kosco Corporation's absorption costing income statement for March follows: Kosco Corporation Income Statement For the Month Ended March 31 Sales (2,400 units)... $48,000 Cost of goods sold: Beginning Inventory (100 units)... $ 1,000 Add Cost of Goods Manufactured (2,500 units)... 25,000 Goods Available for Sale... 26,000 Less Ending Inventory (200 units)... 2,000 Cost of Goods Sold... 24,000 Gross Margin... 24,000 Less Selling and Administrative Expenses: Fixed... 7,200 Variable... 9,600 16,800 Net Operating Income... $ 7,200 During March, the company's variable production costs were $8 per unit and its fixed manufacturing overhead totaled $5, Net operating income under the variable costing method for March would be: A) $7,200. B) $7,000. C) $7,600. D) $6,800. The answer is b. You could do a variable costing income statement or you could use the formula that I showed you in class. Fixed Overhead per unit is $2 ($5,000/2,500 units): Fixed Manufacturing Overhead Per Unit x Unsold Units: $2 x 100 = $200 $7,200 - $200 = $7,000 Page 4

5 8. The contribution margin per unit during March was: A) $8. B) $12. C) $10. D) $3. Sales Revenue: $48,000 Less Variable Costs: Variable COGS: $19,200 ($8 x 2,400) Var. S,G&Adm: 9,600-28,800 Contribution Margin: $19,200 Contribution Margin per Unit: $8 ($19,200/2,400) 9. The break-even point in units for the month under variable costing would be: A) 600 units. B) 900 units. C) 1,017 units. D) 1,525 units. The answer is d. X = Fixed Costs / Contribution Margin Per Unit Fixed Costs = $5,000 + $7,200 = $12,200 Break Even point = $12,200/8 = 1,525 units. 10. The dollar value of Kosco's ending inventory on March 31 under variable costing would be: A) $1,600. B) $2,400. C) $2,000. D) $3,400. $8 x 200 = $1,600. Page 5

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