Variable costing

1. Of the following, which is the greatest disadvantage of direct costing?

a).By expensing all fixed costs in the period incurred, the effects of fixed costs on net
income are highlighted.
b).By expensing all fixed costs in the period incurred, record keeping is simplified.
c).Net income tends to vary with sales.
d).Product and period costs must be separated into fixed and variable components.
2.Operating income using direct costing as compared to absorption costing would be higher
a).When quantity of beginning inventory is less than the quantity of ending inventory.
b).When quantity of beginning inventory is more than quantity of ending inventory.
c).When quantity of beginning inventory equals quantity of ending inventory.
d).Under no circumstances.
3.Which of the following methods provides (s) the added benefits of usefulness for external
reporting?
i Variable
ii Absorption
a).i only
b).ii only
c). Both
d).None
4.In an income statement prepared as an internal report using direct costing, variable selling and
administrative expenses would
a).Not be used
b).Be used in the computation of operating income but not in the computation of
contribution margin
c).Be treated the same as fixed selling and administrative expenses
d).Be used in the computation of contribution margin
5. Using the direct costing method, which of the following is assigned to inventory?
Variable selling and Admin costs
a).
b).
c).
d).

Variable factory overhead costs

Yes
Yes
No
No

Yes
No
No
Yes

6. Marley Manufactures the Guzler which has the following costs:

Direct material: $10 per unit
Direct labour : $16 per unit
Variable overheads: $4 per unit
Marley budget to incur fixed overheads of $20,000 at an expected output of 4,000 units; during
the period, it actually produced 3,000 units, but only 2,500 were sold. Prepare the income
statement using both direct and absorption costing if selling price is $70 per unit.
7. Casper made a product that has the following costs:
Direct material: $4 per unit
Direct Labour : $6 per unit
Variable overheads: $5 per unit
Budget fixed overheads were $10,000 at expected output of 2,000 units. However, Casper
incurred $20,000 of fixed overheads during the period. Actual output is 4,500 units, but only
4,000 were sold at $30 per unit. Prepare the income statement using both direct and absorption
costing methods.