CHAPTER 13

ACCOUNTING FOR OVERHEAD COSTS

LEARNING OBJECTIVES:

1. Compute budgeted factory-overhead rates and apply factory overhead to

production.
2. Determine and use appropriate cost allocation bases for overhead application to
products and services.
3. Identify the meaning and purpose of normalized overhead rates.
4. Construct an income statement using the variable-costing approach.
5. Construct an income statement using the absorption-costing approach.
6. Compute the production-volume variance and show how it should appear in the
income statement.
7. Explain why a company might prefer to use a variable-costing approach.

TRUE / FALSE:
LEARNING OBJECTIVE 1

1. In determining the budgeted overhead application rate, the actual amount of the cost
driver is used as the numerator.
False

2. Total overhead applied is the result of multiplying the actual amount of the cost driver by
the budgeted overhead rate.
True

3. Accountants use actual overhead rates to apply overhead to jobs as they are completed.
False

4. A company can increase the accuracy of its product cost information by converting some
factory-overhead costs from indirect to direct costs.
True

5. Budgeted factory-overhead rate = total budgeted factory overhead / total actual amount of
the cost driver.
False

LEARNING OBJECTIVE 2

6. There should be a strong cause-and-effect relationship between the factory overhead

incurred and the cost driver chosen for its application.
True

237
7. No one cost driver is right for all situations.
True

8. Direct-labor hours rather than direct-labor cost usually drive fringe-benefit costs such as
pensions and payroll taxes.
False

9. Normally, 80% of the cost drivers drive 50% of the overhead costs.
False

LEARNING OBJECTIVE 3

10. Actual product cost may be distorted by fluctuations in production volume.

True

11. The most common contributor to a variance between actual overhead and applied
overhead is by operating at a different level of volume than the level used as a
denominator in calculating the budgeted overhead rate.
True

12. When the amount of overhead applied to the product exceeds the amount incurred by the
department, the difference is called overapplied overhead.
True

13. The most widely used approach in disposing of an overhead variance is proration.
False

14. The proration method of disposing of overhead variances prorates the variance among
three accounts including Direct-Materials Inventory, WIP Inventory, and Finished Goods
Inventory.
False

15. The immediate write-off method subtracts the underapplied overhead amount from Cost
of Goods Sold.
False

16. The proration method assigns underapplied overhead and overapplied overhead amounts
based on the beginning-of-year account balances of WIP, Finished Goods, and Cost of
Goods Sold.
False

17. In actual practice, prorating is done only when it would materially affect inventory
valuations.
True

LEARNING OBJECTIVE 4

18. Variable costing is more important for external reporting than for internal decision
making.
False
238
19. The variable-costing income statement uses the contribution-approach format.
True

20. The variable-costing income statement separates costs into manufacturing and
nonmanufacturing categories.
False

21. Gross margin appears in a variable-costing income statement.

False

22. The variable-costing method does not include fixed overhead in a product’s cost.
True

23. The variable-costing method regards fixed manufacturing costs as expenses in the period
they are incurred.
True

LEARNING OBJECTIVE 5

24. Fixed manufacturing overhead is excluded from the cost of products under absorption
costing.
False

25. Absorption costing is more widely used than variable costing.

True

26. Absorption-costing income is not affected by production volume.

False

27. The absorption-costing method has fixed factory overhead appearing in only cost of
goods sold.
False

28. In an absorption-costing statement, revenue less variable manufacturing cost is the gross
margin.
False

LEARNING OBJECTIVE 6

29. A production-volume variance is calculated as the applied volume minus the actual
volume multiplied by the actual overhead rate.
False

30. The production-volume variance measures the difference between applied and budgeted
fixed overhead.
True

31. When actual volume is more than expected volume, fixed overhead is underapplied.
False
239
32. Production-volume variance = applied fixed overhead – budgeted fixed overhead.
True

33. There is no production-volume variance only when expected production volume equals
actual production volume.
True

34. An unfavorable production-volume variance decreases the manufacturing costs shown on

the income statement.
False

35. Most companies consider production-volume variances to be beyond immediate control.

True

36. It is possible for variable overhead to have a production-volume variance.

False

37. When sales exceed production, variable-costing income is greater than absorption-costing
income.
True

38. Any difference in variable-costing and absorption-costing operating income can be

explained by multiplying the fixed-overhead product-costing rate by the change in the
total units in the beginning and ending inventories.
True

LEARNING OBJECTIVE 7

39. If a company uses the variable-costing approach, a manager might be tempted to produce
unneeded units just to increase reported operating income.
False

40. Underapplied and overapplied fixed overhead has two components: (1) a production-
volume variance, and (2) a fixed-overhead flexible-budget variance.
True

41. All variances other than the production-volume variance are essentially flexible-budget
variances.
True

42. The production-volume variance serves primarily a product costing purpose.

True

240
MULTIPLE CHOICE:
LEARNING OBJECTIVE 1

43. Roth Company had the following data available:

Beginning direct-materials inventory $26,000

Beginning WIP Inventory 64,000
Beginning finished-goods inventory 58,000
Direct materials purchased on account 148,000
Direct materials requisitioned 82,000
Direct-labor cost incurred 130,000
Factory overhead incurred 146,000
Cost of goods completed 292,000
Cost of goods sold 256,000
Overhead application rate 150%
(as a percent of direct-labor cost)

The ending inventory of work in process is _____.

a. $438,000
b. $179,000
c. $130,000
d. $422,000

$64,000 + $82,000 + $130,000 + ($130,000 x 150%) - $292,000 = $179,000

44. Carey Company had the following data available:

Beginning direct-materials inventory $26,000

Beginning WIP Inventory 64,000
Beginning finished-goods inventory 58,000
Direct materials purchased on account 148,000
Direct materials requisitioned 82,000
Direct-labor cost incurred 130,000
Factory overhead incurred 146,000
Cost of goods completed 292,000
Cost of goods sold 300,000
Overhead application rate 150%
(as a percent of direct-labor cost)

The ending inventory of finished goods is _____.

a. $58,000
b. $36,000
c. $50,000
d. $292,000

$58,000 + $292,000 - $300,000 = $50,000

241
45. Eddie Company had the following data available:

Direct materials purchased on account $74,000

Direct materials requisitioned $41,000
Direct-labor cost incurred $65,000
Factory overhead incurred $77,000
Factory overhead applied $85,000

Work in process is increased by _____.

a. $334,250
b. $191,000
c. $179,000
d. $139,000

$41,000 + $65,000 + $85,000 = $191,000

46. Duke Company had the following data available:

Direct materials purchased on account $74,000

Direct materials requisitioned $44,000
Payment for direct materials $70,000

Direct materials inventory increased by _____.

a. $70,000
b. $41,000
c. $30,000
d. $74,000

$74,000 - $44,000 = $30,000

47. The two key items in determining the budgeted factory-overhead rate are budgeted total
overhead and _____.

a. actual volume of the cost driver

b. actual factory-overhead costs
c. budgeted total volume of the cost driver
d. estimated factory-overhead costs

48. The budgeted factory-overhead rate is computed as _____.

a. actual factory overhead / actual production in units

b. actual factory overhead / actual cost driver activity
c. budgeted total overhead / actual cost driver activity
d. budgeted total overhead / budgeted cost driver

242
49. To apply the budgeted overhead to a job, the budgeted overhead rate is multiplied by the
_____.

a. actual cost-driver data

b. actual production in units
c. actual factory-overhead costs
d. estimated factory-overhead costs

50. The entry to record the application of overhead includes a _____.

a. debit to Factory Department Overhead Control

b. debit to WIP Inventory
c. credit to Cost of Goods Sold
d. credit to Accumulated Depreciation

51. USC Company had the following information:

Budgeted factory overhead $90,000

Actual factory overhead $80,000
Budgeted: Direct-labor hours 20,000
Actual: Direct-labor hours 21,000

The budgeted factory-overhead rate using direct-labor hours as the cost driver is _____.

a. $4.00
b. $3.57
c. $4.50
d. $3.81

$90,000 / 20,000 = $4.50

52. Kings Company had the following information:

Budgeted factory overhead $75,000

Actual factory overhead $80,000
Budgeted: Direct-labor hours 20,000
Actual: Direct-labor hours 21,000

The amount of overhead applied to a company that uses 2,000 direct-labor hours is
_____.

a. $8,000
b. $7,500
c. $7,140
d. $7,600

$75,000 / 20,000 = $3.75;

$3.75 x 2,000 = $7,500

243
53. Rams Company had the following information:

Budgeted factory overhead $90,000

Actual factory overhead $107,000
Budgeted: Direct-labor costs $100,000
Actual: Direct-labor costs $107,000

The budgeted factory-overhead rate using direct-labor costs as the cost driver is _____.

a. $.81
b. $.90
c. $1.00
d. $1.05

$90,000 / 100,000 = $.90

54. Patriots Company had the following information:

Budgeted factory overhead $85,000

Actual factory overhead $105,000
Budgeted: Direct-labor costs $100,000
Actual: Direct-labor costs $105,000

The journal entry to apply overhead to a job incurring $15,000 of direct-labor cost
includes a _____.

a. debit to WIP Inventory for $12,750

b. credit to WIP Inventory for $15,000
c. debit to Factory Overhead Control for $12,750
d. credit to factory Overhead Control for $15,000

$85,000 / $100,000 = .85;

$15,000 x .85 = $12,750

55. Dodgers Company had the following information:

Budgeted factory overhead $90,000

Actual factory overhead $82,000
Budgeted: Machine hours 40,000
Actual: Machine hours 35,500

The budgeted factory-overhead rate using machine hours as the cost driver is _____.

a. $2.250
b. $2.025
c. $2.050
d. $2.875

$90,000 / 40,000 =$2.250

244
56. Giants Company had the following information:

Budgeted factory overhead $80,000

Actual factory overhead $82,000
Budgeted: Machine hours 40,000
Actual: Machine hours 39,500

The overhead applied for a company that uses 10,000 machine hours is _____.

a. $20,000
b. $20,250
c. $20,500
d. $28,750

$80,000 / 40,000 =$2.00;

$2.00 x 10,000 = $20,000

57. Rockies Company had the following information:

Budgeted factory overhead $90,000

Actual factory overhead $80,000
Budgeted: Production setups 12,000
Actual: Production setups 11,500

The budgeted factory-overhead rate using production setups as the cost driver is _____.

a. $6.25
b. $6.52
c. $6.78
d. $7.50

$90,000 / 12,000 = $7.50

58. Padres Company had the following information:

Budgeted factory overhead $78,000

Actual factory overhead $80,000
Budgeted: Production setups 12,000
Actual: Production setups 12,500

The journal entry to apply overhead to a job requiring 4,500 setups includes a _____.

a. debit to Factory Overhead Control for $31,296

b. credit to Factory Overhead Control for $29,250
c. debit to WIP Inventory for $31,296
d. credit to Cost of Goods Sold for $29,250

$78,000 / 12,000 = $6.50;

$6.50 x 4,500 = $29,250

245
59. Mets Company had the following information:

Budgeted variable factory overhead $66,000

Budgeted fixed factory overhead $46,500

Actual variable factory overhead $70,500

Actual fixed factory overhead $55,500

Budgeted cost-driver activity levels:

Direct-labor hours 32,000

Direct-labor costs $150,000
Machine hours 60,000
Production setups 15,000

Actual cost-driver activity levels:

Direct-labor hours 31,500

Direct-labor costs $165,600
Machine hours 56,190
Production setups 14,280

The budgeted factory-overhead rate using direct-labor hours as the cost driver is _____.

a. $4.00
b. $3.57
c. $3.52
d. $3.81

($66,000 + $46,500) / 32,000 = $3.52

246
60. Phillies Company had the following information:

Budgeted variable factory overhead $66,000

Budgeted fixed factory overhead $46,500

Actual variable factory overhead $77,500

Actual fixed factory overhead $62,500

Budgeted cost-driver activity levels:

Direct-labor hours 30,000

Direct-labor costs $160,000
Machine hours 60,000
Production setups 15,000

Actual cost-driver activity levels:

Direct-labor hours 31,500

Direct-labor costs $165,600
Machine hours 56,190
Production setups 14,280

The budgeted factory-overhead rate using direct-labor costs as the cost driver is _____.

a. 68%
b. 70.3%
c. 80%
d. 72.5%

($66,000 + $46,500) / $160,000 = 70.3%

247
61. Tigers Company had the following information:

Budgeted variable factory overhead $66,000

Budgeted fixed factory overhead $46,500

Actual variable factory overhead $77,500

Actual fixed factory overhead $55,500

Budgeted cost-driver activity levels:

Direct-labor hours 30,000

Direct-labor costs $150,000
Machine hours 62,000
Production setups 15,000

Actual cost-driver activity levels:

Direct-labor hours 31,500

Direct-labor costs $165,600
Machine hours 56,190
Production setups 14,280

The budgeted factory-overhead rate using machine hours as the cost driver is _____.

a. $2.000
b. $2.003
c. $2.135
d. $1.815

($66,000 + $46,500) / 62,000 = $1.815

248
62. Yankees Company had the following information:

Budgeted variable factory overhead $66,000

Budgeted fixed factory overhead $46,500

Actual variable factory overhead $67,500

Actual fixed factory overhead $52,500

Budgeted cost-driver activity levels:

Direct-labor hours 30,000

Direct-labor costs $150,000
Machine hours 60,000
Production setups 15,000

Actual cost-driver activity levels:

Direct-labor hours 31,500

Direct-labor costs $165,600
Machine hours 56,190
Production setups 14,280

The budgeted factory-overhead rate using production setups as the cost driver is _____.

a. $7.88
b. $8.00
c. $7.50
d. $8.40

($66,000 + $46,500) / 15,000 = $7.50

249
63. The following information was gathered for Red Sox Company:

Budgeted direct-labor hours 34,000

Actual direct-labor hours 30,400
Budgeted factory overhead $144,500
Actual factory overhead $151,980

Assume the cost driver is direct-labor hours. The budgeted factory-overhead rate is
_____.

a. $4.45
b. $4.63
c. $4.25
d. $4.84

$144,500 / 34,000 = $4.25

64. The following information was gathered for White Sox Company:

Budgeted direct-labor hours 34,000

Actual direct-labor hours 32,400
Budgeted factory overhead $144,500
Actual factory overhead $155,980

Assume the cost driver is direct-labor hours. The amount of factory overhead applied is
_____.

a. $144,500
b. $137,700
c. $142,922
d. $149,980

$144,500 / 34,000 = $4.25;

$4.25 x 32,400 = $137,700

65. The following information was gathered for Indians Company:

Budgeted direct-labor hours 8,000

Actual direct-labor hours 8,400
Budgeted factory overhead $220,875
Actual factory overhead $224,970

Assume the cost driver is direct-labor hours. The budgeted factory-overhead rate is
_____.

a. $27.61
b. $27.77
c. $27.27
d. $29.03

$220,875 / 8,000 = $27.61

250
66. The following information was gathered for Royals Company:

Budgeted direct-labor hours 7,750

Actual direct-labor hours 8,100
Budgeted factory overhead $220,875
Actual factory overhead $224,970

Assume the cost driver is direct-labor hours. The amount of factory overhead applied is
_____.

a. $220,875
b. $230,850
c. $215,295
d. $224,970

$220,875 / 7,750 = $28.50

$28.50 x 8,100 = $230,850

LEARNING OBJECTIVE 2

67. If a department identifies more than one cost driver for overhead costs, the department
ideally should _____.

a. put 80% of the cost into one pool and 20% into second pool
b. select a single cost driver
c. allocate 80% of the costs with 20% of the drivers
d. create as many cost pools as there are cost drivers

68. The cost driver chosen for applying factory-overhead costs should be the cost driver that
_____.

a. is easiest to understand
b. incurs the least administration cost
c. causes most of the overhead costs
d. confers a competitive advantage

69. _____ is least likely to be a cost driver as a basis for applying overhead costs.

a. Direct-labor cost
b. Indirect labor hours
c. Machine hours
d. Production setups

251
LEARNING OBJECTIVE 3

70. A normal costing system uses the following _____.

a. actual direct material, actual direct labor, and actual overhead

b. actual direct material, actual direct labor, and applied overhead
c. actual direct material, applied direct labor, and actual overhead
d. applied direct material, applied direct labor, and actual overhead

71. _____ is the most important contributor to the variances between actual and applied
overhead.

a. Poor forecasting
b. Inefficient use of overhead items
c. Calendar variations, number of workdays in a month
d. The difference between actual and budgeted volume of cost driver activity

72. A company that produces more than its planned volume for a year will _____.

a. underapply overhead
b. not have an overhead variance
c. overapply overhead
d. none of these answers is correct

73. The excess of actual overhead over the overhead applied to products is called _____.

a. overapplied overhead
b. underapplied overhead
c. overestimated overhead
d. prorated overhead

74. The most widely used approach to disposing of overhead variances is _____.

a. proration
b. to allocate it between cost of goods sold and finished goods inventory
c. immediate write-off
d. to capitalize it as a cost of finished goods inventory

75. In the immediate write-off approach, underapplied overhead is regarded as _____.

a. a reduction in current income

b. an addition to the cost of inventory
c. a decrease in cost of goods sold
d. a decrease in the cost of inventory

252
76. In the immediate write-off approach, overapplied overhead is regarded as _____.

a. a decrease in current income

b. a decrease in cost of goods sold
c. an addition to the cost of inventory
d. a reduction to the cost of inventory

77. If the overhead control account has a debit balance at the end of the period, then overhead
is _____.

a. overapplied and cost of goods sold is understated

b. overapplied and cost of goods sold is restated
c. underapplied and cost of goods sold is understated
d. underapplied and cost of goods sold is overstated

78. If the overhead control account has a credit balance at the end of the period, then
overhead is _____.

a. overapplied and the difference should be credited to the proper accounts

b. overapplied and the difference should be debited to the proper accounts
c. underapplied and the difference should be debited to the proper
accounts
d. underapplied and the difference should be credited to the proper
accounts

79. The most common treatment of an end-of-year immaterial overhead variance is to _____.

a. ignore it
b. allocate the variance among inventories and cost of goods sold
c. capitalize the variance as a cost of finished goods inventory
d. close the variance to cost of goods sold in the current period

80. The proration method of disposing of overhead variances assigns the variance in
proportion to the sizes of the ending account balances to_____.

a. WIP Inventory, Finished Goods Inventory, and Direct Materials Inventory

b. Cost of Goods Sold, WIP Inventory, and Direct Materials
c. Direct Materials Inventory and WIP Inventory
d. Cost of Goods Sold, WIP Inventory, and Finished Goods Inventory

253
81. Vikings Company incurred actual overhead costs of $297,500 for the year. A budgeted factory-
overhead rate of 150% of direct-labor cost was determined at the beginning of the year.
Budgeted factory overhead was $300,000, and budgeted direct-labor cost was $200,000.
Actual direct-labor cost was $205,000 for the year. The factory-overhead variance for the
year was_____.

a. $2,500 underapplied
b. $2,500 overapplied
c. $10,000 underapplied
d. $10,000 overapplied

$297,500 - ($205,000 x 150%) = $10,000 overapplied

82. Kings Company incurred actual overhead costs of $305,000 for the year. A budgeted factory-
overhead rate of 150% of direct-labor cost was determined at the beginning of the year.
Budgeted factory overhead was $300,000, and budgeted direct-labor cost was $200,000.
Actual direct-labor cost was $205,000 for the year. The disposition of the factory-
overhead variance for the year (assuming an immaterial amount) was a_____.

a. debit to Cost of Goods Sold for $2,500

b. credit to Cost of Goods Sold for $2,500
c. debit to Cost of Goods Sold for $5,000
d. credit to Cost of Goods Sold for $5,000

$305,000 - ($205,000 x 150%) = $2,500 overapplied and reduce COGS

83. Suns Company incurred actual overhead costs of $305,000 for the year. A budgeted factory-
overhead rate of 150% of direct-labor cost was determined at the beginning of the year.
Budgeted factory overhead was $300,000, and budgeted direct-labor cost was $200,000.
Actual direct-labor cost was $205,000 for the year. The disposition of the variance
(assuming a material amount) would include a_____.

a. debit to Factory Department Overhead Control for $2,500

b. credit to Factory Department Overhead Control for $5,000
c. debit to Cost of Goods Sold for $2,500
d. credit to Cost of Goods Sold for $5,000

$305,000 - ($205,000 x 150%) = $2,500 overapplied

84. Choosing direct-labor cost rather than direct-labor hours as a cost driver for overhead
implies that_____.

a. higher paid employees use proportionally more support cost

b. higher paid employees use proportionally less support cost
c. direct-labor cost data is easier to obtain
d. direct-labor hour data is easier to obtain

254
85. Phoenix Company incurred actual overhead costs of $80,000 for the year. A budgeted
factory-overhead rate of 210% of direct-labor cost was determined at the beginning of the
year. Budgeted factory overhead was $78,750, and budgeted direct-labor cost was
$37,500. Actual direct-labor cost was $40,000 for the year. The disposition of the
variance, assuming a material amount, would include a_____.

a. debit to Factory Department Overhead Control for $4,000

b. credit to Factory Department Overhead Control for $1,250
c. debit to Cost of Goods Sold for $4,000
d. credit to Cost of Goods Sold for $1,250

$80,000 - ($40,000 x 210%) = $4,000 overapplied

86. The following information was gathered for Marlins Company:

Budgeted direct-labor hours 8,000

Actual direct-labor hours 8,100
Budgeted factory overhead $224,000
Actual factory overhead $224,970

Assume the cost driver is direct-labor hours. The amount of over/underapplied overhead
is_____.

a. $970 underapplied
b. $970 overapplied
c. $1,830 underapplied
d. $1,830 overapplied

$224,970 – [($224,000 / 8,000) x 8,100] = $1,830 overapplied

87. The following information was gathered for Gophers Company:

Budgeted direct-labor hours 31,000

Actual direct-labor hours 32,400
Budgeted factory overhead $147,250
Actual factory overhead $149,980

Assume the cost driver is direct-labor hours. The amount of over/underapplied overhead
is_____.

a. $2,730 underapplied
b. $2,730 overapplied
c. $6,450 underapplied
d. $3,920 overapplied

$149,980 – [($147,250 / 31,000) x 32,400] = $3,920 overapplied

255
LEARNING OBJECTIVE 4

88. Variable costing regards fixed manufacturing overhead as_____.

a. an unexpired cost
b. an inventoriable cost
c. a charge against sales
d. a product cost

89. _____ is another term for variable costing.

a. Full costing
b. Direct costing
c. Traditional costing
d. Absorption costing

90. _____ is not an inventoriable cost under variable costing.

a. Direct materials
b. Variable selling and administrative expenses
c. Variable manufacturing overhead
d. All of these answers are correct.

91. _____ is (are) expensed as a period cost under variable costing.

a. Fixed manufacturing overhead

b. Direct materials
c. Variable manufacturing overhead
d. Direct labor

92. In absorption costing, costs are separated into the major categories of_____.

a. manufacturing and nonmanufacturing

b. manufacturing and fixed
c. fixed and variable
d. variable and nonmanufacturing

93. When the variable costing method is used, fixed factory overhead appears on the income
statement as a_____.

a. component of cost of goods sold

b. fixed expense
c. production-volume variance
d. component of cost of goods sold and as a production-volume variance

256
94. _____ is (are) used for external reporting.

a. Absorption costing
b. Variable costing
c. Direct costing
d. Absorption costing and variable costing

95. Northstars Company reported the following information about the production and sales of
its only product during its first month of operations:

Sales ($225 per unit) $405,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

_____ units were sold.

a. 400
b. 1,800
c. 2,000
d. 1,575

$405,000 / $225 = 1,800 units

257
96. Ducks Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $405,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

_____ units were produced.

a. 400
b. 1,600
c. 2,200
d. 1,575

$405,000 / $225 = 1,800 units sold;

1,800 + 400 = 2,200 units

258
97. Indiana Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The cost of producing one unit of product using variable costing is_____.

a. $160
b. $200
c. $225
d. $170

$360,000 / $225 = 1,600 units sold;

1,600 + 400 = 2,000 units produced;
($176,000 + $100,000 + $44,000) / 2,000 = $160 per unit

259
98. Ohio Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The ending inventory under variable costing is_____.

a. $80,000
b. $90,000
c. $64,000
d. $68,000

($176,000 + $100,000 + $44,000) / 2,000 = $160 per unit;

400 x $160 = $64,000

260
99. Illinois Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $405,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The cost of goods sold under variable costing is_____.

a. $320,000
b. $360,000
c. $288,000
d. $272,000

($176,000 + $100,000 + $44,000) / 2,000 = $160 per unit;

$405,000 / $225 = 1,800 units sold;
1,800 x $160 = $288,000

261
100. Iowa Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The contribution margin under variable costing is_____.

a. $20,000
b. $84,000
c. $104,000
d. $40,000

($176,000 + $100,000 + $44,000) / 2,000 = $160 per unit;

$360,000 / $225 = 1,600 units sold;
1,600 x $160 = $256,000 COGS;
$360,000 - $20,000 - $256,000 = $84,000

262
101. Pennsylvania Company reported the following information about the production and
sales of its only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The operating income (loss) under variable costing is_____.

a. $10,000
b. 41,000
c. $(6,000)
d. $(70,000)

($176,000 + $100,000 + $44,000) / 2,000 = $160 per unit;

$360,000 / $225 = 1,600 units sold;
1,600 x $160 = $256,000 COGS;
$360,000 - $20,000 - $256,000 - $80,000 - $10,000 = $(6,000)

263
102. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $10,000

WIP none
Finished goods 1,200 units

Raw materials purchased during the current period are_____.

a. $25,000
b. $35,000
c. $18,000
d. none of these answers is correct

$25,000 + $10,000 = $35,000

264
103. A company has the following information for its first month of operations:

Sales ($65 per unit) $91,000

Raw materials used 25,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $7,000

WIP none
Finished goods 1,200 units

_____ units were sold during the period.

a. 0
b. 1,400
c. 2,400
d. 3,600

$91,000 / $65 = 1,400 units

265
104. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $91,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $7,000

WIP none
Finished goods 1,200 units

_____ units were produced during the period.

a. 0
b. 1,200
c. 2,600
d. 3,600

$91,000 / $65 = 1,400 units sold;

1,400 + 1,200 = 2,600 units

266
105. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $7,000

WIP none
Finished goods 1,200 units

_____ is the inventory cost per unit using variable costing.

a. $65.00
b. $35.00
c. $37.92
d. $36.25

$78,000 / $65 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($25,000 + $42,000 + $17,000) / 2,400 = $35.00

267
106. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $7,000

WIP none
Finished goods 1,200 units

The ending inventory under variable costing is_____.

a. $48,000
b. $84,000
c. $42,000
d. $96,000

$78,000 / $65 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($25,000 + $42,000 + $17,000) / 2,400 = $35.00
$35.00 x 1,200 = $42,000

268
107. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $7,000

WIP none
Finished goods 1,200 units

The cost of goods sold under variable costing is_____.

a. $42,000
b. $96,000
c. $48,000
d. $84,000

$78,000 / $65 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($25,000 + $42,000 + $17,000) / 2,400 = $35.00
$35.00 x 1,200 = $42,000

269
108. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

Ending inventories:

Raw materials $7,000

WIP none
Finished goods 1,200 units

The total contribution margin under variable costing is_____.

a. $21,000
b. $7,000
c. $34,500
d. $33,000

$78,000 / $65 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($25,000 + $42,000 + $17,000) / 2,400 = $35.00
$35.00 x 1,200 = $42,000 COGS
$78,000 - $42,000 - $3,000 = $33,000

270
109. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $12,500

WIP 0 none
Finished goods 0 1,200 units

Raw materials purchased during the current period are_____.

a. $37,500
b. $50,000
c. $27,000
d. none of these answers is correct.

$37,500 + $12,500 = $50,000

271
110. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $136,500
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $10,500

WIP 0 none
Finished goods 0 1,200 units

_____ units were sold during the period.

a. 500
b. 1,400
c. 1,200
d. 3.600

$136,500 / $97.50 = 1,400 units

272
111. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $10,500

WIP 0 none
Finished goods 0 1,400 units

_____ units were produced during the period.

a. 0
b. 1,400
c. 2,600
d. 4,000

$117,000 / $97.50 = 1,200 units sold;

1,200 + 1,400 = 2,600 units

273
112. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $10,500

WIP 0 none
Finished goods 0 1,200 units

_____ is the inventory cost per unit using variable costing.

a. $97.50
b. $52.50
c. $56.88
d. $54.38

$117,000 / $97.50 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($37,500 + $63,000 + $25,500) / 2,400 = $52.50

274
113. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $10,500

WIP 0 none
Finished goods 0 1,200 units

The ending inventory under variable costing is_____.

a. $72,000
b. $126,000
c. $63,000
d. $144,000

$117,000 / $97.50 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($37,500 + $63,000 + $25,500) / 2,400 = $52.50;
$52.50 x 1,200 = $63,000

275
114. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $10,500

WIP 0 none
Finished goods 0 1,200 units

The cost of goods sold under variable costing is_____.

a. $63,000
b. $144,000
c. $72,000
d. $126,000

$117,000 / $97.50 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($37,500 + $63,000 + $25,500) / 2,400 = $52.50;
$52.50 x 1,200 = $63,000

276
115. A company has the following information for the current month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

Inventories: Beginning Ending

Raw materials 0 $10,500

WIP 0 none
Finished goods 0 1,200 units

The total contribution margin under variable costing is_____.

a. $31,500
b. $10,500
c. $49,500
d. $54,000

$117,000 / $97.50 = 1,200 units sold;

1,200 + 1,200 = 2,400 units;
($37,500 + $63,000 + $25,500) / 2,400 = $52.50;
$52.50 x 1,200 = $63,000
$117,000 - $63,000 - $4,500 = $49,500

LEARNING OBJECTIVE 5

116. Absorption costing assigns _____ to the product.

a. variable manufacturing costs

b. all variable costs
c. variable and fixed manufacturing costs
d. all fixed and variable costs

117. The fixed overhead rate is computed as_____.

a. budgeted fixed manufacturing overhead / expected volume of production

b. actual fixed manufacturing overhead / actual volume of production
c. budgeted fixed manufacturing overhead / actual volume of production
d. actual fixed manufacturing overhead / expected volume of production

277
118. Fixed factory overhead appears on the absorption-costing income statement as_____.

a. a fixed expense
b. part of cost of goods sold
c. a production volume variance
d. part of cost of goods sold and as a production volume variance

119. An absorption-costing income statement separates cost into the major categories of_____.

a. manufacturing and nonmanufacturing

b. product and period
c. inventoriable and noninventoriable
d. all of these answers are correct

120. The _____ is not a difference between the standard absorption-costing format and the
variable-costing format.

a. computation of unit product cost

b. presentation of direct manufacturing costs
c. presentation of fixed manufacturing cost
d. major cost categories

121. There is no difference between variable-costing and absorption-costing income if there is

no_____.

a. beginning inventory
b. ending inventory
c. change in inventory level
d. variable overhead cost

278
122. Pearl Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The cost of goods sold under absorption costing is_____.

a. $320,000
b. $360,000
c. $256,000
d. $272,000

$360,000 / $225 = 1,600 units sold;

1,600 + 400 = 2,000 units produced;
[($176,000 + $100,000 + $44,000 + $80,000) / 2,000] x 1,600 = $320,000

279
123. Royalton Company reported the following information about the production and sales of
its only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The gross profit under absorption costing is_____.

a. $104,000
b. $84,000
c. $0
d. $40,000

$360,000 / $225 = 1,600 units sold;

1,600 + 400 = 2,000 units produced;
[($176,000 + $100,000 + $44,000 + $80,000) / 2,000] x 1,600 = $320,000;
$360,000 - $320,000 = $40,000

280
124. Chester Company reported the following information about the production and sales of
its only product during its first month of operations:

Sales ($225 per unit) $360,000

Direct materials used $176,000
Direct labor $100,000
Variable factory overhead $44,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $10,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 400 units

The operating income (loss) under absorption costing is_____.

a. $0
b. $10,000
c. ($6,000)
d. ($70,000)

$360,000 / $225 = 1,600 units sold;

1,600 + 400 = 2,000 units produced;
[($176,000 + $100,000 + $44,000 + $80,000) / 2,000] x 1,600 = $320,000;
$360,000 - $320,000 - $20,000 - $10,000 = $10,000

281
125. The fixed-overhead rate is determined by dividing the budgeted fixed manufacturing
overhead by_____.

a. expected volume of the cost driver

b. actual volume of production
c. budgeted variable manufacturing overhead
d. the number of units sold

126. In absorption costing, the fixed factory overhead is included_____.

a. entirely in the cost of goods sold

b. as part of cost of goods sold and as a production-volume variance
c. entirely as a production-volume variance
d. entirely in ending inventory

127. In absorption costing, sales revenue less cost of goods sold is_____.

a. contribution margin
b. net income
c. operating income
d. gross margin

128. _____ is not an alternative term for absorption costing.

a. Direct costing
b. Full costing
c. Traditional approach
d. Functional approach

129. The primary difference between variable and absorption costing is the accounting
for_____.

a. beginning inventory costs

b. fixed manufacturing overhead
c. selling and administrative costs
d. variable manufacturing overhead

130. _____ assigns both fixed and variable manufacturing costs to the product.

a. Direct costing
b. Variable costing
c. Absorption costing
d. Fixed costing

282
131. Stars Company reported the following information about the production and sales of its
only product during its first month of operations:

Sales ($225 per unit) $315,000

Direct materials used $160,000
Direct labor $100,000
Variable factory overhead $60,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $30,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 600 units

The cost of producing one unit of product using absorption costing is_____.

a. $160.00
b. $130.00
c. $225.00
d. $200.00

($315,000 / $225) + 600 = 2,000 units produced

($160,000 + $100,000 + $60,000 + $80,000) / 2,000 units = $200

283
132. Panthers Company reported the following information about the production and sales of
its only product during its first month of operations:

Sales ($225 per unit) $315,000

Direct materials used $160,000
Direct labor $100,000
Variable factory overhead $60,000
Fixed factory overhead $80,000
Variable selling and administrative expenses $20,000
Fixed selling and administrative expenses $30,000

Ending inventories:

Direct materials -0-

WIP -0-
Finished goods 600 units

The ending inventory under absorption costing is_____.

a. $135,000
b. $120,000
c. $78,000
d. $96,000

($315,000 / $225) + 600 = 2,000 units produced;

($160,000 + $100,000 + $60,000 + $80,000) / 2,000 units = $200;
600 x $200 = $120,000

284
133. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $20,000
Contribution margin unknown

The company sold half of the units it produced. _____ is the cost of goods sold under
absorption costing.

a. $30,000
b. $78,000
c. $58,000
d. $42,000

$78,000 - $20,000 = $58,000

134. A company has the following information for its first month of operations:

Raw materials used $25,000

Sales ($65 per unit) $78,000
Direct labor $42,000
Variable factory overhead $17,000
Fixed factory overhead unknown
Variable selling and administrative $3,000
Fixed selling and administrative $5,000
Gross profit $30,000
Contribution margin unknown

The company sold half of the units it produced. _____ of factory overhead is included in
the ending inventory under absorption costing.

a. $12,000
b. $6,000
c. $8,400
d. $-0-

$78,000 / $65 = 1,200 units sold;

2 x 1,200 = 2,400 units produced and 2,400 - 1,200 = units left;
$78,000 - $30,000 = $48,000 COGS;
$48,000 / 1,200 units sold = $40 manufacturing cost per unit;
($25,000 + $42,000 + $17,000 + Z) / 2,400 = $40;
Z = $12,000 fixed factory overhead;
$12,000 x (1,200 / 2,400) = $6,000

285
135. A company has the following information for its first month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $35,000
Contribution margin unknown

The company sold half of the units it produced. ____ is the cost of goods sold under
absorption costing.

a. $45,000
b. $117,000
c. $82,000
d. $63,000

$117,000 - $35,000 = $82,000

136. A company has the following information for its first month of operations:

Raw materials used $37,500

Sales ($97.50 per unit) $117,000
Direct labor $63,000
Variable factory overhead $25,500
Fixed factory overhead unknown
Variable selling and administrative $4,500
Fixed selling and administrative $7,500
Gross profit $45,000
Contribution margin unknown

The company sold half of the 2,400 units it produced. _____ of factory overhead is
included in the ending inventory under absorption costing.

a. $18,000
b. $9,000
c. $12,600
d. $-0-

$117,000 / $97.50 = 1,200 units sold;

2 x 1,200 = 2,400 units produced and 2,400 - 1,200 = units left;
$117,000 - $45,000 = $72,000 COGS;
$72,000 / 1,200 units sold = $60 manufacturing cost per unit;
($37,500 + $63,000 + $25,500 + Z) / 2,400 = $60;
Z = $18,000 fixed factory overhead;
$18,000 x (1,200 / 2,400) = $9,000

286
LEARNING OBJECTIVE 6

137. The production-volume variance is the difference between_____.

a. applied fixed overhead and budgeted fixed overhead

b. expected fixed overhead and actual fixed overhead
c. expected fixed overhead and budgeted fixed overhead
d. budgeted fixed overhead and actual fixed overhead

138. _____ is (are) computed for fixed overhead.

a. Production-volume variance
b. Flexible-volume variance
c. Production-volume variance and flexible-budget variance
d. None of these answers is correct

139. _____ is (are) computed for variable overhead.

a. Production-volume variance
b. Flexible-volume variance
c. Production-volume variance and flexible-budget variance
d. None of these answers is correct

140. Applied fixed cost is computed using_____volume.

a. expected
b. budgeted
c. actual
d. estimated

141. The difference between applied and budgeted fixed overhead is the_____.

a. production-volume variance
b. price variance
c. quality variance
d. feedback variance

142. When actual volume is less than expected volume, the production-volume variance
is_____.

a. favorable
b. overapplied
c. unfavorable
d. none of these answers is correct

287
143. When actual volume is less than expected volume, fixed overhead is_____.

a. favorable
b. underapplied
c. overapplied
d. none of these answers is correct

288
SHORT ANSWER:

LEARNING OBJECTIVE 1

144. The budgeted total overhead divided by the budgeted cost-driver activity

Budgeted factory-overhead rate

LEARNING OBJECTIVE 3

145. The cost system which computes the cost of a manufactured product as the sum of actual direct
materials, actual direct labor, and normal applied overhead

Normal costing system

146. The excess of overhead applied to products over actual overhead incurred

Overapplied overhead

147. The excess of actual overhead over the overhead applied to products

Underapplied overhead

148. To assign underapplied overhead or overapplied overhead in proportion to the sizes of the
ending accounting balances

Prorate

149. The method that adjusts only the Cost of Goods Sold account for overapplied and
underapplied overhead

Immediate write-off method

150. The accounts that are affected under the proration method

Work-In-Process (WIP) Inventory, Finished Goods Inventory, and Cost of Goods

Sold

LEARNING OBJECTIVE 4

151. The costing method that separates costs into major categories of fixed and variable

Variable costing

152. Variable costing is commonly called this

Direct costing and contribution approach

289
153. A variable-costing income statement separates costs into the major categories of
_______________ and _______________

Variable, fixed

154. The difference between sales revenue and all variable costs

Contribution margin

LEARNING OBJECTIVE 5

155. The costing method that is required for external reporting

Absorption costing

156. The format for the absorption-costing income statement separates costs into major categories of
_______________ and _______________

Manufacturing, nonmanufacturing

157. The difference between sales revenue and manufacturing cost

Gross margin or gross profit

158. The amount of fixed manufacturing overhead applied to each unit of production. It is
determined by dividing the budgeted fixed overhead by the expected volume of
production for the budget period

Fixed-overhead rate

LEARNING OBJECTIVE 6

159. The denominator in the computation of the fixed overhead rate

Expected volume of production

160. The production-volume variance is usually simply called

Volume variance

161. A variance that expresses the difference between actual production and the expected
volume of production

Production-volume variance

290
PROBLEMS:
LEARNING OBJECTIVE 1

162. Bulldog Company has the following ending account balances:

Direct materials inventory $25,000

WIP inventory $24,500
Finished goods inventory $54,500
Cost of goods sold $74,500

Additional information is as follows:

Cost of direct materials purchased $41,000

Cost of direct materials requisitioned $47,000
Cost of goods completed $119,000
Factory overhead applied $48,000
(120% of direct labor)

Ignore any year-end adjustments for overhead and compute the beginning inventory
balances of:

a. direct materials inventory

b. WIP inventory

c. finished goods inventory

Answer:

a. $47,000 - $41,000 + $25,000 = $31,000

b. $48,000 / 120% = $40,000 direct-labor costs incurred

$119,000 - $47,000 - $40,000 - $48,000 + $24,500 = $8,500

c. $74,500 - $119,000 + $54,500 = $10,000

291
LEARNING OBJECTIVES 1 and 3

163. The following information was gathered for Elliott Company:

Budgeted direct-labor hours 75,000

Actual direct-labor hours 77,500

Budgeted factory overhead $562,500

Actual factory overhead $538,000

Assume that direct-labor hours is the cost driver.

Compute:

a. Budgeted factory-overhead rate

b. Factory overhead applied

c. Amount of over/underapplied overhead

Answer:

a. $562,500 / 75,000 hours = $7.50 per hour

b. $7.50 x 77,500 hours = $581,250

c. $538,000 - $581,250 = $43,250 overapplied

292
164. Jones Corp. uses a budgeted factory-overhead rate to apply overhead to production.
The following data are available for the year:

Budgeted factory overhead $675,000

Actual factory overhead $726,000
Budgeted direct-labor costs $450,000
Actual direct-labor costs $482,000

End of year balances are as follows:

Materials inventory $120,000

WIP inventory $100,000
Cost of goods sold $150,000
Finished goods inventory $250,000

Required:

a. Determine the budgeted factory-overhead rate based on direct-labor costs.

b. What is the applied overhead based on direct-labor costs?

c. What is the overhead variance?

d. Prorate the overhead variance to the appropriate accounts.

Answer:

a. $675,000 / $450,000 = 150%

b. 150% x $482,000 = $723,000

c. $726,000 - $723,000 = $3,000 underapplied

d. $100,000 + $150,000 + $250,000 = $500,000

WIP: $100,000 / $500,000 x $3,000 = $600

Finished goods: $250,000 / $500,000 x $3,000 = $1,500

Cost of goods sold: $150,000 / $500,000 x $3,000 = $900

293
165. Smith Company applies overhead based upon machine hours. Budgeted factory
overhead was $266,400 and budgeted machine hours were 18,500. Actual factory
overhead was $287,920 and actual machine hours were 19,050. Before disposition of
under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories
were as follows:

Direct materials $60,000

WIP 190,000
Finished goods 250,000
Total $500,000

Required:

a. Determine the budgeted factory-overhead rate per machine hour.

b. Compute the overapplied or underapplied overhead.

c. Assuming the variance is immaterial, give the journal entry to dispose of the
variance.

d. Assuming the variance is material, give the journal entry to dispose of the variance
using proration.

Answer:

a. $266,400 / 18,500 hours = $14.40 per hour

b. $14.40 x 19,050 hours = $274,320 - $287,920 = $13,600 underapplied overhead

c. Cost of Goods Sold 13,600

Factory Department Overhead Control 13,600

d. $560,000 + $190,000 + $250,000 = $1,000,000

Cost of goods sold:

$560,000 / $1,000,000 = 56% x $13,600 = $7,616

WIP:

$190,000 / $1,000,000 = 19% x $13,600 = $2,584

Finished goods:

$250,000 / $1,000,000 = 25% x $13,600 = $3,400

Cost of Goods Sold 7,616

WIP Inventory 2,584
Finished Goods Inventory 3,400
Factory Department Overhead Control 13,600

294
LEARNING OBJECTIVE 3

166. Andrew Company had the following balances as of December 31, 20X5:

Cost of goods sold $250,000

Direct-materials inventory 50,000
WIP inventory 170,000
Finished goods inventory 80,000
Factory department overhead control 50,000 Credit

Required:

a. Does the variance represent overapplied or underapplied overhead?

b. Prepare the entry to dispose of the variance using the proration method.

c. What effect, if any, did the entry in part b. have on gross profit?

Answer:

a. Overapplied

b. $250,000 + $170,000 + $80,000 = $500,000

Cost of goods sold:

$250,000 / $500,000 = 50% x $50,000 = $25,000

WIP:

$170,000 / $500,000 = 34% x $50,000 = $17,000

Finished goods:

$80,000 / $500,000 = 16% x $50,000 = $8,000

Factory Department Overhead Control 50,000

Cost of Goods Sold 25,000
WIP Inventory 17,000
Finished Goods Inventory 8,000

c. The gross profit would increase by $25,000.

295
LEARNING OBJECTIVE 4

167. Donald Company prepared the following absorption-costing income statement for the
year ended May 31, 20X5:

Sales (16,000 units) $320,000

Cost of goods sold 216,000
Gross margin $104,000
Selling and administrative expenses 46,000
Operating income $58,000

Additional information follows:

Selling and administrative expenses include $1.50 of variable cost per unit sold. There
was no beginning inventory, and 17,500 units were produced. Variable manufacturing
costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs.

Required:

Prepare a variable-costing income statement for the same period.

Answer:

Sales $320,000
Variable expenses:
Manufacturing cost of goods sold 1 $176,000
Selling and administrative 2 24,000 200,000
Contribution margin $120,000
Fixed expenses:
Fixed factory overhead 3 $43,750
Fixed selling and administrative 4 22,000 65,750
Operating income $54,250
1
16,000 units x $11 = $176,000
2
16,000 units x $1.50 = $24,000
3
[($216,000 / 16,000 units) - $11] x 17,500 units = $43,750
4
$46,000 - $24,000 = $22,000

296
LEARNING OBJECTIVES 4 and 5

168. Kirk Company gathered the following information for the year ended December 31,
20X5:

Units produced 45,000 units

Units sold 43,200 units
Direct labor $137,200
Direct materials used $126,400
Fixed selling and administrative expenses $51,000
Variable selling and administrative expenses $58,000
Fixed manufacturing overhead $83,250
Variable manufacturing overhead $73,900
Beginning inventories none
Gross margin $171,200
Direct-materials inventory, December 31 $12,800
WIP, December 31 none

Required:

a. What is the ending finished-goods inventory cost under absorption costing?

b. What is the ending finished-goods inventory cost under variable costing?

Answer:

a. ($126,400 + $137,200 + $73,900 + $83,250) / 45,000 units = $9.35 per unit

$9.35 per unit x (45,000 - 43,200) = $16,830

b. ($126,400 + $137,200 + $73,900) / 45,000 units = $7.50 per unit

$7.50 per unit x (45,000 - 43,200) = $13,500

297
169. Smitty Company has provided the following information for the year ended April 30,
20X5:

Units sold 8,400 units

Units produced 11,200 units
Direct labor $99,600
Direct materials used $155,000
Fixed manufacturing overhead $52,640
Variable manufacturing overhead $70,200
Selling and administrative expenses (all fixed) $64,800
Beginning inventories none
Contribution margin $71,200
Direct-materials inventory, April 30 $19,920
WIP, April 30 none

Required:

a. What is the ending finished-goods inventory cost under variable costing?

b. What is the ending finished-goods inventory cost under absorption costing?

Answer:

a. ($155,000 + $99,600 + $70,200) / 11,200 units = $29.00 per unit

$29.00 per unit x (11,200 - 8,400) = $81,200

b. ($155,000 + $99,600 + $70,200 + $52,640) / 11,200 = $33.70 per unit

$33.70 per unit x 2,800 units = $94,360

298
170. The following data are available for Scream Company for the year:

Sales: 38,000 units at $50 each

Expected and actual production: 40,000 units

Manufacturing costs incurred:

Variable: $1,400,000
Fixed: $228,000

Nonmanufacturing costs incurred:

Variable: $76,000
Fixed: $135,000

Beginning inventories: none

Required

a. Determine operating income using the variable-costing approach.

b. Determine operating income using the absorption-costing approach.

c. Explain why operating income is not the same under the two approaches.

Answer:

a. 38,000 x $50 = $1,900,000 sales

($1,400,000 / 40,000) x 38,000 = $1,330,000 manufacturing variable cost

$1,900,000 - $1,330,000 - $76,000 = $494,000 contribution margin

$494,000 - $228,000 - $135,000 = $131,000 operating income

b. 38,000 x $50 = $1,900,000 sales

($228,000 / 40,000) x 38,000 = $216,600 manufacturing fixed cost

$1,900,000 - $1,330,000 - $216,600 = $353,400 gross margin

$353,400 - $76,000 - $135,000 = $142,400 operating income

c. $142,400 - $131,000 = $11,400 or (2,000 units in ending inventory x $5.70 per

unit of fixed manufacturing cost).

299
171. Oklahoma State Company produced 125,000 units and sold 112,500 units during its first year of
operations. Actual fixed costs came in right on budget, and variable selling costs were
$1.50 per unit sold. Additional data follow:

Sales $2,868,750

Manufacturing costs:

Material and labor $1,125,000

Variable overhead $431,250
Fixed overhead $656,250

Selling expenses:

Variable $337,500
Fixed $131,250

Required:

a. Prepare an income statement for the year assuming variable costing.

b. Prepare an income statement for the year assuming absorption costing.

Answer:

a. Sales $2,868,750
Variable expenses:
Mfg. cost of goods sold * $1,400,625
Selling expenses 337,500 1,738,125
Contribution margin $1,130,625
Fixed expenses:
Fixed factory overhead $656,250
Selling expenses 131,250 787,500
Operating income $343,125

* [($1,125,000 + $431,250) / 125,000] x 112,500 = $1,400,625

b. Sales $2,868,750
Cost of goods sold * 1,991,250
Gross margin $887,500
Selling expenses 468,750
Operating income $408,750

* $1,125,000 + $431,250 + $656,250 = $2,212,500

($2,212,500 / 125,000) x 112,500 = $1,991,250 cost of goods sold.

300
172. Lawsuit Company produces and sells a single product. Reported operating income for
the first three years of operations under absorption and variable costing are reported
below.

Variable Costing Absorption Costing

Year 1 $70,000 $60,000
Year 2 $80,000 $80,000
Year 3 $90,000 $100,000

Standard production costs per unit, sales prices, absorption rates, and expected volume
levels were the same each year. There were no underapplied or overapplied overhead
costs and no variances in any year.

Required:

a. In what year did units produced equal units sold?

b. In what year did units produced exceed units sold?

c. What is the dollar amount of the ending inventory in Year 3 if absorption costing
is used?

d. What is the difference between “units produced” and “units sold” in Year 3 if the
absorption costing fixed-manufacturing overhead application rate is $2 per unit?

Answer:

a. In Year 2 when variable costing net income equaled absorption costing net
income

b. In Year 3 when absorption costing net income exceeded variable costing net
income

c. $80,000 - $70,000 = $10,000

d. ($70,000 - $80,000) / $2 = 5,000 units

301
LEARNING OBJECTIVE 5

173. Below is the variable costing income statement for Brooklyn Company:

Sales, 6,000 units @ $35 $210,000

Variable expenses:
Beginning inventory, 680 units @ $20 $13,600
Variable manufacturing cost of
goods manufactured, 6,600 units @ $20 + $132,000
Variable manufacturing cost of
goods available for sale $145,600
Ending inventory, 1,280 units @ $20 - $25,600

Variable manufacturing cost of goods $120,000

Variable selling and administrative exp. + $24,900
Total variable costs $144,900

Contribution margin $65,100

Fixed expenses:
Fixed factory overhead $19,800
Fixed selling and admin. expenses + $15,300
Total fixed costs - $35,100

Operating income $30,000

Required:

Prepare an absorption-costing income statement for the same period. Assume that actual
fixed costs were equal to budgeted fixed costs and that fixed cost per unit produced has
remained constant over time.

Answer:

Sales $210,000
Cost of goods sold * 138,000
Gross margin $72,000
Selling and administrative expenses ** 40,200
Operating income $31,800

* Fixed factory overhead $19,800 / 6,600 units = $3 per unit;

$3 per unit + $20 per unit = $23 per unit;
$23 per unit x 6,000 units sold = $138,000

** $24,900 + $15,300 = $40,200

302
LEARNING OBJECTIVE 6

174. Florida Company's overhead cost information is given below:

Standard applied overhead $210,000

Budgeted overhead based on standard machine hours allowed $230,000

Budgeted overhead based on actual machine hours used $215,000

Actual overhead $200,000

Required:

a. Compute the total overhead variance.

b. Calculate the flexible-budget variance

c. Determine the production-volume variance.

Answer:

a. $200,000 - $210,000 = $10,000 favorable

b. $200,000 - $230,000 = $30,000 favorable

c. $230,000 - $210,000 = $20,000 unfavorable

303
175. Alabama Company's overhead cost information is given below:

Standard applied overhead $322,000

Budgeted overhead based on standard machine hours allowed $332,000

Budgeted overhead based on actual machine hours used $310,000

Actual overhead $346,000

Required:

a. Compute the total overhead variance.

b. Calculate the flexible-budget variance.

c. Determine the production-volume variance.

Answer:

a. $346,000 - $322,000 = $24,000 unfavorable

b. $346,000 - $332,000 = $14,000 unfavorable

c. $332,000 - $322,000 = $10,000 unfavorable

304
176. The following information was compiled by Georgia Company:

Expected volume of production 50,000 units

Actual level of production 47,500 units
Budgeted fixed overhead $400,000
Actual fixed overhead $415,000
Variable overhead rate per direct-labor hour $18
Actual variable overhead $790,000
Standard direct-labor hours allowed
per unit produced 1.0 hour
Standard direct-labor rate per hour $32.00
Actual direct-labor hours of input 46,500 hours
Actual direct-labor rate per hour $33.00

Compute the following variances:

a. Variable factory overhead flexible-budget variance

b. Fixed factory overhead flexible-budget variance

c. Fixed factory overhead production-volume variance

Answer:

a. $790,000 - (47,500 x 1.0 hr. x $18) = $65,000 favorable

b. $415,000 - $400,000 = $15,000 unfavorable

c. $400,000 - (47,500 x $8 *) = $20,000 favorable

* $400,000 / 50,000 units = $8 per unit

305
CRITICAL THINKING:
LEARNING OBJECTIVE 3

177. Provide reasons for differences between the amounts of incurred and applied overhead.

Answer:

Incurred overhead will differ from applied overhead in much the same way as any
estimate will differ from actual experience. Specific causes might be: variations in
suppliers’ prices; inefficiencies in production (excessive downtime, for example);
failure of sales to materialize; failure to meet production quotas; and unexpected
increases in fixed overhead (increase in insurance rates, for example).

178. What is the best theoretical method of allocating underapplied or overapplied overhead, assuming
that the objective is to obtain as accurate a cost application as possible?

Answer:

The best theoretical method of allocating underapplied or overapplied overhead is

to disregard it completely and recompute an actual overhead rate based on actual
costs incurred allocated over actual production units. Proration is usually a
reasonable approximation of this theoretical ideal.

306