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CHAPTER11

ABSORPTI
ON/
VARI
ABLECOSTINGANDCOST-
VOLUME-
PROFI
TANALYSI
S

MULTI
PLECHOI
CE

1. Consi
dert
hef ol
lowi
ngt hr
eeproductcosti
ngal
ter
nat
ives:pr
ocesscost
ing,j
ob
or
dercost
ing,andstandardcost
ing.Whichoft
hesecanbeusedinconjuncti
on
wit
habsor
ptioncosti
ng?

a. j
obordercost
ing
b. st
andardcost
ing
c. pr
ocesscosti
ng
d. al
loft
hem

ANSWER: d EASY

2. Inarecentper
iod,
MarvelCo.incur
red$20,
000offixedmanufactur
ingover
head
anddeducted$30,
000offixedmanufactur
ingover
head.MarvelCo.mustbe
usi
ng

a. absor pti
oncosti
ng.
b. variablecosti
ng.
c. directcosti
ng.
d. standar dcost
ing.

ANSWER: a EASY

3. Anot
hernamef
orabsor
pti
oncost
ingi
s

a. ful
lcosti
ng.
b. dir
ectcosting.
c. j
obor dercosti
ng.
d. fi
xedcosting.

ANSWER: a EASY

4. Ifafi
rm pr
oducesmoreuni
tsthani
tsel
ls,
absor
pti
oncost
ing,
rel
ati
vet
o
vari
abl
ecosti
ng,wi
llr
esul
tin

a. hi
gherincomeandassets.
b. hi
gherincomebutl
owerasset
s.
c. l
owerincomebuthi
gherasset
s.
d. l
owerincomeandassets.

ANSWER: a MEDI
UM

111
112 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

5. Underabsor
pti
oncosti
ng,
fixedmanuf
act
uri
ngover
headcoul
dbef
oundi
nal
lof
t
hefoll
owingexceptt
he

a. work-in-
processaccount.
b. fi
nishedgoodsi nventor
yaccount
.
c. CostofGoodsSol d.
d. periodcosts.

ANSWER: d EASY

6. I
faf
ir
m usesabsor
pti
oncost
ing,
fixedmanuf
act
uri
ngover
headwi
llbei
ncl
uded

a. onl
yonthebal ancesheet.
b. onl
yonthei ncomestatement.
c. onbot
ht hebalancesheetandincomestat
ement.
d. onnei
therthebalancesheetnorincomest
atement
.

ANSWER: c EASY

7. Underabsor
pti
oncost
ing,i
fsalesr
emainconst
antf
rom per
iod1t
oper
iod2,
the
companywillr
epor
talar
gerincomeinper
iod2when

a. peri
od2pr oduct
ionexceedsperiod1product
ion.
b. peri
od1pr oduct
ionexceedsperiod2product
ion.
c. vari
abl
eproducti
oncost sarelar
gerinperi
od2thanperi
od1.
d. fi
xedproducti
oncostsarelargerinper
iod2thanper
iod1.

ANSWER: a MEDI
UM

8. TheFASBrequir
eswhichoft
hef
oll
owi
ngt
obeusedi
npr
epar
ati
onofext
ernal
fi
nanci
alst
atement
s?

a. vari
ablecosti
ng
b. standardcosti
ng
c. acti
vit
y-basedcosti
ng
d. absorpti
oncosting

ANSWER: d EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 113

9. Anendi
ngi
nvent
oryval
uat
iononanabsor
pti
oncost
ingbal
ancesheetwoul
d

a. sometimesbel essthantheendinginventoryvaluat
ionundervariabl
e
costi
ng.
b. alwaysbelesst hantheendi
nginventoryvaluationundervari
ablecosti
ng.
c. alwaysbethesameast heendinginventoryvaluati
onundervariable
costi
ng.
d. alwaysbegreaterthanorequaltotheendi nginventor
yvaluati
onunder
vari
ablecost
ing.

ANSWER: d EASY

10. Absor
pti
oncost
ingdi
ff
ersf
rom var
iabl
ecost
ingi
nal
loft
hef
oll
owi
ngexcept

a. tr
eatmentoffi
xedmanuf actur
ingoverhead.
b. tr
eatmentofvari
abl
epr oducti
oncosts.
c. accept
abil
i
tyforext
ernalreporti
ng.
d. arr
angementoftheincomest atement.

ANSWER: b EASY

11. Whi
choft
hef
oll
owi
ngi
snotassoci
atedwi
thabsor
pti
oncost
ing?

a. funct
ionalformat
b. grossmar gi
n
c. peri
odcost s
d. contr
ibuti
onmar gi
n

ANSWER: d EASY

12. Unabsor
bedf
ixedover
headcost
sinanabsor
pti
oncost
ingsyst
em ar
e

a. fi
xedmanuf actur
ingcostsnotal l
ocatedt
ounitsproduced.
b. vari
ableover headcostsnotallocatedtouni
tsproduced.
c. excessvariableoverheadcosts.
d. coststhatcannotbecont rol
led.

ANSWER: a EASY
114 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

13. Prof
itunderabsorpt
ioncosti
ngmaydifferf
rom pr
ofi
tdet
ermi
nedundervar
iabl
e
cost
ing.Howi sthi
sdiff
erencecal
cul
ated?

a. Changeinthequant
it
yofal
luni
tsi
ninvent
oryt
imesther
elevantfi
xed
costsperunit
.
b. Changeinthequant
it
yofal
luni
tspr
oducedti
mestherel
evantfi
xed
costsperunit
.
c. Changeinthequant
it
yofal
luni
tsi
ninvent
oryt
imesther
elevantvari
abl
e
costperunit
.
d. Changeinthequant
it
yofal
luni
tspr
oducedti
mestherel
evantvari
able
costperunit
.

ANSWER: a EASY

14. Whatfact
or,
relat
edtomanufact
uri
ngcosts,causest
hedi
ffer
encei
nnet
ear
ningscomputedusi
ngabsorpt
ioncost
ingandnetear
ningscomput
edusi
ng
var
iabl
ecosti
ng?

a. Absor pt
ioncost i
ngconsi dersallcostsinthedeterminat
ionofnet
earnings,whereasvar iabl
ecost i
ngconsi dersfi
xedcoststobeperiod
costs.
b. Absor pt
ioncost i
ngal l
ocatesf i
xedover headcostsbetweencostofgoods
soldandi nventories,
andvar iablecostingconsi
dersallfi
xedcoststobe
periodcosts.
c. Absor pt
ioncost i
ng i
nvent or
iesalldi
rectcost
s,butvari
ablecosti
ng
considersdirectcostst obeper i
odcost s.
d. Absor pt
ioncost i
ng i
nvent or
iesallfi
xedcostsfortheperi
odinending
fi
nishedgoodsi nventory,butvariabl
ecost i
ngexpensesallf
ixedcosts.

ANSWER: b EASY

15. Thecost
ingsyst
em t
hatcl
assi
fi
escost
sbyf
unct
ionalgr
ouponl
yis

a. standardcost
ing.
b. jobordercost
ing.
c. vari
ablecosti
ng.
d. absorpti
oncosti
ng.

ANSWER: d EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 115

16. Afunct
ional
classi
fi
cat
ionofcost
swoul
dcl
assi
fy
depr
eci
ati
ononof
fi
ce
equi
pment
asa

a. productcost.
b. generalandadmini
str
ati
veexpense.
c. sell
ingexpense.
d. vari
ablecost.

ANSWER: b EASY

17. Thecost
ingsyst
em t
hatcl
assi
fi
escost
sbybot
hfunct
ionalgr
oupandbehavi
or
i
s

a. processcosti
ng.
b. jobordercost
ing.
c. vari
ablecosti
ng.
d. absorpti
oncosti
ng.

ANSWER: c EASY

18. Undervar
iabl
ecost
ing,
whi
choft
hef
oll
owi
ngar
ecost
sthatcanbei
nvent
ori
ed?

a. vari
abl
esell
ingandadminist
rati
veexpense
b. vari
abl
emanuf act
uri
ngoverhead
c. fi
xedmanufacturi
ngover
head
d. fi
xedsel
li
ngandadmi ni
str
ativeexpense

ANSWER: b EASY

19. Consi
derthefol
lowingthr
eeproductcosti
ngal
ter
nat
ives:pr
ocesscost
ing,j
ob
or
dercosti
ng,andstandardcost
ing.Whichoft
hesecanbeusedinconjuncti
on
wit
hvari
ablecosti
ng?

a. j
obordercost
ing
b. st
andardcost
ing
c. pr
ocesscosti
ng
d. al
loft
hem

ANSWER: d EASY
116 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

20. Anot
hernamef
orvar
iabl
ecost
ingi
s

a. fullcosti
ng.
b. directcosti
ng.
c. standardcosting.
d. adjustablecosti
ng.

ANSWER: b EASY

21. I
faf
ir
m usesvar
iabl
ecost
ing,
fixedmanuf
act
uri
ngover
headwi
llbei
ncl
uded

a. onl
yonthebal ancesheet.
b. onl
yonthei ncomestatement.
c. onbot
ht hebalancesheetandincomestat
ement.
d. onnei
therthebalancesheetnorincomest
atement
.

ANSWER: b EASY

22. Undervar
iabl
ecost
ing,

a. al
lproductcost
sarevar i
able.
b. al
lperi
odcostsarevariable.
c. al
lproductcost
sarefixed.
d. pr
oductcostsarebothf i
xedandvar
iabl
e.

ANSWER: a EASY

23. Howwil
laf
avorabl
evol
umevar
ianceaf
fectneti
ncomeundereachoft
he
f
oll
owi
ngmethods?

Absorpti
on Variabl
e
a. r
educe noef f
ect
b. r
educe i
ncrease
c. i
ncrease noef f
ect
d. i
ncrease reduce

ANSWER: c EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 117

24. Var
iabl
ecost
ingconsi
der
swhi
choft
hef
oll
owi
ngt
obepr
oductcost
s?

Fixed Fixed Vari


abl
e Var i
abl
e
Mf
g.Costs Sel
li
ng&Adm. Mfg.Cost
s Sel
li
ng&Adm.
a. yes no yes no
b. yes no yes yes
c. no no yes yes
d. no no yes no

ANSWER: d EASY

25. Thevari
abl
ecosti
ngformati
soft
enmor
eusef
ult
omanager
sthant
he
absor
pti
oncost
ingfor
matbecause

a. costsareclassif
iedbyt heirbehavi
or.
b. costsarealwaysl ower.
c. i
tisrequir
edf orexternalreport
ing.
d. i
tjusti
fi
eshi gherproductpr i
ces.

ANSWER: a EASY

26. Thedif
ferencebetweenthereport
edincomeunderabsor
pti
onandvar
iabl
e
cost
ingisattr
ibut
ablet
ot hedi
ffer
enceinthe

a. i
ncomestat
ementformat
s.
b. t
reat
mentoffi
xedmanufacturi
ngover head.
c. t
reat
mentofvari
abl
emanuf actur
ingoverhead.
d. t
reat
mentofvari
abl
esell
ing,general
,andadminist
rat
iveexpenses.

ANSWER: b EASY

27. Whi
choft
hef
oll
owi
ngcost
swi
llvar
ydi
rect
lywi
tht
hel
evelofpr
oduct
ion?

a. tot
almanufactur
ingcost
s
b. tot
alper
iodcosts
c. vari
abl
eperiodcosts
d. vari
abl
eproductcosts

ANSWER: d EASY
118 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

28. Ont hevari


abl
ecosti
ngincomestat
ement,
thedi
ff
erencebet
weenthe
contr
ibut
ionmargi
nandincomebef
orei
ncometaxesi
sequalt
o

a. t
hetotalvar
iablecost
s.
b. t
heCostofGoodsSol d.
c. t
otal
fixedcosts.
d. t
hegrossmar gin.

ANSWER: c EASY

29. Forfi
nanci
alr
eport
ingt
otheI
RSandot
herext
ernaluser
s,manuf
act
uri
ng
over
headcostsar
e

a. deductedint
heperiodthatt
heyareincur
red.
b. i
nventori
edunti
ltherel
atedproduct
saresold.
c. tr
eatedli
keperi
odcosts.
d. i
nventori
edunti
ltherel
atedproduct
shavebeencompl
eted.

ANSWER: b EASY

30. I
ntheappli
cati
onof
var
iabl
ecost
ingasacost
-al
locat
ionpr
ocessi
n
manuf
acturi
ng,

a. var
iabl
edirectcost sar
et r
eatedasperiodcosts.
b. nonvar
iabl
eindi rectmanufacturi
ngcostsaretreat
edasproductcost
s.
c. var
iabl
eindirectmanuf act
uringcost
sar etreat
edasproductcost
s.
d. nonvar
iabl
edi rectcost
sar etreat
edaspr oductcost
s.

ANSWER: c EASY

31. Abasictenetofvar
iabl
ecosti
ngisthatperi
odcostsshoul
dbecur
rent
ly
expensed.Whatist
herati
onalebehi
ndthisprocedur
e?

a. Peri
odcost sar euncontr
ollableandshoul dnotbechargedtoaspecif
ic
product.
b. Peri
odcost sar egeneral
lyimmat eri
al i
namountandt hecostof
assigningtheamount stospeci fi
cproductswouldoutweighthebenefi
ts.
c. All
ocat i
onofper i
odcostsi sarbit
raryatbestandcouldleadtoerr
oneous
decisionbymanagement .
d. Becauseper i
odcostswilloccurwhet herproduct
ionoccurs,
iti
simproper
toallocatethesecoststopr oducti
onanddef eracurr
entcostofdoing
business.

ANSWER: d MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 119

32. Whichofthefol
lowi
ngisaterm mor
edescr
ipt
iveoft
het
ypeofcostaccount
ing
of
tencal
leddir
ectcost
ing
?

a. out-
of-
pocketcost
ing
b. vari
ablecost
ing
c. rel
evantcosti
ng
d. pri
mecost i
ng

ANSWER: b EASY

33. Whatcost
sar
etr
eat
edaspr
oductcost
sundervar
iabl
e(di
rect
)cost
ing?

a. onl
ydirectcost
s
b. onl
yvariabl
eproducti
oncost
s
c. al
lvar
iablecost
s
d. al
lvar
iableandfixedmanuf
actur
ingcost
s

ANSWER: b EASY

34. Whi
chofthef
ollowingmustbeknownaboutapr
oduct
ionpr
ocessi
nor
dert
o
i
nst
it
uteavar
iablecost
ingsyst
em?

a. thevari
abl eandf i
xedcomponentsofallcostsrel
atedt
opr oduct
ion
b. thecontroll
ableandnon-cont
roll
ablecomponent sofal
lcostsrel
atedt
o
producti
on
c. standardpr oduct
ionrat
esandt i
mesforallelementsofproducti
on
d. contri
butionmar ginandbr
eak-evenpointforal
lgoodsinproducti
on

ANSWER: a EASY

35. Whyisvariabl
ecost
ingnoti
naccor
dancewi
thgener
all
yaccept
edaccount
ing
pr
inci
ples?

a. Fixedmanuf actur
ingcost
saretr
eatedasperiodcostsundervar
iabl
e
costing.
b. Variablecost i
ngprocedur
esarenotwellknowninindustr
y.
c. Netear ningsarealwaysover
stat
edwhenusi ngvariabl
ecosti
ng
procedures.
d. Variablecost i
ngignorest
heconceptoflowerofcostormarketwhen
valuinginventory.

ANSWER: a EASY
1110 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

36. Whichofthef
oll
owi
ngi
sanar
gumentagai
nstt
heuseofdi
rect(
var
iabl
e)
cost
ing?

a. Absor pti
oncostingoverst
atest
hebalancesheetvalueofinvent
ori
es.
b. Var iablefact
oryoverheadisaperi
odcost.
c. Fi xedmanuf acturi
ngoverheadi
sdiff
icul
ttoall
ocateproperl
y.
d. Fi xedmanuf acturi
ngoverheadi
snecessaryfortheproducti
onofa
pr
oduct
.

ANSWER: d EASY

37. Whi
choft
hef
oll
owi
ngst
atement
sist
ruef
oraf
ir
mthatusesvar
iabl
ecost
ing?

a. Thecostofauni tofproductchangesbecauseofchangesi
nthenumber
ofunit
smanuf actur
ed.
b. Prof
it
sf l
uctuat
ewi t
hsales.
c. Anidlefaci
li
tyvari
ati
oniscalculat
ed.
d. Noneoft heabove.

ANSWER: b EASY

38. Ani ncomest


atementi
sprepar
edasaninter
nalr
epor
t.Underwhi
choft
he
fol
lowingmethodswoul
dtheter
m cont
ri
buti
onmargi
nappear?

Absor
ptioncost
ing Var
iabl
ecost
ing
a. no no
b. no yes
c. yes no
d. yes yes

ANSWER: b EASY

39. I
nanincomestat
ementprepar
edasanint
ernalr
epor
tusi
ngt
hevar
iabl
ecost
ing
met
hod,fi
xedmanuf
actur
ingover
headwould

a. notbeused.
b. beusedinthecomputat
ionofoper ati
ngincomebutnotinthe
computati
onofthecont
ri
butionmar gin.
c. beusedinthecomputat
ionoft hecontri
buti
onmargin.
d. betreat
edthesameasvariablemanuf act
uri
ngoverhead.

ANSWER: b EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1111

40. Variabl
ecost
inghasanadvant
ageoverabsor
pti
oncost
ingf
orwhi
choft
he
fol
lowingpur
poses?

a. analysisofpr ofi
tabil
it
yofpr oduct
s,t
err
it
ori
es,
andothersegmentsofa
business
b. determi ningtheCVPr elat
ionshipamongthemajorf
actor
sofsell
ing
pri
ce,sal esmi x,
andsal esvolume
c. minimi zingtheeffectsofinventor
ychangesonneti
ncome
d. al
loft heabove

ANSWER: d EASY

41. I
nt hevar
iabl
ecost
ingi
ncomest
atement
,whi
chl
inesepar
atest
hevar
iabl
eand
f
ixedcosts?

a. selli
ngexpenses
b. gener alandadminist
rat
iveexpense
c. productcont r
ibut
ionmar gi
n
d. totalcontri
buti
onmar gi
n

ANSWER: d EASY

42. Af
ir
m pr
esent
lyhast
otalsal
esof$100,
000.I
fit
ssal
esr
ise,
its

a. netincomebasedonvar i
ablecost
ingwil
lgoupmoret
hanit
sneti
ncome
basedonabsor pt
ioncosti
ng.
b. netincomebasedonabsor pti
oncosti
ngwil
lgoupmoret
hanit
snet
i
ncomebasedonvar i
ablecosti
ng.
c. fi
xedcostswi l
lal
sori
se.
d. perunitvar
iabl
ecostswillr
ise.

ANSWER: a MEDI
UM

43. CVPanal
ysi
srequi
rescost
stobecat
egor
izedas

a. ei
therfi
xedorvar i
able.
b. fi
xed,mixed,orvari
able.
c. productorperi
od.
d. standar
doract ual
.

ANSWER: a EASY
1112 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

44. Wi
thr
espectt
ofi
xedcost
s,CVPanal
ysi
sassumest
otalf
ixedcost
s

a. perunitremainconstantasvolumechanges.
b. remainconstantfr
om oneperiodtothenext.
c. varydir
ectl
ywi t
hvolume.
d. remainconstantacrosschangesinvol
ume.

ANSWER: d EASY

45. CVPanalysisr
eli
esontheassumpti
onsthatcostsar
eei
therst
ri
ctl
yfi
xedor
st
ri
ctl
yvariabl
e.Consi
stentwi
tht
heseassumptions,
asvol
umedecreasest
otal

a. fi
xedcostsdecr ease.
b. vari
ablecostsremai nconst
ant
.
c. costsdecrease.
d. costsremainconst ant
.

ANSWER: c EASY

46. Accor
dingt
oCVPanal
ysi
s,acompanycoul
dneveri
ncural
osst
hatexceeded
i
tstot
al

a. vari
ablecost
s.
b. fi
xedcosts.
c. costs.
d. contri
but
ionmargi
n.

ANSWER: c EASY

47. CVPanal
ysi
sisbasedonconcept
sfr
om

a. standardcost
ing.
b. vari
ablecosti
ng.
c. jobordercost
ing.
d. processcosti
ng.

ANSWER: b EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1113

48. Cost-vol
ume-prof
itanalysi
sisat echniqueavail
abletomanagementt o
understandbett
ertheinter
relat
ionshipsofseveralfactor
st hataf
fectafi
rms
prof
it.Aswithmanysucht echniques,theaccountantoversimpli
fi
esthereal
worldbymaki ngassumpt i
ons.Whi choft hefol
lowingisnotamaj or
assumpt i
onunderlyi
ngCVPanal ysis?

a. Allcostsincur r
edbyaf i
rm canbeseparatedintothei
rfi
xedandvar i
abl
e
component s.
b. Thepr oductsel li
ngpriceperuniti
sconstantatallvol
umel evel
s.
c. Operatingef f
iciencyandempl oyeeproducti
vit
yareconstantatall
volumel evels.
d. Formul ti
-productsituati
ons,thesal
esmi xcanvar yatal
lvolumelevel
s.

ANSWER: d EASY

49. I
nCVPanal
ysi
s,l
inearf
unct
ionsar
eassumedf
or

a. contribut
ionmargi
nperuni
t.
b. fi
xedcostperunit.
c. totalcost
sperunit
.
d. alloftheabove.

ANSWER: a EASY

50. Whichofthef
oll
owi
ngf
act
orsi
sinvol
vedi
nst
udyi
ngcost
-vol
ume-
prof
it
r
elati
onshi
ps?

a. productmix
b. variabl
ecosts
c. fi
xedcosts
d. alloftheabove

ANSWER: d EASY

51. Cost-
vol
ume-pr
ofi
trel
ati
onshi
pst
hatar
ecur
vil
inearmaybeanal
yzedl
inear
lyby
consi
der
ingonl
y

a. f
ixedandmi xedcosts.
b. r
elevantfixedcosts.
c. r
elevantvar i
abl
ecost s.
d. arelevantrangeofvol ume.

ANSWER: d EASY
1114 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

52. Af
tert
hel
evelofvol
umeexceedst
hebr
eak-
evenpoi
nt

a. t
hecont r
ibut
ionmargi
nrati
oincreases.
b. t
hetotalcontri
but
ionmargi
nexceedst hetot
alfi
xedcost
s.
c. t
otal
fixedcostsperuni
twil
lremai nconst
ant.
d. t
hetotalcontri
but
ionmargi
nwillturnfr
om negat
ivet
oposit
ive.

ANSWER: b EASY

53. Whi
choft
hef
oll
owi
ngwi
lldecr
easet
hebr
eak-
evenpoi
nt?

Decreasei
n I
ncr
easeindi
rect I
ncreasein
f
ixedcost l
aborcost sell
ingprice
a. yes yes yes
b. yes no yes
c. yes no no
d. no yes no

ANSWER: b EASY

54. Att
hebr
eak-
evenpoi
nt,
fixedcost
sar
eal
ways

a. l
essthanthecontr
ibuti
onmar gin.
b. equalt
othecontr
ibuti
onmar gin.
c. morethanthecontr
ibut
ionmar gin.
d. morethanthevari
ablecost
.

ANSWER: b EASY

55. Themet
hodofcostaccount
ingt
hatl
endsi
tsel
ftobr
eak-
evenanal
ysi
sis

a. vari
able.
b. standard.
c. absolute.
d. absorption.

ANSWER: a EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1115

56. Gi
vent
hef
oll
owi
ngnot
ati
on,
whati
sthebr
eak-
evensal
esl
eveli
nuni
ts?

SP=sel
li
ngpr
iceperuni
t,FC=t
otalf
ixedcost
,VC=var
iabl
ecostperuni
t

a. SP/
(FC/
VC)
b. FC/
(VC/
SP)
c. VC/
(SPFC)
d. FC/
(SPVC)

ANSWER: d EASY

57. Consi
dert
heequat
ionX=Sal
es[
(CM/
Sal
es)(
Sal
es)
].Whati
sX?

a. netincome
b. fi
xedcosts
c. contri
buti
onmar
gin
d. vari
ablecost
s

ANSWER: d MEDI
UM

58. I
faf
ir
msneti
ncomedoesnotchangeasi
tsvol
umechanges,
thef
ir
m(
s)

a. mustbeintheservi
ceindust
ry.
b. musthavenofixedcosts.
c. sal
espri
cemustequal$0.
d. sal
espri
cemustequalitsvari
abl
ecost
s.

ANSWER: d MEDI
UM

59. Br
eak-
evenanal
ysi
sassumesovert
her
elevantr
anget
hat

a. t
otalvariabl
ecostsareli
near.
b. f
ixedcost speruni
tareconstant
.
c. t
otalvariabl
ecostsarenonli
near.
d. t
otalrevenueisnonli
near.

ANSWER: a EASY
1116 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

60. Tocomput
ethebr
eak-
evenpoi
nti
nuni
ts,
whi
choft
hef
oll
owi
ngf
ormul
asi
s
used?

a. FC/CM perunit
b. FC/CM rati
o
c. CM/ CM rat
io
d. (FC+VC)/CM rat
io

ANSWER: a EASY

61. Afi
rm
sbreak-
evenpoi
nti
ndol
lar
scanbef
oundi
nonecal
cul
ati
onusi
ngwhi
ch
oft
hef
oll
owingfor
mulas?

a. FC/
CM peruni
t
b. VC/
CM
c. FC/
CM rat
io
d. VC/
CM rat
io

ANSWER: c EASY

62. Thecont
ri
but
ionmar
ginr
ati
oal
waysi
ncr
easeswhent
he

a. vari
ablecost
sasaper cent
ageofnetsal
esi
ncrease.
b. vari
ablecost
sasaper cent
ageofnetsal
esdecrease.
c. break-
evenpointi
ncreases.
d. break-
evenpointdecreases.

ANSWER: b EASY

63. Inamulti
ple-
productf
ir
m,t
hepr
oductt
hathast
hehi
ghestcont
ri
but
ionmar
gin
peruni
twil
l

a. gener
atemor eprofi
tforeach$1ofsal esthant
heot
herpr
oduct
s.
b. havethehighestcontr
ibuti
onmarginratio.
c. gener
atethemostpr ofi
tforeachunitsold.
d. havethel
owestvar i
ablecostsperunit
.

ANSWER: c EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1117

64. ___
__ _
_____
__f
ocusesonl
yonf
act
orst
hatchangef
rom onecour
seofact
iont
o
another.

a. I
ncrement alanalysi
s
b. Marginofsaf et
y
c. Operati
ngl ever
age
d. Abreak-evenchar t

ANSWER: a EASY

65. Themar
ginofsaf
etywoul
dbenegat
ivei
facompany(
s)

a. waspr esent
lyoperat
ingatavolumet hatisbel
owthebr
eak-evenpoi
nt.
b. presentfi
xedcostswerelessthanit
scont ri
but
ionmar
gin.
c. vari
ablecostsexceededit
sfixedcosts.
d. degreeofoperati
nglever
agei sgr
eaterthan100.

ANSWER: a EASY

66. Themar
ginofsaf
etyi
sakeyconceptofCVPanal
ysi
s.Themar
ginofsaf
etyi
s
the

a. contr
ibut
ionmargi
nrate.
b. dif
fer
encebetweenbudgetedcont
ri
but
ionmarginandactualcontri
but
ion
margin.
c. dif
fer
encebetweenbudgetedcont
ri
but
ionmarginandbreak-even
contr
ibut
ionmargi
n.
d. dif
fer
encebetweenbudgetedsal
esandbreak-
evensal
es.

ANSWER: d EASY

67. Managementisconsi
der
ingrepl
aci
nganexist
ingsal
escommissi
on
compensat
ionplanwi
thafixedsal
arypl
an.I
fthechangei
sadopt
ed,t
he
company
s

a. break-evenpointmustincrease.
b. mar ginofsafetymustdecrease.
c. operatinglever
agemusti ncrease.
d. profitmustincrease.

ANSWER: c MEDI
UM
1118 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

68. Aspr
oject
edneti
ncomei
ncr
easest
he

a. degreeofoperati
ngleveragedecli
nes.
b. mar gi
nofsafetystaysconstant
.
c. break-
evenpointgoesdown.
d. contri
but
ionmar gi
nr at
iogoesup.

ANSWER: a MEDI
UM

69. Amanager
ialpr
efer
encef
oraver
ylowdegr
eeofoper
ati
ngl
ever
agemi
ght
i
ndi
cat
ethat

a. anincreaseinsalesvolumeisexpected.
b. adecreaseinsalesvolumeisexpected.
c. thefi
rmi sveryunprof
it
able.
d. thefi
rm hasveryhighfixedcost
s.

ANSWER: b MEDI
UM

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions7073.

YoungCor
porat
ionhasthefoll
owi
ngst
andar
dcost
sassoci
atedwi
tht
hemanuf
act
ure
andsal
eofoneofit
sproducts:

Dir
ectmater
ial $3.
00peruni t
Dir
ectl
abor 2.
50peruni t
Vari
abl
emanuf act
uri
ngover
head 1.
80peruni t
Fi
xedmanufacturi
ngover
head 4.
00peruni t(
basedonanesti
mat
e
of50,
000unitsperyear
)
Var
iabl
esel
li
ngexpenses .
25peruni t
Fi
xedSG&Aexpense $75,000peryear

Dur
ing2001,i
tsfi
rstyearofoperat
ions,
Youngmanufactur
ed51,000uni
tsandsol
d
48,
000.Thesel
li
ngpr i
ceperunitwas$25.Allcost
swereequalt
ostandar
d.

70. Underabsor
pti
oncost
ing,
thest
andar
dpr
oduct
ioncostperuni
tfor2001was

a. $11.
30.
b. $7.
30.
c. $11.
55.
d. $13.
05.

ANSWER: a EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1119

71. Undervar
iabl
ecost
ing,
thest
andar
dpr
oduct
ioncostperuni
tfor2001was

a. $11.
30.
b. $7.
30.
c. $7.
55.
d. $11.
55.

ANSWER: b EASY

72. Basedonvar
iabl
ecost
ing,
thei
ncomebef
orei
ncomet
axesf
ort
heyearwas

a. $570,
600.
b. $560,
000.
c. $562,
600.
d. $547,
500.

ANSWER: c MEDI
UM

73. Thevol
umevar
ianceunderabsor
pti
oncost
ingi
s

a. $8,
000F.
b. $4,
000F.
c. $4,
000U.
d. $8,
000U.

ANSWER: b MEDI
UM
1120 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions7476.

Thef
oll
owi
ngi
nfor
mat
ioni
savai
labl
eforXCo.f
ori
tsf
ir
styearofoper
ati
ons:

Salesinuni ts 5,
000
Product i
oninuni t
s 8,
000
Manuf acturi
ngcost s:
Directlabor $3peruni
t
Directmat eri
al 5peruni
t
Var i
ableoverhead 1peruni
t
Fixedover head $100,
000
Netincome( absorpti
onmet
hod) $30,
000
Salespr i
ceperuni t $40

74. WhatwouldXCo.haverepor
tedasi
tsi
ncomebef
orei
ncomet
axesi
fithad
usedvar
iabl
ecost
ing?

a. $30,
000
b. ($7,
500)
c. $67,
500
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: b MEDI
UM

75. Whatwast
het
otalamountofSG&Aexpensei
ncur
redbyXCo.
?

a. $30,
000
b. $62,
500
c. $6,
000
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: b MEDI
UM

76. Basedonvar
iabl
ecost
ing,
whatwoul
dXCo.showast
heval
ueofi
tsendi
ng
i
nventor
y?

a. $120,
000
b. $64,
500
c. $27,
000
d. $24,
000

ANSWER: c EASY
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1121

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions7779.

Thefoll
owinginfor
mat
ionhasbeenext
ract
edf
rom PCo.

sfi
nanci
alr
ecor
dsf
ori
tsf
ir
st
yearofoperat
ions:

Uni
tsproduced 10,
000
Uni
tssold 7,
000
Var
iablecost
sperunit
:
Directmater
ial $8
Directl
abor 9
Manuf act
uri
ngoverhead 3
SG&A 4
Fi
xedcosts:
Manuf act
uri
ngoverhead $70,
000
SG&A 30,
000

77. Basedonabsor
pti
oncost
ing,
PCo.

sincomei
nit
sfi
rstyearofoper
ati
onswi
ll
be

a. $21,000hi
gherthanitwoul
dbeundervari
ablecost
ing.
b. $70,000hi
gherthanitwoul
dbeundervari
ablecost
ing.
c. $30,000hi
gherthanitwoul
dbeundervari
ablecost
ing.
d. highert
hanitwouldbeundervari
abl
ecosti
ng,butt
heexactdi
ff
erence
cannotbedeter
mi nedf
rom t
heinfor
mati
ongiven.

ANSWER: a MEDI
UM

78. Basedonabsor
pti
oncost
ing,
theCostofGoodsManuf
act
uredf
orPCo.

sfi
rst
yearwoul
dbe

a. $200,
000.
b. $270,
000.
c. $300,
000.
d. $210,
000.

ANSWER: b MEDI
UM

79. Basedonabsor
pti
oncost
ing,
whatamountofper
iodcost
swi
llPCo.deduct
?

a. $70,
000
b. $79,
000
c. $30,
000
d. $58,
000

ANSWER: d MEDI
UM
1122 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

80. Forit
smostr ecentf
iscalyear
,afi
rmreportedthati
tscont
ri
but
ionmarginwas
equalto40percentofsalesandthati
tsnetincomeamountedto10percentof
sal
es.Ifi
tsf
ixedcostsf ort
heyearwere$60,000,howmuchwer esal
es?

a. $150,
000
b. $200,
000
c. $600,
000
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: b MEDI
UM

81. Atit
spresentlevelofoperati
ons,asmal lmanufact
uri
ngf i
rm hastot
alvari
abl
e
cost
sequal t
o75per centofsalesandtotalf
ixedcost
sequalt o15percentof
sal
es.Basedonvar iablecosti
ng,ifsal
eschangeby$1. 00,i
ncomewi l
lchange
by

a. $0.25.
b. $0.10.
c. $0.75.
d. cantbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven.

ANSWER: a EASY

82. Youobtai
nthef
oll
owinginf
ormationregar
dingf
ixedpr
oduct
ioncost
sfr
om a
manufact
uri
ngf
irmforfi
scalyear2001:

Fi
xedcost
sinthebeginni
nginvent
ory$16,
000
Fi
xedcost
sincur
redthisper
iod 100,
000

Whi
choft
hef
oll
owi
ngst
atement
sisnott
rue:

a. Themaxi mum amountoff ixedpr oducti


oncoststhatthi
sfir
m could
deductusi ngabsorpti
oncost sin2001i s$116,000.
b. Themaxi mum diff
erencebetweent hi
sfir
ms2001i ncomebasedon
absor pti
oncostinganditsincomebasedonvar i
abl
ecostingis$16,000.
c. Usi ngvariabl
ecosti
ng, t
hisfi
rm wi l
ldeductnomor ethan$16,000for
fixedproductioncosts.
d. Ifthisfi
rm producedsubstantiall
ymor eunit
sthanitsoldin2001,
var i
ablecosti
ngwi l
lprobablyyiel
dal owerincomet hanabsorpt
ion
cost i
ng.

ANSWER: c MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1123

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions8386.

SimpleCorp.producesasingl
epr
oduct
.Thef
oll
owi
ngcostst
ruct
ureappl
iedt
oit
sfi
rst
yearofoperat
ions,2001:

Var
iabl
ecosts:
SG&A $2peruni
t
Producti
on $4peruni
t
Fi
xedcosts(tot
alcosti
ncur
redf
ort
heyear
):
SG&A $14,
000
Producti
on $20,
000

83. Assumeforthisquesti
ononl yt
hatduri
ng2001Simpl
eCorp.manufactured
5,
000unitsandsold3,800.Therewasnobeginni
ngorendi
ngwor k-
in-
process
i
nventor
y.Howmuchl argerorsmall
erwoul
dSimpleCor
p.
sincomebei fituses
absor
pti
onratherthanvariabl
ecosti
ng?

a. Theabsor
pti
oncost
ingi
ncomewoul
dbe$6,
000l
arger
.
b. Theabsor
pti
oncost
ingi
ncomewoul
dbe$6,
000small
er.
c. Theabsor
pti
oncost
ingi
ncomewoul
dbe$4,
800l
arger
.
d. Theabsor
pti
oncost
ingi
ncomewoul
dbe$4,
000small
er.

ANSWER: c MEDI
UM

84. Assumef ort


hisquesti
ononlythatSimpleCor
p.manufact
uredandsold5,
000
unit
sin2001.Atthi
slevelofacti
vit
yithadanincomeof$30,000usi
ngvar
iabl
e
costi
ng.Whatwast hesal
espriceperunit?

a. $16.
00
b. $18.
80
c. $12.
80
d. $14.
80

ANSWER: b MEDI
UM

85. Assumefort
hisquesti
ononlyt
hatSimpl
eCorp.pr
oduced5,
000uni
tsandsold
4,
500uni
tsin2001.IfSi
mpleusesabsor
pti
oncost
ing,i
twoul
ddeductper
iod
cost
sof

a. $24,
000.
b. $34,
000.
c. $27,
000.
d. $23,
000.

ANSWER: d MEDI
UM
1124 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

86. Assumeforthi
squesti
ononl
ythatSi
mpl eCorp.manufact
ured5,
000uni
tsand
sold4,
000in2001.I
fSimpl
eemploysacostingsyst
em basedonvari
abl
ecosts,
thecompanywouldend2001wit
haf i
nishedgoodsinvent
oryof

a. $4,
000.
b. $8,
000.
c. $6,
000.
d. $5,
000.

ANSWER: a MEDI
UM

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions8789.

Thefoll
owinginf
ormat
ionwasextr
actedf
rom t
hef
ir
styearabsor
pti
on-
based
accounti
ngrecor
dsofConfusedCo.

Tot
alfi
xedcostsincurr
ed $100,
000
Tot
alvari
ablecostsi
ncurred 50,
000
Tot
alperi
odcostsincurr
ed 70,
000
Tot
alvari
ableperi
odcostsincur
red 30,000
Uni
tsproduced 20,
000
Uni
tssold 12,
000
Uni
tsalespri
ce $12

87. Whati
sCostofGoodsSol
dforConf
usedCo.

sfi
rstyear
?

a. $80,
000
b. $90,
000
c. $48,
000
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: c DI
FFI
CULT

88. I
fConf
usedCo.hadusedvari
abl
ecostingi
nit
sfi
rstyearofoper
ati
ons,
how
muchi
ncome(loss)bef
orei
ncometaxeswoul
dithavereport
ed?

a. ($6,000)
b. $54,000
c. $26,000
d. $2,000

ANSWER: d DI
FFI
CULT
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1125

89. Basedonvari
ablecost
ing,
ifConf
usedhadsold12,
001uni
tsi
nst
eadof12,
000,
i
tsincomebefor
eincometaxeswouldhavebeen

a. $9.
50hi
gher.
b. $11.
00hi
gher.
c. $8.
50hi
gher.
d. $8.
33hi
gher.

ANSWER: c MEDI
UM

90. ZCor
p.incur
redt
hefol
lowi
ngcost
sin2001(
it
sfi
rstyearofoper
ati
ons)based
onpr
oducti
onof10,
000uni
ts:

Dir
ectmater
ial $5peruni
t
Dir
ectl
abor $3peruni
t
Vari
abl
eproductcost
s $2peruni
t
Fi
xedproductcost
s(i
ntot
al) $100,
000

WhenZCor p.pr
eparedit
s2001fi
nanci
alst
atements,
itsCostofGoodsSol
d
wasli
stedat$100,
000.Basedonthi
sinf
ormati
on,whichofthefol
lowi
ng
st
atementsmustbet r
ue:

a. ZCorp.soldal
l10,
000uni tsthati
tpr
oduced.
b. ZCorp.sold5,
000units.
c. ZCorp.hadaveryprofit
ableyear.
d. Fr
om theinfor
mati
ongi ven,onecannott
ellwhetherZCorp.
sfi
nanci
al
st
atementswerepreparedbasedonvar i
ableorabsorpt
ioncost
ing.

ANSWER: b MEDI
UM
1126 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions9193.

Threenewcompanies(X,Y,andZ)beganoper
ati
onsonJanuary1,2001.Consi
dert
he
fol
lowi
ngoperati
ngcoststhatwer
eincur
redbythesecompani
esduringthecompl
ete
cal
endaryear2001:

CompanyX CompanyY CompanyZ


Producti
oninunits 10,
000 10,
000 10,
000
Salespri
ceperunit $10 $10 $10
Fi
xedpr oduct
ioncost
s $10,
000 $20,
000 $30,
000
Variabl
eproducti
oncost
s $30,000 $20,
000 $10,
000
Variabl
eSG&A $10,
000 $20,
000 $30,
000
Fi
xedSG&A $30,
000 $20,
000 $10,
000

91. Basedonsalesof7,000unit
s,whi
chcompanywillr
epor
tthegr
eat
eri
ncome
bef
oreincometaxesfor2001underabsor
pti
oncosti
ng?

a. CompanyX
b. CompanyY
c. CompanyZ
d. Al
loft
hecompani
eswi
llr
epor
tthesamei
ncome.

ANSWER: d MEDI
UM

92. Basedonsalesof7,000unit
s,whi
chcompanywillr
epor
tthegr
eat
eri
ncome
bef
oreincometaxesfor2001undervar
iabl
ecost
ing?

a. CompanyX
b. CompanyY
c. CompanyZ
d. Al
loft
hecompani
eswi
llr
epor
tthesamei
ncome.

ANSWER: a MEDI
UM

93. Basedonsalesof10,
000uni
ts,
whichcompanywi l
lrepor
tthegr
eat
eri
ncome
bef
oreincometaxesf
or2001undervar
iabl
ecost
ing?

a. CompanyX
b. CompanyY
c. CompanyZ
d. Al
loft
hecompani
eswi
llr
epor
tthesamei
ncomebef
orei
ncomet
axes.

ANSWER: d MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1127

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions9496.

JVCo.pr oducesasingleproductt
hatsel
lsfor$7.00peruni
t.Standardcapacit
yis
100,000unitsperyear;100,
000unit
swer eproducedand80,000unitsweresoldduring
theyear.Manufactur
ingcostsandsell
ingandadmi ni
str
ati
veexpensesar epresent
ed
below.

Ther
ewerenovari
ancesfrom t
hestandardvar
iabl
ecosts.Anyunder-orover
appli
ed
over
headi
swri
ttenoffdi
rect
lyatyear
-endasanadjust
mentt ocostofgoodssold.

Fixedcosts Vari
ablecosts
Dir
ectmater
ial $0$1.50perunitproduced
Dir
ectl
abor 01.
00peruni tproduced
Manufact
uri
ngover
head 150,0000.
50peruni tproduced
Sel
li
ng&Admi n. 80,0000.
50peruni tsold

JVhadnoi
nvent
oryatt
hebegi
nni
ngoft
heyear
.

94. Inpresent
ingi
nventor
yonthebal
ancesheetatDecember31,
theuni
tcost
underabsorpt
ioncost
ingi
s

a. $2.
50.
b. $3.
00.
c. $3.
50.
d. $4.
50.

ANSWER: d MEDI
UM

95. Whati
stheneti
ncomeundervar
iabl
ecost
ing?

a. $50,
000
b. $80,
000
c. $90,
000
d. $120,
000

ANSWER: a MEDI
UM

96. Whati
stheneti
ncomeunderabsor
pti
oncost
ing?

a. $50,
000
b. $80,
000
c. $90,
000
d. $120,
000

ANSWER: b MEDI
UM
1128 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

97. Afi
rm hasfixedcost
sof$200,000andvari
ablecost
sperunitof$6.I
tpl
anson
sel
li
ng40,000unitsi
nthecomingyear.Toreal
izeaprof
itof$20,
000,
thefi
rm
musthaveasal espr
iceperuni
tofatl
east

a. $11.
00.
b. $11.
50.
c. $10.
00.
d. $10.
50.

ANSWER: b MEDI
UM

98. Afir
m hasf i
xedcostsof$200,000andvariablecostsperunitof$6.Itpl
anson
sel
li
ng40,000unitsi
nt hecomingyear.Ift
hef i
rm paysincomet axesonit
s
i
ncomeatar at
eof40per cent
,whatsalespricemustthef i
rm usetoobtai
nan
aft
er-
taxprofi
tof$24,000onthe40,000units?

a. $11.
60
b. $11.
36
c. $12.
00
d. $12.
50

ANSWER: c DI
FFI
CULT

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions99102.

Bel
owi
sani
ncomest
atementf
orBenderCo.f
or2001:

Sales $400,000
Variablecost
s (125,
000 )
Cont ri
but
ionmar gi
n $275,000
Fi
xedcost s (200,
000 )
Profitbef
oretaxes $ 75,
000

99. Whati
sBender
sdegr
eeofoper
ati
ngl
ever
age?

a. 3.
67
b. 5.
33
c. 1.
45
d. 2.
67

ANSWER: a MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1129

100. Basedonthecostandrevenuestr
uctur
eont hei
ncomest
atement
,whatwas
Bender
sbreak-
evenpoi
ntfor2001indoll
ars?

a. $200,
000
b. $325,
000
c. $300,
000
d. $290,
909

ANSWER: d MEDI
UM

101. WhatwasBender
smar
ginofsaf
etyf
or2001?

a. $200,
000
b. $75,
000
c. $100,
000
d. $109,
091

ANSWER: d EASY

102. Assumi ngthatthefi


xedcost sareexpect
edt or
emai nat$200,000for2002and
thesalespriceperunitandvar i
abl
ecostsperunitarealsoexpectedtoremai
n
constant,howmuchpr of
itbeforet
axeswillbeproducedifthecompany
anti
cipates2002salesr i
singto130percentofthe2001l evel
?

a. $97,
500
b. $195,
000
c. $157,
500
d. Apredi
cti
oncannotbemadef
rom t
hei
nfor
mat
iongi
ven.

ANSWER: c MEDI
UM
1130 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions103and104.

Ti
mber
linepr
oducesandsel
lsasi
ngl
epr
oduct
.Inf
ormat
iononi
tscost
sfor2001
foll
ow:

Var
iabl
ecosts:
SG&A $2peruni
t
Producti
on $4peruni
t
Fi
xedcosts:
SG&A $12,
000peryear
Producti
on $15,
000peryear

103. AssumeTi mberl


inepr
oducedandsold5,000uni
tsi
n2001.Atthi
slevelof
act
ivi
ty,
itproducedaprof
itof$18,
000.WhatwasTi
mberl
ine
ssalespriceper
uni
t?

a. $15.
00
b. $11.
40
c. $9.
60
d. $10.
00

ANSWER: a MEDI
UM

104. In2002,Timberl
ineestimatesthatitwillpr
oduceandsel
l4,000uni
ts.The
vari
abl
ecostsperuni tandt hetot
alfixedcostsar
eexpect
edt obet
hesameas
i
n2001.However ,
itanti
cipatesasalespr i
ceof$16peruni
t.Whati
s
Timberl
ine
sproj
ect edmar ginofsafetyin2002?

a. $7,
000
b. $20,
800
c. $18,
400
d. $13,
000

ANSWER: b MEDI
UM

105. StoryManufacturi
ngi ncur
sannualfixedcostsof$250,
000i nproduci
ngand
sell
ingTal
es.Estimatedunitsal
esfor2001are125,000.Anaf t
er-
taxincome
of$75,000isdesiredbymanagement .Thecompanyprojectsit
sincomet ax
rat
eat40per cent.Whati sthemaximum amountt hatStorycanexpendf or
vari
ablecostsperunitandst i
llmeetit
sprofi
tobj
ecti
veifthesalespri
ceperunit
i
sest i
matedat$6?

a. $3.
37
b. $3.
59
c. $3.
00
d. $3.
70
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1131

ANSWER: c MEDI
UM
1132 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions106and107.

Thef
oll
owi
ngi
nfor
mat
ionr
elat
est
ofi
nanci
alpr
oject
ionsofBi
gCo.f
or2001:

Pr
oject
edsal
es 60,
000uni
ts
Pr
oject
edvari
ablecost
s $2.
00perunit
Pr
oject
edfi
xedcosts $50,
000peryear
Pr
oject
edunitsal
espri
ce $7.
00

106. Howmanyunit
swoul
dBi
gCo.needt
osel
lin2001t
oear
napr
ofi
tbef
oret
axes
of$10,
000?

a. 25,714
b. 10,000
c. 8,571
d. 12,000

ANSWER: d MEDI
UM

107. I
fBigCo.achi
evesi
tspr
oject
ionsi
n2001,
whatwi
llbei
tsdegr
eeofoper
ati
ng
l
ever
age?

a. 6.
00
b. 1.
20
c. 1.
68
d. 2.
40

ANSWER: b MEDI
UM

108. SignalCo.manufacturesasingl
eproduct.For2001, thecompanyhadsal esof
$90,000,vari
abl
ecostsof$50,000,andfixedcostsof$30,000.Signalexpect
s
i
tscostst r
uctur
eandsal espri
ceperunittoremaint hesamein2002, however
totalsal
esareexpectedtojumpby20per cent
.Ifthe2002projecti
onsare
reali
zed,neti
ncomei n2002shouldexceedneti ncomei n2001by

a. 100percent
.
b. 80percent.
c. 20percent.
d. 50percent.

ANSWER: b MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1133

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions109111.

Diver
sif
iedCor
p.manufactur
esandsel
lst
wopr
oduct
s:XandY.Theoper
ati
ngr
esul
ts
ofthecompanyfor2001foll
ow:

Pr
oductX Pr
oductY
Sal
esinuni
ts 2,
000 3,
000
Sal
espri
ceperuni
t $10 $5
Var
iabl
ecost
speruni
t 7 3

I
naddi
ti
on,
thecompanyi
ncur
redt
otalf
ixedcost
sint
heamountof$9,
000.

109. Howmanyt
otaluni
tswoul
dthecompanyhaveneededt
osel
ltobr
eakeveni
n
2001?

a. 3,
750
b. 750
c. 3,
600
d. 1,
800

ANSWER: a MEDI
UM

110. I
fthecompanywoul
dhavesol
dat ot
alof6,000unit
sin2001,consi
stentwit
h
CVPassumpti
onshowmanyofthoseunit
swoul dyouexpecttobeProductY?

a. 3,
000
b. 4,
000
c. 3,
600
d. 3,
500

ANSWER: c MEDI
UM

111. Howmanyunitswoul
dthecompanyhaveneededt
osel
lin2001t
opr
oducea
pr
ofi
tof$12,
000?

a. 8,
750
b. 20,
000
c. 10,
000
d. 8,
400

ANSWER: a MEDI
UM
1134 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

112. Bel
owi
sani
ncomest
atementf
orJewel
lCo.f
or2002:

Sales $300,000
Variablecost
s (
150,000 )
Cont ri
but
ionmar gi
n $150,000
Fi
xedcost s (
100,000 )
Profitbef
oretaxes $ 50,
000

Whatwast
hecompany
smar
ginofsaf
etyi
n2002?

a. $50,
000
b. $100,
000
c. $150,
000
d. $25,
000

ANSWER: b MEDI
UM

113. Bel
owi
sani
ncomest
atementf
orJewel
lCo.f
or2002:

Sales $300,000
Variablecost
s (150,000 )
Cont ri
but
ionmar gi
n $150,000
Fi
xedcost s (100,000 )
Profitbef
oretaxes $50,000

I
ftheuni
tsalespr
iceforJewel
l
ssoleproductwas$10,howmanyuni
tswoul
d
i
thaveneededtosel
lin2002toproduceapr of
itof$40,
000?

a. 27,
500
b. 29,
000
c. 28,
000
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: c MEDI
UM

114. Af i
rm est
imatesthati
twil
lsel
l100,
000unitsofit
ssoleproductint
hecoming
peri
od.Itproj
ectsthesal
espri
ceat$40perunit,t
heCM rati
oat60percent
,and
profi
tat$500,000.Whati
sthefir
m budget
ingforfi
xedcostsinthecomi
ng
peri
od?

a. $1,
600,
000
b. $2,
400,
000
c. $1,
100,
000
d. $1,
900,
000

ANSWER: d MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1135
1136 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

115. HatCo.manuf acturesawestern-


styl
ehatthatsel
lsfor$10perunit
.Thisisi
ts
sol
epr oductandithasproject
edthebreak-
evenpointat50,
000unitsinthe
comingper i
od.I
ff i
xedcostsareproj
ectedat$100,
000,whatistheproj
ected
cont
ributi
onmar ginrat
io?

a. 80per
cent
b. 20per
cent
c. 40per
cent
d. 60per
cent

ANSWER: b MEDI
UM

116. BrandoCo.manufact
uresl
it
tl
eboxesof
badat t
it
udes.
Eachboxsel
lsf
or$15.
Thefir
msproj
ect
edcostsfor2002ar
eli
stedbel
ow:

Var
iabl
ecost speruni
t:
Production $5
SG&A 1
Fi
xedcosts:
Production $40,
000
SG&A 60,
000
Esti
mat edvolume 20,
000uni
ts

Whati
sBr
ando
spr
oject
edmar
ginofsaf
etyf
or2002?

a. $133,
333
b. $150,
000
c. $80,
000
d. $100,
000

ANSWER: a MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1137

117. BrandoCo.manufact
uresl
it
tl
eboxesof
badat t
it
udes.
Eachboxsel
lsf
or$15.
Thefir
msproj
ect
edcostsfor2002ar
eli
stedbel
ow:

Var
iabl
ecost speruni
t:
Production $5
SG&A 1
Fi
xedcosts:
Production $40,
000
SG&A 60,
000
Esti
mat edvolume 20,
000uni
ts

Whati
sBr
ando
spr
oject
eddegr
eeofoper
ati
ngl
ever
agef
or2002?

a. 2.
25
b. 1.
80
c. 3.
75
d. 1.
67

ANSWER: a MEDI
UM

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions118120.

Bel
owar
eincomest
atement
sthatappl
ytot
hreecompani
es:A,
B,andC:

CompanyA CompanyB CompanyC


Sales $100 $100 $100
Variablecost
s (
10) (20) (
30)
Cont ri
but
ionmar gi
n $90 $80 $70
Fi
xedcost s (
30) (20) (
10)
Profitbef
oretaxes $60 $60 $60

118. Withi
ntherelevantr
ange,ifsalesgoupby$1f
oreachf
ir
m,whi
chf
ir
m wi
ll
exper
iencethegreatesti
ncreaseinprof
it
?

a. CompanyA
b. CompanyB
c. CompanyC
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: a EASY
1138 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

119. Withi
ntherelevantr
ange,ifsalesgoupbyoneuni
tforeachf
ir
m,whi
chf
ir
m wi
ll
exper
iencethegreatesti
ncreaseinneti
ncome?

a. CompanyA
b. CompanyB
c. CompanyC
d. can
tbedet
ermi
nedf
rom t
hei
nfor
mat
iongi
ven

ANSWER: d EASY

120. Atsal
esof$100,
whi
chf
ir
m hast
hehi
ghestmar
ginofsaf
ety?

a. CompanyA
b. CompanyB
c. CompanyC
d. Theyal
lhavet
hesamemar
ginofsaf
ety.

ANSWER: c MEDI
UM

121. Alanisint
erest
edi nent
eringthecatfi
shfarmingbusi ness.Heesti
matesifhe
entersthi
sbusiness,hi
sfixedcostswouldbe$50, 000peryearandhisvar i
abl
e
costswouldequal30per centofsales.I
feachcatfishsellsfor$2,
howmany
catfi
shwouldAl anneedtosellt
ogener ateaprof
itt hati
sequalto10percentof
sales?

a. 40,
000
b. 41,
667
c. 35,
000
d. Nolevel
ofsal
escangener
atea10per
centnetr
etur
nonsal
es.

ANSWER: b DI
FFI
CULT

122. Thefoll
owi
nginf
ormat
ionper
tai
nst
oNovaCo.

scost
-vol
ume-
prof
it
rel
ati
onshi
ps:

Break-evenpointinuni
tssol
d 1,
000
Variablecostsperunit $500
Totalfixedcosts $150,
000

Howmuchwi
ll
becont
ri
but
edt
opr
ofi
tbef
oret
axesbyt
he1,
001stuni
tsol
d?

a. $650
b. $500
c. $150
d. $0
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1139

ANSWER: c MEDI
UM
1140 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

123. I
nfor
mat
ionconcer
ningLabel
Cor
por
ati
on
sPr
oductAf
oll
ows:

Sal
es $300,
000
Var
iabl
ecost
s 240,
000
Fi
xedcost
s 40,
000

Assumi
ngthatLabelincr
easedsal
esofPr
oductAby20per
cent
,whatshoul
d
t
heprof
itf
rom ProductAbe?

a. $20,
000
b. $24,
000
c. $32,
000
d. $80,
000

ANSWER: c MEDI
UM

124. Li
ndsayCompanyrepor
tedt
hef
oll
owi
ngr
esul
tsf
rom sal
esof5,
000uni
tsof
Pr
oductAforJune:

Sal
es $200,
000
Vari
abl
ecosts (120,
000)
Fi
xedcosts (60,
000)
Operat
ingi
ncome $20,000

Assumet hatLi
ndsayincr
easest hesel
li
ngpr
iceofPr
oductAby10percenti
n
Jul
y.Howmanyuni t
sofPr oductAwouldhavetobesol
dinJul
ytogenerat
ean
operat
ingincomeof$20,000?

a. 4,
000
b. 4,
300
c. 4,
500
d. 5,
000

ANSWER: a MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1141

THEFOLLOWI
NGMULTI
PLECHOI
CERELATETOMATERI
ALCOVEREDI
NTHE
APPENDI
XOFTHECHAPTER.

125. Onabreak-
evenchar
t,t
hebr
eak-
evenpoi
nti
slocat
edatt
hepoi
ntwher
ethe
t
otal

a. r
evenueli
necrossesthetot
alfi
xedcostline.
b. r
evenueli
necrossesthetot
alcontr
ibut
ionmar gi
nli
ne.
c. f
ixedcostl
inei
ntersect
sthetot
alvari
ablecostli
ne.
d. r
evenueli
necrossesthetot
alcostl
ine.

ANSWER: d EASY

126. I
naCVPgr
aph,
thesl
opeoft
het
otalr
evenuel
inei
ndi
cat
est
he

a. r
ateatwhi chprofi
tchangesasvol
umechanges.
b. r
ateatwhi chthecontr
ibuti
onmargi
nchangesasvol
umechanges.
c. r
ati
oofi ncreaseoftot
alfi
xedcost
s.
d. t
otalcostsperunit.

ANSWER: b MEDI
UM

127. I
naCVPgr aph,t
hear
eabet
weent
het
otalcostl
ineandt
het
otalr
evenuel
ine
r
epr
esent
st ot
al

a. contr
ibut
ionmargi
n.
b. vari
ablecost
s.
c. fi
xedcosts.
d. prof
it.

ANSWER: d EASY

128. InaCVPgraph,
thear
eabet
weent
het
otalcostl
ineandt
het
otalf
ixedcostl
ine
yiel
dst
he

a. fi
xedcostsperunit .
b. total
vari
ablecosts.
c. profi
t.
d. contri
but
ionmar gin.

ANSWER: b EASY
1142 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

129. IfSABCompany
sfixedcost
swer
etoi
ncr
ease,
theef
fectonapr
ofi
t-
vol
ume
graphwoul
dbethatthe

a. cont ri
but
ionmar
ginli
newoul
dshiftupwar
dparall
eltothepresentline.
b. cont ri
but
ionmar
ginli
newoul
dshiftdownwar
dpar al
lelt
othepr esentli
ne.
c. sl opeoft
hecont
ribut
ionmar
ginl
inewouldbemor epronounced
(st
eeper
).
d. sl opeoft
hecont
ribut
ionmar
ginl
inewouldbelesspronounced( fl
atter
).

ANSWER: b MEDI
UM

130. IfSABCompany
svari
abl
ecostsperuni
tweretoi
ncreasebuti
tsuni
tsell
ing
pri
cest
aysconst
ant,
theeff
ectonaprof
it
-vol
umegraphwouldbethatthe

a. cont
ri
but
ionmar
ginli
newoul
dshiftupwar
dparall
eltothepresentline.
b. cont
ri
but
ionmar
ginli
newoul
dshiftdownwar
dpar al
lelt
othepr esentli
ne.
c. sl
opeoft
hecont
ribut
ionmar
ginl
inewouldbepronounced(steeper).
d. sl
opeoft
hecont
ribut
ionmar
ginl
inewouldbelesspronounced( fl
atter
).

ANSWER: d EASY

131. Themostusef
uli
nfor
mat
ionder
ivedf
rom acost
-vol
ume-
prof
itchar
tist
he

a. amountofsal
esrevenueneededt ocoverenter
pri
sevari
abl
ecosts.
b. amountofsal
esrevenueneededt ocoverenter
pri
sefi
xedcost
s.
c. rel
ati
onshi
pamongr evenues,vari
abl
ecosts,andfi
xedcost
satvari
ous
l
evel
sof act
ivi
ty.
d. vol
umeoroutputlevelatwhichtheenter
pri
sebreakseven.

ANSWER: c EASY

SHORTANSWER/
PROBLEMS

1. Whydomanager
sfr
equent
lypr
efervar
iabl
ecost
ingt
oabsor
pti
oncost
ingf
or
i
nter
naluse?

ANSWER: Manager smaypr ef


ervariabl
ecostingbecauseitcl
assi
fi
escost
s
bothbythei
rfunct
ionandt heirbehavi
or .Whencostsareclassi
fi
edbybehavi
or,
managerscanmor eaccuratelypredi
cthowt otalcost
swillchangewhen
volumechanges.Withmoreaccur ateinformat
ion,managerscanmakebetter
product
ionandpri
cingdecisions.

MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1143

2. Whyi
svar
iabl
ecost
ingnotusedext
ensi
vel
yinext
ernalr
epor
ti
ng?

ANSWER: Var i
abl
ecosti
ngisnotusedext
ensi
vel
youtsideoft
hef
ir
m
becauseabsor
pti
oncost
ingisr
equir
edbyGAAPandt heIRS.

MEDI
UM

3. Howcanacompanypr oducebot
hvar
iabl
eandabsor
pti
oncost
ingi
nfor
mat
ion
f
rom asi
ngl
eaccount
ingsystem?

ANSWER: Fi rmsonl yhaveoneaccount i


ngi nf
ormationsystem.Thissystem
willbebasedonei thervari
ableorabsorpt
ioncosting.I
ft hesyst
em needsto
provideinfor
mat ioninbot hthevar
iabl
eandabsor ptionformats,t
hesystems
account i
nginformat i
oncanbeconver tedfrom oneformatt otheother
.The
conver si
onrequiresanadj ustmenttotheproductinventoryaccountsandthe
amountofpr oductcost schargedagai
nsttheper i
odsincome.Theconversion
i
st ypical
lyeasierifstandardcosti
ngisempl oyed.

MEDI
UM

4. Whatar
ethemaj
ordi
ff
erencesbet
weenvar
iabl
eandabsor
pti
oncost
ing?

ANSWER: Themaj ordi


f fer
encebetweenvar iablecost i
ngandabsor pti
on
costingisi nthewayeachdef i
nesproductcost.Whi l
eabsor pt
ioncosti
ng
i
ncludesf ixedmanufacturingoverheadasapr oductcost ,vari
ablecosti
ng
tr
eat sitasacostoft heper i
od.Asecondar ydifferencebet weenthetwo
met hodsi sthefor
matoft heincomest atement .Absor pt
ioncostinguti
li
zesthe
tr
adi t
ionalincomestatementf ormatthatcategor i
zescost sbytheirf
unction
only.Var i
ablecost
ingusesani ncomestatementf ormatthatcategori
zescosts
bybot htheirfunct
ionandbehavi or.

MEDI
UM

5. Whyi
sabsor
pti
oncost
ingnotusedf
orCVPanal
ysi
s?

ANSWER: Absor pt
ioncost
ingisnotusedinbreak-
evenanal
ysisbecauseit
presentsaclassi
fi
cat
ionofcost
sbyf unct
ionrat
herthanbybehavior
.Withouta
behavioralcl
assi
fi
cat
ionofcost
s,iti
simpossibl
etopredi
cthowtotalcosts
changeasvol umechanges.

MEDI
UM
1144 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

6. Howdochangesi
nvol
umeaf
fectt
hebr
eak-
evenpoi
nt?

ANSWER: Wi t
hintherel
evantr
ange,t
hebr eak-
evenpointdoesnotchange.
Thi
sisduetotheli
neari
tyassumpti
onsthatapplytot
otalrevenues,
fixedcost
s,
andvar
iabl
ecosts.

MEDI
UM

7. Whatmajorassumpti
ondomul ti
productf
ir
msneedt
omakei
nusi
ngCVP
anal
ysi
sthatsi
ngle-
productf
ir
msneednotmake?

ANSWER: Theassumpt ionthatmustbei


mposedi saconst
antsal
esmix.A
multi
productf i
rm assumesthat(wi
thi
nther
elevantr
ange)t
hesalesmixi
s
constant.ThispermitsCVPanalysi
stobeperf
ormedusingaunitoft
he
constantsalesmix.

MEDI
UM

8. Whati
mport
anti
nfor
mat
ioni
sconveyedbyt
hemar
ginofsaf
etycal
cul
ati
oni
n
CVPanal
ysi
s?

ANSWER: Thebr eak-


evenpoi ntinCVPanal ysi
siscri
ti
calbecausei
tdivi
des
prof
itabl
elevelsofoperati
onfrom unprofi
tablelevel
sofoperati
on.Themargin
ofsafetygi
vesmanager sani deaoft heextenttowhichsalescanfal
lbef
ore
operati
onswillbecomeunpr ofi
table.

MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1145

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions911.

Li
mpi nCo.manufact
uresandsellswal
kingcanes.Thef
oll
owi
ngi
ncomest
atement
appl
iesto2001,i
tsfi
rstyearofoper
ati
ons:

Sales(800uni t
s@ $15) $12,000
CostofGoodsSol d (8,000)
GrossMar gin $4, 000
Sell
ing,general
,andadmini
str
ati
veexpenses (3,000)
Operati
ngi ncome $1, 000

Ot
heri
nfor
mat
ion:
1. Thecompanypr oduced1,000unit
sduri
ngtheyear
.
2. Var iabl
eSG&Aexpensesare$1percane.
3. Var iabl
epr
oduct
ioncostsare$7percane.
4. Ther ewasnoendingwork-i
n-pr
ocessi
nventor
y.

9. Howmuchf
ixedmanuf
act
uri
ngover
headdi
dtheLi
mpi
nCo.i
ncuri
n2001?

ANSWER: TheCostofGoodsSol disbasedonsal esof800uni tsandi s


recordedat$8,000.This$8,000iscompr i
sedof$5,600ofvar iabl
epr oduct
costs($7800) .Theref
or e,
$2,400oftheCostofGoodsSol disfixed.Given
thatthefi
rm sold80per centofit
soutput(800/1,
000) ,
$2,400mustbe80
percentofthetotalf
ixedmanuf actur
ingoverheadincurred.Thissetsthetotal
fi
xedmanuf acturi
ngover headcostsincurr
edat$3,000.

MEDI
UM

10. Whatwer
ethet
otalvar
iabl
ecost
sincur
redi
n2001?

ANSWER: Thet ot
alvari
ablepr
oductcost
swoul
dbe$5,600/
.80=$7,
000.
Thetot
alvar
iabl
eSG&Awoul dbe$1800=$800.Tot
alvari
abl
ecost
sincur
red
are$7,
000+$800=$7, 800.

MEDI
UM

11. I
ftheLi
mpi
nCo.adopt
edvari
ablecost
ing,
theendi
ngf
ini
shedgoodsi
nvent
ory
f
or2001woul
dbecarr
iedatwhatval
ue?

ANSWER: Theansweri
s200uni
ts$7=$1,
400.

EASY
1146 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions1214.

TheCr ownCo.manuf acturest oasters.Thecompanyhi redacostaccount antinits


fi
rstyearofoperat
ions, 2001, toexpl ai
nt omanagementhowi tscostsbehaved.Af t
er
studyi
ngvar i
ousdocument sandi ndust r
ydat a,t
hecostaccount antannouncedt hat
thetotalSG&Aexpensest hatt hefirm canexpectt oincurinanyper iodiscaptur
edby
theequation:Y=$50,000+$10X, wher eYi sthetotalSG&Aexpensei ncurr
edandXi s
thenumberofuni t
ssol d.Al so, t
heaccount antannouncedt hatthetotalpr
oductcosts
i
ncur r
edinanyperiodcoul dbecapt uredbyt heformulaY=$100, 000+$6X, whereYis
thetotalmanufact
uringcosti ncurredandXi sthenumberofuni tsproduced.In2001,
thefir
m produced10,000uni tsandsol d9,000oft hem at$35each.

12. Accor
dingt
otheaccount
ant
sequat
ions,
whatwoul
dbet
het
otalofal
lcost
s
i
ncurr
edbythefi
rmin2001?

ANSWER: Tot alproductioncostsar


ebasedont henumberofunitsproduced
andwouldbe:(
10, 000$6)+$100, 000=$160,000.Totalper
iodcost
swoul dbe
basedonthenumberofuni tssol
dandwouldbe:(9,000$10)+$50,000=
$140,
000.Thetotalofallcostswouldbe$160,
000+$140, 000=$300,000.

MEDI
UM

13. Ift
hefi
rmscostsconf
ormedexactl
ytotheaccountant
sequat
ions,howmuch
i
ncomebef or
eincometaxeswouldberepor
tedfor2001ifthef
irm uses
absor
pti
oncosting?

ANSWER:
Sales($359, 000) $315,
000
CostofGoodsSol d:
Beg.fi
n.goodsi nventor
y $ 0
CostofGoodsManuf actur
ed 160,
000
Goodsavai l
able $160,
000
Endinginventory (
16,
000)
CostofGoodsSol d (144,
000 )
Grossmar gin $171,
000
Lessperiodcost s (140,
000 )
Incomebef or
ei ncometaxes $31,000

MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1147

14. Ift
hefir
mscostsconf
ormedexactl
ytotheaccountant
sequat
ions,howmuch
i
ncomebef or
eincometaxeswouldberepor
tedfor2001ifthef
irm usesvar
iabl
e
costi
ng?

ANSWER:
Sales $315,
000
Lessvar i
ablecosts:
Productcosts($69,000) $54,
000
Periodcosts($109,000) 90,
000 (144,
000 )
Cont r
ibut
ionmar gi
n $171,
000
Lessf i
xedcosts:
Productcosts $100,
000
Periodcosts 50,
000 (150,
000 )
Incomebef or
ei ncometaxes $21,000

MEDI
UM

15. Stanl
eyCor
p.producesasingl
eproduct
.Thef
oll
owi
ngi
sacostst
ruct
ure
appli
edt
oit
sfir
styearofoperat
ions,
2001:

Sal
espri
ce $15peruni
t
Var
iabl
ecosts:
SG&A $2peruni
t
Producti
on $4peruni
t
Fi
xedcosts(tot
alcosti
ncur
redf
ort
heyear
):
SG&A $14,
000
Producti
on $20,
000

Dur
ing2001,St
anleyCor
p.manufactur
ed5,000unitsandsol
d3,
800.Ther
ewas
nobegi
nningorendi
ngwork-
in-
processinvent
ory.

a. Howmuchi ncomebeforei
ncometaxeswouldbereport
edi
fStanl
ey
usesabsor
pti
oncosti
ng?
b. Howmuchi ncomebeforei
ncometaxeswouldbereport
edi
fvari
abl
e
cost
ingwasused?
c. Showwhyt hetwocost
ingmethodsgivedi
ff
erenti
ncomeamounts.
1148 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

ANSWER:
a. Incomeunderabsorpti
oncost
ingis:
Sales$153,800= $57,000
COGS3, 800($4+$20,
000/5,000) 30,
400
GM $26,600
Oper
.Exp.
VSE$23, 800= $7,600
FSE 14,
000 (21,600 )
Absorpt
ionincomebef
oreincometaxes $5,000

b. I
ncomeundervar i
abl
ecosting:
CMU=SPVPr od.CostVSGA=$15$4$2=$9
Vol.sol
d3,800
CM $34,
200
Less:FCPr oduct
ion (
20,
000)
SG&A (
14,
000)
Vari
ablecosti
ngincomebeforei
ncomet
axes $ 200

c. Reasonf ordi
ffer
enceinincome:
Fi
xedcost sexpensedunderabsorp.costi
ng
COGS3, 800$20,000/5,000uni
ts $15,
200
Fi
xedSG&A 14,
000
Total $29,
200
Fi
xedcost sexpensedundervariabl
ecosting
Fi
xedSG&A $14,
000
Fi
xedPr oducti
on 20,
000
TotalFC $34,
000
Di
fferenceinFCexpensedundert womet hods $4,800

Thi
sisal
sot
hedi
ff
erencei
nincomeamount
s.

MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1149

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions16and17.

I
nfor
mat
ionr
elat
ingt
othe2001oper
ati
onsofMcNi
ckl
eCor
p.f
oll
ows:

Sales $120,
000
Variablecost
s (36,
000)
Cont ri
but
ionmar gi
n $84,000
Fi
xedcost s (70,
000)
Profitbef
oretaxes $14,000

16. McNickl
e
sbreak-
evenpoi
ntf
or2001was1,
000uni
ts.Comput
eMcNi
ckl
e
s
sal
espri
ceperunit
.

ANSWER: Thebr
eak-
evenpoi
nti
sfoundbydi
vidi
ngt
hef
ixedcost
sbyt
he
CM r
ati
o.

TheCM r
ati
ois:

$84,
000/
$120,
000=70%.Br
eakevenwoul
dthenbe:

$70,
000/ .
70=$100,000.Si
ncewealsoknowthatthebreak-
evenpoi
nti
s
defi
nedas1, 000uni
ts,
itmustf
oll
owthattheuni
tsalespri
ceis
$100,000/1,
000=$100.

MEDI
UM

17. Comput
eMcNi
ckl
e
sdegr
eeofoper
ati
ngl
ever
agef
or2001.

ANSWER: Thedegr eeofoper


ati
nglever
ageiscomputedast
hecont
ri
but
ion
margi
ndi
videdbypr
ofitbef
oret
axes:$84,
000/
$14,000=6.

MEDI
UM
1150 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions18and19.

DosCo.manufact
uresandsell
s2pr
oduct
s:AandB.Thepr
oject
edi
nfor
mat
ionon
t
hesetwoproduct
sfor2002is:

Pr
oductA Pr
oductB
Sal
esinuni
ts 4,
000 1,
000
Sal
espri
ceperuni
t $12 $8
Var
iabl
ecost
speruni
t 8 4

Tot
alf
ixedcost
sfort
hecompanyar
epr
oject
edat$10,
000.

18. Comput
eDosCo.

spr
oject
edbr
eak-
evenpoi
ntf
or2002i
ntot
aluni
ts.

ANSWER: Thecompanyant i
cipatesasalesmixconsisti
ngof4unitsof
ProductAand1unitofProductB.Thet ot
alcontr
ibuti
onmar gi
nforoneunitof
salesmixwouldbe$20.Thisconsistsof$16ofcontri
buti
onmar gi
nfrom t
he4
unitsofPr
oductAand$4ofcont ri
butionmarginfrom 1uni
tofProductB.

Theoverallcompanybreakevenisfoundbydividi
ngtotalf
ixedcostsbythe
contr
ibut
ionmar gi
nononeuni tofsalesmix:$10,
000/$20=500uni ts.The500
unit
sofsal esmixcont
ain5005uni tsofproductforatot
alof2,500.Ofthe
2,
500t ot
alunit
s,2,
000areuni t
sofProductAand500ar eunit
sofPr oductB.

MEDI
UM

19. Howmanyuni
tswouldt
hecompanyneedtosel
ltopr
oduceani
ncomebef
ore
i
ncomet
axesequalt
o15per
centofsal
es?

ANSWER: Agai n,usingauni tofsalesmixastheunitofanalysi


s,oneunitof
sal
esmi xsel
lsf
or$56.Si ncethecont ri
buti
onmar gi
nis$20ononeuni tofsales
mix,theCM rati
oononeuni tofsalesmi xi
s$20/ $56=.3571.Thisi
mpliesthat
vari
ablecostsasaper centageofsal esareequalto1. 3571=.6429.Income
befor
ei ncometaxesequalt o15per centofsal
escanbef oundbysolvi
nga
for
mul aofthefoll
owingtype:

Sal
esVCFC=I
ncomebef
orei
ncomet
axes

I
nthi
sparti
cul
arcase,
wesolvet
hefol
lowi
ngfor
mula:
Sal
es(.6429Sal
es)$10,
000=(.15Sal
es)

Solvi
ngforSal
es,weget$48,
286.Wecanf i
ndouthowmanyuni t
sofsal
esmix
arerequi
redt
ogenerat
esalesof$48,
286bydividi
ng$48,286by$56=863.
These863unitsofsal
esmixeachcontai
n5unitsofproduct
,sothecorr
ect
answerwouldbe8635=4, 315unit
sofproduct,
3,452ofProductAand863
ofProductB.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1151

MEDI
UM
1152 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions20and21.

PCorp.predict
sitwil
lproduceandsel
l40,000uni
tsofi
tssol
eproducti
n2001.Att
hat
l
evelofvolume,itpr
oject
sasalespri
ceof$30perunit,
acontr
ibut
ionmargi
nrat
ioof
40percent,andfi
xedcostsof$5perunit
.

20. Whati
sthecompany
spr
oject
edbr
eakevenf
or2001i
ndol
lar
sanduni
ts?

ANSWER: Gi ventheCM r
ati
oof40per cent
,andtheSalespri
ceperuni
tof
$30, t
heCM peruni
tmustbe$30.40=$12.Thet otalfi
xedcostswoul
dbe
project
edat$540,000=$200,
000.Breakevenwouldbe:$200,
000/$12=
16,667uni
ts.Thi
swouldal
soequateto$500,000ofsales.

MEDI
UM

21. Whatwoul
dthecompany
spr
oject
edpr
ofi
tbei
fitpr
oducedandsol
d30,
000
uni
ts?

ANSWER:
Projectedpr ofi
twouldbe:
Sales( 30,000$30) $900,
000
Variablecost s(
30,000$18) (540,
000)
Cont r
ibutionmargin $360,
000
Fixedcost s (200,
000)
Profit $160,
000

MEDI
UM
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1153

Quest
ions22and23ar ebasedont
hefol
lowi
ngdat
aper
tai
ningt
otwot
ypesof
pr
oductsmanufact
uredbyKornCorp.
:

Peruni
t
Sal
espri
ce Variabl
ecost
s
Pr
oductY $120$70
Pr
oductZ $500$200

Fi
xedcost
stot
al$300,
000annuall
y.Theexpect
edmi
xinuni
tsi
s60per
centf
or
Pr
oductYand40percentf
orProductZ.

22. Howmuchi
sKor
nsbr
eak-
evenpoi
ntsal
esi
nuni
ts?

ANSWER:
BEPuni
ts=FC/(uni
tSPunitVC)oruni
tCM(UMC)
Formul
ti
plepr
oducts,
uset
heweightedCM wi
thwei
ght
sbasedonuni
tsof
sal
eswei
ghts.

BEP=FC/[ 60%($120$70)+40%($500$200)
]
=$300,
000/($30/u+$120/
u)=2,
000unit
s

MEDI
UM

23. Whatar
eKor
nsbr
eak-
evenpoi
ntsal
esi
ndol
lar
s?

ANSWER:
BEPdol lars=FC/ CMR
Formul ti
pleproducts,useweight
edCMRwi thwei
ghtsbasedonsal
esdoll
ars
aswei ghtsorsalesmi x.
Sal
esmi xis60per centand40percenti
nunit
sori
ndol l
ars.
Weightedaver ageCMR=WACM/ WASal e
WACMR=[ 60%($120$70)+40%( $500$200)](60%$120)+(40%
$500)
WACMR=[ $30+$120][ $72+$200]=.551
BEPsal es=2, 000$272=$544, 000

MEDI
UM
1154 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

24. Thismakesnosenseatall,
sai
dBi l
lSharp,
presidentofEssexCompany. We
soldthesamenumberofuni t
sthisyearaswedi dlastyear
, yetourpr
ofi
tshave
mor ethandoubl
ed.Whomadet hegoofthecomput erorthepeoplewho
operateit
?Thestat
ementstowhi chMr.Sharpwasr efer
ri
ngar eshownhere
(absorpti
oncost
ingbasi
s):

2001 2002
Sales(
20,000unitseachyear) $700,
000$700,
000
Lesscostofgoodsold 460,
000 400,
000
Grossmar gin $240,
000$300,
000
Lesssel
li
ngandadmi ni
str
ati
veexpenses 200,
000 200,
000
Incomebef or
eincometaxes $40,000$100,
000

Thecompanywasor ganizedonJanuary1,2001,sotheprevi
ousstatements
showtheresultsofi
tsfir
sttwoyearsofoperati
on.Inthefir
styear
,the
companyproducedandsol d20,
000unit
s;inthesecondyear,t
hecompany
againsol
d20,000units,butiti
ncr
easedproducti
oninordertohaveast ockof
unit
sonhand, asshownher e:

20012002
Producti
oninunits 20,
00025,000
Salesinunits 20,
00020,000
Variabl
eproducti
oncostperuni
t $8$8
Fi
xedover headcosts(
tot
al) $300,
000 $300,
000

Fixedoverheadcost
sareappliedtouni
tsofproductonabasi
sofeachyear
s
producti
on.(Thecompanypr oducesandsel
lsasinglepr
oduct
.)Var
iabl
e
sell
ingandadminist
rat
iveexpensesare$1perunitsol
d.

Requi
red:
1. Computethecostofsingl
euni
tofpr
oductf
oreachyearunder
:
a. absorpti
oncosti
ng.
b. vari
ablecost
ing.

2. Whati
stheval
ueofendi
ngi
nvent
oryi
n2002under
:
a. f ul
lcost
?
b. var i
abl
ecost
?
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1155

ANSWER:
2001 2002
1. a Var
iabl
eman. $8$8
Fi
xedman. 15 122001$300,
000 =$15
$23$20 20,
000

2002 $300,
000=$12
25,
000

b. Var
iabl
eman. 2001 2002
$8 $8

2. a. 5,
000$23=$115,
000

b. 5,
000 20= 100,
000

MEDI
UM
1156 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

25. Thef
oll
owi
ngdat
ahavebeent
akenf
rom t
her
ecor
dsofacompany:

Productioninunitsdur i
ng2001 200,
000
Unitssolddur i
ng2001 190,
000
Sell
ingpr i
ceperuni t $15.
00
Standardvar i
ablecostsperuni t:
Mater i
alandlabor $8.
00
Indi
rectmanuf acturingcosts 2.
00
Sell
ing&admi ni
strativeexpenses 1.
00 $11.
00
Fi
xedcost sbudgetedf oryear:
Indi
rectmanuf acturingcosts $400,
000
Sell
ing&admi ni
strativeexpenses 300,
000$700,
000

Requi
red:
1. Det erminethei
ncome( l
oss)befor
eincometaxesf
ort
heyear2001under
(a)absorpt
ioncost
ingand(b)vari
abl
ecosti
ng.

2. Whati
stheval
ueofendi
ngi
nvent
oryunder(
a)absor
pti
oncost
ingand
(
b)var
iabl
ecost
ing?

3. Reconci
let
hedi
ff
erencei
nthet
woi
ncomes.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1157

ANSWER:
1. (a.
) (
b.)
Sales $2,
850,
000Sal
es $2,
850,
000
COGS( 190,
00012) 2, 280,
000VC( 190,
00011) 2,
090,
000
$ 570,
000CM $ 760,
000
SLA 490,
000 FC 700,
000
Incomebeforei
ncometaxes$ 80,000Incomebefor
eincomet
axes
$ 60, 000

2. PRODUCTCOST
(
a.) $1210,
000=$120,
000 ABSORPTION VARI
ABLE

(
b.) $1010,
000=$100,
000
VAR $10 $10
(400,
000)
FI
X 2(200,
000) _
__
$12 $10

3. NI=(
200,
000190,
000)$2=$20,
000

MEDI
UM
1158 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

26. Act
ualcost
sforSoni
c,I
nc.f
ort
hepastyearwer
easf
oll
ows:

Dir
ectmateri
al(
2pounds@ $5) $10peruni
t
Dir
ectl
abor(3hour
s@ $10) $30peruni
t
Vari
abl
eselli
ngandadmini
str
ati
ve $2peruni
t
Fi
xedsell
ingandadmini
str
ati
ve $80,
000

Duri
ngtheyear,10,000unitswereproducedand9, 000unit
sweresol
d.There
werenobeginni
ngi nventori
es.Thi
rtythousanddirectl
aborhour
swereworked
duri
ngtheyear.Act ualover
headfortheyeartotal
ed$252,000ofwhi
ch
$140,
000wasf ixed.Selli
ngprice=$100/unit.

Budget
edfixedover headwas$150, 000andtheexpect
edacti
vit
ylevelwas
30,
000dir
ectl aborhours.Vari
ableoverheadwasbudgetedat3directl
abor
hour
speruni tand$4perdi r
ectlaborhour.

Thecompanyusesanormalcost
ingsyst
em andover
headvar
iancesar
ecl
osed
tocostofgoodssol
d.

Requi
red:
a. Det ermi
net
heuni
tcostusi
ngvar
iabl
ecost
ing.

b. Det
ermi
net
heuni
tcostusi
ngabsor
pti
oncost
ing.

c. Usingvari
abl
ecost
ing,
det
ermi
net
hecont
ri
but
ionmar
gin,
andvar
iabl
e
costi
ngincome.

d. Usingabsorpt
ioncost
ing,
det
ermi
net
hegr
ossmar
gin,
andabsor
pti
on
costi
ngincome.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1159

ANSWER:

a. DM $10
DL 30
V-
FOH(
3$4) 12
$52

b. DM $10
DL 30
V-
FOH 12
F-
FOH (
3$5) 15$150,
000=$5
$6730,
000

c. SellPrice $100
VARCost 54($52+$2)
CM $469, 000unit
s= $414,
000
FC (
230,
000 )
=Incomebef orei
ncometaxes(STD) $184,
000
+f avor
abl
eVAR-FOHSPDVAR 8,
000
Incomebeforei
ncometaxes(act
ual) $192,
000

Var
iabl
eFOHspendi
ngvar
iance=$112,
000(
30,
000$4)=$8,
000F

d. SP $100
COGS 67
GM $339, 000unit
s= $297,
000
S&AEXP( 9,
000$2)+$80, 000 (98,
000 )
I
ncomebef oreincomet axes(STD) $199, 000
+Favorabl
evar i
ance 8,
000
Incomebef oreincomet axesactual $207,
000

MEDI
UM
1160 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

27. Spor t
sInnovatorshasdevelopedanewdesi gntoproducehur dlesthatareused
i
nt rackandfieldcompetit
ion.Thecompany shurdl
edesignisi nnovati
vein
thatthehurdl
eyi el
dswhenhi tbyarunnerandi t
sheightisextraordi
naril
yeasy
toadjust.Managementest i
matesexpect
edannualcapaci tyt
obe90, 000unit
s;
overheadisappl i
edusingexpectedannualcapacit
y.Thecompany scost
accountantpredictst
hefollowi
ng2001activit
iesandrelatedcosts:

St
andar
dunitvariablemanuf acturingcosts$12
Variableunitsel l
ingexpense$5
Fi
xedmanuf actur i
ngover head$480,000
Fi
xedsel
li
ngandadmi ni
strativeexpenses$136, 000
Sell
ingpr iceperunit$35
Unitsofsales80,000
Unitsofpr oduction85,
000
Unitsinbegi nningi nvent
ory10,
000

Otherthananypossibl
eunder-oroverappl
iedf
ixedover
head,management
expectsnovari
ancesfrom t
hepreviousmanufactur
ingcost
s.Under-or
overappli
edfi
xedoverheadi
stobewr i
tt
enofft
oCostofGoodsSold.

Requi
red:
1. Det erminetheamountofunder
-orover
appl
iedf
ixedover
headusi
ng(
a)
var
iabl
ecosti
ngand(b)absor
pti
oncosti
ng.

2. Prepareproj
ect
edincomest
atement
susi
ng(
a)var
iabl
ecost
ingand(
b)
absorpt
ioncosti
ng.

3. Reconci
let
hei
ncomesder
ivedi
npar
t2.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1161

ANSWER:

1.a. $0

b. (
90,
00085,
000)$5.
33=$26,
650U

2.a. Sal
es(80,
000$35)=$2,
800,000
VC (80,
000$17)= (
1,360,
000 )
CM $1,
440,000
FC ( 616,000 )
I
ncomebefor
eincomet
axes$ 824,000

b. Sal
es(
80,
000$35)$2,800,
000
COGS( $17.3380,000)
(
1,386,
400 )
GM $1,413,
600
S&A ( 536,000 )
Incomebef or
ei ncome(STD)
$ 877,
600
VOLVAR (26,
650 )
I
ncomebef
orei
ncometaxes
$ 850,
950

3.5,
000$5.
33=$26,
650.

MEDI
UM
1162 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

28. OnDecember30, 2001,abombbl astdestroyedt hebulkoftheaccount ing


recordsoft heHorneDi visi
on,asmal lone-productmanuf actur
ingdivisi
ont hat
usesstandar dcostsandf l
exi
blebudget s.Allvariancesarewritt
enof fas
addit
ionst o(ordeductionsfrom)income;nonear epro-
ratedtoinventories.In
addit
ion,thechiefaccount antmysteriousl
ydi sappeared.Youhavet het askof
reconstr
uct i
ngther ecordsfortheyear2001.Thegener almanagerhassai d
thattheaccountanthasbeenexper iment i
ngwi thbothabsor pt
ioncost i
ngand
vari
ablecost i
ng.

Ther
ecor
dsar
eamess,
butyouhavegat
her
edt
hef
oll
owi
ngdat
afor2001:

a. Cashonhand, December31, 2001 $10


b. Sales $128,
000
c. Actualf i
xedi ndirectmanuf actur i
ngcost s 21,
000
d. Account srecei vabl e,
December31, 2001 20,
000
e. Standar dvar i
abl emanuf acturingcost sperunit 1
f. Var i
ancesf rom st andardofal lvar i
ablemanuf actur
ingcost
s $5,000U
g. Oper ati
ngincome, absorpti
on-cost i
ngbasi s $14,
400
h. Account spayabl e,December31, 2001 18,
000
i
. Grosspr ofit,absor pti
oncost i
ngatst andard
(beforededuct ingvariances) 22,
400
j. Total l
iabi
li
ties 100,
000
k. Unf avorablebudgetvar i
ance, fixedmanuf acturi
ngcosts 1,
000U
l
. Not esreceivabl efrom chiefaccount ant 4,
000
m. Cont ri
buti
onmar gin,atstandar d(beforedeductingvari
ances)48,
000
n. Direct-
mat erialpur chases,atst andardpr i
ces 50,
000
o. Actualsel l
ingandadmi nist
rativecost s(al
lfi
xed) 6,
000

Thesedonotnecessar
il
yhavet
obesol
vedi
nanypar
ti
cul
aror
der
.Ignor
e
i
ncometaxes.

Requi
red:
1. Oper atingincomeonavar iable-
costi
ngbasi s.
2. Numberofuni t
ssol d.
3. Numberofuni t
spr oduced.
4. Numberofuni t
susedast hedenomi natortoobtainfixedindirectcost
appli
cat i
onrateperuni tonabsor pti
on-costingbasis.
5. Di dinventory(i
nuni ts)increaseordecrease?Expl ain.
6. Bynowmuchi ndol l
arsdi dtheinventorylevelchange( a)under
absorptioncosting,(b)undervar i
ablecosting?
7. Var i
ablemanuf acturi
ngcostofgoodssol d, atst
andar dprices.
8. Manuf acturi
ngcostofgoodssol datstandar dpri
ces, absorpti
oncosti
ng.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1163

ANSWER:

1. CM $48,
000Actualfi
xmf g $21,
000
FC (26,
000)unf avor
ableVAR (1,
000)
Oper
atingIncome( STD) $22,000 f
ixcost@STD $20,
000
unfavorablevar
iances (6,
000)
Oper
atingIncome( act
ual
)$16,000

2. Sal
es $128,
000
CM (48,
000)
=VC $80,000/$1UNI
T=80,
000uni
tssol
d

3. Sal
es $128,
000
GM (22,
400)
COGS $105,
600/80,
000=$1.
32

Di
ffer
encei
nOI=(
PS)f i
xmf
g/unit
$(
1,600)=(
P80,
000)$.
32P=75,000

4. OIabsor
pti
oncost=$22,
400$6, 000=$16,
400OISTD
(14,
400)OIACT
var
iances $2,000UNF
otherVAR 6,
000UNF
VOLVAR $4,000FAV

$4,
000F=( 75,
000X)$. 32
X=62,500unit
sproduced

5. I
nvent
orydecr
eased.OIabsor
pti
oni
slesst
hanOIvar
iabl
e.

6. Absorpti
oncost5,
000uni
ts$1.
32=$6,600
Vari
ablecost5,
000uni
ts$1=$5,000

7. 80,
000uni
ts$1=$80,
000

8. 80,
000$1.
32=$105,
600

DI
FFI
CULT
1164 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

29. SmithCompanyproducesandsel
lstwoproduct
s:AandBi ntherati
oof3At o
5B.Selli
ngpri
cesforAandBare,r
espect
ivel
y,$1,
200and$240;r especti
ve
vari
ablecost
sare$480and$160.Thecompanysfixedcostsare$1,800,
000
peryear.

Comput
ethevol
umeofsal
esi
nuni
tsofeachpr
oductneededt
o:

Requi
red:
a. br eakeven.

b. ear
n$800,
000ofi
ncomebef
orei
ncomet
axes.

c. earn$800,
000ofi
ncomeaf
teri
ncomet
axes,
assumi
nga30per
centt
ax
rat
e.

d. ear
n12per
centonsal
esr
evenuei
nbef
ore-
taxi
ncome.

e. ear
n12percentonsal
esr
evenuei
naf
ter
-t
axi
ncome,
assumi
nga30
per
centt
ax rat
e.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1165

ANSWER:

A SP $1,
200B SP $240
VC (
480) VC (
160 )
CM $ 720 CM $80

Wei
ght
edCM =(
3$720)+(
5$80)=$2,
560

a. $1,
800,
000 =703.
125 A=7043=2,
112uni
ts
$2,
560 B=7045=3,
520

b. $1,
800,
000+$800,
000 =1015.
625 A=1,
0163=
3,
048unit
s
$2,560 B=1,
0165=5,
080

c. $800,
000/
1.
3=$1,
142,
857

$1,
800,
000+$1,142,
857=1,
149.
55 A=1,
1503=3,
450uni
ts
$2,
560 B=1,
1505=5,
750

d. SP=(
3$1,
200)+(
5$240)=$4,
800

X=$1,
800,
000+$.
12X=$4,
354,
839
$2,
560/
$4,
800

A=(
$4,
354,
839.
75)
/$1200=2,722uni
ts
B=(
$4,
354,
839.
25/
$240=4,537

e. X=$1,
800,
000+$.
12X
1.3 =$4,
973,
684
$2,
560/
$4,
800

A=(
$4,
973,
684.
75)
/$1,
200=3,109uni
ts
B=(
$4,
973,
684.
25/
$240=5,181

MEDI
UM
1166 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

30. TheJonesCompanymakest
hreepr
oduct
s.Dat
afol
low:

Pr
oductA Pr
oductB Pr
oductC
Sel
li
ngpri
ce $10$20 $40
Var
iabl
ecost
s 712 16

Total
annualfi
xedcostsare$840,
000.Thefi
rmsexperi
encehasbeent hat
about20percentofdol
larsal
escomefr
om productA,60percentf
rom B,and
20percentf
rom C.

Requi
red:
a. Computebr
eak-
eveni
nsal
esdol
lar
s.

b. Det
ermi
net
henumberofuni
tst
obesol
datt
hebr
eak-
evenpoi
nt.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1167

ANSWER:
A B C
a. SP $10$20 $40
VC (7)(12 )(16 )
=CM $3 $8 $24
CMR 30% 40% 60%

CMR=(
.230%)+(
.640%)+(
.260%)=42%

BE=$840,
000/
.42=$2,
000,
000

b. A(
$2,
000,
000.
20)
/$10=40,
000uni
ts

B(
$2,
000,
000.
60)
/$20=60,
000uni
ts

C(
$2,
000,
000.
20)
/$40=10,
000uni
ts

MEDI
UM
1168 Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s

31. TheFredCompanysellstwoproducts,AandB,wit
hcontri
but
ionmarginrat
ios
of40and30percentandselli
ngpricesof$5and$2.50aunit
.Fixedcosts
amountto$72,
000amont h.Monthlysal
esaver
age30,000unit
sofproductA
and40,000uni
tsofproductB.

Requi
red:
a. Assumi ngt hatthreeunitsofpr oductAar esoldf oreveryf ourunit
sofpr oductB,
calcul
atet hedol l
arsalesvol umenecessar ytobr eakeven.
b. Aspar tofi tscostaccount i
ngr outi
ne,FredCompanyassi gns$36,000i nfixed
coststo
eachpr oducteachmont h.Cal cul
atethebreak-evendol larsalesvolumef or
eachpr oduct .
c. Fr edCompanyi sconsideringspendi nganaddi tional$9,700amont hon
advert
ising, gi
vingmor eemphasi stoproductAandl essemphasi stopr oductB.
Ifi
tsanal ysisiscorrect,
salesofpr oductAwi llincreaset o40,000uni t
samont h,
butsalesofpr oductBwi l
lfal lto32,000unitsamont h.Recalculat
et hebr eak-
evensal esvolume, indollars, atthi
snewpr oductmi x.Shoul dthepr oposalto
spendt headdi ti
onal$9,700amont hbeaccept ed?

ANSWER:

a. CM =(
3$2)+(4$.
75)=$9
SP=(3$5)=(
4$2.50)=$25

BE=$72,
000=$400,
000
$9/$25

b. A=$36,
000=$90,
000 B=$36,
000 =$120,
000
.4 .
3

c. CM =(
5$2)+(4$.
75)=$13
SP=(5$5)+(
4$2.50)=$35

BE=$72,
000+$9,
700=$219,
962
$13/
35

OLDNEW
CM A=30,
000$2 =$60,000 CM A=40, 000$2=$80,000
B=40,
000$.
75 = 30,
000 B=32,
000$.
75
= 24,
000
$90,
000 $104,
000
FC (72,
000) FC (
81,
700)
OI $18,
000OI $22,300

Atcur
rentsal
esl
evel
sincr
easeadver
ti
sing.
Chapt
er11 Absor
pti
on/
Var
iabl
eCost
ingandCost
-Vol
ume-
Prof
itAnal
ysi
s 1169

MEDI
UM

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