Exam 7: Absorption, Variable and Throughput Costing

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000. In which month(s) was variable costing profit lower than absorption costing profit?

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The product cost per unit using variable costing is

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Ending inventory for year 2 using variable costing would be

During its first year of operations, Kima Ltd. experienced the following: The amount of variable costs deducted from revenues under the variable costing approach would be

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: For how many months would variable costing profit be higher than absorption?

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity: The volume variance for the year was

PFA Ltd uses a throughput costing system and reported the following information for its first month of operations: Units produced…………………………………..140 Units sold………………………………………..120 Material cost per unit produced……………….$3.50 Conversion cost per unit produced……………$6.50 Fixed period costs per unit produced………….$6.00 Variable period costs per unit produced………$4.00 Selling price per unit…………………………$25.00 Under which of the following costing methods would PFA report the highest operating profit?

Variable costing income statements include fixed manufacturing overhead as part of the costs of ending inventory.

Normal capacity and budgeted capacity are demand-based capacity measurements.

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 1 using absorption costing would be

In variable costing

Absorption costing

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Operating profit for year 1 using variable costing would be

Throughput costing assumes that product costs other than materials tend to be fixed in the short run.

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 2 using absorption costing would be

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity: The volume variance was favorable in quarter(s)?

Under generally accepted accounting principles, absorption costing is used for

Direct materials costs are treated similarly under variable costing and throughput costing.

Because absorption costing capitalises fixed manufacturing overhead costs to inventory, managers using it may build up inventories unnecessarily.

Which of the following are demand-based capacity levels? I Normal capacity II Budgeted capacity III Practical capacity