Chapter 9: Inventory Costing and Capacity Analysis
Multiple Choice


1.  

The following data is available for the Eminence Company:

Production 500,000 units
Sales 400,000 units
Selling price $35 per unit
Direct-material unit cost $6
Direct-labor unit cost 8
Variable-overhead unit cost 1
Fixed overhead total cost $2,000,000
Variable nonmanufacturing costs $1 per unit sold
Fixed nonmanufacturing costs $2,500,000

No beginning inventories of work-in-process or finished goods and no ending inventory of work-in-process.

Calculate the unit inventoriable cost using the variable costing method for Eminence Company.

$16
$15
$14
$1


2.  

Referring to the information for Eminence Company in Question 1, what is the unit inventoriable cost using the absorption costing method.

$35
$20
$19
$15


3.  

Referring to the information for Eminence Company in Question 1, what is the contribution margin?

$8,000,000
$6,400,000
$6,000,000
$7,600,000


4.  

Referring to the information for the Eminence Company in Question 1, what is the cost of goods sold using absorption costing?

$9,500,000
$6,400,000
$8,000,000
$7,600,000


5.  

Referring to the information for Eminence Company in Question 1, what is the amount of operating income under variable costing?

$3,100,000
$3,500,000
$1,500,000
$1,900,000


6.  

Referring to the information for Eminence Company in Question 1, what is the amount of operating income using absorption costing?

$3,100,000
$3,500,000
$1,500,000
$1,900,000


7.  

Referring to the information for Eminence Company in Questions 1, 5, and 6, what is the cause of the $400,000 difference in operating incomes between the variable costing and absorption costing income statements?

The variable nonmanufacturing costs are expensed before the calculation of the contribution margin for variable costing but not so for absorption costing.
The net selling price for variable costing is less than for absorption costing because of the $1 per unit sold of variable nonmanufacturing cost.
The $4 per unit of fixed manufacturing overhead cost in each inventory unit (100,000) for absorption costing is part of the asset inventory on the balance sheet rather than the full write-off of fixed costs under variable costing.
d. Variable costing does not use ending inventory in calculating the variable costs to be subtracted from revenues, but absorption costing does use ending inventory to subtract costs from cost of goods sold and that causes the operating income under absorption costing to be higher.


8.  

Of the factors used in calculating breakeven point, which ones are only used with absorption costing method?

Fixed costs and sales level in units
Unit contribution margin and production level in units
Denominator level chosen to set the fixed manufacturing costs rate and production level in units
Denominator level chosen to set the fixed manufacturing costs rate and fixed costs


9.  

The board of directors of E-Z-Duz It Corporation hired a new CEO to take over their company. He had good credentials as a competent executive able to turn around troubled or ailing companies. His contract with E-Z-Duz It provided for a token salary with a year-end bonus of 10% of operating profit (before considering the bonus or income taxes). Early in the year, the new CEO announced an increase to the advertising budget and an increase in production ("to fill the pipelines") to meet increased sales.

The following is the absorption costing income statement for E-Z-Duz It for the CEOs first year:

Sales, 25,000,000 x $2 $50,000,000
Production costs:
Variable manufacturing , 30,000,000 x $1 $30,000,000
Fixed manufacturing, 8,400,000
Total $38,400,000
Ending inventory, 5,000,000 units x $1.28 6,400,000
Cost of goods sold 32,000,000
Gross margin $18,000,000
Nonmanufacturing expenses
Variable $12,500,000
Fixed 4,100,000 16,600,000
Operating income $ 1,400,000
=========

The day after the income statement was released, the CEO resigned to take a job with another corporation having difficulties similar to those E-Z-Duz It Corporation had the year prior to his arrival. The president remarked, "I enjoy challenges. Now that E-Z-Duz It is in the black, Id prefer tackling another knotty difficulty." His contract with his new employer is similar to the one he had with E-Z-Duz It Corporation.

What is the operating income using variable costing?

$1,400,000
$(5,000,000)
$8,400,000
-0-


10.  

Referring to the E-Z-Duz It Corporation in Question 9, what accounts for the difference of $1,400,000 in operating income?

The difference in the way that inventory is costed between the two costing methods when inventory levels are changing--$0.28 fixed manufacturing cost per unit for the additional 5,000,000 units of ending inventory.
The greater volume of sales that resulted from the additional advertising.
Producing more units than the amount sold
The difference in the way that inventory is costed between the two costing methods always causes a difference in operating income.


11.  

Which of the following is not a way of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant manager?

Reward managers for investing funds in inventory
Change the accounting system to either variable or throughput costing
Extend the time period used to evaluate performance
Include nonfinancial as well as financial variables in the measures used to evaluate performance


12.  

Alternative income statements for the same company for a given year follow:

A B C
Sales $100,000 $100,000 $100,000
Cost of goods sold 40,000 30,000 42,000
$ 60,000 $ 70,000 $ 58,000
Variances:
Direct material (1,500) (1,500)
Direct labor (500) (500)
Factory overhead (4,000)
 — 
(4,000)
$ 54,000
$ 68,000
$ 54,000
Other operating expenses:
(all fixed) 40,000 54,000 40,000
Operating income $ 14,000
========
$ 14,000
========
$ 14,000
========

Which costing system was used for company A?

Actual costing
Standard absorption costing
Standard variable costing
Normal absorption costing


13.  

Refer to the information in Question 12, which costing system was used for company B?

Actual costing
Standard absorption costing
Standard variable costing
Normal absorption costing


14.  

Refer to the information in Question 12, which costing system was used for company C?

Actual costing
Standard absorption costing
Standard variable costing
Normal absorption costing


15.  

The Varamore Company incurs fixed manufacturing overhead of $2,700,000annually with the following information about denominator levels:

  • master-budget utilization level is 37,500 machine-hours
  • normal utilization level, 45,000 machine-hours
  • practical capacity, 50,000 machine hours allowed
  • theoretical capacity, 54,000 machine hours

During a recent year, 37,500 units were produced and 30,000 of those units were sold. One standard machine-hour is allowed for each unit produced. There was no beginning inventory and no fixed manufacturing overhead spending variance.

Which denominator-level concept would result in the highest operating income?

Master-budget utilization level
Normal utilization level
Practical capacity
Theoretical capacity


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