Financial and Managerial Accounting 7th Edition By Wild – Test Bank

$20.00

Pay And Download
Complete Test Bank With Answers
 
 
Sample Questions Posted Below

 

 

 

 

Chapter 05 Inventories and Cost of Sales Answer Key

True / False Questions

1. . Goods in transit are automatically included in inventory regardless of whether title has passed to the buyer.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

2. . Goods on consignment are goods shipped by their owner, called the consignor, to another party called the consignee.  The consignee sells goods for the owner.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

3. If obsolete or damaged goods can be sold, they will be included in inventory at their original cost.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

4. If the seller is responsible for paying freight charges, then ownership of inventory passes when goods arrive at their destination.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

5. Net realizable value for damaged or obsolete goods is sales price less the cost of making the sale.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

  6. The cost of an inventory item includes its invoice cost minus any discount, plus any added or incidental costs necessary to put it in a place and condition for sale..

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

. 7. One application of internal control when taking a physical count of inventory is the use of pre-numbered inventory tickets.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

8. Incidental costs for acquiring merchandise inventory, such as import duties, freight, storage, and insurance, should not be added to the cost of inventory.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

9. The Inventory account is a controlling account for the inventory subsidiary ledger that contains a separate record for each separate product.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

  10. Most companies do not take a physical count of inventory each year, but rather rely on inventory records to determine the inventory value.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

11. The expense recognition (matching) principle is used to determine how much of the cost of goods available for sale is deducted from sales and how much is carried forward as inventory.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

  12. The consistency concept allows a company to use different accounting methods from period to period in order to maximize profits.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

  13. A company must disclose any change in its inventory costing method in its financial statements.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

  14. Whether purchase costs are rising or falling, FIFO always will yield the highest gross profit and net income.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

  15. An advantage of the weighted average inventory method is that it tends to smooth out erratic changes in costs.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

16. In a period of rising purchase costs, LIFO usually gives a lower taxable income and therefore, yields a tax advantage.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

17. FIFO is preferred when purchase costs are rising and managers have incentives to report higher income for reasons such as bonus plans, job security, and reputation.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

18. The LIFO method of inventory valuation can result in a company’s ending inventory being valued at less than the inventory’s replacement cost because LIFO inventory leaves the oldest costs in inventory.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

19. The full disclosure principle requires that the notes to the financial statements report any change in the method of accounting for inventory.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Inventory Effects for Financial Statements
 

 

20. An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

21. According to IRS guidelines, companies may use FIFO for financial reporting and LIFO for tax reporting.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

22. An error in the period-end inventory balance will cause an error in the calculation of cost of goods sold.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

23. Errors in the period-end inventory balance only affect the current period’s records and financial statements.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

24. An inventory error is sometimes said to be self-correcting because it yields an offsetting error in the next period.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

25. An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

26. Overstating beginning inventory will understate cost of goods sold and net income.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

27. An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

28. An overstatement of ending inventory will cause an overstatement of assets and an understatement of equity on the balance sheet.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

29. A merchandiser’s ability to pay its short-term obligations depends on many factors including how quickly it sells its merchandise inventory.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

30. The inventory turnover ratio is computed by dividing cost of goods sold by average merchandise inventory.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

31. The days’ sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

32. The simple rule for inventory turnover is that a low ratio is preferable.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

33. It can be expected that companies selling perishable goods have a higher inventory turnover than companies selling nonperishable goods.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

34. A company’s cost of goods sold was $15,500 and its average merchandise inventory was $4,500. Its inventory turnover equals 3.4.

TRUE

Inventory Turnover = Cost of Goods Sold/Average Merchandise Inventory
Inventory Turnover = $15,500/$4,500 = 3.4

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

35. Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days’ sales in inventory equals 25 days.

FALSE

Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold * 365
Days’ Sales in Inventory = $2/$8 * 365 = 91 days

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

36. Determining the unit costs assigned to inventory items is one of the most important decisions in accounting for inventory.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory
Topic: Determining Inventory Costs
 

 

37. When units are purchased at different costs over time, determining the cost per unit assigned to inventory items is simple.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory
Topic: Determining Inventory Costs
 

 

38. LIFO assumes that inventory costs flow in the order incurred.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory
Topic: Determining Inventory Costs

 

 

39. The assignment of costs to cost of goods sold and inventory using weighted average usually yields different results depending on whether a perpetual or periodic system is used.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

Topic: Inventory Costing under a Periodic System
 

 

40. The FIFO inventory method assumes that costs for the latest units purchased are the first to be charged to the cost of goods sold.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

41. The costs of goods purchased will vary under the different inventory methods of specific identification, FIFO, LIFO, and weighted average.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory
Topic: Determining Inventory Costs

 

 

42. The assignment of costs to the cost of goods sold and to ending inventory using FIFO is the same for both the perpetual and periodic inventory systems.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

Topic: Inventory Costing under a Periodic System
 

 

43. Under FIFO, the most recent costs are assigned to ending inventory.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

44. The choice of an inventory valuation method has little to no impact on gross profit and cost of sales.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting
Topic:  Financial Statement Effects of Costing Methods

 

 

45. In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

46. In applying the lower of cost or market method to inventory valuation, market is defined as the current selling price.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

47. A company has inventory with a selling price of $451,000, a market value of $223,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $223,000.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

48. The lower of cost or market rule for inventory valuation is always applied to individual units separately rather than to major categories of inventory or to the entire inventory.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

49. Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when cost is lower than market value.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

50. Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when market value is lower than cost.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

51. A company’s total cost of inventory was $329,000 and its current replacement cost is $307,000. Under the lower cost or market, the amount reported should be $329,000.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

52. A company’s cost of inventory was $219,500. Due to phenomenal demand the market value of its inventory increased to $221,700. This company should record the inventory at its market value.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

53. When LIFO is used with the periodic inventory system, cost of goods sold is assigned costs from the most recent purchases at the point of each sale, rather than from the most recent purchases for the period.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

54. The retail inventory method estimates the cost of ending inventory by applying the gross profit ratio to net sales.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

55. The reasoning behind the retail inventory method is that if we can get a good estimate of the cost-to-retail ratio, we can multiply ending inventory at retail by this ratio to estimate ending inventory at cost.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

56. The reliability of the gross profit method depends on a good estimate of the gross profit ratio.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

57. In the retail inventory method of inventory valuation, the retail amount of inventory refers to its dollar amount measured using selling prices of inventory items.

TRUE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

58. To avoid the time-consuming process of taking an inventory each year, most companies use the gross profit method to estimate ending inventory.

FALSE

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

59. Using the retail inventory method, if the cost to retail ratio is 70% and ending inventory at retail is $145,000, then estimated ending inventory at cost is $207,143.

FALSE

$145,000 * 0.70 = $101,500

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

Multiple Choice Questions

60. Damaged and obsolete goods that can be sold:

A. Are never counted as inventory.

 

B. Are included in inventory at their full cost.

 

C. Are included in inventory at their net realizable value.

 

D. Should be disposed of immediately.

 

E. Are assigned a value of zero.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

61. Merchandise inventory includes:

A. All goods owned by a company and held for sale.

 

B. All goods in transit.

 

C. All goods on consignment.

 

D. Only damaged goods.

 

E. Only non-damaged goods.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

62. Goods in transit are included in a purchaser’s inventory:

A. At any time during transit.

 

B. When the purchaser is responsible for paying freight charges.

 

C. When the supplier is responsible for freight charges.

 

D. If the goods are shipped FOB destination.

 

E. After the half-way point between the buyer and seller.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

63. Consignment goods are:

A. Goods shipped by the owner to the consignee who sells the goods for the owner.

 

B. Reported in the consignee’s books as inventory.

 

C. Goods shipped to the consignor who sells the goods for the owner.

 

D. Not reported in the consignor’s inventory since they do not have possession of the inventory.

 

E. Always paid for by the consignee when they take possession.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

64. Regardless of the inventory costing system used, cost of goods available for sale must be allocated at the end of the period between

A. beginning inventory and net purchases during the period.

 

B. ending inventory and beginning inventory.

 

C. net purchases during the period and ending inventory.

 

D. ending inventory and cost of goods sold.

 

E. beginning inventory and cost of goods sold.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2  Identify the costs of merchandise inventory
Topic: Determining Inventory Costs
 

 

65. On December 31 of the current year, Plunkett Company reported an ending inventory balance of $215,000. The following additional information is also available:

▪ Plunkett sold and shipped goods costing $38,000 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $215,000.
▪ Plunkett purchased goods costing $44,000 on December 29. The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $215,000.
▪ Plunkett’s ending inventory balance of $215,000 included $15,000 of goods being held on consignment from Carole Company. (Plunkett Company is the consignee.)
▪ Plunkett’s ending inventory balance of $215,000 did not include goods costing $95,000 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.

Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:

A. $194,000

 

B. $209,000

 

C. $200,000

 

D. $171,000

 

E. $156,000

Start with beginning inventory of $215,000. The information in the first bullet point was handled correctly. No adjustment is needed for that merchandise. For the second bullet point, the $44,000 of goods should not have been included in ending inventory since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point, ending inventory should not include goods held on consignment from another company. Subtract $15,000. The information in the fourth bullet point was handled correctly. No adjustment is needed. $215,000 – $44,000 – $15,000 = $156,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

66. Bedrock Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:

▪ The ending inventory balance of $412,000 included $72,000 of consigned inventory for which Bedrock was the consignor.
▪ The ending inventory balance of $412,000 included $22,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year.

Based on this information, the correct balance for ending inventory on December 31 is:

A. $412,000

 

B. $340,000

 

C. $318,000

 

D. $362,000

 

E. $390,000

Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should include consigned goods for which the subject company is the consignor. No adjustment. With respect to the second bullet point, inventory should not include office supplies held for use. Subtract $22,000. Ending inventory should be $412,000 – $22,000 = $390,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

67. Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available:

▪ The ending inventory balance of $412,000 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date. Buffalo did not receive the goods until January 2 of the following year.
▪ The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The net realizable value of the damaged goods was $10,000.

Based on this information, the correct balance for ending inventory on December 31 is:

A. $374,000

 

B. $384,000

 

C. $460,000

 

D. $422,000

 

E. $438,000

Start with beginning inventory of $412,000. The information in the first bullet point was handled correctly since inventory should not include goods shipped FOB destination that have not yet been received by the buyer. With respect to the second bullet point, damaged goods should not be included in inventory at their original cost if the net realizable value is materially below cost. Subtract $28,000 ($38,000 – $10,000). Ending inventory should be $412,000 – $28,000 = $384,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

68. Costs included in the Merchandise Inventory account can include all of the following except:

A. Invoice price minus any discount.

 

B. Transportation-in.

 

C. Storage.

 

D. Insurance.

 

E. Damaged inventory that cannot be sold.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

69. Internal controls that should be applied when a business takes a physical count of inventory should include all of the following except:

A. Prenumbered inventory tickets.

 

B. A manager confirms that all inventories are ticketed only once.

 

C. Counters confirm the validity of inventory existence, amounts, and quality.

 

D. Second counts by a different counter.

 

E. Counters of inventory should be those who are responsible for the inventory.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

70. Physical counts of inventory:

A. Are not necessary under the perpetual system.

 

B. Are necessary to adjust the Inventory account to the actual inventory available.

 

C. Must be taken at least once a month.

 

D. Requires the use of hand-held portable computers.

 

E. Are not necessary under the cost-to benefit constraint.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

71. During a period of steadily rising costs, the inventory valuation method that yields the highest reported net income is:

A. Specific identification method.

 

B. Average cost method.

 

C. Weighted-average method.

 

D. FIFO method.

 

E. LIFO method.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

72. The inventory valuation method that tends to smooth out erratic changes in costs is:

A. FIFO.

 

B. Weighted average.

 

C. LIFO.

 

D. Specific identification.

 

E. WIFO.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

73. The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is:

A. FIFO.

 

B. Weighted average.

 

C. LIFO.

 

D. Specific identification.

 

E. Lower of cost or market.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

74. The inventory valuation method that results in the lowest taxable income in a period of inflation is:

A. LIFO method.

 

B. FIFO method.

 

C. Weighted-average cost method.

 

D. Specific identification method.

 

E. Gross profit method.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

75. The consistency concept:

A. Prescribes a company use the same accounting method of inventory valuation, an exception being when a change from one method to another will improve its financial reporting.

 

B. Requires a company to use one method of inventory valuation exclusively.

 

C. Requires that all companies in the same industry use the same accounting methods of inventory valuation.

 

D. Is also called the full disclosure principle.

 

E. Is also called the matching principle.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

76. The full disclosure principle:

A. Prescribes that the notes to the financial statements report the change from one inventory valuation method to another.

 

B. Requires that companies use the same accounting method for inventory valuation period after period.

 

C. Is not subject to the consideration of materiality.

 

D. Is only applied to retailers and manufacturers.

 

E. Is also called the consistency principle.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

77. Companies can and often do use different costing methods for financial reporting and tax reporting. An exception to this is the:

A. Full disclosure principle.

 

B. Consistency concept.

 

C. FIFO inventory valuation method.

 

D. LIFO conformity rule..

 

E. Matching principle.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting..
Topic: Financial Statement Effects of Costing Methods
 

 

78. Which of the following inventory costing methods will always result in the same values for ending inventory and cost of goods sold regardless of whether a perpetual or periodic inventory system is used?

A. FIFO and LIFO

 

B. LIFO and weighted-average cost

 

C. Specific identification and FIFO

 

D. FIFO and weighted-average cost

 

E. LIFO and specific identification

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.

Topic: Financial Statement Effects of Costing Methods
 

 

79. If a period-end inventory amount is reported in error, it can cause a misstatement in all of the following except:

A. Cost of goods sold.

 

B. Gross profit.

 

C. Net sales.

 

D. Current assets.

 

E. Net income.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

80. Since an error in the period-end inventory causes an offsetting error in the next period:

A. Managers can ignore the error.

 

B. It is said to be self-correcting.

 

C. It affects only income statement accounts.

 

D. If affects only balance sheet accounts.

 

E. Is immaterial for managerial decision making.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

81. The understatement of the ending inventory balance causes:

A. Cost of goods sold to be overstated and net income to be understated.

 

B. Cost of goods sold to be overstated and net income to be overstated.

 

C. Cost of goods sold to be understated and net income to be understated.

 

D. Cost of goods sold to be understated and net income to be overstated.

 

E. Cost of goods sold to be overstated and net income to be correct.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

82. The understatement of the beginning inventory balance causes:

A. Cost of goods sold to be understated and net income to be understated.

 

B. Cost of goods sold to be understated and net income to be overstated.

 

C. Cost of goods sold to be overstated and net income to be overstated.

 

D. Cost of goods sold to be overstated and net income to be understated.

 

E. Cost of goods sold to be overstated and net income to be correct.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

83. Lucia Company reported cost of goods sold for Year 1 and Year 2 as follows:

  Year 1 Year 2
Beginning inventory $120,000 $130,000
Cost of goods purchased 250,000 275,000
Cost of goods available for sale 370,000 405,000
Ending inventory 130,000 135,000
Cost of goods sold $240,000 $270,000

Lucia Company made two errors: 1) ending inventory at the end of Year 1 was understated by $15,000 and 2) ending inventory at the end of Year 2 was overstated by $6,000. Given this information, the correct cost of goods sold figure for Year 2 would be:

A. $291,000

 

B. $276,000

 

C. $264,000

 

D. $285,000

 

E. $249,000

If ending inventory for Year 1 was reported at $130,000 but was understated by $15,000, the correct ending inventory figure for Year 1 was $145,000. That amount becomes the beginning inventory for Year 2. Add to that amount the $275,000 of cost of goods purchased in Year 2 and you get cost of goods available for sale of $420,000. Finally, the reported ending inventory figure for Year 2 of $135,000 was overstated by $6,000. Thus, the correct ending inventory figure for Year 2 was $129,000. Subtracting ending inventory of $129,000 from cost of goods available for sale of $420,000 yields cost of goods sold of $291,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

84. Hull Company reported the following income statement information for the current year:

   
Sales $410,000
Cost of goods sold:  
Beginning inventory $132,000
Cost of goods purchased 273,000
Cost of goods available for sale 405,000
Ending inventory 144,000
Cost of goods sold 261,000
Gross profit $149,000

The beginning inventory balance is correct. However, the ending inventory figure was overstated by $20,000. Given this information, the correct gross profit would be:

A. $149,000.

 

B. $169,000.

 

C. $129,000.

 

D. $142,000.

 

E. $112,000.

If ending inventory of $144,000  was overstated by $20,000, the correct amount of ending inventory was $124,000. As a result, cost of goods sold was not $261,000 as reported, but rather $281,000. Thus, gross profit was $129,000 (Sales of $410,000 – Cost of Goods Sold of $281,000).

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

85. An understatement of ending inventory will cause

A. An overstatement of assets and equity on the balance sheet.

 

B. An understatement of assets and equity on the balance sheet.

 

C. An overstatement of assets and an understatement of equity on the balance sheet.

 

D. An understatement of assets and an overstatement of equity on the balance sheet.

 

E. No effect on the balance sheet.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

86. The inventory turnover ratio:

A. Is used to analyze profitability.

 

B. Is used to measure solvency.

 

C. Reveals how many times a company sells its merchandise inventory during a period.

 

D. Reveals how many days a company can sell inventory if no new merchandise is purchased.

 

E. Calculation depends on the company’s inventory valuation method.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

87. Days’ sales in inventory:

A. Is also called days’ stock on hand.

 

B. Focuses on average inventory rather than ending inventory.

 

C. Is used to measure solvency.

 

D. Is calculated by dividing cost of goods sold by ending inventory.

 

E. Is a substitute for the acid-test ratio.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

88. The inventory turnover ratio is calculated as:

A. Cost of goods sold divided by average merchandise inventory.

 

B. Sales divided by cost of goods sold.

 

C. Ending inventory divided by cost of goods sold.

 

D. Cost of goods sold divided by ending inventory.

 

E. Cost of goods sold divided by ending inventory times 365.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

89. Days’ sales in inventory is calculated as:

A. Ending inventory divided by cost of goods sold.

 

B. Cost of goods sold divided by ending inventory.

 

C. Ending inventory divided by cost of goods sold times 365.

 

D. Cost of goods sold divided by ending inventory times 365.

 

E. Ending inventory times cost of goods sold.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

90. Giorgio had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its inventory turnover equals:

A. 0.21.

 

B. 4.51.

 

C. 4.79.

 

D. 76.1 days.

 

E. 80.9 days.

Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $9,421/$1,965 = 4.79 times

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

91. Perfection Company had cost of goods sold of $853,000, ending inventory of $70,500, and average inventory of $71,600. Its inventory turnover equals:

A. 11.9.

 

B. 1.0.

 

C. 6.0.

 

D. 30.6.

 

E. 14.0.

Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $853,000/$71,600 = 11.9 times

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

92. Beckenworth had cost of goods sold of $9,421 million, ending inventory of $2,089 million, and average inventory of $1,965 million. Its days’ sales in inventory equals:

A. 0.21.

 

B. 4.51.

 

C. 4.79.

 

D. 76.1 days.

 

E. 80.9 days.

Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold * 365
Days’ Sales in Inventory = $2,089/$9,421 * 365 = 80.9 days

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

93. Ulrich had cost of goods sold of $6.7 million, ending inventory of $2.2 million, and average inventory of $1.9 million. Its days’ sales in inventory equals:

A. 120.

 

B. 104.

 

C. 60.

 

D. 35.

 

E. 180.

Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold * 365
Days’ Sales in Inventory = $2.2/$6.7 * 365 = 120 days

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

94. Acceptable methods of assigning specific costs to inventory and cost of goods sold include all of the following except:

A. LIFO method.

 

B. FIFO method.

 

C. Specific identification method.

 

D. Weighted average method.

 

E. Retail method.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

95. Decisions management must make in accounting for inventory cost include all of the following except:

A. Costing method.

 

B. Perpetual or periodic inventory system.

 

C. Customer demand for inventory.

 

D. Use of market values or other estimates.

 

E. Items included in inventory and their costs.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

96. The inventory valuation method that identifies each item in ending inventory with a specific purchase and invoice is the:

A. Weighted average inventory method.

 

B. First-in, first-out method.

 

C. Last-in, first-out method.

 

D. Specific identification method.

 

E. Retail inventory method.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

97. A company had the following purchases during its first year of operations:

  Purchases
January: 10 units at $120
February: 20 units at $130
May: 15 units at $140
September: 12 units at $150
November: 10 units at $160

On December 31, there were 26 units remaining in ending inventory. These 26 units consisted of 2 from January, 4 from February, 6 from May, 4 from September, and 10 from November. Using the specific identification method, what is the cost of the ending inventory?

A. $3,500.

 

B. $3,800.

 

C. $3,960.

 

D. $3,280.

 

E. $3,640.

Ending Inventory:

2 @ $120 = $240
4 @ $130 = 520
6 @ $140 = 840
4 @ $150 = 600
10 @ $160 =   1,600
26 units   $3,800

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

98. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Perpetual FIFO inventory valuation method, what is the cost of the ending inventory?  (Assume all sales were made on the last day of the month.)

A. $3,405.

 

B. $3,200.

 

C. $3,365.

 

D. $3,540.

 

E. $3,270.

Ending Inventory:

4 @ $130 = $520
12 @ $135 = 1,620
10 @ $140 = 1,400
26 units       $3,540

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

99. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Periodic FIFO inventory valuation method, what is the cost of the ending inventory?  (Assume all sales were made on the last day of the month.)

A. $3,405.

 

B. $3,200.

 

C. $3,445.

 

D. $3,540.

 

E. $3,270.

Ending Inventory:

4 @ $130 = $520
12 @ $135 = 1,620
10 @ $140 = 1,400
26 units       $3,540

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

100. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Perpetual LIFO inventory valuation method, what is the cost of the ending inventory?  (Assume all sales were made on the last day of the month.)

A. $3,405.

 

B. $3,270.

 

C. $3,200.

 

D. $3,364.

 

E. $5,400.

Ending Inventory:

4 @ $120 = $480
15 @ $125 = 1,875
6 @ $130 = 780
1 @ $135 = 135
0 @ $140 =   0
26 units     $3,270

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

101. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Periodic LIFO inventory valuation method, what is the cost of the ending inventory?  (Assume all sales were made on the last day of the month.)

A. $3,405.

 

B. $3,270.

 

C. $3,200.

 

D. $3,364.

 

E. $5,400.

Ending Inventory:

10 @ $120 = $1,200
16 @ $125 = 2,000
26 units     $3,200

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

 

 

102. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Perpetual FIFO inventory valuation method, what is the value of cost of goods sold?  (Assume all sales were made on the last day of the month.)

A. $8,670.

 

B. $3,540.

 

C. $5,400.

 

D. $5,130.

 

E. $3,270.

Cost of goods sold:

10 @ $120 = $1,200
20 @ $125 = 2,500
11 @ $130 = 1,430
41 units       $5,130

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

103. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Periodic FIFO inventory valuation method, what is the value of cost of goods sold?  (Assume all sales were made on the last day of the month.)

A. $8,670.

 

B. $3,540.

 

C. $5,400.

 

D. $5,130.

 

E. $3,270.

Cost of goods sold:

10 @ $120 = $1,200
20 @ $125 = 2,500
11 @ $130 = 1,430
41 units       $5,130

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

104. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Perpetual LIFO inventory valuation method, what is the value of cost of goods sold?  (Assume all sales were made on the last day of the month.)

A. $8,670.

 

B. $5,400.

 

C. $5,470.

 

D. $5,130.

 

E. $5,305.

Cost of goods sold:

6 @ $120 = $720
5 @ $125 = 625
9 @ $130 = 1,170
11 @ $135 = 1,485
10 @ $140 =   1,400
41 units     $5,400

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

105. A company had the following purchases and sales during its first month of operations:

January 1 Purchased 10 units at $4.00 per unit
January 9 Sold 6 units at $12.00 per unit
January 17 Purchased 8 units at $5.50 per unit
January 27 Sold 7 units at $12.00 per unit

Using the Perpetual weighted average method, what is the value of cost of goods sold? (Round weighted average costs per unit to 2 decimal places.)

A. $40.00.

 

B. $59.00.

 

C. $25.00.

 

D. $24.00.

 

E. $23.35.

Cost of goods sold:

  Average cost per unit Cost of goods sold
January 1 $40.00 / 10 units = $4.00 avg. cost  
January 9   6 units at $4.00 avg. cost = $24.00
January 17 ($40.00 – $24.00 + $44.00)/(10 units – 6 units + 8 units) = $60.00/12 units = $5.00 average cost  
January 27   7 units at $5.00 avg. cost = $35.00
Ending Inventory 5 units @ $5.00 avg. cost = $25.00  

 

 

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

106. A company had the following purchases and sales during its first year of operations:

  Purchases Sales
January: 10 units at $120 6 units
February: 20 units at $125 5 units
May: 15 units at $130 9 units
September: 12 units at $135 8 units
November: 10 units at $140 13 units

On December 31, there were 26 units remaining in ending inventory. Using the Periodic LIFO inventory valuation method, what is the value of cost of goods sold?  (Assume all sales were made on the last day of the month.)

A. $8,670.

 

B. $5,400.

 

C.  $5,470.

 

D. $3,200.

 

E. $5,130.

Cost of goods sold:

4 @ $125 = $500
15 @ $130 = 1,950
12 @ $135 = 1,620
10 @ $140 =   1,400
41 units     $5,470

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

 

107. A company had the following purchases and sales during its first month of operations:

January 1 Purchased 10 units at $4.00 per unit
January 9 Sold 6 units at $12.00 per unit
January 17 Purchased 8 units at $5.50 per unit
January 27 Sold 7 units at $12.00 per unit

Using the Periodic weighted average method, what is the value of cost of goods sold?  (Round weighted average cost per unit to 2 decimal places, and final answer to the nearest dollar.)

A. $84.

 

B. $61.

 

C. $23.

 

D. $27.

 

E. $5.

Cost of goods sold:

Total cost of goods available for sale = $84 ($40 purchased on January 1 + $44 purchased on January 17.

Total units available for sale = 18 (10 purchased on January 1 + 8 purchased on January 17)

 

Weighted average cost per unit = Total cost of goods available for sale ÷ Total units available for sale

Weighted average cost per unit = $84 ÷ 18

Weighted average cost per unit = $4.67 per unit

Cost of goods sold = 13 units sold * $4.67 average cost per unit = $60.71

 

 

 

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

 

 

108. . A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each. On November 8, 8 units were sold for $55 each.  Using the LIFO perpetual inventory method, what was the value of the inventory on November 8 after the sale?

A. $304

 

B. $296

 

C. $288

 

D. $280

 

E. $276

Units available = 5 + 10 + 6 = 21 units
Units in inventory = 21 – 8 units = 13 units
Cost of inventory = (5 * $20) + (8 * $22) = $276

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

109. Marquis Company uses a weighted-average perpetual inventory system and has the following purchases and sales:

August 2 10 units were purchased at $12 per unit.
August 18 15 units were purchased at $14 per unit.
August 29 12 units were sold.

What is the amount of the cost of goods sold for this sale? (Round average cost per unit to 2 decimal places.)

A. $148.00

 

B. $150.50

 

C. $158.40

 

D. $210.00

 

E. $330.00

Average cost = [(10 * $12) + (15 * $14)]/25 units = $13.20/unit
Cost of sale = 12 units * $13.20/unit = $158.40

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

110. Monarch Company uses a weighted-average perpetual inventory system, and has the following purchases and sales:

January 1 20 units were purchased at $10 per unit.
January 12 12 units were sold.
January 20 18 units were purchased at $11 per unit.

What is the value of ending inventory? (Round average cost per unit to 2 decimal places, and final answer to the nearest dollar.)

A.  $278.

 

B. $272

 

C. $126

 

D. $398

 

E. $120

Cost of goods sold = 12 units * $10 per unit = $120

Average cost = [(8 * $10) + (18 * $11)]/26 units = $10.69/unit
Ending inventory = 26 units * $10.69/unit = $277.94

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

111. Monarch Company uses a weighted-average perpetual inventory system and has the following purchases and sales:

January 1 20 units were purchased at $10 per unit.
January 12 12 units were sold.
January 20 18 units were purchased at $11 per unit.

What is the value of cost of goods sold?

A. $278.

 

B. $272

 

C. $126

 

D. $398

 

E.  $120

Cost of goods sold = 12 units * $10 per unit = $120

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

112. Eastview Company uses a perpetual LIFO inventory system, and has the following purchases and sales:

January 1 150 units were purchased at $9 per unit.
January 17 120 units were sold.
January 20 160 units were purchased at $11 per unit.
January 29 150 units were sold.

What is the value of cost of goods sold?

A.  $2,730.

 

B. $2,750.

 

C. $2,670.

 

D. $440.

 

E. $380.

Cost of goods sold = (120 units * $9) + (150 units * $11) = $2,730

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 
113. Eastview Company uses a perpetual LIFO inventory system, and has the following purchases and sales:

January 1 150 units were purchased at $9 per unit.
January 17 120 units were sold.
January 20 160 units were purchased at $11 per unit.
January 29 150 units were sold.

What is the value of ending inventory?

A. $2,730.

 

B. $2,750.

 

C. $2,670.

 

D. $440.

 

E.  $380.

Ending inventory = (30 units * $9) + (10 units * $11) = $380

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

 

114. Eastview Company uses a periodic LIFO inventory system, and has the following purchases and sales:

January 1 150 units were purchased at $9 per unit.
January 17 120 units were sold.
January 20 160 units were purchased at $11 per unit.
January 29 150 units were sold.

What is the value of cost of goods sold?

A. $2,730.

 

B. $2,750.

 

C. $2,670.

 

D. $440.

 

E. $380.

Cost of goods sold = (110 units * $9) + (160 units * $11) = $2,750

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 
115. Eastview Company uses a periodic LIFO inventory system, and has the following purchases and sales:

January 1 150 units were purchased at $9 per unit.
January 17 120 units were sold.
January 20 160 units were purchased at $11 per unit.
January 29 150 units were sold.

What is the value of ending inventory?

A. $2,730.

 

B. $2,750.

 

C. $2,670.

 

D. $440.

 

E.  $360.

Ending inventory = (40 units * $9) = $360

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

116. Grays Company has inventory of 10 units at a cost of $10 each on August 1. On August 3, it purchased 20 units at $12 each. 12 units are sold on August 6. Using the FIFO perpetual inventory method, what amount will be reported as cost of goods sold for the 12 units that were sold?

A. $120.

 

B. $124.

 

C. $128.

 

D. $130.

 

E. $140.

(10 units * $10) + (2 * $12) = $124

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

117. McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO perpetual inventory method, what amount will be reported as cost of goods sold for the 11 units that were sold?

A. $2,239.

 

B. $2,255.

 

C. $2,200.

 

D. $2,228.

 

E. $2,215.

(8 units * $200) + (3 * $205) = $2,215

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

118. McCarthy Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the FIFO perpetual inventory method, what is the value of inventory after the October 4 sale?

A. $3,485.

 

B. $3,445.

 

C. $3,500.

 

D. $3,472.

 

E. $3,461.

Units in inventory = 8 + 20 – 11 = 17
17 units * $205 = $3,485

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

119. Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the LIFO perpetual inventory method, what amount will be reported in cost of goods sold for the 11 units that were sold?

A. $2,239.

 

B. $2,255.

 

C. $2,200.

 

D. $2,228.

 

E. $2,215.

11 * $205 = $2,255

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

120. Starlight Company has inventory of 8 units at a cost of $200 each on October 1. On October 2, it purchased 20 units at $205 each. 11 units are sold on October 4. Using the LIFO perpetual inventory method, what is the value of inventory after the October 4 sale?

A. $3,485.

 

B. $3,445.

 

C. $3,500.

 

D. $3,472.

 

E. $3,461.

Units in inventory = 8 + 20 – 11 = 17
(8 units * $200) * (9 units * $205) = $3,445

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

121. A company’s inventory records report the following:

August 1 Beginning balance 15 units @ $12
August 5 Purchase 10 units @ $13
August 12 Purchase 20 units @ $14

On August 15, it sold 30 units. Using the FIFO perpetual inventory method, what is the value of the inventory at August 15 after the sale?

A. $140

 

B. $160

 

C. $210

 

D. $380

 

E. $590

Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 – 30 = 15 units
Cost of inventory = 15 * $14 each = $210

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

122. A company’s inventory records report the following in November of the current year:

Beginning November 1 5 units @ $20
Purchase November 2 10 units @ $22
Purchase November 12 6 units @ $25

On November 8, it sold 12 units for $54 each. Using the LIFO perpetual inventory method, what was the amount recorded in the cost of goods sold account for the 12 units sold?

A. $254

254

B. $260

 

C. $282

 

D. $188

 

E. $210

(2 × $20) + (10 × $22) = $260

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

123. A company’s inventory records report the following in November of the current year:

Beginning November 1 5 units @ $20
Purchase November 2 10 units @ $22
Purchase November 12 6 units @ $25

On November 8, it sold 12 units for $54 each. Using the LIFO perpetual inventory method, what amount of gross profit was earned from the 12 units sold?

A. $577

648

B. $260

260

C. $366

 

D. $438

 

E. $388

Sales = 12 * $54 = $648
Cost of goods sold = (10 × $22) + (2 × $20) = $260
Gross profit = $648 – $260 = $388

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

124. A company sells garden hoses and uses the perpetual inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during September were as follows:

September 1: Beginning balance of 18 units at $13 each
September 12: Purchased 30 units at $14 each
September 19: Sold 24 units at $30 selling price each
September 20: Purchased 24 units at $17 each
September 27: Sold 27 units at $30 selling price each

If the ending inventory is reported at $276, what inventory method was used?

A. LIFO method.

 

B. FIFO method.

 

C. Weighted average method.

 

D. Specific identification method.

 

E. Retail inventory method.

 

  Purchases Sales Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
Sept.. 1             18 $13 $234
Sept. 12 30 $14 $420       18 $13 $234
              30 $14 $420
Sept. 19       24 $14 $336 18 $13 $234
              6 $14 $84
Sept. 20 24 $17 $408       18 $13 $234
              6 $14 $84
              24 $17 $408
Sept. 27       24 $17 $408 18 $13 $234
        3 $14 $42 3 $14 $42
              21   $276

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

125. Jammer Company uses a weighted average perpetual inventory system and reports the following:

August 2 Purchase 10 units at $12 per unit.
August 18 Purchase 15 units at $15 per unit.
August 29 Sale 20 units.
August 31 Purchase 14 units at $16 per unit.

What is the per-unit value of ending inventory on August 31?

A. $12.00

 

B. $13.80

 

C. $15.42

 

D. $16.00

 

E. $17.74

 

  Purchases Cost of goods sold Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
Aug. 2 10 $12 $120       10 $12.00 $120
Aug. 18 15 $15 $225       25 $13.80* $345
Aug. 29       20 $13.80 $276 5 $13.80 $69
Aug. 31 14 $16 $224       19 $15.42** $293

*$345/25 units = $13.80/unit
**$293/19 units = $15.42/unit

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

126. Given the following information, determine the cost of the inventory at June 30 using the LIFO perpetual inventory method.

June 1 Beginning inventory 15 units at $20 each
June 15 Sale of 6 units for $50 each  
June 29 Purchase 8 units at $25 each

The cost of the ending inventory is:

A. $200

333333333333

B. $220

 

C. $380

 

D. $275

 

E. $300

 

  Purchases Cost of goods sold Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
June 1 15 $20 $300       15 $20 $300
June 15       6 $20 $120 9 $20 $180
June 29 8 $25 $200       9 $20 $180
              8 $25 $200
              17   $380

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

127. In applying the lower of cost or market method to inventory valuation, market is defined as:

A. Historical cost.

 

B. Current replacement cost.

 

C. Current sales price.

 

D. FIFO.

 

E. LIFO.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

  128. Raleigh Co. has the following products in its ending inventory. Compute the lower of cost or market total for inventory applied separately to each product.

Product Quantity Cost per unit Market per unit
Jelly 150 $2.00 2.15
Jam 370 $2.65 2.50
Marmalade 260 $3.10 3.05

 

A. $2,040.50.

 

B. $2,086.50.

 

C. $2,018.00.

 

D. $2,109.00.

 

E. $2,053.50.

Jelly = 150 * $2.00 = $300
Jam = 370 * $2.50 = $925
Marmalade = 260 * $3.05 = $793
Lower of cost or market value = $2,018

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

129. Generally accepted accounting principles require that the inventory of a company be reported at:

A. Market value.

 

B. Historical cost.

 

C. Lower of cost or market.

 

D. Replacement cost.

 

E. Retail value.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

130. The conservatism constraint prescribes that:

A. When multiple estimates of amounts to be received or paid in the future are equally likely, then the least optimistic amount should be used.

 

B. A company use the same accounting methods period after period.

 

C. Revenues and expenses are reported in the period in which they are earned or incurred.

 

D. All items of a material nature are included in financial statements.

 

E. All inventory items are reported at full cost.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

131. A company’s normal selling price for its product is $20 per unit. However, due to market competition, the selling price has fallen to $15 per unit. This company’s current inventory consists of 200 units purchased at $16 per unit. Replacement cost has fallen to $13 per unit. Calculate the value of this company’s inventory at the lower of cost or market.

A. $2,550.

 

B. $2,600.

 

C. $2,700.

 

D. $3,000.

 

E. $3,200.

200 units @ $13 per unit = $2,600

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

132. A company normally sells its product for $20 per unit. However, the selling price has fallen to $15 per unit. This company’s current inventory consists of 200 units purchased at $16 per unit. Replacement cost has now fallen to $13 per unit. What is the amount of the lower cost of market adjustment the company must make as a result of this decline in value?

A. $1,000.

 

B. $1,400.

 

C. $400.

 

D. $600.

 

E. $800.

200 units * ($16 – $13) = $600

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

133. A company’s current inventory consists of 5,000 units purchased at $6 per unit. Replacement cost has now fallen to $5 per unit. What is the entry the company must record to adjust inventory to market?

A. Debit Merchandise Inventory $25,000; credit Cost of Goods Sold $25,000.

 

B. Debit Cost of Goods Sold $30,000; credit Merchandise Inventory $30,000.

 

C. Debit Cost of Goods Sold $5,000; credit Merchandise Inventory $5,000.

 

D. Debit Loss on Inventory $5,000; credit Cost of Goods Sold $5,000.

 

E. Debit Merchandise Inventory $30,000; credit Cost of Goods Sold $25,000.

5,000 units * ($6 – $5) = $5,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

  134. A company has the following per unit original costs and replacement costs for its inventory. LCM is applied to individual items.

Part A: 50 units with a cost of $5, and replacement cost of $4.50
Part B: 75 units with a cost of $6, and replacement cost of $6.50
Part C: 160 units with a cost of $3, and replacement cost of $2.50

Under the lower of cost or market method, the total value of this company’s ending inventory is:

A. $1,180.00.

 

B. $1,075.00.

 

C. $1,112.50.

 

D. $1,217.50.

 

E. $1,137.50.

 

    Per unit Total LCM applied to
  Units Cost Market Cost Market Items Whole
A 50 $5 $4.50 $250 $225.00 $225  
B 75 $6 $6.50 450   487.50 450  
C 160 $3 $2.50      480     400.00      400  
Total       $1,180 $1,112.50 $1,075 $1,112.50

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

135. A company has beginning inventory of 10 units at a cost of $10 each on February 1. On February 3, it purchases 20 units at $12 each. 12 units are sold on February 5. Using the FIFO periodic inventory method, what is the cost of the 12 units that are sold?

A. $120

 

B. $124

 

C. $128

 

D. $130

 

E. $140

(10 units * $10) + (2 * $12) = $124

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

136. A company has beginning inventory of 15 units at a cost of $12 each on October 1. On October 5, it purchases 10 units at $13 per unit. On October 12 it purchases 20 units at $14 per unit. On October 15, it sells 30 units. Using the FIFO periodic inventory method, what is the value of the inventory at October 15 after the sale?

A. $140

 

B. $160

 

C. $210

 

D. $380

 

E. $590

Units available for sale = 15 + 10 + 20 = 45 units
Units in inventory = 45 – 30 = 15 units
Cost of inventory = 15 * $14 each = $210

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System
 

 

137. A company had beginning inventory of 10 units at a cost of $20 each on March 1. On March 2, it purchased 10 units at $22 each. On March 6 it purchased 6 units at $25 each. On March 8, it sold 22 units for $54 each. Using the FIFO perpetual inventory method, what was the cost of the 22 units sold?

A. $470

 

B. $490

 

C. $450

 

D. $570

 

E. $520

(10 * $20) + (10 * $22) + (2 * $25) = $470

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

138. A company uses the periodic inventory system and had the following activity during the current monthly period.

November 1: Beginning inventory 100 units @ $20
November 5: Purchased 100 units @ $22
November 8: Purchased 50 units @ $23
November 16: Sold 200 units @ $45
November 19: Purchased 50 units @ $25

Using the weighted-average inventory method, the company’s ending inventory would be:

A. $2,000

 

B. $2,200

 

C. $2,250

 

D. $2,400

 

E. $4,400

 

BI 100 @ $20 $2,000
11/5 100 @ $22 2,200
11/8 50 @ $23 1,150
11/19 50 @ $25    1,250
Total 300 $6,600

Weighted average cost per unit: $6,600/300 units = $22
Ending inventory: (300 units – 200 units) * $22 = $2,200

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System
 

 

139. Health Defense sells first aid kits and uses the periodic inventory system to account for its merchandise. The beginning balance of the inventory and its transactions during January were as follows:

January 1: Beginning balance of 18 units at $13 each
January 12: Purchased 30 units at $14 each
January 19: Sold 24 units at a selling price of $30 each
January 20: Purchased 24 units at $17 each
January 27: Sold 27 units at a selling price of $30 each

If the ending inventory is reported at $357, what inventory method was used?

A. LIFO.

 

B. FIFO.

 

C. Weighted average.

 

D. Specific identification.

 

E. Retail inventory method.

 

Beginning Inventory 18 @ $13 $234
January 12 30 @ $14 420
January 20 24 @ $17 408
Total 72 units $1,062
Sold 51 units  
Ending Inventory 21 @ 17 $357

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

140. A company’s warehouse contents were destroyed by a flood on September 12. The following information was the only information that was salvaged:

1. Inventory, beginning: $28,000
2. Purchases for the period: $17,000
3. Sales for the period: $55,000
4. Sales returns for the period: $700

The company’s average gross profit ratio is 35%. What is the estimated cost of the lost inventory?

A. $9,705.

 

B. $25,995.

 

C. $29,250.

 

D. $44,000.

 

E. $45,000.

COGS = ($55,000 – $700) * 65% = $35,295
Goods available for sale = $28,000 + $17,000 = $45,000
EI = $45,000 – $35,295 = $9,705

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

141. A company reports the following information regarding its inventory.

Beginning inventory: cost is $80,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000

The year-end inventory shows $135,000 worth of merchandise available at retail prices. What is the cost of the ending inventory calculated using the retail inventory method?

A. $135,000.

 

B. $73,125.

 

C. $78,300.

 

D. $72,900.

 

E. $105,000.

 

  At cost At retail
Beginning inventory $80,000 $130,000
Purchases    65,000 120,000
Goods available $145,000 $250,000

Cost/retail ratio $145,000/$250,000 = 58%
Ending inventory at cost $135,000 * 58% = $78,300

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

142. On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available:

Beginning inventory, January 1: $4,000
Net sales: $80,000
Net purchases: $78,000

The company’s gross margin ratio is 25%. Using the gross profit method, the cost of goods sold would be:

A. $60,000.

 

B. $20,000.

 

C. $58,500.

 

D. $63,000.

 

E. $19,500.

75% * $80,000 = $60,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

143. On March 31 a company needed to estimate its ending inventory to prepare its first quarter financial statements. The following information is available:

Beginning inventory, January 1: $4,000
Net sales: $80,000
Net purchases: $78,000

The company’s gross margin ratio is 25%. Using the gross profit method, the estimated ending inventory value would be:

A. $82,000.

 

B. $60,000.

 

C. $20,000.

 

D.  $22,000.

 

E. $19,500.

Beginning inventory + Purchases = Cost of Goods Available for Sale

$4,000 + $78,000 = $82,000

Cost of Goods Available for Sale – Estimated Cost of Goods Sold = Estimated Ending Inventory

$82,000 – (75% * $80,000) = Estimated Ending Inventory

$22,000 = Estimated Ending Inventory

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

144. Big Box Store has operated with a 30% average gross profit ratio for a number of years. It had $100,000 in sales during the second quarter of this year. If it began the quarter with $18,000 of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated ending inventory by the gross profit method is:

A. $30,000.

 

B. $21,000.

 

C. $20,000.

 

D. $18,000.

 

E. $27,000.

COGS = $100,000 * 70% = $70,000
Costs available for sale = $18,000 + $72,000 = $90,000
End. Inv. = $90,000 – $70,000 = $20,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

145. On January 31, a company needed to estimate its ending inventory to prepare its monthly financial statements. The following information is currently available:

Inventory as of January 1: $120,500
Net sales for January: $400,000
Net purchases for January: $270,500

This company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross profit method would be:

A. $102,425.

 

B. $10,425.

 

C. $9,000.

 

D. $51,000.

 

E. $51,425.

COGS = $400,000 * 85% = $340,000
Costs available for sale = $120,500 + $270,500 = $391,000
EI = $391,000 – $340,000 = $51,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

146. Interim financial statements:

A. Are required by the Congress.

 

B. Are necessary to achieve full disclosure about a business’s operations.

 

C. Are statements prepared for periods of less than one year.

 

D. Require the use of the perpetual method for inventories.

 

E. Cannot be prepared if the company follows the conservatism principle.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

147. Jefferson Company has sales of $300,000 and cost of goods available for sale of $270,000. If the gross profit ratio is typically 30%, the estimated cost of the ending inventory under the gross profit method would be:

A. $60,000

 

B. $180,000

 

C. $30,000

 

D. $90,000

 

E. $120,000

If sales for the period were $300,000 and the company’s typical gross profit ratio is 30%, gross profit would be approximately $90,000. That means that cost of goods sold must have been $210,000. Subtracting cost of goods sold of $210,000 from the $270,000 of cost of goods available for sale yields ending inventory of $60,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

148. Oxford Packing Company reported net sales in November of the current year of $1,000,000. At the beginning of November, the company reported beginning inventory of $368,000. Cost of goods purchased during November amounted to $217,500. The company reported ending inventory at the end of November of $226,750.
The company’s gross profit rate for November of the current year was:

A. 35.9%

 

B. 18.8%

 

C. 81.2%

 

D. 64.1%

 

E. 58.6%

Combining beginning inventory of $368,000 with purchases for the period of $217,500 yields cost of goods available for sale of $585,500. If we then subtract the ending inventory of $226,750, we get cost of goods sold of $358,750. Subtracting cost of goods sold ($358,750) from sales ($1,000,000) yields gross profit of $641,250. Dividing gross profit of $641,250 by sales of $1,000,000 yields a gross profit percentage of 64.125% or 64.1% rounded.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

149. On April 24 of the current year, The Memphis Pecan Company experienced a tornado that destroyed the company’s entire inventory. At the beginning of April, the company reported beginning inventory of $226,750. Inventory purchased during April (until the date of the tornado) was $197,800. Sales for the month of April through April 24 were $642,500. Assuming the company’s typical gross profit ratio is 50%, estimate the amount of inventory destroyed in the tornado.

A. $212,275

 

B. $103,300

 

C. $217,950

 

D. $321,250

 

E. $157,788

Beginning inventory on April 1 was $226,750. Purchases for the month of April amounted to $197,800, yielding cost of goods available for sale of $424,550. If the company’s typical gross profit ratio is 50% and if sales for the month of April were $642,500, then the cost of goods sold during April was $321,250. Subtracting that amount from the cost of goods available for sale yields ending inventory of $103,300.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

150. Avanti purchases inventory from overseas and incurs the following costs: the merchandise cost is $50,000, credit terms 2/10, n/30 that apply only to the $50,000; FOB shipping point freight charges are $1,500; insurance during transit is $500; and import duties are $1,000. Avanti paid within the discount period and incurred additional costs of $1,200 for advertising and $5,000 for sales commissions. Compute the cost that should be assigned to the inventory.

A. $50,000

 

B. $53,000

 

C. $52,000

 

D. $51,500

 

E. $53,200

$50,000 * .98 = $49,000 + $1,500 + $500 + $1,000 = $52,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

151. Hasham purchases inventory from overseas and incurs the following costs: the merchandise cost is $80,000, credit terms 1/10, n/30, applicable only to the $80,000; FOB shipping point freight charges are $2,500; insurance during transit is $300; and import duties are $1,500. Hasham paid within the discount period. Compute the cost that should be assigned to the inventory.

A. $83,500

 

B. $79,200

 

C. $81,700

 

D. $84,300

 

E. $81,000

($80,000 * .99) + $2,500 + $300 + $1,500 = $83,500

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

152. Some companies choose to avoid assigning incidental costs of acquiring merchandise to inventory by recording them as cost of goods sold when incurred. The principle that supports this is called:

A. The expense recognition principle.

 

B. The materiality constraint.

 

C. The cost principle.

 

D. The conservation constraint principle.

 

E. The lower of cost or market principle.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

153. All of the following statements related to goods on consignment are true except:

A. Goods on consignment are goods provided by the owner, call the consignor.

 

B. A consignee sells goods for the owner.

 

C. The consignor continues to own the consigned goods.

 

D. The consignee reports the goods in its inventory until sold.

 

E. The consignor reports the goods in its inventory until sold.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

154. When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest gross profit and income?

A. FIFO.

 

B. LIFO.

 

C. Weighted average.

 

D. Specific identification.

 

E. Gross margin.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

155. When costs to purchase inventory regularly decline, which method of inventory costing will yield the lowest cost of goods sold?

A. FIFO.

 

B. LIFO.

 

C. Weighted average.

 

D. Specific identification.

 

E. Gross margin.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

156. IFRS reporting currently does not allow which method of inventory costing?

A. Specific identification.

 

B. FIFO.

 

C. LIFO.

 

D. Weighted average.

 

E. Lower of cost or market.

 

AACSB: Communication
AICPA: BB Global
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

157. All of the following statements regarding U.S. GAAP and IFRS are true except:

A. Both U.S. GAAP and IFRS include broad and similar guidance for the items and costs making up merchandise inventory.

 

B. For both U.S. GAAP and IFRS, merchandise inventory includes all items that a company owns and holds for sale.

 

C. Both U.S. GAAP and IFRS require companies to write down inventory when its value falls below the cost presently recorded.

 

D. Both U.S. GAAP and IFRS allow reversals of write downs up to the original acquisition cost.

 

E. With limited exceptions, neither U.S. GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.

 

AACSB: Communication
AICPA: BB Global
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

158. Sandoval needs to determine its year-end inventory. The warehouse contains 20,000 units, of which 3,000 were damaged by flood and are not sellable. Another 2,000 units were purchased from Markor Company, FOB shipping point, and are currently in transit. The company also consigns goods and has 4,000 units at a consignee’s location. How many units should Sandoval include in its year-end inventory?

A. 29,000

 

B. 21,000

 

C. 23,000

 

D. 19,000

 

E. 26,000

20,000 – 3,000 + 2,000 + 4,000 = 23,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

159. Salmone Company reported the following purchases and sales of its only product. Salmone uses a perpetual inventory system. Determine the cost assigned to the ending inventory using FIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,980

 

B. $2,460

 

C. $2,850

 

D. $2,590

 

E. $2,860

(140 * $12 = $1,680) + (100 * $13 = $1,300) = $2,980

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

160. Salmone Company reported the following purchases and sales of its only product. Salmone uses a perpetual inventory system. Determine the cost assigned to cost of goods sold using FIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,980

 

B. $2,460

 

C. $2,850

 

D. $2,590

 

E. $5,440

(140 * $10 = $1,400) + [(10 * $10 = $100) + (80 * $12 = $960)] = $2,460

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

161. Salmone Company reported the following purchases and sales of its only product. Salmone uses a perpetual inventory system. Determine the cost assigned to ending inventory using LIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $5,440

 

B. $2,460

 

C. $2,590

 

D. $2,980

 

E. $2,860

(150 * $10 = $1,500) + (80 * $12 = $960) + (10 * $13 = $130) = $2,590

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

162. Salmone Company reported the following purchases and sales for its only product. Salmone uses a perpetual inventory system. Determine the cost assigned to cost of goods sold using LIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,860

 

B. $2,460

 

C. $2,590

 

D. $2,850

 

E. $2,980

(140 * $12 = $1,680) + (90 * $13 = $1,170) = $2,850

 

 

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

 

 

 

163. Salmone Company reported the following purchases and sales of its only product. Salmone uses a periodic inventory system. Determine the cost assigned to the ending inventory using FIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,980

 

B. $5,440

 

C. $2,460

 

D. $2,850

 

E. $2,590

(140 * $12 = $1,680) + (100 * $13 = $1,300) = $2,980

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

 

 

 

 

 

  164. Salmone Company reported the following purchases and sales of its only product. Salmone uses a periodic inventory system. Determine the cost assigned to cost of goods sold using FIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,460

 

B. $2,860

 

C. $2,980

 

D. $2,850

 

E. $2,590

(150 * $10 = $1,500) + (80 * $12 = $960) = $2,460

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

 

 

 

 

 

 

  165. Salmone Company reported the following purchases and sales of its only product. Salmone uses a periodic inventory system. Determine the cost assigned to ending inventory using LIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,260

 

B. $3,180

 

C. $2,580

 

D. $3,580

 

E. $2,100

(150 * $10 = $1,500) + (90 * $12 = $1,080) = $2,580

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

 

 

 

 

  166. Salmone Company reported the following purchases and sales for its only product. Salmone uses a periodic inventory system. Determine the cost assigned to cost of goods sold using LIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
May 1 Beginning Inventory 150 units @ $10.00  
5 Purchase 220 units @ $12.00  
10 Sales   140 units @ $20.00
15 Purchase 100 units @ $13.00  
24 Sales   90 units @ $21.00

 

A. $2,590

 

B. $2,850

 

C. $2,580

 

D. $2,860

 

E. $2,460

(100 * $13 = $1,300) + (130 * $12 = $1,560) = $2,860

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System

 

 

 

167. On September 1 of the current year, Scots Company experienced a flood that destroyed the company’s entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $215,450. Inventory purchased during August was $192,530. Sales for the month of August were $542,500. Assuming the company’s typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.

A. $87,480

 

B. $134,520

 

C. $109,980

 

D. $82,480

 

E. $81,480

Merchandise available for sale — $215,450 + $192,530 = $407,980
Estimate cost of goods sold — $542,500 * .6 = $325,500
Estimated ending inventory — $407,980 – $325,500 = $82,480

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

168. Use the following information for Shafer Company to compute inventory turnover for year 2.

  Year 2 Year 1
Net sales $647,500 $582,000
Cost of goods sold 389,500 360,840
Ending inventory 76,700 79,380

 

A. 9.98

 

B. 5.08

 

C. 4.99

 

D. 8.30

 

E. 8.44

Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $389,500/[($76,700 + $79,380)/2]
Inventory Turnover = $389,500/$78,040 = 4.99

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

169. Use the following information for Davis Company to compute inventory turnover for Year 2.

  Year 2 Year 1
Cost of goods sold 279,500 291,800
Ending inventory 47,700 49,350

 

A. 5.86

 

B. 5.76

 

C. 5.67

 

D. 11.77

 

E. 5.89

Inventory Turnover = Cost of Goods Sold/Average Inventory
Inventory Turnover = $279,500/[($47,700 + $49,350)/2]
Inventory Turnover = $279,500/$48,525 = 5.76

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

170. Use the following information for Ephron Company to compute days’ sales in inventory for Year 2.

  Year 2 Year 1
Net sales $547,500 $572,000
Cost of goods sold 348,500 370,840
Ending inventory 75,700 81,400

 

A. 52.4

 

B. 82.3

 

C. 50.5

 

D. 76.8

 

E. 79.3

Days’ Sales in Inventory = Ending Inventory/Cost of Goods Sold * 365
Days’ Sales in Inventory = $75,700/$348,500 * 365 = 79.3

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Days’ Sales in Inventory
 

 

Matching Questions

171. Match each of the following terms with the appropriate definition.

1. The number of times a company’s average inventory is sold during a period.  Conservatism constraint   9
2. An inventory valuation method where each item in inventory is identified with a specific purchase and invoice. Net realizable value   3
3. The expected sales price of an item minus the cost of making the sale. Retail inventory method   5
4. An inventory pricing method that assumes the unit prices of the beginning inventory and of each purchase are weighted by the number of units of each in inventory; the calculation occurs at the time of each sale. Days’ sales in inventory   6
5. A method for estimating an ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail price.  Weighted average inventory method   4
6. An estimate of days needed to convert the inventory at the end of the period into receivables or cash.  Interim statements   8
7. An inventory valuation method that assumes that inventory items are sold in the order acquired.  LIFO method   10
8. Financial statements prepared for periods of less than one year.  Specific identification method   2
9. The accounting constraint that aims to select the less optimistic estimate when two or more estimates are about equally likely.  FIFO method   7
10. An inventory valuation method that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.  Inventory turnover   1

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Determining Inventory Items
Topic: Inventory Costing Under a Perpetual System

Topic: Inventory Estimation Methods
Topic: Inventory Turnover and Days’ Sales in Inventory
Topic: Lower of Cost or Market
 

 

172. Match the following terms with the appropriate definition.

1. The required method of reporting inventory at market when market is lower than cost.  Consignor   4
2. The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to determine the cost of inventory. Gross profit method   3
3. A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold, which is then subtracted from the cost of goods available for sale to determine the estimated ending inventory. Consistency concept   10
4. An owner of goods who ships them to another party who will then sell the goods for the owner. Days’ sales in inventory   8
5. One who receives and holds goods owned by another for purposes of selling the goods for the owner. Consignee   5
6. The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely. Specific identification method   2
7. The number of times a company’s average inventory is sold during an accounting period. Inventory turnover   7
8. An estimate of days needed to convert the inventory available at the end of the period into receivables or cash. Lower of cost or market   1
9. A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail prices.  Retail inventory method   9
10. The accounting principle that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be comparable. Conservatism principle   6

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Determining Inventory Items
Topic: Inventory Costing Under a Perpetual System
Topic: Inventory Estimation Methods
Topic: Inventory Turnover and Days’ Sales in Inventory

Topic:  Lower of Cost or Market
 

 

Short Answer Questions

173. Match the inventory valuation method from the list below that is being described in each situation in letters a-e. In all cases, assume a period of rising prices.

FIFO First in, first out
LIFO Last in, first out
WA Weighted average
SI Specific identification

_________ a. The method that is used if each inventory item can be matched with a specific purchase and invoice.
_________ b. The method that will cause the company to have the lowest income taxes.
_________ c. The method that will cause the company to have the lowest cost of goods sold.
_________ d. The method that will assign a value to inventory that approximates current cost.
_________ e. The method that will tend to smooth out erratic changes in costs.

a. SI; b. LIFO; c. FIFO; d. FIFO; e. WA

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Financial Statement Effects of Costing Methods
Topic: Inventory Costing Under a Perpetual System

 

 

174. Identify the items that are included in merchandise inventory. (In your answer address the special situations of goods in transit, consigned goods, and damaged goods.)

Merchandise inventory consists of goods owned by a company and held for resale. Three special cases involving ownership decisions are goods in transit, consigned goods, and damaged goods. Goods in transit are included in the inventory of the company that owns the goods. Consigned goods are included in the inventory of the consignor. Damaged goods are valued at net realizable value.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

175. What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.

The costs of merchandise inventory include the invoice price minus any discounts, plus any added or incidental costs necessary to put the inventory in a place and condition for sale. Incidental costs include import duties, freight costs, storage, insurance, and costs of aging.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Costs of Merchandise Inventory
 

 

176. Describe the internal controls that must be applied when taking a physical count of inventory.

The internal controls should include (1) prenumbered tickets that are all accounted for; (2) counters who are not responsible for the inventory; (3) counters who must confirm the validity of inventory’s existence, amounts, and quality; (4) a second count by a different counter; and (5) confirmation that all inventories are ticketed once and only once by a manager.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

177. Explain the effects of inventory valuation methods on the cost of ending inventory, income, and income taxes.

The specific identification method exactly identifies the costs of the inventory items sold. The weighted average method tends to smooth out erratic changes in costs by “averaging” inventory costs. However, LIFO and FIFO provide different amounts in periods of rising or falling costs. For example, in periods of rising costs, LIFO provides a lower income and thus lower taxes. In periods of falling costs, LIFO provides a higher income and thus higher taxes. FIFO calculations provide both higher income and taxes in periods of rising costs and lower income and taxes in periods of declining costs.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

178. How do the consistency concept and the full disclosure principle affect inventory valuation?

The consistency concept requires that companies use the same accounting method for inventory valuation from period to period so that the financial statements are comparable across periods. The only exception is when a change from one method to another will improve its financial reporting. The consistency principle does not require a company to use one inventory valuation method for all categories of inventory. The full disclosure principle requires that in cases where a company does change its inventory valuation method, the notes to the financial statements report the type of change, its justification, and its effect on net income.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

179. What is the effect of an error in the ending inventory balance on the accounts reported in the income statement?

An inventory error causes misstatements in cost of goods sold, gross profit, net income, current assets, and equity. It also causes misstatements in the next period’s cost of goods sold and net income. However, the inventory error is said to be self-correcting because the error in the first period is offset by the error in the second period.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

180. Explain how the inventory turnover ratio and the days’ sales in inventory ratio are used to evaluate inventory management.

A merchandiser’s ability to pay its short term obligations depends, among other factors, on how quickly it sells its merchandise inventory. The inventory turnover ratio reveals how many times a company turns over (sells) its inventory during a period. A low ratio compared to competitors suggests the company may be holding more inventory than necessary to support its sales volume. On the other hand, a ratio that is too high compared to competitors may suggest that the inventory level is too low and customers may have to back order merchandise. The days’ sales in inventory ratio helps to better interpret inventory turnover. It can be interpreted as the number of days one can sell from inventory if no new items are purchased, and can be viewed as a measure of the buffer against out-of-stock inventory.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

181. Identify and describe the four inventory valuation methods.

The specific identification method assigns costs to each inventory item based on specific invoice costs. The weighted average method assigns costs by using the total balance in inventory and dividing it by the number of units to arrive at a cost per unit at each sale. This cost per unit is then multiplied by the number of units in ending inventory. The first-in-first-out method assigns cost to items sold assuming that the first units purchased are the first to be sold. The last-in-first out method assumes that the last units purchased are the first to be sold.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

182. Explain why the lower of cost or market rule is used to value inventory.

The concept of conservatism requires that if there is more than one estimate of the value of an asset, then the lower of the two should be used. The lower of cost or market rule compares the acquisition cost of inventory with the current replacement cost. The lower of these two values is then selected as the amount to be reported. Lower of cost or market can be used on the inventory as a whole, major categories of inventory, or on individual items of inventory.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

183. Discuss the important accounting features of a periodic inventory system including accounts and procedures used.

Each purchase of merchandise is debited to the Purchases account. Cost of goods sold is not recorded at the time of sale. Instead, a physical count of inventory at the end of the accounting period is used to determine the amount of inventory sold. Certain costs of inventory such as transportation-in, purchases discounts, and purchases returns and allowances are recorded in separate accounts. These separate accounts are then used to help compute inventory and cost of goods sold at the end of the period.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Periodic System
 

 

184. Explain the reason a company might use the retail inventory method for valuing inventory.

The retail method is generally used to prepare interim statements because it avoids the time-consuming and expensive process of taking a physical inventory. It uses the cost to retail ratio to give an estimated ending inventory at cost. Some companies use the retail inventory to prepare annual statements, and may also estimate inventory for audit purposes or when inventory is damaged or destroyed.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

185. Explain the reason a company might use gross profit inventory method for valuing inventory.

The gross profit method is often used when inventory is destroyed, lost or stolen. The cost of ending inventory is estimated by applying the gross profit ratio to net sales at retail. Companies may need an estimate of inventory to file a claim on a loss with its insurer. The method can also be used to see whether inventory amounts from physical counts are reasonable.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

186. Sarbanes Oxley (SOX) demands that companies safeguard inventory and properly report it. List methods that companies should use to safeguard inventory and accounting procedures that should be used to properly report inventory.

Safeguards include restricted access, use of authorized requisitions, security measures, and controlled environments to prevent damage. Proper accounting includes matching inventory received with purchase order terms and quality requirements, preventing misstatements, and controlling access to inventory records.

 

AACSB: Communication
AICPA: BB Industry
AICPA: BB Legal
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

187. The company’s inventory manager receives compensation that includes a bonus based on gross profit. You discover that the inventory manager has knowingly overstated ending inventory by $2 million. What effect does this error have on the financial statements of the company and specifically gross profit? Why would the manager knowingly overstate ending inventory? Would this be considered an ethics violation?

By overstating ending inventory, the cost of goods sold is understated, causing the gross profit to be overstated and net income to be overstated. By overstating the gross profit, this would increase the manager’s bonus. The assets and equity would also be overstated. Since the manager’s bonus is based on gross profit, the error would result in a larger bonus since gross profit would be overstated. Yes, this would be considered an ethics violation since the manager intentionally overstated ending inventory and the financial statements would contain errors that could affect decisions made by the users of the financial statements.

 

AACSB: Ethics
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Costing Methods
Topic: Financial Statement Effects of Inventory Errors
 

 

188. Mary’s Antiques does not have its own retail location, instead maintains inventory in its warehouse and sells merchandise through Oldtime Antique Mall. Oldtime does not assume responsibility for goods until they are sold to customers at which time it takes a commission for items sold and sends the sale proceeds to Mary’s. Identify which company has the role of the consignor and the consignee. Which company should include any unsold goods as part of its inventory?

Mary’s Antiques is the consignor; Oldtime Antiques Mall is the consignee. Mary’s Antiques should include any unsold goods as part of its inventory.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

189. What advantages does a perpetual inventory system have over periodic inventory system?

Advances in technology have greatly reduced the cost, and effort to manage, a perpetual inventory system. The perpetual inventory system updates the inventory balance as transactions affecting inventory occur, the balance is increased for purchases and decreased for sales. The subsidiary ledger also enables companies to get detailed records for each inventory item without a lot of extra effort. Knowing the exact amount of inventory may avoid the risk of lost sales and also help management reduce the level of inventory, thereby increasing the inventory turnover and decreasing the required number of days’ sales in inventory. The reduced level of inventory also reduces costs. Many companies are now asking whether they can afford not to have a perpetual inventory system because timely access to inventory information is a competitive advantage.

 

AACSB: Technology
AICPA: BB Leveraging Technology
AICPA: FN Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

190. Patrick Randall of Sports Supplies finds that maintaining appropriate levels of inventories while controlling costs is a major challenge. What are the challenges Patrick refers to?

Any entrepreneur who sells inventory must constantly balance the need to have adequate inventory available to meet customers’ demands while also minimizing the amount of investment in inventory. Maintaining too little inventory can result in stock-outs (lost sales due to a lack of available inventory) but maintaining too much inventory wastes the company’s resources (by requiring funds be invested in inventory and not in other more productive assets). Randy knew that to meet his customers’ needs, he would need sound inventory accounting. By implementing inventory management tools, he learned how to fill orders, collect money, and maintain the right inventory.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Determining Inventory Costs
 

 

Essay Questions

191. Carolina Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation:

Carolina Company
Income Statement

For the year ended December 31
Sales $60,000
Cost of goods sold   23,000
Gross profit $37,000
Expenses   13,000
Income before taxes $24,000

Carolina’s ending inventory using the LIFO method was $8,700. Carolina’s accountant determined that had the company used FIFO, the ending inventory would have been $9,100.

a. Determine what the income before taxes would have been, had Carolina used the FIFO method of inventory valuation instead of LIFO.
b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?
c. If Carolina wanted to lower the amount of income taxes to be paid, which method would it choose?

a. If ending inventory is $400 higher using FIFO ($9,100 – $8,700), then the cost of goods sold would be $400 lower, gross profit $400 higher, and income before taxes would be $400 higher. Therefore, income before taxes would be $24,000 + $400 = $24,400.
b.

  LIFO FIFO
Income before taxes $24,000  $24,400
Income taxes (30%) $7,200 $7,320

Income taxes would be $120 higher using FIFO than LIFO.
c. Carolina would choose the LIFO method because it results in lower income taxes.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

192. Evaluate each inventory error separately and determine whether it overstates or understates cost of goods sold and net income.

Inventory error: Cost of goods sold is: Net income is:
Understatement of beginning inventory                                       
Understatement of ending inventory                                       
Overstatement of beginning inventory                                       
Overstatement of ending inventory                                       

 

 

Inventory error: Cost of goods sold is:   Net income is:
Understatement of beginning inventory   Understated Overstated
Understatement of ending inventory  Overstated  Understated
Overstatement of beginning inventory  Overstated  Understated
Overstatement of ending inventory  Understated  Overstated

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

193. The Community Store reported the following amounts on their financial statements for Year 1, Year 2, and Year 3:

  For the year ended December 31
  Year 1 Year 2 Year 3
Cost of goods sold $75,000 $87,000 $77,000
Net income 22,000 25,000 21,000
Total current assets 155,000 165,000 110,000
Equity 287,000 295,000 304,000

It was discovered early in Year 4 that the ending inventory on December 31, Year 1 was overstated by $6,000, and the ending inventory on December 31, Year 2 was understated by $2,500. The ending inventory on December 31, Year 3 was correct. Ignoring income taxes determine the correct amounts of cost of goods sold, net income, total current assets, and equity for each of the years Year 1, Year 2, and Year 3.

 

  For the year ended December 31
  Year 1 Year 2 Year 3
Cost of goods sold $81,000 $78,500 $79,500
Net income 16,000 33,500 18,500
Total current assets 149,000 167,500 110,000
Equity 281,000 297,500 304,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

194. A company reported the following data:

  Year 1 Year 2
Cost of goods sold $317,500 $279,100
Average inventory 72,000 93,000

Required:

1. Calculate the company’s merchandise inventory turnover for each year.
2. Comment on the company’s efficiency in managing its inventory.

1. Year 1 $317,500/72,000 = 4.41
Year 2 $279,100/93,000 = 3.00
2. The company’s efficiency in managing its inventory is decreasing as its sales of merchandise decrease. This is a negative reflection on inventory management.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Analyze
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

195. A company reported the following data:

  Year 1 Year 2
Cost of goods sold $425,000 $486,000
Ending inventory 140,000 175,000

Required:

1. Calculate the days’ sales in inventory for each year.
2. Comment on the trend in inventory management.

1. Year 1 ($140,000/$425,000) * 365 = 120 days
Year 2 (175,000/$486,000) * 365 = 131 days
2. The company has a trend of increasing the number of days it takes to sell its inventory. This is a negative reflection on inventory management.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Blooms: Analyze
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

196. A company made the following purchases during the year:

Jan. 10 15 units @ $360 each
Mar. 15 25 units @ $390 each
Apr. 25 10 units @ $420 each
July 30 20 units @ 450 each
Oct. 10 15 units @ $480 each

On December 31, there were 28 units in ending inventory. These 28 units consisted of 2 from the January 10 purchase, 3 from the March 15 purchase, 4 from the April 25 purchase, 11 from the July 30 purchase, and 8 from the October 10 purchase. Using specific identification, calculate the cost of the ending inventory.

 

2 * $360 = $720
3 * $390 = 1,170
4 * $420 = 1,680
11 * $450 = 4,950
8 * $480 = 3,840
    $12,360

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

197. A company’s inventory records indicate the following data for the month of July:

July 1 Beginning 380 units at $15 each
July 5 Purchased 270 units at $17 each
July 10 Sold 400 units at $50 each
July 20 Purchased 300 units at $22 each
July 25 Sold 400 units at $50 each

If the company uses the weighted average inventory valuation method and the perpetual inventory system, what would be the cost of its ending inventory? (Round average cost per unit to 2 decimals, and final answer to the nearest dollar.)

Note:  As a result of rounding the cost per unit to two decimal places, the sum of cost of goods sold plus ending inventory may not exactly equal cost of goods available for sale.

  Purchases Sales Balance
Date Units Per unit Total Units Per unit Total Units Per unit Total
7/1 380 $15 $5,700       380 $15.00 $5,700
7/5 270 $17 $4,590       650 $15.83 $10,290
7/10       400 $15.83 $6,332 250 $15.83 $3,958
7/20 300 $22 $6,600       550 $19.20 $10,558
7/25       400 $19.20 $7,680 150 $19.20 $2,878
                 

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

198. A company’s inventory records indicate the following data for the month of April:

April 1 Beginning 350 units at $18 each
April 5 Purchase 290 units at $20 each
April 9 Sale 500 units at $55 each
April 14 Purchase 250 units at $22 each
April 20 Sale 200 units at $55 each
April 30 Purchase 240 units at $25 each

If the company uses the first-in, first-out (FIFO) method and the perpetual inventory system, what would be the cost of the ending inventory?

 

  Purchases Sales Balance
  Units Unit cost Total Units Unit cost Total Units Unit cost Total
4/1 350 $18 $6,300       350 $18 $6,300
              350 $18 $6,300
4/5 290 $20 5,800       290 $20 5,800
              640   $12,100
4/9       350 $18 $6,300      
        150 $20 3,000 140 $20 $2,800
4/14             140 $20 $2,800
  250 $22 5,500       250 $22 5,500
              390   $8,300
4/20       140 $20 $2,800      
        60 $22 1,320 190 $22 $4,180
4/30 240 $25 6,000       190 $22 $4,180
              240 $25 6,000
              430   $10,180

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

199. A company’s inventory records indicate the following data for the month of January:

Jan. 1 beginning 180 units at $9 each
Jan. 5 purchased 170 units at $10 each
Jan. 9 sold 300 units at $35 each
Jan. 14 purchased 200 units at $11 each
Jan. 20 sold 150 units at $35 each
Jan. 30 purchased 230 units at $12 each

If the company uses the last-in, first-out perpetual inventory system, what would be the cost of the ending inventory?

 

  Purchases Sales Balance
Date Units Unit
cost
Total Units Unit
cost
Total Units Unit
cost
Total
1/1 180 $9 $1,620       180 $9 $1,620
1/5 170 $10 $1,700       180 $9 $1,620
              170 $10 $1,700
              350   $3,320
1/9       170 $10 $1,700      
        130 $9 1,170 50 $9 $450
1/14 200 $11 $2,200       50 $9 $450
              200 $11 $2,200
              250   $2,650
1/20       150 $11 $1,650 50 $9 $450
              50 $11 550
              100   $1,000
1/30 230 $12 $2,760       50 $9 $450
              50 $11 550
              230 $12 2,760
              330   $3,760

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

200. A company’s inventory records indicate the following data for the month of January:

Jan. 1 Beginning 180 units at $9 each
Jan. 5 Purchased 170 units at $10 each
Jan. 9 Sold 300 units at $35 each
Jan. 14 Purchased 200 units at $11 each
Jan. 20 Sold 150 units at $35 each
Jan. 30 Purchased 230 units at $12 each

If the company uses the last-in, first-out perpetual inventory system, what is the amount of cost of goods sold for January?

 

  Purchases Sales Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
1/1 180 $9 $1,620       180 $9 $1,620
1/5 170 $10 $1,700       180 $9 $1,620
              170 $10 $1,700
              350   $3,320
1/9       170 $10 $1,700      
        130 $9 1,170 50 $9 $450
1/14 200 $11 $2,200       50 $9 $450
              200 $11 $2,200
              250   $2,650
1/20       150 $11 $1,650 50 $9 $450
              50 $11 550
              100   $1,000
1/30 230 $12 $2,760       50 $9 $450
              50 $11 550
                        230 $12   2,760
            $4,520 330   $3,760

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

201. A company’s inventory records indicate the following data for the month of April:

April 1 Beginning 350 units at $18 each
April 5 Purchase 290 units at $20 each
April 9 Sale 500 units at $55 each
April 14 Purchase 250 units at $22 each
April 20 Sale 200 units at $55 each
April 30 Purchase 240 units at $25 each

If the company uses the first-in, first-out (FIFO) method and the perpetual inventory system, what is the amount of cost of goods sold for April?

 

  Purchases Sales Balance
  Units Unit cost Total Units Unit cost Total Units Unit cost Total
4/1 350 $18 $6,300       350 $18 $6,300
              350 $18 $6,300
4/5 290 $20 5,800       290 $20 5,800
              640   $12,100
4/9       350 $18 $6,300      
        150 $20 3,000 140 $20 $2,800
4/14             140 $20 $2,800
  250 $22 5,500       250 $22 5,500
              390   $8,300
4/20       140 $20 $2,800      
        60 $22 1,320 190 $22 $4,180
4/30 240 $25 6,000       190 $22 $4,180
              240 $25 6,000
            $13,420 430   $10,180

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

202. Calculate the ending inventory using FIFO for a company that uses a perpetual inventory system, using the information given below.

  Units Unit Cost
Beginning inventory 100 $10
Aug. 5 purchased 40 12
Aug. 10 sold 60
Aug. 15 purchased 70 13
Aug. 25 sold 50

 

 

  Purchases Cost of Goods Sold Inventory
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
8/1             100 $10 $1,000
8/5 40 $12 $480       100 $10 $1,000
              40 $12 480
              140   $1,480
8/10       60 $10 $600 40 $10 $400
              40 $12 480
              80   $880
8/15 70 $13 $910       40 $10 $400
              40 $12 480
              70 $13 910
              150   $1,790
8/25       40 $10 $400 30 $12 $360
        10 $12 120 70 $13 910
              100   $1,270

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

203. Calculate the ending inventory using LIFO for a company that uses a perpetual inventory system, using the information given below.

  Units Unit Cost
Beginning inventory 100 $10
Aug. 5 purchased 40 12
Aug. 10 sold 60
Aug. 15 purchased 70 13
Aug. 25 sold 50  

 

 

  Purchases Cost of goods sold Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
8/1             100 $10 $1,000
8/5 40 $12 $480       100 $10 $1,000
              40 $12 $480
              140   $1,480
8/10       40 $12 $480 80 $10 $800
        20 $10 $200      
        60   $680      
8/15 70 $13 $910       80 $10 $800
              70 $13 $910
              150   $1,710
8/25       50 $13 $650 80 $10  $800
              20 $13 $260
              100   $1,060

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

204. Using the information given below for a company that uses a perpetual inventory system, calculate the ending inventory using weighted average.

  Units  Unit Cost
Beginning inventory 100 $10
Jan. 5 purchased 40 12
Jan. 10 sold 60
Jan. 15 purchased 70 13
Jan. 25 sold 50  –

 

 

  Purchases Cost of goods sold Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
1/1             100 $10.00 $1,000
1/5 40 $12 $480       140 $10.57* $1,480
1/10       60 $10.57 $634 80 $10.57 $846
1/15 70 $13 $910       150 $11.71** $1,756
1/25       50 $11.71 $585 100 $11.71 $1,171

*$1,480/140 units = $10.57/unit
**$1,756/150 units = $11.71/unit

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System


 

 

205. Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses FIFO inventory valuation and a perpetual inventory system.

January 1: Purchased 100 units at $10 per unit.
February 5: Purchased 60 units at $12 per unit.
March 16: Sold 40 units for $16 per unit.

 

Sales = 40 * $16 = $640
Cost of goods sold = 40 * $10 = $400
Gross profit = $640 – $400 = $240

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

206. Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses LIFO inventory valuation and a perpetual inventory system.

January 1: Purchased 100 units at $10 per unit.
February 5: Purchased 60 units at $12 per unit.
March 16: Sold 40 units for $16 per unit.

 

Sales = 40 * $16 = $640
Cost of goods sold = 40 * $12 = $480
Gross profit = $640 – $480 = $160

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

207. Use the information below to determine the sales revenue, cost of goods sold and gross profit that would be reported for the company related to the March 16 sale assuming the company uses weighted average inventory valuation and a perpetual inventory system.

January 1: Purchased 100 units at $10 per unit.
February 5: Purchased 60 units at $12 per unit.
March 16: Sold 40 units for $16 per unit.

 

Sales = 40 * $16 = $640
Cost of goods sold = 40 * $10.75* = $430
Gross profit = $640 – $430 = $210

*[(100 * $10) + (60 * $12)]/160 = $10.75

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

208. A company reported the following data related to its ending inventory:

Product Units Available Cost Market
849 100 $10 $11
842 75 16 14
847 60 14 13
860 40 16 20

Calculate the lower-of-cost-or-market on the inventory applied separately to each product.

 

Product Units On Hand Per Unit Cost Market Total Cost Total Market LCM by Product
849 100 $10 $11 $1,000 $1,100 $1,000
842 75 16 14 1,200 1,050 1,050
847 60 14 13 840 780 780
860 40 16 20      640       800     640
         $3,680   $3,470

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

209. A company had the following ending inventory costs:

Product Units of Hand Unit Cost Market Value
A 10 $5 $6
B 50            8 7
C 35           10 11

Required:

Calculate the lower of cost or market (LCM) value for each individual item.

 

Product Total Cost Total Market LCM
A $50 $60 $50
B 400 350 350
C 350 385 350
TOTAL  800   $750

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

210. A company uses the periodic inventory system, and the following information is available. All purchases and sales are on credit. The selling price for the merchandise is $11 per unit.

    Units Unit Cost Total Cost
6/01 Inventory Balance 30 $3 $90
6/06 Purchase 70 4 280
6/11 Purchase 45 5 225
6/16 Purchase 50 6 300
  Goods available 195   $895
6/12 Sale 100    
6/20 Sale 60    
  Goods sold 160    
6/31 Inventory Balance 35    

Required:

Determine the cost of the ending inventory and the cost of goods sold for June using the LIFO method.

Ending Inventory:

30 units @ $3 = $90
5 units @ $4 = 20
35 units $110

Cost of goods sold:

Goods available $895
-End. Inv. 110
COGS $785

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

211. A company made the following merchandise purchases and sales during the month of May:

May 1 Purchased 380 units at $15 each
May 5 Purchased 270 units at $17 each
May 10 Sold 400 units at $50 each
May 20 Purchased 300 units at $22 each
May 25 Sold 400 units at $50 each

There was no beginning inventory. If the company uses the weighted average periodic method, what would be the cost of the ending inventory?

 

380 units × $15 each = $5,700
270 units × $17 each = 4,590
300 units × $22 each = 6,600
950 units $16,890
800 units sold  
150 units in ending inventory  

 

Average cost = $16,890/950 units = $17.78 per unit
Cost of ending inventory = 150 units * $17.78 each =  $2,667

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

212. A company made the following merchandise purchases and sales during the month of May:

May 1 Purchased 380 units at $15 each
May 5 Purchased 270 units at $17 each
May 10 Sold 400 units at $50 each
May 20 Purchased 300 units at $22 each
May 25 Sold 400 units at $50 each

There was no beginning inventory. If the company uses the LIFO periodic inventory method, what would be the cost of the ending inventory?

 

380 units × $15 each = $5,700
270 units × $17 each = 4,590
300 units × $22 each = 6,600
950 units $16,890
800 units sold  
150 units in ending inventory  
   
Cost of ending inventory = 150 * $15 each = $2,250

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

213. A company made the following merchandise purchases and sales during the month of May:

May 1 Purchased 380 units at $15 each
May 5 Purchased 270 units at $17 each
May 10 Sold 400 units at $50 each
May 20 Purchased 300 units at $22 each
May 25 Sold 400 units at $50 each

There was no beginning inventory. If the company uses the FIFO periodic inventory method, what would be the cost of the ending inventory?

 

380 units × $15 each = $5,700
270 units × $17 each = 4,590
300 units × $22 each = 6,600
950 units $16,890
800 units sold  
150 units in ending inventory  

Cost of ending inventory = 150 * $22 each = $3,300

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P3 Appendix 5A-Compute inventory in a periodic system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing under a Periodic System
 

 

214. A company’s store was destroyed by an earthquake on February 10 of the current year. The only information for the current period that could be salvaged included the following:

Beginning inventory, January 1: $44,000
Purchases to date: $198,000
Sales to date: $310,000

Historically, the company’s gross profit ratio has been 30%. Estimate the value of the destroyed inventory using the gross profit method.

 

Beginning Inventory $44,000
Purchases 198,000
Goods available for sale $242,000
COGS ($310,000 * 70%) 217,000
Estimated Inventory at 2/10 $25,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

215. Apply the retail method to the following company information to calculate the cost of the ending inventory for the current period.

  Cost Retail
Beginning inventory $20,224 $31,600
Net purchases 59,508 97,000
Sales   89,000

 

 

  At Cost At Retail
Goods available for sale:    
Beginning inventory $20,224 $31,600
Net purchases  59,508 97,000
Goods available for sale $79,732 $128,600
Cost ratio: $79,732/$128,600 = 62%    
Sales at retail   89,000
Ending inventory at retail   $39,600
Ending inventory at cost ($39,600 * 62%) $24,552  

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

216. A company uses the retail inventory method and has the following information available concerning its most recent accounting period:

  At Cost At Retail
Beginning-of-period inventory $148,600 $245,200
Net purchases 677,400 1,229,800
Sales   1,200,000

1. What is the cost-to-retail ratio using the retail method?
2. What is the estimated cost of the ending inventory?

 

 Cost-to-retail ratio:    
Beginning inventory $148,600 $245,200
Net purchases 677,400  1,229,800
Cost of goods available for sale $826,000 $1,475,000
Cost to-retail ratio is 56%.    
 Estimated cost of the ending inventory:    
Sales   $1,200,000
Ending inventory at retail   $275,000
Estimated cost of ending inventory (56% * $275,000) $154,000  

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

217. Forever Young Game Stores (FYG) has taken a physical count of its inventory at March 31, its fiscal year-end. After reviewing the accounting records and documentation, the following items have been discovered:

(a) An invoice from Shreck Co. indicates that $30,000 of games were shipped to FYG on March 27, terms FOB shipping point. The games and invoice did not arrive at FYG until February 2 and were not included in the physical count.
(b) An invoice from Gamers, Inc. indicates that $8,000 of games were shipped to FYG on March 29, terms FOB destination. The games and invoice did not arrive at FYG until February 2 and were not included in the physical count.
The physical count and cost assignment on March 31 prior to these two items is $440,000. The cost of goods sold for FYG is $2,100,000.

1. Calculate the amount that should be reported as ending inventory for FYG.
2. Calculate the days’ sales in inventory before and after the appropriate adjustments for inventory.

1. The ending inventory should be adjusted to $470,000. Only the $30,000 invoice needs to be added since it was shipped FOB shipping point, the owner (FYG) should include the inventory in the ending balance. ($440,000 + $30,000 = $470,000)
2. Before adjustment: $440,000/$2,100,000 * 365 = 76.5 days
After adjustment: $470,000/$2,100,000 * 365 = 81.7 days

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
AICPA: FN Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

218. A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using FIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
April 1 Beginning Inventory 175 units @ $15.00  
4 Purchase 150 units @ $16.00  
7 Sales   160 units @ $30.00
10 Purchase 200 units @ $17.00  
16 Sales   250 units @ $30.00
25 Purchase 160 units @ $18.00  
28 Sales   150 units @ $32.00

 

 

  Purchases Cost of goods sold Balance
Date Units Unit cost Total Units Unit cost Total Units Unit cost Total
4/1             175 $15 $2,625
4/4 150 $16 $2,400       175 $15 $2,625
               150 $16 2,400
              325   $5,025
4/7       160 $15 $2,400 15 $15 $225
              150 $16 2,400
              165   $2,625
4/10 200 $17 $3,400       15 $15 $225
              150 $16 2,400
              200 $17 3,400
              365   $6,025
4/16       15 $15 $225      
        150 $16 $2,400      
        85 $17 $1,445 115 $17 $1,955
4/25 160 $18 $2,880       115 $17 $1,955
               160 $18 $2,880
              275   $4,835
4/28       115 $17 $1,955      
        35 $18 $630 125 $18 2,250
Totals           $9,055     $2,250

 

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

219. A company reported the current month purchase and sales data for its only product and uses the perpetual inventory system. Determine the cost assigned to ending inventory and cost of goods sold using LIFO.

Date Activities Units Acquired at Cost Units Sold at Retail
April 1 Beginning Inventory 175 units @ $15.00  
4 Purchase 150 units @ $16.00  
7 Sales   160 units @ $30.00
10 Purchase 200 units @ $17.00  
16 Sales   250 units @ $30.00
25 Purchase 160 units @ $18.00  
28 Sales   150 units @ $32.00

 

 

  Purchases Cost of goods sold Balance
Date Units Unit cost Total  Units Unit cost Total  Units Unit cost  Total
4/1             175 $15 $2,625
4/4 150 $16 $2,400       175 $15 $2,625
                150  $16  2,400
               325    $5,025
4/7       150 $16 $2,400      
         10  $15 150  165  $15  $2,475
4/10 200 $17 $3,400       165 $15 $2,475
               200  $17  3,400
               365    $5,875
4/16       200 $17 $3,400      
         50  $15 $750  115  $15  $1,725
4/25 160 $18 $2,880       115 $15 $1,725
                160  $18  $2,880
               275    $4,605
4/28       150 $18 $2,700 115 $15 $1,725
               10  $18 180
Totals           $9,400     _$1,905

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

220. A company uses the retail inventory method and has the following information available concerning its most recent accounting period:

  At Cost At Retail
January 1 beginning inventory $167,340 $304,240
Cost of goods purchased 561,850 1,021,560
Sales   940,400
Sales returns   40,200

1. Use the retail inventory method to estimate the company’s year-end inventory at cost.
2. A year-end physical count at retail prices yields a total inventory of $404,800. Prepare a calculation showing the company’s loss from shrinkage at cost and at retail.

1.

$729,190/1,325,800 = .55
$1,325,800 – $900,200 = $425,600
$425,600 * .55 = $234,080

2.

$425,600 – $404,800 = $20,800 inventory shrinkage at retail
$20,800 * .55 = $11,440 inventory shrinkage at cost

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

Fill in the Blank Questions

221. Goods that are in transit and were shipped FOB shipping point should be included in the inventory records of the _______________________.

purchaser or buyer

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

222. Goods that are in transit and were shipped FOB destination should be included in the inventory records of the _______________________.

seller

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

223. Goods on consignment are goods that are shipped by the owner, called the _______________, to another party called the ______________________ that will sell the goods for the owner.

consignor; consignee

answers must appear in this order

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

224. _______________________ is the estimated sales price of damaged goods minus the cost of making the sale.

Net realizable value

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

225. Some companies use the __________________ constraint to avoid assigning incidental costs of acquiring merchandise to inventory.

matching; cost-to-benefit (or materiality)

answers can appear in any order

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 05-C1 Identify the items making up merchandise inventory.
Topic: Determining Inventory Items
 

 

226. The cost of an inventory item includes the _____________, plus ______________ costs necessary to put it in a place and condition for sale.

invoice price minus any discount; any added or incidental

answers must appear in this order

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-C2 Identify the costs of merchandise inventory.
Topic: Costs of Merchandise Inventory
 

 

227. When purchase costs regularly rise, the ___________________ method of inventory valuation yields the highest gross profit and net income.

First in, first out (FIFO)

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

228. When purchase costs regularly rise, the ___________________ method of inventory valuation yields the lowest gross profit and net income, providing a tax advantage.

Last in, first out (LIFO)

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

229. An advantage of the _________________ method of inventory valuation is that it tends to smooth out the effect of erratic changes in costs.

weighted average

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-A1 Analyze the effects of inventory methods for both financial and tax reporting.
Topic: Financial Statement Effects of Costing Methods
 

 

230. An overstated beginning inventory will ______________ cost of goods sold and _____________ net income.

overstate; understate

answers must appear in this order

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 05-A2 Analyze the effects of inventory errors on current and future financial statements.
Topic: Financial Statement Effects of Inventory Errors
 

 

231. The ________________________ ratio reflects how much inventory is available in terms of days’ sales.

days’ sales in inventory

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

232. The _____________________ is a measure of how quickly a merchandiser sells its merchandise inventory.

inventory turnover

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-A3 Assess inventory management using both inventory turnover and days’ sales in inventory.
Topic: Inventory Turnover and Days’ Sales in Inventory
 

 

233. The ______________________ method of assigning costs to inventory and cost of goods sold exactly matches the costs of particular items with the revenues they generate and would be used when items can be easily traced to the purchase invoice cost.

specific identification

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

234. The _____________________ method of assigning costs to inventory and cost of goods sold assumes that the inventory items are sold in the order acquired.

first in, first out (FIFO)

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

235. The ______________________ method of assigning costs to inventory and cost of goods sold assumes that the most recent purchases are sold first.

last in, first out (LIFO)

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

236. The ______________________ method of assigning costs to inventory and cost of goods sold requires that we divide the cost of goods available for sale by the units of inventory available at the time of each sale.

weighted average (or average cost)

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

237. Regardless of what inventory method or system is used, cost of goods available for sale must be allocated between ___________________ and ___________________.

cost of goods sold; ending inventory

answers can appear in any order

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 05-P1 Compute inventory in a perpetual system using the methods of specific identification; FIFO; LIFO; and weighted average.
Topic: Inventory Costing Under a Perpetual System

 

 

238. When applying the lower of cost or market method of inventory valuation, market is defined as the ______________________.

replacement cost

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P2 Compute the lower of cost or market amount of inventory.
Topic: Lower of Cost or Market
 

 

239. The _________________ method is commonly used to estimate the value of inventory that has been destroyed, lost, or stolen.

gross profit

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 05-P4 Appendix 5B-Apply both the retail inventory and gross profit methods to estimate inventory.
Topic: Inventory Estimation Methods
 

 

 

 

 

Chapter 19 Variable Costing and Analysis Answer Key

True / False Questions

1. . Under variable costing, product costs consist of direct labor, direct materials, and variable overhead.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing


 

 

2. Under variable costing, product costs consist of direct labor, direct materials, and fixed overhead.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

3. The absorption costing approach assigns all manufacturing costs to products.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption Costing


 

 

4. Absorption costing is required under GAAP.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption Costing
 

 

5. The use of absorption costing can result in misleading product cost information.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing


 

 

6. Variable costing treats fixed overhead cost as a period cost.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

7. The biggest problems with producing too much are lost sales and customer dissatisfaction.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.
Topic: Production levels
 

 

8. Many companies link manager bonuses to income computed under absorption costing because this is how income is reported to shareholders.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.
Topic: Production levels
 

 

9. Under absorption costing, a company had the following unit costs when 10,000 units were produced:

Direct labor $2 per unit
Direct material $3 per unit
Variable overhead  $4 per unit
Total variable $9 per unit
Fixed overhead ($50,000/10,000 units)  $5 per unit
  Total production cost $14 per unit

The total product cost per unit under absorption costing if 25,000 units had been produced would be $11.

TRUE

$2 DL + $3 DM + $4 VOH + ($50,000/25,000) FOH = $11

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

10. Assume a company had the following production costs:

Direct labor $2 per unit
Direct material $3 per unit
Variable overhead  $4 per unit
Total variable $9 per unit
Fixed overhead ($50,000/10,000 units)  $5 per unit
  Total production cost $14 per unit

Under absorption costing, the total product cost per unit when 4,000 units are produced would be $22.50.

FALSE

$2 + $3 + $4  + ($50,000/4,000) = $21.50 per unit

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

11. When the number of units produced is equal to the number of units sold, net income reported under variable costing is identical to net income reported under absorption costing.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

12. When there are zero units in Beginning Finished Goods Inventory and the units produced are more than the units sold, the income will be lower under variable costing than under absorption costing.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Comparing Variable Costing and Absorption Costing
 

 

13. Variable costing is required by Generally Accepted Accounting Principles (GAAP) for financial statement purposes.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

14. Since fixed costs remain constant in the short run, special orders should be accepted as long as the order price is greater than the variable costs.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

15. For short-term pricing decisions, absorption costing is an appropriate costing method to use.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

16. When setting long-term sales prices for products, the sales price must cover all costs, including fixed costs.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P4 Determine product selling price based on absorption costing.
Topic: Determine product selling prices
 

 

17. Evaluating and rewarding managers based on absorption basis income can lead to overproduction.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.
Topic: Production levels
 

 

18. Cost information from both absorption costing and variable costing can aid managers in pricing.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 19-P4 Determine product selling price based on absorption costing.
Topic: Determine product selling prices
 

 

19. Managers should accept special orders provided the special order price exceeds the product cost per unit under absorption costing.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

20. Absorption costing is useful because it reflects the full costs that sales must exceed for the company to be profitable.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P4 Determine product selling price based on absorption costing.
Topic: Determine product selling prices
 

 

21. The traditional income statement format used for financial reporting is called the contribution margin format.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

22. If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under variable costing
 

 

23. Fixed costs change in the short run depending upon management’s decision to accept or reject special orders.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

24. Variable costing separates the variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

25. A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.

FALSE

14,000/.7 – 14,000 = 6,000 unit capacity remaining
Per unit variable costs = $2 DM + $4 DL + $1.50 VOH = $7.50
Per unit incremental income = $10.00 – $7.50 = $2.50

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

26. A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

FALSE

When a company is operating at full capacity, any special order whose selling price is less than the existing business should be rejected.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

27. Absorption costing is usually used for internal management purposes, and variable costing is usually used for external reporting purposes.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

28. Assuming fixed costs remain constant, and a company produces and sells the same number of units, then income under absorption costing is less than income under variable costing.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

29. Assuming fixed costs remain constant, and a company produces more units than it sells, then income under absorption costing is less than income under variable costing.

 

Answer:

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

30. Assuming fixed costs remain constant, and a company sells more units than it produces, then income under absorption costing is less than income under variable costing.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

31. The data needed for cost-volume-profit analysis is readily available if the income statement is prepared under absorption costing.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Computing income under absorption costing
 

 

32. The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium

Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Computing income under variable costing
 

 

33. Given the following data, total product cost per unit under variable costing is $10.75.

Direct labor $7 per unit
Direct materials $1 per unit
Overhead  
   Total variable overhead $20,000
   Total fixed overhead $90,000
Expected units to be produced 40,000 units

FALSE

$7 DL + $1 DM + ($20,000/40,000 units) VOH = $8.50

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

34. Given the following data, total product cost per unit under variable costing is $7.09.

Direct labor $2.50 per unit
Direct materials $1.75 per unit
Overhead  
   Total variable overhead $42,600
   Total fixed overhead $160,000
Expected units to be produced 15,000 units

TRUE

$2.50 DL + $1.75 DM + ($42,600/15,000 units) VOH = $7.09

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

35. Given the following data, total product cost per unit under variable costing will be greater than total product cost under absorption costing.

Direct labor $2 per unit
Direct materials $8 per unit
Overhead  
   Total variable overhead $37,500
   Total fixed overhead $249,000
Expected units to be produced 15,000 units

FALSE

Variable costing:
$2 DL + $8 DM + ($37,500/15,000 units) VOH = $12.50
Absorption costing:
$2 DL + $8 DM + ($37,500/15,000 units) VOH + ($249,000/15,000 units) FOH = $29.10

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing


 

 

36. Given the following data, total product cost per unit under absorption costing is $9.14.

Direct labor $0.72 per unit
Direct materials $0.80 per unit
Overhead  
   Total variable overhead $202,500
   Total fixed overhead $140,400
Expected units to be produced 45,000 units

TRUE

$0.72 DL + $0.80 DM + [($202,500 + 140,400)/45,000 units)] MOH = $9.14

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

37. Given the following data, total product cost per unit under absorption costing is $11.40.

Direct labor $5 per unit
Direct materials $6 per unit
Overhead  
   Total variable overhead $32,800
   Total fixed overhead $164,000
Expected units to be produced 82,000 units

FALSE

$5 DL + $6 DM + [($32,800 + 164,000)/82,000 units)] MOH = $13.40

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

38. Given the following data, total product cost per unit under absorption costing will be greater than total product cost per unit under variable costing.

Direct labor $9 per unit
Direct materials $7 per unit
Overhead  
   Total variable overhead $45,000
   Total fixed overhead $27,000
Expected units to be produced 9,000 units

TRUE

Variable costing: $9 DL + $7 DM + ($45,000/9,000 units) VOH = $21
Absorption costing: $9 DL + $7 DM + ($45,000/9,000 units) VOH + ($27,000/9,000 units) FOH = $24

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing

 

 

39. Given the following data, total product cost per unit under absorption costing will be $400 greater than total product cost per unit under variable costing.

Direct labor $1.50 per unit
Direct materials $1.50 per unit
Overhead  
   Total variable overhead $900,000
   Total fixed overhead $1,200,000
Expected units to be produced 3,000 units

TRUE

$1,200,000/3,000 = $400 per unit more because of fixed overhead.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Topic: Product costs under absorption costing
 

 

40. The variable costing income statement classifies costs based on cost behavior rather than function.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

41. Contribution margin is another way to refer to gross margin.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

42. Under an income statement prepared using absorption costing, expenses are grouped according to cost behavior.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

43. A variable costing income statement focuses attention on the relationship between costs and sales that is not evident from the absorption costing format.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

44. When units produced equal units sold, reported income is identical under absorption costing and variable costing.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
19-P3 Convert income under variable costing to the absorption cost basis
Topic: Converting Income under Variable Costing to Absorption Costing
 
 

 

45. Sales less total variable costs equals manufacturing margin.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing margin
 

 

46. When units produced exceed the units sold, income under absorption costing is higher than income under variable costing.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

47. When units produced are less than units sold, income under absorption costing is higher than income under variable costing.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

48. Income under absorption costing will always be different than income under variable costing.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

49. Reporting contribution margin by market segment is useful in assessing the profitability of each segment.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

50. Contribution margin is the excess of sales over total variable costs.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

51. Variable costing is the only acceptable basis for both external reporting and tax reporting.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

52. The bottom line of a contribution margin report is net income.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

53. Under variable costing, fixed manufacturing overhead is expensed at the time the units are produced.  Under absorption costing, fixed manufacturing overhead is expensed at the time the units are sold.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

54. Under absorption costing, fixed manufacturing overhead is expensed at the time the units are produced.  Under variable costing, fixed manufacturing overhead is expensed at the time the units are sold.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

55. When the number of units produced exceeds the number of units sold, absorption costing defers some of the fixed costs incurred.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

56. Information presented in a variable costing format can assist management when making short-term pricing decisions.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

57. It is not possible to convert reports prepared using variable costing to absorption costing reports.

FALSE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

58. To convert variable costing income to absorption costing income, management will need to add fixed overhead cost deferred in ending inventory and subtract fixed overhead cost recognized from beginning inventory.

TRUE

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

Multiple Choice Questions

59. Which of the following costing methods charges all manufacturing costs to its products?

A. Direct costing

 

B. ABC costing

 

C. Variable costing

 

D. Absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

60. Which of the following is not included in the product cost under variable costing?

A. Direct materials.

 

B. Fixed manufacturing overhead

 

C. Direct labor.

 

D. Variable manufacturing overhead

 

E. All variable manufacturing costs.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

61. Using absorption costing, which of the following manufacturing costs are assigned to products?

A. Direct materials and direct labor.

 

B. Direct labor and variable manufacturing overhead.

 

C. Fixed manufacturing overhead, direct materials, and direct labor.

 

D. Variable manufacturing overhead, direct materials, and direct labor.

 

E. Variable manufacturing overhead, direct materials, direct labor, and fixed manufacturing overhead.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

62. Which of the following statements is true regarding absorption costing?

A. It is not the traditional costing approach.

 

B. It is not permitted to be used for financial reporting.

 

C. It is not permitted to be used for tax reporting.

 

D. It assigns all manufacturing costs to products.

 

E. It requires only variable costs to be treated as product costs.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

63. Which of the following statements is true regarding variable costing?

A. It is a traditional costing approach.

 

B. Only manufacturing costs that change in total with changes in production level are included in product costs.

 

C. It is not permitted to be used for managerial reporting.

 

D. It treats overhead in the same manner as absorption costing.

 

E. It makes it easier to manipulate earnings with changes in production levels.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

64. Which of the following statements is true?

A. Variable costing treats fixed overhead as a period cost.

 

B. Absorption costing treats fixed overhead as a period cost.

 

C. Absorption costing treats fixed overhead as an expense in the period it is incurred.

 

D. Variable costing excludes all overhead from product costs.

 

E. Managers can manipulate earnings more easily under variable costing by varying the production level.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

65. Which of the following would be a line item for a variable costing income statement?

A. Gross margin

 

B. Cost of goods available for sale

 

C. Total cost of goods sold

 

D. Contribution margin

 

E. Work-in-process inventory

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Comparing variable costing and absorption costing
 

 

66. Which of the following statements is true?

A. Under variable costing, direct materials and direct labor are expensed as period expenses.

 

B. Under variable costing, fixed manufacturing overhead is expensed as period expenses.

 

C. Fixed manufacturing overhead costs are treated the same under both absorption costing and variable costing.

 

D. Reported income under absorption costing is not affected by production level changes.

 

E. Under absorption costing, fixed manufacturing overhead is expensed as period expenses.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

67. Under absorption costing, which of the following statements is not true?

A. Over production and inventory buildup can occur because of how managers are evaluated and rewarded.

 

B. The fixed costs per unit decline as more units are produced.

 

C. Variable inventory costs are treated in the same manner as they are under variable costing.

 

D. Fixed inventory costs are treated in the same manner as they are under variable costing.

 

E. All manufacturing costs are assigned to products.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

68. When the number of units sold exceed the number of units produced, income reported under absorption costing will be lower than under variable costing. Which of the following gives the best justification of the above statement?

A. Income under absorption costing is always less than income reported using variable costing, regardless of the number of units produced.

 

B. Income under absorption costing is always more than income reported using variable costing, regardless of the number of units produced.

 

C. The fixed overhead cost deferred in ending inventory is greater than the fixed overhead cost recognized from beginning inventory.

 

D. The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

69. Mentor Corp. has provided the following information for the current year:

Units produced 3,500 units
Sale price $200 per unit
Direct materials $70 per unit
Direct labor $55 per unit
Variable manufacturing overhead $20 per unit
Fixed manufacturing overhead $350,000 per year
Variable selling and administrative costs $30 per unit
Fixed selling and administrative costs $150,000 per year

Calculate the unit product cost using absorption costing.

A. $245

 

B. $275

 

C. $55

 

D. $145

 

  Absorption Costing
Direct materials $70
Direct labor 55
Variable manufacturing overhead 20
Fixed manufacturing overhead ($350,000 ÷ 3,500 units)    100
Total unit product cost $245

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

70. Mentor Corp. has provided the following information for the current year:

Units produced 3,500 units
Sale price $200 per unit
Direct materials $70 per unit
Direct labor $55 per unit
Variable manufacturing overhead $20 per unit
Fixed manufacturing overhead $350,000 per year
Variable selling and administrative costs $30 per unit
Fixed selling and administrative costs $150,000 per year

Calculate the unit product cost using variable costing.

A. $245

 

B. $275

 

C. $55

 

D. $145

 

  Variable Costing
Direct materials $70
Direct labor 55
Variable manufacturing overhead   20
Total unit product cost $145

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

71. Under absorption costing, a company had the following unit costs when 9,000 units were produced.

Direct labor $7.25 per unit
Direct material $8.00 per unit
Variable overhead $5.50 per unit
Fixed overhead ($67,500/9,000 units)  $7.50 per unit
  Total production cost $28.25 per unit

Compute the total product cost per unit under absorption costing if 25,000 units had been produced.

A. $28.25

 

B. $23.45

 

C. $26.25

 

D. $20.75

 

E. $15.25

$7.25 DL + $8 DM + $5.50 VOH + ($67,500/25,000) FOH = $23.45

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under absorption costing
 

 

72. Under absorption costing, a company had the following unit costs when 9,000 units were produced.

Direct labor $7.25 per unit
Direct material $8.00 per unit
Variable overhead $5.50 per unit
Fixed overhead ($67,500/9,000 units)   $7.50 per unit
   Total production cost $28.25 per unit

Compute the total product cost per unit under variable costing if 30,000 units had been produced.

A. $31.75

 

B. $28.25

 

C. $23.45

 

D. $15.25

 

E. $20.75

$7.25 DL + $8 DM + $5.50 VOH = $20.75

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

73. Under absorption costing, a company had the following unit costs when 8,000 units were produced.

Direct labor $8.50 per unit
Direct material $9.00 per unit
Variable overhead $6.75 per unit
Fixed overhead ($60,000/8,000 units)    $7.50 per unit
  Total production cost  $31.75 per unit

Compute the total production cost per unit under variable costing if 25,000 units had been produced.

A. $31.75

 

B. $27.25

 

C. $26.25

 

D. $24.25

 

E. $17.50

$8.50 DL + $9 DM + $6.75 VOH = $24.25

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product costs under variable costing
 

 

74. When evaluating a special order, management should:

A. Only accept the order if the incremental revenue exceeds all product costs.

 

B. Only accept the order if the incremental revenue exceeds fixed product costs.

 

C. Only accept the order if the incremental revenue exceeds total variable product costs.

 

D. Only accept the order if the incremental revenue exceeds full absorption product costs.

 

E. Only accept the order if the incremental revenue exceeds regular sales revenue.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

75. A company is currently operating at 80% capacity producing 5,000 units. Current cost information relating to this production is shown in the table below:

  Per Unit
Sales price $34
Direct material $2
Direct labor $3
Variable overhead $4
Fixed overhead $5

The company has been approached by a customer with a request for a 100-unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

A. Any amount over $34 per unit.

 

B. Any amount over $20 per unit.

 

C. Any amount over $14 per unit.

 

D. Any amount over $9 per unit.

 

E. Any amount over $5 per unit.

5,000/.80 – 5,000 = 1,250 unit capacity available
$2 + $3 + $4 = $9 incremental costs

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

76. A company is currently operating at 75% capacity and producing 3,000 units. Current cost information relating to this production is shown in the table below:

  Per Unit
Sales price $43
Direct material $7
Direct labor $6
Variable overhead $4
Fixed overhead $4

The company has been approached by a customer with a request for a 200-unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

A. Any amount over $43 per unit.

 

B. Any amount over $17 per unit.

 

C. Any amount over $21 per unit.

 

D. Any amount over $13 per unit.

 

E. Any amount over $22 per unit.

3,000/.75 – 3,000 = 1,000 unit capacity remaining
$7 + $6 + $4 = $17 incremental costs

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

77. Geneva Company manufactures dolls that are sold to various customers. The company works at full capacity for half the year to meet peak demand, and operates at 80% capacity for the other half of the year. The following information is provided:

Units produced and sold 600,000 units
Selling price $35/unit
Variable manufacturing costs $20/unit
Fixed manufacturing costs $1,200,000/yr.
Variable selling and administrative costs $6/unit
Fixed selling and administrative costs $950,000/yr.

Geneva receives a purchase order to make 5,000 dolls as a one-time event. The good news is that this order is during a period when Geneva does have excess capacity. What is the lowest selling price Geneva should accept for this purchase order?

A. $35.00

 

B. $26.00

 

C. $29.50

 

D. $23.50

Variable manufacturing costs per unit + Variable selling and administrative costs per unit = $20 + $6 = $26.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

78. Which of the following best describes costs assigned to the product under the absorption costing method?

Direct labor (DL)
Direct materials (DM)
Variable selling and administrative (VSA)
Variable manufacturing overhead (VOH)
Fixed selling and administrative (FSA)
Fixed manufacturing overhead  (FOH)

A. DL, DM, VSA, and VOH.

 

B. DL, DM, and VOH.

 

C. DL, DM, VOH, and FOH.

 

D. DL and DM.

 

E. DL, DM, FSA, and FOH.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under absorption costing
 

 

79. Which of the following best describes costs assigned to the product under the variable costing method?

Direct labor (DL)
Direct materials (DM)
Variable selling and administrative (VSA)
Variable manufacturing overhead (VOH)
Fixed selling and administrative (FSA)
Fixed manufacturing overhead  (FOH)

A. DL, DM, VSA, and VOH.

 

B. DL, DM, and VOH..

 

C. DL, DM, VOH, and FOH.

 

D. DL and DM.

 

E. DL, DM, FSA, and FOH.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under variable costing
 

 

80. Income __________ when there is zero beginning inventory and all inventory units produced are sold.

A. Will be lower under variable costing than absorption costing

 

B. Will be the same under both variable and absorption costing

 

C. Will be higher under variable costing than absorption costing

 

D. Will be higher than gross margin under variable costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

81. During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. What is the value of ending inventory under absorption costing?

A. $60,000

 

B. $110,000

 

C. $50,000

 

D. $250,000

$5 + $3 + $4 + ($250,000/25,000 units) = $22 per unit × 5,000 units = $110,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under absorption costing
 

 

82. During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. What is the value of ending inventory under variable costing?

A. $60,000

 

B. $110,000

 

C. $50,000

 

D. $250,000

$5 + $3 + $4 = $12 per unit × 5,000 units = $60,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under variable costing
 

 

83. During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $5 per unit, Direct labor, $3 per unit, Variable overhead, $4 per unit, and Fixed overhead, $250,000. The company produced 25,000 units, and sold 20,000 units, leaving 5,000 units in inventory at year-end. Income calculated under variable costing is determined to be $315,000. How much income is reported under absorption costing?

A. $315,000

 

B. $265,000

 

C. $565,000

 

D. $365,000

Income under absorption costing = Income under variable costing + Fixed overhead cost in ending inventory – Fixed overhead cost in beginning inventory. $315,000 + $50,000 – $0 = $365,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

84. Special order decisions should be made using variable costing because:

A. Special order decisions usually focus on fixed costs

 

B. Variable costing includes all overhead costs in the calculation of product costs.

 

C. Only variable costs will increase as a result of the special order.

 

D. All costs, including variable and fixed costs, must be covered by the special order pricing.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

85. Shore Company reports the following information regarding its production cost.

Units produced 28,000 units
Direct labor $23 per unit
Direct materials $24 per unit
Variable overhead $280,000 in total
Fixed overhead $94,920 in total

Compute product cost per unit under absorption costing.

A. $57.00

 

B. $60.39

 

C. $47.00

 

D. $23.00

 

E. $24.00

$23 DL + $24 DM + ($280,000/28,000) VOH + ($94,920/28,000) FOH = $60.39

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under absorption costing
 

 

86. Urban Company reports the following information regarding its production cost:

Units produced 20,000 units
Direct labor $13 per unit
Direct materials $18 per unit
Variable overhead $220,000 in total
Fixed overhead $110,000 in total

Compute production cost per unit under variable costing.

A. $18.00

 

B. $36.50

 

C. $42.00

 

D. $13.00

 

E. $31.00

$13 DL + $18 DM + ($220,000/20,000) VOH = $42.00

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under variable costing
 

 

87. Hayes Inc. provided the following information for the current year:

Beginning inventory 100 units
Units produced 750 units
Units sold 800 units
Selling price $150/unit
Direct materials $35/unit
Direct labor $16/unit
Variable manufacturing overhead $15/unit
Fixed manufacturing overhead $24,000/yr
Variable selling/administrative costs $8/unit
Fixed selling/administrative costs $15,500/yr

What is the unit product cost for the year using absorption costing?

A. $98

 

B. $66

 

C. $74

 

D. $96

 

Direct materials $35  
Direct labor 16  
Fixed manufacturing overhead 32 ($24,000/750 units)
Variable manufacturing overhead  15  
Total unit product cost $98  

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under absorption costing
 

 

88. Hayes Inc. provided the following information for the current year:

Beginning inventory 100 units
Units produced 750 units
Units sold 800 units
Selling price $150/unit
Direct materials $35/unit
Direct labor $16/unit
Variable manufacturing overhead $15/unit
Fixed manufacturing overhead $24,000/yr
Variable selling/administrative costs $8/unit
Fixed selling/administrative costs $15,500/yr

What is the unit product cost for the year using variable costing?

A. $98

 

B. $66

 

C. $74

 

D. $96

 

Direct materials $35
Direct labor 16
Variable manufacturing overhead    15
Total unit product cost  $66

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

89. Sea Company reports the following information regarding its production cost.

Units produced 42,000 units
Direct labor $35 per unit
Direct materials $28 per unit
Variable overhead $17 per unit
Fixed overhead $105,000 in total

Compute the product cost per unit under variable costing.

A. $28.00

 

B. $82.50

 

C. $80.00

 

D. $63.00

 

E. $35.00

$35 DL + $28 DM + $17 VOH = $80

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

90. Sea Company reports the following information regarding its production costs:

Units produced 42,000 units
Direct labor $35 per unit
Direct materials $28 per unit
Variable overhead $17 per unit
Fixed overhead $105,000 in total

Compute the product cost per unit under absorption costing.

A. $28.00

 

B. $82.50

 

C. $80.00

 

D. $63.00

 

E. $35.00

$35 DL + $28 DM + $17 VOH + ($105,000/42,000) FOH = $82.50

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

  [Section Break 91-96]

Advanced Company reports the following information for the current year. All beginning inventory amounts equaled $0 this year.

Units produced this year 25,000 units
Units sold this year 15,000 units
Direct materials $9 per unit
Direct labor $11 per unit
Variable overhead $75,000 in total
Fixed overhead $137,500 in total

 

91. Given Advanced Company’s data, compute cost per unit of finished goods under variable costing.

A. $20.00

 

B. $25.00

 

C. $21.88

 

D. $23.00

 

E. $28.50

$9 DM + $11 DL + ($75,000/25,000) VOH = $23

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

92. Given Advanced Company’s data, compute cost per unit of finished goods under absorption costing.

A. $20.00

 

B. $34.17

 

C. $25.32

 

D. $23.00

 

E. $28.50

$9 DM + $11 DL + ($75,000/25,000) VOH + ($137,500/25,000) FOH = $28.50

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

93. Given Advanced Company’s data, compute cost of finished goods in inventory under absorption costing.

A. $285,000

 

B. $712,500

 

C. $427,500

 

D. $230,000

 

E. $345,000

$9 DM + $11 DL + ($75,000/25,000) VOH + ($137,500/25,000) FOH = $28.50 per unit cost
25,000 units -15,000 units = 10,000 units in ending inventory
10,000 units × $28.50 = $285,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

94. Given Advanced Company’s data, compute cost of finished goods in inventory under variable costing.

A. $285,000

 

B. $712,500

 

C. $427,500

 

D. $230,000

 

E. $345,000

$9 DM + $11 DL + ($75,000/25,000) VOH = $23
25,000 units -15,000 units = 10,000 units in ending inventory
10,000 units × $23 = $230,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

95. Given Advanced Company’s data, and the knowledge that the product is sold for $50 per unit and operating expenses are $200,000, compute the net income under absorption costing.

A. $55,000

 

B. $67,500

 

C. $80,500

 

D. $122,500

 

E. $205,000

NI = ($50 – $28.50)(15,000 units) – $200,000 = $122,500

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

96. Given Advanced Company’s data, and the knowledge that the product is sold for $50 per unit and operating expenses are $200,000, compute the net income under variable costing.

A. $55,000

 

B. $67,500

 

C. $80,500

 

D. $122,500

 

E. $205,000

NI = ($50 – $23.00)(15,000 units) – $200,000 – $137,500 = $67,500

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

97. Clear Company reports the following information for its first year of operations:

Units produced this year 50,000 units
Units sold this year 49,000 units
Direct materials $7 per unit
Direct labor $3 per unit
Variable overhead $210,000 in total
Fixed overhead ? in total

If the company’s cost per unit of finished goods using absorption costing is $19.30, what is total fixed overhead?

A. $350,000

 

B. $255,000

 

C. $150,000

 

D. $249,900

 

E. $147,000

$19.30 = DM + DL + VOH + FOH
$19.30 = $7 + $3 + ($210,000/50,000) + FOH
$19.30 = $14.20 + FOH
FOH = $5.10 per unit
$5.10 per unit × 50,000 units = $255,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

98. Milton Company reports the following information for the current year:

Units produced this year 45,000 units
Units sold this year 53,000 units
Direct materials $5 per unit
Direct labor $2 per unit
Variable overhead $270,000 in total
Fixed overhead ? in total

If the company’s cost per unit of finished goods using absorption costing is $18, what is total fixed overhead?

A. $225,000

 

B. $180,000

 

C. $270,000

 

D. $315,000

 

E. $720,000

$18 = DM + DL + VOH + FOH
$18 = $5 + $2 + ($270,000/45,000) + FOH
$18 = $13 + FOH
FOH = $5 per unit
$5 per unit × 45,000 units = $225,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

99. Gage Company reports the following information for its first year of operations:

Units produced this year 7,000 units
Units sold this year 6,500 units
Direct materials $22 per unit
Direct labor $30 per unit
Variable overhead ? in total
Fixed overhead $56,000 in total

If the company’s cost per unit of finished goods using variable costing is $63, what is total variable overhead?

A. $21,000

 

B. $71,500

 

C. $77,000

 

D. $19,500

 

E. $16,590

$63 = DM + DL + VOH
$63 = $22 + $30 + VOH
VOH = $11 per unit
$11 per unit × 7,000 units = $77,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

100. A company reports the following information for its first year of operations:

Units produced this year 650 units
Units sold this year 500 units
Direct materials $750 per unit
Direct labor $1,000 per unit
Variable overhead ? in total
Fixed overhead $308,750 in total

If the company’s cost per unit of finished goods using variable costing is $2,375, what is total variable overhead?

A. $237,500

 

B. $75,000

 

C. $312,500

 

D. $406,250

 

E. $97,500

$2,375 = DM + DL + VOH
$2,375 = $750 + $1,000 + VOH
VOH = $625 per unit
$625 per unit × 650 units = $406,250

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

101. Magenta Inc. reports the following information for the current year, which is its first year of operations:

Units produced this year 750,000 units
Units sold this year 740,000 units
Direct materials $18.30 per unit
Direct labor $14.20 per unit
Variable overhead ? in total
Fixed overhead $4,500,000 in total

If the company’s cost per unit of finished goods using absorption costing is $39.75, what is total variable overhead?

A. $925,000

 

B. $877,500

 

C. $937,500

 

D. $865,800

 

E. $5,437,500

$39.75 = DM + DL + VOH + FOH
$39.75 = $18.30 + $14.20 + VOH + ($4,500,000/750,000)
$39.75 = $38.50 + VOH
VOH = $1.25 per unit
$1.25 per unit × 750,000 units = $937,500

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

102. A company reports the following information for its first year of operations:

Units produced this year 43,000 units
Units sold this year 39,000 units
Direct materials $0.57 per unit
Direct labor $0.83 per unit
Variable overhead $26,660 in total
Fixed overhead ? in total

If the company’s cost per unit of finished goods using variable costing is $2.02, what is the amount of total fixed overhead?

A. $26,660

 

B. $35,690

 

C. $24,510

 

D. $60.200

$$

E. Cannot be determined from the given data.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

103. A company reports the following information for its first year of operations:

Units produced this year ? units
Units sold this year 1,500 units
Direct materials $9 per unit
Direct labor $5 per unit
Variable overhead $7 per unit
Fixed overhead $24,000 in total

If the company’s cost per unit of finished goods using absorption costing is $27, how many units were produced?

A. 4,000 units.

 

B. 3,600 units.

 

C. 1,846 units.

 

D. 2,667 units.

 

E. 2,000 units.

$27 = DM + DL + VOH + FOH
$27 = $9 + $5 + $7 + FOH
FOH = $6 per unit
$6 per unit × units produced = $24,000
Units produced = 4,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

104. Accurate Metal Company sold 32,000 units of its product at a price of $250 per unit. Total variable cost per unit is $150, consisting of $145 in variable production cost and $5 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.

A. $8,000,000

 

B. $4,960,000

 

C. $4,800,000

 

D. $3,360,000

 

E. $3,200,000

($250 – $145) × 32,000 units = $3,360,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

105. Chance, Inc. sold 3,000 units of its product at a price of $72 per unit. Total variable cost per unit is $51, consisting of $32 in variable production cost and $19 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.

A. $96,000

 

B. $63,000

 

C. $120,000

 

D. $216,000

 

E. ($90,000)

($72 – $32) × 3,000 units = $120,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

106. Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year. During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit. Cost information for this year is shown in the following table:

Production costs  
   Direct materials $0.80 per unit
   Direct labor $0.70 per unit
   Variable overhead $500,000 in total
   Fixed overhead $450,000 in total
Non-production costs  
   Variable selling and administrative $30,000 in total
   Fixed selling and administrative $490,000 in total

Given this information, which of the following is true?

A. Net income under variable costing will exceed net income under absorption costing by $50,000.

 

B. Net income under absorption costing will exceed net income under variable costing by $50,000.

 

C. Net income will be the same under both absorption and variable costing.

 

D. Net income under variable costing will exceed net income under absorption costing by $60,000.

 

E. Net income under absorption costing will exceed net income under variable costing by $60,000.

100,000 units × ($450,000/900,000 FOH) = $50,000 inventoried under absorption and expensed under variable costing.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

  [Section Break 107-108]

Galaxy, Inc., a manufacturer of telescopes, began operations on June 1 of the current year. During this time, the company produced 60,000 units and sold 40,000 units at a sales price of $600 per unit. Cost information for this year is shown in the following table:

Production costs  
   Direct materials $90 per unit
   Direct labor $75 per unit
   Variable overhead $240,000 in total
   Fixed overhead $420,000 in total
Non-production costs  
   Variable selling and administrative $80,000 in total
   Fixed selling and administrative $520,000 in total

 

107. Given the Galaxy, Inc. data, what is net income using absorption costing?

A. $11,275,000

 

B. $17,400,000

 

C. $16,360,000

 

D. $16,800,000

 

E. $16,220,000

Sales = $600 × 40,000 = $24,000,000
Cost of goods sold = $90 + $75 + ($240,000/60,000) + ($420,000/60,000) = $176 × 40,000 units = $7,040,000
Nonproduction costs = $80,000 + $520,000 = $600,000
Net income using absorption costing = $24,000,000 – $176(40,000) – $600,000 = $16,360,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

108. Given the Galaxy Inc. data, what is net income using variable costing?

A. $16,220,000

 

B. $17,400,000

 

C. $16,360,000

 

D. $11,275,000

 

E. $16,800,000

Sales = $600 × 40,000 = $24,000,000
Cost of goods sold = $90 + $75 + ($240,000/60,000) = $169 × 40,000 units = $6,760,000

Other variable costs (nonproduction) = $80,000
Total fixed costs = $420,000 (production overhead) + $520,000 (nonproduction) = $940,000
Net income using variable costing = $24,000,000 – $169(40,000) – $80,000 – $940,000 = $16,220,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

  [Section Break 109-110]

Scavenger Company, a manufacturer of recycling bins, began operations on January 1 of the current year. During this time, the company produced 60,000 units and sold 55,000 units at a sales price of $15 per unit. Cost information for this year is shown in the following table:

Production costs  
   Direct materials $2.50 per unit
   Direct labor $3.00 per unit
   Variable overhead $45,000 in total
   Fixed overhead $240,000 in total
Non-production costs  
   Variable selling and administrative $10,000 in total
   Fixed selling and administrative $50,000 in total

 

109. Given the Scavenger Company data, what is net income using absorption costing?

A. $201,250

 

B. $181,250

 

C. $150,000

 

D. $177,600

 

E. $276,250

Sales = $15(55,000) = $825,000
COGS = DM + DL + VOH + FOH
Variable overhead production costs per unit = $45,000/60,000 units = $0.75 per unit
Fixed overhead production costs per unit = $240,000/60,000 units = $4.00 per unit
[($2.50 + $3.00 + $0.75 + $4.00) × 55,000 units] = $563,750
Sales – COGS – non-production costs = Net Income
$825,000 – $563,750 – $10,000 – $50,000 = $201,250

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

110. Given the Scavenger Company data, what is net income using variable costing?

A. $201,250

 

B. $181,250

 

C. $150,000

 

D. $177,600

 

E. $276,250

Sales: $15(55,000) = $825,000
Variable COGS = DM + DL + VOH
Variable overhead production costs per unit = $45,000/60,000 units = $0.75 per unit
[($2.50 + $3.00 + $0.75) × 55,000 units] = $343,750
Other variable costs (nonproduction) = $10,000
Total fixed costs = $240,000 + $50,000 = $290,000
Sales – Variable COGS – Variable nonproduction cost – Fixed costs = Net income
$825,000 – $343,750 – $10,000 – $290,000 = $181,250

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

111. Brush Industries reports the following information for May:

Sales $900,000
Fixed cost of goods sold 100,000
Variable cost of goods sold 250,000
Fixed selling and administrative costs 100,000
Variable selling and administrative costs 125,000

Calculate the operating income for May under absorption costing.

A. $650,000

 

B. $325,000

 

C. $525,000

 

D. $550,000

Sales $900,000 – Cost of goods sold $350,000 = Gross margin $550,000 – Selling and administrative costs $225,000 = $325,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

  [Section Break 112-113]

Cool Pools, a manufacturer of above ground pools, began operations on January 1 of the current year. During this time, the company produced 45,000 units and sold 44,000 units at a sales price of $60 per unit. Cost information for this year is shown in the following table:

Production costs  
   Direct materials $11.25 per unit
   Direct labor $3.20 per unit
   Variable overhead $315,000 in total
   Fixed overhead $39,600 in total
Non-production costs  
   Variable selling and administrative $2,000 in total
   Fixed selling and administrative $6,000 in total

 

112. Given the Cool Pools Company data, what is net income using absorption costing?

A. $1,649,480

 

B. $1,648,600

 

C. $1,627,150

 

D. $1,709,480

 

E. $1,708,600

Sales = $60(44,000) = $2,640,000
Variable overhead production costs per unit = $315,000/45,000 units = $7 per unit
Fixed overhead production costs per unit = $39,600/45,000 units = $0.88 per unit
COGS = DM + DL + VOH + FOH
[($11.25 + $3.20 + $7.00 + $0.88) × 44,000 units] = $982,520
Sales – COGS – Nonproduction costs = Net income
$2,640,000 – $982,520 – $2,000 – $6,000 = $1,649,480

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

113. Given the Cool Pools Company data, what is net income using variable costing?

A. $1,649,480

 

B. $1,648,600

 

C. $1,627,150

 

D. $1,709,480

 

E. $1,708,600

Sales = $60(44,000) = $2,640,000
Variable overhead production costs per unit = $315,000/45,000 units = $7 per unit
COGS = DM + DL + VOH
[($11.25 + $3.20 + $7.00) × 44,000 units] = $943,800
Other variable cost (non-production) = $2,000
Total fixed costs = $39,600 + $6,000 = $45,600
Sales – Variable COGS – Fixed costs = Net income
$2,640,000 – $943,800 – $2,000 – $45,600 = $1,648,600

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

114. Brush Industries reports the following information for May:

Sales $900,000
Fixed cost of goods sold 100,000
Variable cost of goods sold 250,000
Fixed selling and administrative costs 100,000
Variable selling and administrative costs 125,000

Calculate the gross margin for May under absorption costing.

A. $650,000

 

B. $325,000

 

C. $525,000

 

D. $550,000

Sales $900,000 – Cost of goods sold $350,000 = Gross margin $550,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

115. Reliance Corporation sold 4,000 units of its product at a price of $15 per unit. Total variable cost per unit is $8.50, consisting of $7.75 in variable production cost and $0.75 in variable selling and administrative cost. Compute the contribution margin for the company.

A. $26,000

 

B. $34,000

 

C. $60,000

 

D. $31,000

 

E. $36,900

$15.00 – $8.50 = $6.50 × 4,000 units = $26,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

116. Quaker Corporation sold 6,600 units of its product at a price of $42.40 per unit. Total variable cost per unit is $19.25, consisting of $10.15 in variable production cost and $9.10 in variable selling and administrative cost. Compute contribution margin for the company.

A. $279,840

 

B. $119,130

 

C. $66,990

 

D. $152,790

 

E. $60,060

$42.40 – $19.25 = $23.15 × 6,600 units = $152,790

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

117. Geneva Co. reports the following information for July:

Sales $750,000
Variable costs 225,000
Fixed costs 100,000

Calculate the contribution margin for July.

A. $525,000

 

B. $425,000

 

C. $650,000

 

D. $750,000

Sales $750,000 – VC $225,000 = $525,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

118. Alexis Co. reported the following information for May:

  Part A  
Units sold 5,000 units
Selling price per unit $800  
Variable manufacturing cost per unit 520  
Sales commission per unit – Part A 80  

What is the manufacturing margin for Part A?

A. $1,000,000

 

B. $1,400,000

 

C. $3,600,000

 

D. $2,600,000

 

Sales (5,000 units × $800/unit) $4,000,000
Variable costs:  
Variable manufacturing costs (5,000 × $520/unit)   2,600,000
Manufacturing margin $1,400,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

119. Alexis Co. reported the following information for May:

  Part A  
Units sold 5,000 units
Selling price per unit $800  
Variable manufacturing cost per unit 520  
Sales commission per unit – Part A 80  

What is the contribution margin for Part A?

A. $1,000,000

 

B. $1,400,000

 

C. $3,600,000

 

D. $2,600,000
  Sales (5,000 units × $800/unit) $4,000,000
  Variable costs:  
  Variable manufacturing costs (5,000 × $520/unit) 2,600,000
  Manufacturing margin $1,400,000
  Variable selling expenses (5,000 units x $80 per unit)      400,000
  Contribution margin $1,000,000

 

 

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

120. Swisher, Incorporated reports the following annual cost data for its single product:

Normal production level 30,000 units
Direct materials $6.40 per unit
Direct labor $3.93 per unit
Variable overhead $5.80 per unit
Fixed overhead $150,000 in total

This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company’s income increase or decrease under absorption costing?

A. $60,000 decrease.

 

B. $90,000 decrease.

 

C. There is no change in income.

 

D. $90,000 increase.

 

E. $60,000 increase.

$150,000/30,000 units = $5 FOH per unit at 30,000 unit level
$150,000/50,000 units = $3 FOH per unit at 50,000 unit level
$5 – 3 = $2 less FOH cost in each unit sold
$2 × 30,000 = $60,000 increase

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing


 

 

121. Swisher, Incorporated reports the following annual cost data for its single product:

Normal production level 30,000 units
Direct materials $6.40 per unit
Direct labor $3.93 per unit
Variable overhead $5.80 per unit
Fixed overhead $150,000 in total

This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company’s income increase or decrease under variable costing?

A. $60,000 decrease.

 

B. $90,000 decrease.

 

C. There is no change in income.

 

D. $90,000 increase.

 

E. $60,000 increase.

There would be no change because fixed costs are expensed in the period in which they are incurred, regardless of the number of units sold.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing


 

 

122. Swola Company reports the following annual cost data for its single product.

Normal production level 75,000 units
Direct materials $1.25 per unit
Direct labor $2.50 per unit
Variable overhead $3.75 per unit
Fixed overhead $300,000 in total

This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company’s income increase or decrease under absorption costing?

A. $187,500 increase.

 

B. $112,500 increase.

 

C. There will be no change in income.

 

D. $112,500 decrease.

 

E. $187,500 decrease.

$300,000/75,000 units = $4 FOH per unit at 75,000 unit level
$300,000/200,000 units = $1.50 FOH per unit at 200,000 unit level
$4 – 1.50 = $2.50 less FOH cost in each unit sold
$2.50 × 75,000 = $187,500 gross margin increase

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing


 

 

123. Swola Company reports the following annual cost data for its single product.

Normal production level 75,000 units
Direct materials $1.25 per unit
Direct labor $2.50 per unit
Variable overhead $3.75 per unit
Fixed overhead $300,000 in total


This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company’s income increase or decrease under variable costing?

A. $187,500 increase.

 

B. $112,500 increase.

 

C. There will be no change in income.

 

D. $112,500 decrease.

 

E. $187,500 decrease.

There would be no change because fixed costs are expensed in the period in which they are incurred, regardless of the number of units sold.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing


 

 

  [Section Break 124-126]

Red and White Company reported the following monthly data:

Units produced 2,000 units
Sales price $25 per unit
Direct materials $1 per unit
Direct labor $2 per unit
Variable overhead $3 per unit
Fixed overhead $8,000 in total

 

124. What is Red and White’s contribution margin for this month if 980 units were sold?

A. $38,000

 

B. $18,620

 

C. $24,500

 

D. $50,000

 

E. $21,560

($25 – $1 – $2 – $3) = $19 × 980 units = $18,620

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

125. What is Red and White’s net income under absorption costing if 980 units are sold and operating expenses are $12,000?

A. $(1,380)

 

B. $(2,000)

 

C. $2,700

 

D. $6,620

 

E. $10,620

CM = ($25 – $1 – $2 – $3) = $19 × 980 units = $18,620
NI = $18,620 – (980 units)($8,000/2000 units) FC – $12,000 = $2,700

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

126. What is Red and White’s net income under variable costing if 980 units are sold and operating expenses are $12,000?

A. $(1,380)

 

B. $(2,000)

 

C. $2,700

 

D. $6,620

 

E. $10,620

CM = ($25 – $1 – $2 – $3) = $19 × 980 units = $18,620
NI = $18,620 – $8,000 FC – $12,000 = $(1,380)

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

127. Decko Industries reported the following monthly data:

Units produced 52,000 units
Sales price $33 per unit
Direct materials $1.50 per unit
Direct labor $2.50 per unit
Variable overhead $3.50 per unit
Fixed overhead $234,000 in total

What is the company’s contribution margin for this month if 50,000 units were sold?

A. $1,326,000

 

B. $1,716,000

 

C. $1,275,000

 

D. $1,650,000

 

E. $1,450,000

($33 – $1.50 – $2.50 – $3.50) = $25.50 × 50,000 units = $1,275,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

128. Tim’s Tools, a manufacturer of cordless drills, began operations this year. During this year, the company produced 20,000 units and sold 18,000 units. At year-end, the company reported the following income statement using absorption costing:

Sales (18,000 × $30) $540,000
Cost of goods sold (18,000 × $14)  252,000
Gross margin $288,000
Selling and administrative expenses    90,000
Net income $198,000

Production costs per unit total $14, which consists of $12.90 in variable production costs and $1.10 in fixed production costs (based on the 20,000 units produced). 60% of total selling and administrative expenses are variable. Compute net income under variable costing.

A. $307,800

 

B. $198,000

 

C. $195,800

 

D. $288,000

 

E. $220,000

$198,000 – (2,000 units × FOH $1.10) = $195,800

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

129. Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and sold 23,000 units during the current year. Beginning inventory under absorption costing consisted of 3,000 units valued at $66,000 (Direct materials $12 per unit; Direct labor, $3 per unit; Variable Overhead, $2 per unit, and Fixed overhead, $5 per unit.) All manufacturing costs have remained constant over the 2-year period. At year-end, the company reported the following income statement using absorption costing:

Sales (23,000 × $45) $1,035,000
Cost of goods sold (23,000 × $22)  506,000
Gross margin $529,000
Selling and administrative expenses 115,000
Net income     $414,000

60% of total selling and administrative expenses are variable. Compute net income under variable costing.

A. $414,000

 

B. $399,000

 

C. $529,000

 

D. $429,000

 

E. $644,000

Income under absorption costing = Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory

$414,000  = Income under variable costing + (0 units × FOH $5) – (3,000 units x FOH $5) $414,000  = Income under variable costing – $15,000

$429,000  = Income under variable costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

130. Wind Fall, a manufacturer of leaf blowers, began operations this year. During this year, the company produced 10,000 leaf blowers and sold 8,500. At year-end, the company reported the following income statement using absorption costing:

Sales (8,500 × $45) $382,500
Cost of goods sold (8,500 × $20)  170,000
Gross margin $212,500
Selling and administrative expenses    60,000
Net income $152,500

Production costs per leaf blower total $20, which consists of $16 in variable production costs and $4 in fixed production costs (based on the 10,000 units produced). Fifteen percent of total selling and administrative expenses are variable. Compute net income under variable costing.

A. $146,500

 

B. $158,500

 

C. $237,500

 

D. $206,500

 

E. $246,500

Income under absorption costing = Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory

$152,500  = Income under variable costing + (1,500 units × FOH $4) – (0 units x FOH $4) $152,500  = Income under variable costing + $6,000 – $0

$146,500  = Income under variable costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

131. Aces, Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. At year-end, the company reported the following income statement using absorption costing.

Sales (4,900 × $90) $441,000
Cost of goods sold (4,900 × $38)  186,200
Gross margin $254,800
Selling and administrative expenses    75,000
Net Income $179,800

Production costs per tennis racket total $38, which consists of $25 in variable production costs and $13 in fixed production costs (based on the 6,000 units produced). Ten percent of total selling and administrative expenses are variable. Compute net income under variable costing.

A. $194,100

 

B. $165,500

 

C. $311,000

 

D. $240,500

 

E. $233,000

$179,800 – ($13 × 1,100 units) = $165,500

Income under absorption costing = Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory

$179,800  = Income under variable costing + (1,100 units × FOH $13) – (0 units x FOH $13) $179,800  = Income under variable costing + $14,300 – $0

$165,500  = Income under variable costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

132. Jeter Corporation had net income of $212,000 based on variable costing. Beginning and ending inventories were 6,000 units and 10,000 units, respectively. Assume the fixed overhead per unit was $4 for both the beginning and ending inventory. What is net income under absorption costing?

A. $252,000

 

B. $228,000

 

C. $244,000

 

D. $276,000

 

E. $212,000

Income under variable costing + FOH in End. Inv. – FOH in Beg. Inv. = Income under absorption costing

$212,000 + (10,000 units × $4) – (6,000 × $4) = $228,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

133. Kluber, Inc. had net income of $900,000 based on variable costing. Beginning and ending inventories were 55,000 units and 52,000 units, respectively. Assume the fixed overhead per unit was $1.25 for both the beginning and ending inventory. What is net income under absorption costing?

A. $833,125

 

B. $903,750

 

C. $966,875

 

D. $896,250

 

E. $900,000

Income under variable costing + FOH in End. Inv. – FOH in Beg. Inv. = Income under absorption costing

$900,000 + (52,000 units × $1.25) – (55,000 × $1.25) = $896,250

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

134. Pact Company had net income of $972,000 based on variable costing. Beginning and ending inventories were 7,800 units and 5,200 units, respectively. Assume the fixed overhead per unit was $3.61 for both the beginning and ending inventory. What is net income under absorption costing?

A. $962,614

 

B. $1,018,923

 

C. $925,077

 

D. $969,400

 

E. $981,379

Income under variable costing + FOH in End. Inv. – FOH in Beg. Inv. = Income under absorption costing

$972,000 + (5,200 units × $3.61) – (7,800 × $3.61) = $962,614

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

135. Front Company had net income of $72,500 based on variable costing. Beginning and ending inventories were 800 units and 1,200 units, respectively. Assume the fixed overhead per unit was $7.90 for both the beginning and ending inventory. What is net income under absorption costing?

A. $69,340

 

B. $75,660

 

C. $88,300

 

D. $56,700

 

E. $72,900

Income under variable costing + FOH in End. Inv. – FOH in Beg. Inv. = Income under absorption costing

$72,500 + (1,200 units × $7.90) – (800 × $7.90) = $75,660

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

136. Given the following data, calculate product cost per unit under variable costing.

Direct labor $8 per unit
Direct materials $3 per unit
Overhead  
   Total variable overhead $30,000
   Total fixed overhead $85,000
Expected units to be produced 50,000 units

 

A. $7 per unit

 

B. $13.30 per unit

 

C. $11.00 per unit

 

D. $11.60 per unit

 

E. $16.50 per unit

$8 DL + $3 DM + ($30,000/50,000 units) VOH = $11.60

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

137. Given the following data, calculate product cost per unit under absorption costing.

Direct labor $7 per unit
Direct materials $1 per unit
Overhead  
   Total variable overhead $20,000
   Total fixed overhead $90,000
Expected units to be produced 40,000 units

 

A. $8 per unit

 

B. $8.50 per unit

 

C. $10.25 per unit

 

D. $10.75 per unit

 

E. $12 per unit

$7 DL + $1 DM + ($20,000/40,000 units) VOH + ($90,000/40,000 units) = $10.75

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

138. Given the following data, calculate the total product cost per unit under variable costing.

Direct labor $3.50 per unit
Direct materials $1.25 per unit
Overhead  
   Total variable overhead $41,400
   Total fixed overhead $150,000
Expected units to be produced 18,000 units

 

A. $4.75 per unit

 

B. $7.05 per unit

 

C. $15.38 per unit

 

D. $13.08 per unit

 

E. $16 per unit

$3.50 DL + $1.25 DM + ($41,400/18,000 units) VOH = $7.05

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

139. Given the following data, calculate the total product cost per unit under absorption costing.

Direct labor $3.50 per unit
Direct materials $1.25 per unit
Overhead  
   Total variable overhead $41,400
   Total fixed overhead $150,000
Expected units to be produced 18,000 units

 

A. $4.75 per unit

 

B. $7.05 per unit

 

C. $13.08 per unit

 

D. $15.38 per unit

 

E. $16 per unit

$3.50 DL + $1.25 DM + ($41,400/18,000 units) VOH + ($150,000/18,000 units) FOH = $15.38

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

Matching Questions

140. Match the following

1. Direct labor, direct materials, and manufacturing overhead.      Gross margin   7
2. Costs that are expensed in the period they are incurred.      Operating capacity   4
3. Sales less variable expenses.      Manufacturing margin   10
4. Maximum number of units that can be produced in the period.      Absorption costing   8
5. A costing method that includes only variable manufacturing costs.      Period costs   2
6. An income statement format that focuses on cost behavior.      Contribution margin   3
7. Sales less cost of goods sold.      Variable costing   5
8. A costing method that includes all manufacturing costs.      Product costs   1
9. Contribution margin divided by sales.      Contribution format   6
10. Sales less variable production costs.      Contribution margin ratio   9

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
Topic: Manufacturing Margin
Topic: Compute income under variable costing
 

 

Essay Questions

141. Identify the treatment of each of the following costs under variable costing and absorption costing:

  Variable Costing Absorption Costing
Product Cost Period Cost Product Cost Period Cost
1. Direct materials        
2. Direct labor        
3. Variable manufacturing overhead        
4. Fixed manufacturing overhead        
5. Variable selling        
6. Fixed selling        
7. Variable administrative        
8. Fixed administrative        

 

 

  Variable Costing Absorption Costing
Product Cost Period Cost Product Cost Period Cost
1. Direct materials X   X  
2. Direct labor X   X  
3. Variable manufacturing overhead X   X  
4. Fixed manufacturing overhead   X X  
5. Variable selling   X   X
6. Fixed selling   X   X
7. Variable administrative   X   X
8. Fixed administrative   X   X

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
Topic: Product cost under Variable Costing
 

 

142. What costs are treated as product costs under the absorption costing method?

Under absorption costing, direct labor, direct materials, and all manufacturing overhead costs, both fixed and variable, are treated as product costs.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

143. What costs are treated as product costs under the variable costing method?

Under variable costing, direct labor, direct materials, and variable manufacturing overhead costs are treated as product costs. Fixed manufacturing overhead is treated as a period cost.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

144. How can the use of absorption costing result in overproduction?

Absorption costing treats fixed manufacturing overhead as a product cost. As a fixed cost, the amount per unit goes down as the total number of units produced is increased. If these excess units produced are not sold, the fixed overhead cost allocated to the units is not currently expensed. This reduction in cost per unit will decrease cost of goods sold and increase net income. Therefore, companies must guard against increasing production merely for the sake of increasing the current period net income.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.
Topic: Product cost under Absorption Costing
 

 

145. When excess capacity exists, what is the minimum special order price a manager should accept to increase net income?

With excess capacity, increases in production level would increase variable production costs, but not fixed costs. Therefore, managers should accept special orders provided the special order price exceeds total variable cost.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

146. What are the benefits of using variable costing when striving to control costs? Are these benefits available under absorption costing?

Under absorption costing, both variable production costs and fixed production costs are combined. This makes it difficult to evaluate the effectiveness of cost controls by different levels of managers. Variable costing separates the variable costs from the fixed costs and, therefore, makes it easier to identify and assign control over costs.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Comparing Variable Costing and Absorption Costing
 

 

147. What is the formula to compute manufacturing margin?

Manufacturing margin equals sales minus variable manufacturing costs.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

148. How does contribution margin differ from gross margin?

Contribution margin equals sales less variable expenses. This is a subtotal used in variable costing where costs are grouped according to cost behavior. Gross margin equals sales less cost of goods sold. This is a subtotal used in absorption costing where expenses are grouped according to function.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

149. How will net income under variable costing compare to net income under absorption costing in the following three situations? Explain briefly the cause of any differences.

(a) Units produced equal units sold
(b) Units produced exceed units sold
(c) Units produced are less than units sold

(a) Income is identical under variable costing and absorption costing when the units produced equal the units sold.
(b) When units produced exceed units sold, income under variable costing is less than income under absorption costing. This is because some of fixed overhead was allocated to ending inventory under absorption costing, but all of fixed overhead was expensed under variable costing.
(c) When units produced are less than units sold, income under variable costing is greater than income under absorption costing. This is because absorption costing is expensing some of a prior period’s fixed overhead in addition to the current period’s fixed overhead, while variable costing is only expensing the current period’s fixed overhead.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

150. What is a contribution margin report?

A contribution margin report presents cost data in a manner that emphasizes the company’s contribution margin and contribution margin ratio. The basic format is to present sales less variable costs equaling contribution margin.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Product cost under Variable Costing
 

 

151. What are the limitations of using variable costing?

Variable costing is not an acceptable basis for either external reporting or tax reporting.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

152. What is the general procedure for converting variable costing net income to absorption costing net income?

The general formula is variable costing net income plus fixed production cost in ending inventory less fixed production cost in beginning inventory.

 

AACSB: Communication
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

Short Answer Questions

153. A company is currently operating at 60% capacity producing 10,000 units. Cost information relating to this current production is shown in the following table:

  Per Unit
Sales price $21.00
Direct material $6.00
Direct labor $4.12
Variable overhead $2.23
Fixed overhead $0.80

The company has been approached by a customer with a request for a special order for 5,000 units. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

10,000/.6 – 10,000 = 6,666 unit remaining capacity
$6 + $4.12 + $2.23 = $12.35 incremental costs
Any sales price that exceeds the $12.35 incremental costs will increase current profits.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

154. A company is currently operating at 65% capacity producing 12,000 units. Cost information relating to this current production is shown in the following table:

  Per Unit
Sales price $6.00
Direct material $2.30
Direct labor $0.87
Variable overhead $0.91
Fixed overhead $0.70

The company has been approached by a customer with a request for a special order for 2,000 units. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

12,000/.65 – 12,000 = 6,461 unit remaining capacity
$2.30 + $0.87 + $0.91 = $4.08 incremental costs
Any sales price that exceeds the $4.08 incremental costs will increase current profits.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

155. A company is currently operating at 70% capacity producing 8,000 units. Cost information relating to this current production is shown in the following table:

  Per Unit
Sales price $15.00
Direct material $3.20
Direct labor $7.10
Variable overhead $0.05
Fixed overhead $0.60

The company has been approached by a customer with a request for a special order for 1,500 units. The sales price per unit for this special order is $10. Should the company accept the special order?

8,000/.7 – 8,000 = 3,428 unit remaining capacity
The company should not accept this special order. Incremental costs exceed incremental income.
$3.20 + $7.10 + $0.05 = $10.35 incremental costs

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

156. Assume a company sells a given product for $33.28 per unit. How many units must the company sell to break-even if variable selling costs are $1.40 per unit, variable production costs are $23.56 per unit, and total fixed costs are $2,080,000?

$2,080,000/($33.28 – $1.40 – $23.56) = 250,000 units

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

157. Assume a company sells a given product for $95 per unit. Variable selling costs are $24.25 per unit and variable production costs are $53.50 per unit. If the company breaks even when selling 260,000 units, what are total fixed costs?

$95 – $24.25 – $53.50 = $17.25 contribution margin per unit
$17.25 × 260,000 units = $4,485,000 total fixed costs

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

158. Assume a company sells a given product for $18 per unit. Variable selling costs are $0.70 per unit and variable production costs are $5.30 per unit. If the company breaks even when selling 4,000,000 units, what are total fixed costs?

$18 – $0.70 – $5.30 = $12 contribution margin per unit
$12 × 4,000,000 units = $48,000,000 total fixed costs

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Product cost under Variable Costing
 

 

159. Blackbird, Incorporated reports the following information regarding its production cost:

Units produced 39,000 units
Direct labor $13 per unit
Direct materials $17 per unit
Variable overhead $7,800,000 in total
Fixed overhead $9,750,000 in total

a. Compute production cost per unit under variable costing.
b. Compute production cost per unit under absorption costing.

a. $13 DL + $17 DM + ($7,800,000/39,000) VOH = $230 per unit under variable costing
b. $230 + ($9,750,000/39,000) FOH = $480 per unit under absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
Topic: Product cost under Variable Costing
 

 

160. Triton Industries reports the following information regarding its production cost:

Units produced 77,000 units
Direct labor $27 per unit
Direct materials $12 per unit
Variable overhead $2,541,000 in total
Fixed overhead $3,311,000 in total

a. Compute product cost per unit under variable costing.
b. Compute product cost per unit under absorption costing.

a. $27 DL + $12 DM + ($2,541,000/77,000) VOH = $72 per unit under variable costing
b. $72 + ($3,311,000/77,000) FOH = $115 per unit under absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Comparing Variable Costing and Absorption Costing
 

 

161. Home Base, Inc. reports the following production cost information:

Beginning inventory 10,000 units
Units produced 97,000 units
Units sold 92,000 units
Direct labor $17 per unit
Direct materials $34 per unit
Variable overhead $2,522,000 in total
Fixed overhead $1,940,000 in total
Operating costs $2,000,000 in total

Assume that productions costs have remained the same since the previous period and all units are sold for $137.00 per unit.

a. Compute production cost per unit under variable costing.
b. Compute production cost per unit under absorption costing.
c. Determine net income using variable costing.
d. Determine net income using absorption costing.

a. $17 DL + $34 DM + ($2,522,000/97,000) VOH = $77 per unit under variable costing
b. $77 + ($1,940,000/97,000) FOH = $97 per unit under absorption costing
c. NI = ($137 – $77)(92,000 units) – $1,940,000 – $2,000,000 = $1,580,000
d. NI = ($137 – $97)(92,000 units) – $2,000,000 = $1,680,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing

 


 

 

162. Home Base, Inc. reports the following production cost information:

Units produced 97,000 units
Units sold 92,000 units
Direct labor $17 per unit
Direct materials $34 per unit
Variable overhead $2,522,000 in total
Fixed overhead $1,940,000 in total

a. Compute production cost per unit under variable costing.
b. Compute production cost per unit under absorption costing.
c. Determine the cost of ending inventory using variable costing.
d. Determine the cost of ending inventory using absorption costing.

a. $17 DL + $34 DM + ($2,522,000/97,000) VOH = $77 per unit under variable costing
b. $77 + ($1,940,000/97,000) FOH = $97 per unit under absorption costing
c. (97,000 units – 92,000 units) × $77 per unit = $385,000 ending inventory under variable costing
d. (97,000 units – 92,000 units) × $97 per unit = $485,000 ending inventory under absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing


 

 

163. Lukin Corporation reports the following first year production cost information.

Units produced 62,000 units
Units sold 59,000 units
Direct labor $41 per unit
Direct materials $15 per unit
Variable overhead $9,300,000 in total
Fixed overhead $4,340,000 in total

a. Compute production cost per unit under variable costing.
b. Compute production cost per unit under absorption costing.
c. Determine the cost of ending inventory using variable costing.
d. Determine the cost of ending inventory using absorption costing.

a. $41 DL + $15 DM + ($9,300,000/62,000) VOH = $206 per unit under variable costing
b. $206 + ($4,340,000/62,000) FOH = $276 per unit under absorption costing
c. (62,000 units – 59,000 units) × $206 per unit = $618,000 ending inventory under variable costing
d. (62,000 units – 59,000 units) × $276 per unit = $828,000 ending inventory under absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing


 

 

164. Lukin Corporation reports the following first year production cost information:

Units produced 62,000 units
Units sold 59,000 units
Sales price $350 per unit
Direct labor $41 per unit
Direct materials $15 per unit
Variable overhead $9,300,000 in total
Fixed overhead $4,340,000 in total
Operating expenses $1,000,000

a. Compute production cost per unit under variable costing.
b. Compute production cost per unit under absorption costing.
c. Determine the net income using variable costing.
d. Determine the net income using absorption costing.

a. $41 DL + $15 DM + ($9,300,000/62,000) VOH = $206 per unit under variable costing
b. $206 + ($4,340,000/62,000) FOH = $276 per unit under absorption costing
c. NI = ($350 – $206)(59,000 units) – $4,340,000 – $1,000,000 = $3,156,000
d. NI = ($350 – $276)(59,000 units) – $1,000,000 = $3,366,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing


 

 

165. Castaway Company reports the following first year production cost information:

Units produced 53,000 units
Units sold 51,000 units
Direct labor $8 per unit
Direct materials $4 per unit
Variable overhead $2,173,000 in total
Fixed overhead $3,339,000 in total

a. Compute production cost per unit under variable costing.
b. Compute production cost per unit under absorption costing.
c. Determine the cost of ending inventory using variable costing.
d. Determine the cost of ending inventory using absorption costing.

a. $8 DL + $4 DM + ($2,173,000/53,000) VOH = $53 per unit under variable costing
b. $53 + ($3,339,000/53,000) FOH = $116 per unit under absorption costing
c. (53,000 units – 51,000 units) × $53 per unit = $106,000 ending inv. under variable costing
d. (53,000 units – 51,000 units) × $116 per unit = $232,000 ending inv. under absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

166. Castaway Company reports the following first year production cost information:

Units produced 53,000 units
Units sold 51,000 units
Sales price $150 per unit
Direct labor $8 per unit
Direct materials $4 per unit
Variable overhead $2,173,000 in total
Fixed overhead $3,339,000 in total
Operating expenses $1,000,000 in total

a. Determine the net income using variable costing.
b. Determine the net income using absorption costing.

a. Product cost: $8 DL + $4 DM + ($2,173,000/53,000) VOH = $53 per unit under variable costing
NI = ($150 – $53)(51,000 units) – $3,339,000 – $1,000,000 = $608,000
b. Product cost: $53 + ($3,339,000/53,000) FOH = $116 per unit under absorption costing
NI = ($150 – $116)(51,000 units) – $1,000,000 = $734,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Compute income under variable costing

Topic: Compute income under absorption costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing
 

 

167. A company reports the following information regarding its production cost:

Units produced 14,000 units
Direct labor $13 per unit
Direct materials $3 per unit
Variable overhead ? in total
Fixed overhead $56,000 in total

Required: Perform the following independent calculations.

a. Compute total variable overhead cost if the production cost per unit under variable costing is $73.
b. Compute total variable overhead cost if the production cost per unit under absorption costing is $73.

a. $13 DL + $3 DM + (VOH/14,000) = $73
VOH/14,000 = $57
Total VOH = ($57 × 14,000) = $798,000
b. $13 DL + $3 DM + (VOH/14,000) + ($56,000/14,000) FOH = $73
VOH/14,000 = $53
Total variable overhead = ($53 × 14,000) = $742,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

168. A company reports the following information regarding its production cost:

Units produced 22,000 units
Direct labor $31 per unit
Direct materials $27 per unit
Variable overhead ? in total
Fixed overhead $2,750,000 in total

Required: Perform the following independent calculations.

a. Compute total variable overhead cost if the production cost per unit under variable costing is $240.
b. Compute total variable overhead cost if the production cost per unit under absorption costing is $240.

a. $31 DL + $27 DM + (VOH/22,000) VOH = $240
VOH/22,000 = $182
Total variable overhead = ($182 × 22,000) = $4,004,000
b. $31 DL + $27 DM + (VOH/22,000) + ($2,750,000/22,000) FOH = $240
VOH/22,000 = $57
Total variable overhead = ($57 × 22,000) $1,254,000 total variable overhead

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

169. Digby Company manufactured and sold 37,000 units of its product at a price of $93 per unit. Total variable cost per unit is $60, consisting of $58 in variable production cost and $2 in variable selling and administrative cost. Fixed costs of manufacturing are $350,000.

a. Compute the manufacturing margin for the company under variable costing.
b. Compute the contribution margin based on this data.
c. Compute the gross margin under absorption costing.

a. ($93 – $58) × 37,000 units = $1,295,000
b. ($93 – $60)(37,000 units) = $1,221,000
c. ($93 – $58)(37,000 units) – $350,000 = $945,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing

Topic: Compute income under absorption costing

Topic: Manufacturing Margin
 

 

170. Cavalier Corporation sold 26,000 units of its product at a price of $225 per unit. Total variable cost per unit is $188, consisting of $103 in variable production cost and $85 in variable selling and administrative cost. Compute the manufacturing margin for the company under variable costing.

($225 – $103) × 26,000 units = $3,172,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

171. Stonehenge Inc., a manufacturer of landscaping blocks, began operations on April 1 of the current year. During this time, the company produced 750,000 units and sold 720,000 units at a sales price of $9 per unit. Cost information for this period is shown in the following table:

Production costs  
   Direct materials $1.80 per unit
   Direct labor $.30 per unit
   Variable overhead $495,000 in total
   Fixed overhead $450,000 in total
Non production costs  
   Variable selling and administrative $18,000 in total
   Fixed selling and administrative $53,000 in total

a. Prepare Stonehenge’s December 31st income statement for the current year under absorption costing.
b. Prepare Stonehenge’s December 31st income statement for the current year under variable costing.

a.

STONEHENGE, INC.
Income Statement (Absorption Costing)
For the nine months ended December 31, xx
Sales (720,000 × $9) $6,480,000
Cost of goods sold (720,000 × $3.36*)   2,419,200
Gross margin 4,060,800
Selling and administrative expenses ($18,000 + $53,000)       71,000
   Net income $3,989,800
*$1.80 + $.30 + ($495,000/750,000) + ($450,000/750,000) = $3.36


b.

STONEHENGE, INC.
Income Statement (Variable Costing)
For the nine months ended December 31, xx
Sales (720,000 × $9) $6,480,000
Variable expenses  
  Variable production costs (720,000 × $2.76*)    1,987,200
  Variable selling and administrative      18,000
Contribution margin 4,474,800
Fixed expenses  
  Fixed overhead 450,000
  Fixed selling and administrative expenses      53,000
Net income $3,971,800
*$1.80 + $.30 + ($495,000/750,000) = $2.76

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing

Topic: Compute income under absorption costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing
 

 

172. Blatt Company, a manufacturer of slippers, began operations on June 1 of the current year. During this time, the company produced 210,000 units and sold 185,000 units at a sales price of $40 per unit. Cost information for this period is shown in the following table:

Production costs  
   Direct materials $5.00 per unit
   Direct labor $4.75 per unit
   Variable overhead $302,000 in total
   Fixed overhead $405,000 in total
Non-production costs  
   Variable selling and administrative $9,000 in total
   Fixed selling and administrative $25,000 in total

a. Prepare Blatt’s December 31st income statement for the current year under absorption costing.
b. Prepare Blatt’s December 31st income statement for the current year under variable costing.

a.

Blatt COMPANY
Income Statement (Absorption Costing)
For the seven months ended December 31, xx
Sales (185,000 × $40) $7,400,000
Cost of goods sold (185,000 × $13.12*)   2,427,200
Gross margin   4,972,800
Selling and administrative expenses ($9,000 + $25,000)       34,000
   Net income $4,938,800
*$5 + $4.75 + ($302,000/210,000) + ($405,000/210,000) = $13.12


b.

Blatt COMPANY
Income Statement (Variable Costing)
For the  seven months ended December 31, xx
Sales (185,000 × $40) $7,400,000
Variable expenses  
  Variable production costs (185,000 × $11.19*) 2,070,150
  Variable selling and administrative        9,000
Contribution margin  5,320,850
Fixed expenses  
  Fixed overhead  405,000
  Fixed selling and administrative expenses      25,000
Net income $4,890,850
*$5 + $4.75 + ($302,000/210,000) = $11.19

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing

Topic: Compute income under absorption costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing
 

 

173. Wrap-It Company, a manufacturer of wrapping paper, began operations on June 1 of the current year. During this time, the company produced 370,000 units and sold 310,000 units at a sales price of $50 per unit. Cost information for this period is shown in the following table:

Production costs  
   Direct materials $2.00 per unit
   Direct labor $.80 per unit
   Variable overhead $814,000 in total
   Fixed overhead $481,000 in total
Non production costs  
   Variable selling and administrative $78,000 in total
   Fixed selling and administrative $210,000 in total

a. Prepare Wrap-It’s December 31st income statement for the current year under absorption costing.
b. Prepare Wrap-It’s December 31st income statement for the current year under variable costing.

a.

WRAP-IT COMPANY
Income Statement (Absorption Costing)
For the seven months ended December 31, xx
Sales (310,000 × $50) $15,500,000
Cost of goods sold (310,000 × $6.30*)    1,953,000
Gross margin 13,547,000
Selling and administrative expenses ($78,000 + $210,000)       288,000
   Net income $13,259,000
*$2 + $.80 + ($814,000/370,000) + ($481,000/370,000) = $6.30


b.

WRAP-IT COMPANY
Income Statement (Variable Costing)
For the seven months ended December 31, xx
Sales (310,000 × $50) $15,500,000
Variable expenses  
  Variable production costs (310,000 × $5.00*)    1,550,000
  Variable selling and administrative        78,000
Contribution margin 13,872,000
Fixed expenses  
  Fixed overhead 481,000
  Fixed selling and administrative expenses      210,000
Net income $13,181,000
*$2 + $.80 + ($814,000/370,000) = $5.00

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing

Topic: Compute income under absorption costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing
 

 

174. 32 Degrees, Inc., a manufacturer of frozen food, began operations on July 1 of the current year. During this time, the company produced 140,000 units and sold 140,000 units at a sales price of $125 per unit. Cost information for this period is shown in the following table:

Production costs  
   Direct materials $13.00 per unit
   Direct labor $6.00 per unit
   Variable overhead $2,100,000 in total
   Fixed overhead $3,220,000 in total
Non production costs  
   Variable selling and administrative $91,000 in total
   Fixed selling and administrative $458,000 in total

a. Prepare 32 Degree’s December 31st income statement for the current year under absorption costing.
b. Prepare 32 Degree’s December 31st income statement for the current year under variable costing.

a.

32 DEGREES, INC
Income Statement (Absorption Costing)
For the six months ended December 31, xx
Sales (140,000 × $125) $17,500,000
Cost of goods sold (140,000 × $57*)    7,980,000
Gross margin 9,520,000
Selling and administrative expenses ($91,000 + $458,000)      549,000
   Net income   $8,971,000
*$13 + $6 + ($2,100,000/140,000) + ($3,220,000/140,000) = $57


b.

32 DEGREES, INC
Income Statement (Variable Costing)
For the six months ended December 31, xx
Sales (140,000 × $125) $17,500,000
Variable expenses  
  Variable production costs (140,000 × $34*)    4,760,000
  Variable selling and administrative       91,000
Contribution margin 12,649,000
Fixed expenses  
  Fixed overhead 3,220,000
  Fixed selling and administrative expenses       458,000
Net income  $8,971,000
*$13 + $6 + ($2,100,000/140,000) = $34

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing

Topic: Compute income under absorption costing

Topic: Product cost under variable costing

Topic: Product cost under absorption costing
 

 

175. State Industries has the following information for 20X1:

Units produced and sold 3,000 units
Selling Price $260/unit
Direct materials $20/unit
Direct labor $40/unit
Fixed manufacturing overhead $120,000/yr
Fixed selling and administrative costs $160,000/yr
Variable manufacturing overhead $35/unit
Variable selling and administrative costs $25/unit

There are no beginning inventories. Prepare an income statement for the year under absorption costing.

 

State Industries
Income Statement
Year Ended December 31, 20X1
Sales (3,000 units × $260) $780,000
– Cost of Goods Sold 405,000
Gross Margin 375,000
– Selling and Administrative Costs  235,000
Operating Income  $140,000

Feedback: Cost of goods sold = {Total variable manufacturing costs (x units sold)} + Fixed manufacturing overhead.

Cost of goods sold = [($20 + $40 + $35)(Total variable manufacturing costs) × 3,000 units] + $120,000 (Fixed manufacturing overhead). Cost of goods sold = $405,000.

Selling and administrative Costs = ($25 × 3,000 units) + $160,000 = $235,000.

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing

Topic: Product cost under absorption costing
 

 

176. Maloney Co. provided the following information for the year 20X1:

Units produced and sold 4,400 units
Selling Price $400/unit
Direct materials $85/unit
Direct labor $55/unit
Fixed manufacturing overhead $130,000/yr
Fixed selling and administrative costs $165,000/yr
Variable manufacturing overhead $40/unit

There are no beginning inventories. Prepare an income statement using the variable costing format.

 

Maloney Co.
Income Statement
Year Ended December 31, 20X1
Sales $1,760,000
– Variable Costs 792,000
Contribution Margin 968,000
– Fixed Costs 295,000
Operating Income $673,000


Feedback: Variable costs = 4,400 units × ($85 + $55 + $40) = $792,000

Fixed costs = $130,000 + $165,000 = $295,000

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing

Topic: Product cost under variable costing


 

 

177. Materials Corporation sold 12,000 units of its product at a price of $67 per unit. Total variable cost per unit is $54.94, consisting of $45.05 in variable production cost and $9.89 in variable selling and administrative cost. Compute the contribution margin for the company.

$67.00 – $54.94 = $12.06 × 12,000 units = $144,720

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

178. Countdown Inc. sold 17,000 units of its product at a price of $81 per unit. Total variable cost per unit is $72.09, consisting of $69.05 in variable production cost and $3.04 in variable selling and administrative cost. Compute the contribution margin for the company.

$81.00 – $72.09 = $8.91 × 17,000 units = $151,470

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

179. Heather, Incorporated reports the following annual cost data for its single product:

Normal production and sales level 60,000 units
Direct materials $9.00 per unit
Direct labor $6.50 per unit
Variable overhead $11.00 per unit
Fixed overhead $720,000 in total

This product is normally sold for $56 per unit. If Heather increases its production to 80,000 units while sales remain at the current 60,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.

$720,000/60,000 units = $12 FOH per unit at 60,000 unit level
$720,000/80,000 units = $9 FOH per unit at 80,000 unit level
$12 – 9 = $3 less FOH cost in each unit sold
$3 × 60,000 = $180,000 gross margin increase

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

180. Dataport Company reports the following annual cost data for its single product:

Normal production and sales level 89,000 units
Direct materials $14.00 per unit
Direct labor $21.00 per unit
Variable overhead $27.00 per unit
Fixed overhead $3,738,000 in total

This product is normally sold for $230 per unit. If Dataport increases its production to 100,000 units, while sales remain at the current 89,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.

$3,738,000/89,000 units = $42 FOH per unit at 89,000 unit level
$3,738,000/100,000 units = $37.38 FOH per unit at 100,000 unit level
$42 – 37.38 = $4.62 less FOH cost in each unit sold
$4.62 × 89,000 = $411,180 gross margin increase

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

181. Chilly Chips, Inc., a producer of ice cream, began operations this year. During this year, the company produced 160,000 cartons of ice cream and sold 145,000. At year-end, the company reported the following income statement using absorption costing:

Sales (145,000 × $6.50) $942,500
Cost of goods sold (145,000 × $3.50)  507,000
Gross margin $435,000
Selling and administrative expenses    252,000
Net income $183,000

Production costs per carton total $3.50, which consists of $2.30 in variable production costs and $1.20 in fixed production costs (based on the 16,000 units produced). Sixty percent of total selling and administrative expenses are variable. Compute net income under variable costing.

Income under absorption costing = Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory

$183,000 = Income under variable costing + ($1.20 × 15,000 units) – ($1.20 x 0 units)

$165,000 = Income under variable costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

182. Anchovy, Inc., a producer of frozen pizzas, began operations this year. During this year, the company produced 16,000 cases of pizza and sold 15,000. At year-end, the company reported the following income statement using absorption costing:

Sales (15,000 × $48) $720,000
Cost of goods sold (15,000 × $19)  285,000
Gross margin $435,000
Selling and administrative expenses    79,000
Net income $356,000

Production costs per case total $19, which consists of $15.50 in variable production costs and $3.50 in fixed production costs (based on the 16,000 units produced). Eight percent of total selling and administrative expenses are variable. Compute net income under variable costing.

Income under absorption costing = Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory

$356,000 = Income under variable costing  ($3.50 x 0 units) + ($3.50 × 1,000 units) $352,500 = Income under variable costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under variable costing
 

 

183. Toth, Inc. had net income of $950,000 based on variable costing. Beginning and ending inventories were 60,000 units and 56,000 units, respectively. Assume the fixed overhead cost per unit was $.85 for both the beginning and ending inventory. What is net income under absorption costing?

Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory = Income under absorption costing

$950,000 + (56,000 units × $.85) – (60,000 × $.85) = $946,600

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

184. Fanelli Company had net income of $678,000 based on variable costing. Beginning and ending inventories were 5,000 units and 4,200 units, respectively. Assume the fixed overhead cost per unit was $.50 for both the beginning and ending inventory. What is net income under absorption costing?

Income under variable costing + FOH in Ending inventory – FOH in Beginning inventory = Income under absorption costing

$678,000 + (4,200 units × $.50) – (5,000 × $.50) = $677,600

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

Fill in the Blank Questions

185. Under variable costing, product costs consist of direct labor, direct materials, and _________________.

variable manufacturing overhead

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product Costs
 

 

186. _______________ and _______________ are product costs that can be directly traced to the product.

Direct labor; direct materials (either order)

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product Costs
 

 

187. The product costing approach required by GAAP is referred to as ______________.

absorption costing or full costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

188. Absorption costing is also called ________________________ costing.

full

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

189. ________________________ costing treats fixed overhead as a period cost.

Variable

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

190. ________________________ is a costing method that includes all manufacturing costs in unit product costs.

Absorption costing

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

191. A per unit cost that is constant at all production levels is a ________________________ cost per unit.

variable

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-C1 Describe how absorption costing can result in overproduction.
Topic: Product cost under Variable Costing
 

 

192. When excess capacity exists, managers should accept a special order if the special order price exceeds the ________________________.

total variable costs

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-A1 Use variable costing in pricing special orders.
Topic: Pricing Special Orders
 

 

193. ________________________ is equal to Sales minus Variable manufacturing costs.

Manufacturing margin

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

194. Under variable costing, the product unit cost consists of _______________________,direct materials, and variable overhead.

direct labor

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Variable Costing
 

 

195. Under absorption costing, the product unit cost consists of direct labor, direct materials, variable overhead, and _______________________.

fixed overhead

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P1 Compute unit cost under both absorption and variable costing.
Topic: Product cost under Absorption Costing
 

 

196. On a contribution margin income statement, expenses are grouped according to _______________.

cost behavior

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Product cost under Variable Costing
 

 

197. _______________________ is the amount remaining from sales revenues after all variable expenses have been deducted.

Contribution margin

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Product cost under Variable Costing
 

 

198. ________________ is the amount remaining from sales revenues after cost of goods sold has been deducted.

Gross margin

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Product cost under Absorption Costing
 

 

199. Reported income is identical under absorption costing and variable costing when the units produced _______________ the units sold.

equal

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

200. _______________________ is the amount remaining from manufacturing margin after all variable selling, general and administrative expenses have been deducted.

Contribution margin

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Manufacturing Margin
 

 

201. _______________________ costing is the only acceptable basis for both external reporting and tax reporting.

Absorption

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 19-P2 Prepare and analyze an income statement using absorption costing and using variable costing.
Topic: Compute income under absorption costing
 

 

202. To convert variable costing net income to absorption costing net income, ____________________ the fixed production cost in ending inventory and _______________________ the fixed production cost in beginning inventory.

add; subtract

 

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 19-P3 Convert income under variable costing to the absorption cost basis.
Topic: Converting Income under Variable Costing to Absorption Costing
 

 

There are no reviews yet.

Add a review

Be the first to review “Financial and Managerial Accounting 7th Edition By Wild – Test Bank”

Your email address will not be published. Required fields are marked *

Category:
Updating…
  • No products in the cart.