Quiz – Variable Costing and Absorption Costing

1. If a firm produces more units than it sells, absorption costing, relative to variable costing will
result in
a. Higher income and assets
b. Lower income and lower assets
c. Higher income but lower assets
d. Lower income but higher assets
2. Under absorption costing, if sales remains constant from period 1 to period 2, the company will
report a larger income in period 2 when
a. Period 2 production exceeds period 1 production
b. Period 1 production exceeds period 2 production
c. Variable production costs are larger in period 2 than period 1
d. Fixed production costs larger in period 2 than period 1
3. How will a favourable volume variance affect net income under each of the following methods?
Absorption Variable
a. Reduce no effect
b. Reduce increase
c. Increase no effect
d. Increase reduce
4. Variable costing considers which of the following to be product costs?
Fixed Mfg Fixed S & A Variable Mfg Variable S & A
a. Yes No Yes No
b. Yes No Yes Yes
c. No No Yes Yes
d. No No Yes No
5. The variable costing format is often more useful to managers than the absorption costing format
because
a. Costs are classified by their behaviour
b. It is required for external reporting
c. Costs are always lower
d. It justifies higher product prices
6. When a firm prepares financial reports by using absorption costing
a. Profits will always increase with increase in sales
b. Profits will always decrease with decreases in sales
c. Profits may decrease with increased sales even there is no change in selling prices and
costs
d. Decrease output and constant sales result in increased profit
7. Which of the following statements is true for a firm that uses variable costing?
a. The cost of a unit product changes because of changes in the number of units
manufactured
b. Profits fluctuates with sales
c. An idle facility variation is calculated
d. None of the given choices
8. A firm presently has total sales of P100,000. If it sales rise by P1.00 its
 a. Income based on variable costing will go up more than its net income based on
absorption costing
b. Income based on absorption costing will go up more than its net income based on
variable costing
c. Fixed cost will also rise
d. Per unit variable costs will rise
9. Dredger manufactures a single product using standard costing. Variable production costs are
P12 and fixed production costs are P125,000. Dredger uses a normal activity of 12,500 units to
set its standard costs. Dredger began the year with 1,000 units in inventory, produced 11,000
units and sold 11,500 units. The standard costs of goods sold under absorption costing would be
a. P115,000
b. P132,000
c. P242,000
d. P253,000
10. You obtain the following information regarding fixed production costs from manufacturing firm
for fiscal year 2020:
Fixed cost in the beginning inventory P16,000
Fixed costs incurred during this period P100,000

Which of the following statement is not true?

a. The maximum amount of fixed production costs that this firm could deduct using absorption
costs in 2020 is P116,000
b. The maximum difference between this firm’s 2020 income based on absorption costing and
its income based on variable costing is P16,000
c. Using variable costing, this firm will deduct no more than P100,000 for fixed production
costs
d. If this firm produced substantially more units than it sold in 2020, variable costing will
probably yield lower income than absorption costing

(11 & 12)

The following data for the first year of operation of ABC Company:
Sales in units 5,000
Production units 8,000
Manufacturing costs:
Direct labor P3 per unit
Direct materials P5 per unit
Variable overhead P1 per unit
Fixed overhead P100,000
Net income (absorption) P30,000
Sales per unit P40

11. What would ABC Co. have reported as its income before tax if it had used variable costing?
a. P30,000
b. (P7,500)
 c. P67,500
d. P45,000
12. What was the total amount S&A expense incurred by ABC Co?
a. P30,000
b. P62,500
c. P6,000
d. P45,000
13. For its most recent fiscal year, a firm reported that its contribution margin was equal to 40% of
sales and that its net income amounted to 10% of sales. If its fixed costs for the year were
P60,000, how much were sales?
a. P150,000
b. P200,000
c. P600,000
d. Undeterminable
14. At its present level of operations, a small manufacturing firm has total variable costs equal to
75% of sales and total fixed costs equal 15% of sales. Based on variable costing, if sales change
by P1.00, income will change by
a. P0.25
b. P0.10
c. P0.75
d. Undeterminable
(15 – 18)
Single Corp. produces a single product. The following cost structure applied to their first year of
operations, 2020:
Variable costs
S&A P2.00 per unit
Production P4.00 per unit
Fixed costs (total cost incurred for the year)
S&A P14,000
Production P20,000

15. Assume for this question only, that during 2020 Single Corp. manufactured 5,000 units and sold
3,800. There was no beginning or ending work in process inventory. How much larger or smaller
would Single Corp.’s income statement if it uses absorption costing rather than variable costing?
a. The absorption costing income would be P6,000 larger
b. The absorption costing income would be P6,000 smaller
c. The absorption costing income would be P4,800 larger
d. The absorption costing income would be P4,000 smaller
16. Assume for this question only, that Single Corp. manufactured and sold 5,000 units in 2020. At
this level of activity they had an income of P30,000 using variable costing. What was the sales
price per unit?
a. P16.00
b. P18.80
c. P12.80
 d. P14.80
17. Assume for this question only, that Single Corp. produced 5,000 units and sold 4,500 units in
2020. If Single uses absorption costing, it would deduct period costs of
a. P24,000
b. P34,000
c. P27,000
d. P23,000
18. Assume for this question only, that Single Corp. manufactured 5,000 units and sold 4,000 units
in 2020. If Single employs a costing system based on variable costs, the company would end
2020 with a finished goods inventory of
a. P4,000
b. P8,000
c. P6,000
d. P5,000
19. Laude Co. produces a single product. During march, the company had net operating income
under absorption costing that was P3,500 lower than under variable costing. The company sold
7,000 units in March, and its variable costs were P7 per unit, of which P3 was variable selling
expense. If fixed manufacturing overhead was P2 per unit under absorption costing, then how
many units did the company produce during March?
a. 8,750 units
b. 6,125 units
c. 6,500 units
d. 5,250 units
20. Company XYZ produces a single product. Last year, the company has 16,000 units in its
beginning inventory. During the year, the company’s variable production costs were P6 per unit
and its manufacturing overhead costs were P4 per unit. The company’s net operating income for
the year was P24,000 higher under absorption costing that it was under variable costing. Given
these facts, the number of units in the ending inventory must have been:
a. 22,000 units
b. 10,000 units
c. 6,000 units
d. 20,000 units
(21 – 22)
ABC Company produces convertible cubicles that sell for P400. Standard variable manufacturing cost is
P100 and the standard fixed manufacturing cost is P50, based on budgeted fixed costs of P15,000,000
and budgeted production of 100,000 units. During 2020, ABC produced 96,000 units of convertible
cubicles and sold P90,000 units. Actual costs incurred were:
Fixed manufacturing P14,870,000
Variable manufacturing P9,550,000
Selling and administrative (all fixed) P10,550,000
There were no beginning inventory.
21. For the year 2020
a. Company’s income under absorption costing is P1,630,000
b. Company’s actual cost of goods sold is P22,920,000
 c. Company’s contribution margin under variable costing is P30,000,000
d. Total fixed costs charged to expense during the period under variable costing is
P25,550,000
22. Which of the following statements regarding ABC’s cost variances is true?
a. Fixed budget variance is zero.
b. Volume variance is P600,000 unfavorable
c. Variable efficiency variance is P50,000 favorable
d. Variable spending variance is P180,000 favorable.
23. Which of the following is true of a company that uses absorption costing?
a. Net operating income fluctuates directly with changes in sales volume
b. Fixed production and fixed selling costs are considered to be product costs
c. Unit product costs can change as a result of changes in the number of units
manufactured
d. Variable selling expenses are included in product costs
24. The income statement of ABC Corp, for the month of January of the current year is as follows:
Revenues P21,000
Cost of goods sold:
Direct materials P6,000
Direct labor 4,000
Overhead 2,000 P12,000
Gross profit P 9,000
Selling and administrative expenses 2,000
Operating income P 7,000

Determine the markup based on cost of goods sold (COGS).

Answer: 75%

25. ABC Company had the following information:

Revenues P400,000
Cost of goods sold:
Direct materials P100,000
Direct labor 50,000
Overhead 50,000 200,000
Gross profit P200,000
Selling and administrative expenses 75,000
Operating income P125,000

What is the markup based on prime costs?

Answer: 166.70%