Study, Self Question 1
Correct! Full costing includes direct materials, direct labor, and both fixed and variable
manufacturing overhead in inventoriable costs. Variable costing omits fixed manufacturing
overhead from product costs.
Full costing differs from variable costing in that:
full costing excludes selling costs from consideration.
full costing excludes administrative costs from consideration.
full costing includes variable manufacturing overhead in inventory.
full costing includes fixed manufacturing overhead in inventory.
Self Study, Question 2
Correct! The difference in net income is caused by the handling of fixed manufacturing
overhead. Under full costing, these costs are included in unsold inventory, while under variable
costing, these items are treated as period expenses. As a result, if more units are produced than
sold, under full costing, some costs remain on the balance sheet, while under variable costing,
fixed manufacturing overhead cost is expensed.
If units produced exceed units sold:
full costing and variable costing yield the same income.
full costing yields a higher income than variable costing.
full costing yields a lower income than variable costing.
Self Study, Question 3
Correct! Since JIT management concepts minimize inventories at all levels, the effects of fixed
manufacturing overhead are significantly reduced.
Use of a just-in-time inventory management system is likely to:
decrease the difference between variable and full costing income.
have no effect on the difference between variable and full costing income.
increase the difference between variable and full costing income.
Self Study, Question 4
Correct! Variable costing separates fixed and variable costs which aids in the CVP analysis
process. Because fixed overhead is expensed as a period cost when incurred for all units,
managers are unable to inflate income by overproducing.
A benefit of variable costing for internal reporting purposes is that it:
facilitates CVP analysis.
limits the ability to inflate income by producing more units than needed for current sales.
Both "facilitates CVP analysis" and "limits the ability to inflate income by producing more units
than needed for current sales" are correct.
Neither "facilitates CVP analysis" nor "limits the ability to inflate income by producing more
units than needed for current sales" are correct.
Self Study, Question 5
Correct! Under full costing, fixed factory overhead is capitalized on the balance sheet. Therefore,
the cost of items sold from inventory under full costing is higher than those items held under
variable costing. This increased value of beginning inventory causes a greater cost of goods sold
and a lower net income under full costing.
If units produced are less than units sold:
full costing yields a lower income than variable costing.
full costing and variable costing yield the same income.
full costing yields a higher income than variable costing.
Self Study, Question 6
Correct! Cost is $90,000 as shown in the following computation:
Total variable manufacturing costs per unit
$35.00
Fixed manufacturing overhead per unit ($100,000/10,000)
10.00
Unit cost under full costing
$45.00
Inventory units (10,000 - 8,000)
2,000
Inventory cost under full costing
$90,000
Ajax Manufacturing has the following cost structures:
Direct material
$10
Direct labor
20
Variable manufacturing overhead
5
Total manufacturing variable costs per unit
$35
Fixed manufacturing overhead per year
$100,000
Fixed selling and administrative expense per year
$200,000
Assume that Ajax produces 10,000 items and sells 8,000 items. In this case, the full costing value
of ending inventory is:
$90,000
$130,000
$70,000
$140,000
Self Study, Question 7
Correct! Fixed manufacturing overhead cost is a period cost under variable costing. Cost is
$70,000 as shown in the following computation:
Total variable manufacturing costs per unit
$35.00
Inventory units (10,000 - 8,000)
2,000
Inventory cost under variable costing
$70,000
Ajax Manufacturing has the following cost structures:
Direct material
$10
Direct labor
20
Variable manufacturing overhead
5
Total variable manufacturing costs per unit
$35
Fixed manufacturing overhead per year
$100,000
Fixed selling and administrative expense per year
$200,000
Assume that Ajax produces 10,000 items and sells 8,000 items. In this case, the variable costing
value of ending inventory is:
$130,000
$140,000
$70,000
$90,000
Self Study, Question 8
Incorrect! Fixed manufacturing overhead cost is a product cost under full costing.
Ajax Manufacturing has the following cost structures:
Direct material
$10
Direct labor
20
Variable manufacturing overhead
5
Total variable manufacturing costs per unit
$35
Fixed manufacturing overhead per year
$100,000
Fixed selling and administrative expense per year
$200,000
Assume that Ajax produces 10,000 items and sells 8,000 items. In this case, the full costing value
of cost of goods sold is:
$350,000
$300,000
$280,000
$360,000
Self Study, Question 8
Ajax Manufacturing has the following cost structures:
Direct material
$10
Direct labor
20
Variable manufacturing overhead
5
Total variable manufacturing costs per unit
$35
Fixed manufacturing overhead per year
$100,000
Fixed selling and administrative expense per year
$200,000
Assume that Ajax produces 10,000 items and sells 8,000 items. In this case, the full costing value
of cost of goods sold is:
$350,000
$300,000
$280,000
$360,000
Self Study, Question 9
Correct! Cost of goods sold is $280,000 as shown in the following computation:
Total variable manufacturing costs per unit
$35.00
Units sold
8,000
Variable cost of goods sold
$280,000
Ajax Manufacturing has the following cost structures:
Direct material
$10
Direct labor
20
Variable manufacturing overhead
5
Total variable manufacturing costs per unit
$35
Fixed manufacturing overhead per year
$100,000
Fixed selling and administrative expense per year
$200,000
Assume that Ajax produces 10,000 items and sells 8,000 items. In this case, the variable cost of
goods sold is:
$280,000
$360,000
$300,000
$350,000
Self Study, Question 10
Correct! Contribution margin is $440,000 as follows:
Sales revenue (8,000 x $90)
$720,000
Variable cost of goods sold (8,000 x $35)
(280,000)
Contribution margin
$440,000
Ajax Manufacturing has the following cost structures:
Direct material
$10
Direct labor
20
Variable manufacturing overhead
5
Total variable manufacturing costs per unit
$35
Fixed manufacturing overhead per year
$100,000
Fixed selling and administrative expense per year
$200,000
Assume that Ajax produces 10,000 items and sells 8,000 items. The selling price of Ajax's
product is $90 per unit. In this case, the contribution margin on the income statement prepared
using variable costing is:
$440,000
$550,000
$700,000
$350,000