ACYMANS2: Cost Volume Profit Analysis and Variable vs. Absorption Costing (Product Costing)

The systematic examination of the relationships among selling prices, volume of sales and production, costs, and profits is termed

a. Contribution margin analysis

b. Budgetary analysis

c. Cost-volume-profit analysis

d. Gross profit analysis

c. Cost-volume-profit analysis

Which of the following assumptions does not pertain to cost-volume-profit analysis?

a. The total revenue function is linear

b. All costs are classified as fixed or variable

c. The units produced will equal the units sold

d. Sales mix may vary during the related period

d. Sales mix may vary during the related period

*constant all throughout the period

At the breakeven point, fixed cost is always

a. Less than the contribution margin

b. More than the contribution margin

c. Equal to the contribution margin

d. More than the variable cost

c. Equal to the contribution margin

Cost-volume profit analysis is a key factor in many decisions, including choice of product-lines, pricing of products, marketing strategy, and utilization of product facilities. A calculation used in CVP analysis is the break-even point. Once the break-even point has been reached, operating income will increase by the

a. Sales price per unit for each additional unit sold

b. Contribution margin per unit for each additional unit sold

c. Fixed cost per unit for each additional unit sold

d. Gross margin per unit for each additional unit sold

b. Contribution margin per unit for each additional unit sold

To reduce the break-even point, the company may

a. Decrease both the fixed costs and contribution margin

b. Increase both the fixed costs and the contribution margin

c. Decrease the fixed costs and increase the contribution margin

d. Increase the fixed costs and decrease the contribution margin

c. Decrease the fixed costs and increase the contribution margin

The rate or amount that sales may decline before losses are incurred is called

a. Sensitive level of income

b. Variable sales ratio

c. Margin of safety

d. Residual income rates

c. Margin of safety

The margin of safety is a key concept of CVP analysis. The margin of safety is the

a. Contribution margin rate

b. Difference between budgeted contribution margin and actual contribution margin

c. Difference between budgeted contribution margin and break-even contribution margin

d. Difference between budgeted sales and break-even sales

d. Difference between budgeted sales and break-even sales

Company X produces a product that has the following data per annum

Unit sales price P400 per unit

Unit variable costs P260 per unit

Total fixed cost P7,000,000

Units sold 70,000 units

Unit contribution margin, contribution margin ratio, and variable cost ratio.

UCM: 400-260 = 140

CMR: 140/400 = 35%

VCR: 18.2M/28M = 65%

[260*70k = 18.2M]

[400*70k = 28M]

Company X produces a product that has the following data per annum

Unit sales price P400 per unit

Unit variable costs P260 per unit

Total fixed cost P7,000,000

Units sold 70,000 units

Break-even point in units and in pesos.

BEPu: 7M/140 = 50k units

BEPp: 7M/35% = P20M

Company X produces a product that has the following data per annum

Unit sales price P400 per unit

Unit variable costs P260 per unit

Total fixed cost P7,000,000

Units sold 70,000 units

Margin of safety in units, in pesos, and margin of safety ratio

MOSunits: 70k-50k = 20k

MOSp: 28M-20M = 8M

MOSr: 8M/28M = 28.57%

Company X produces a product that has the following data per annum

Unit sales price P400 per unit

Unit variable costs P260 per unit

Total fixed cost P7,000,000

Units sold 70,000 units

Net profit ratio

[28M-18.2M-7M] = 2.8M

2.8M/28M = 10%

Company X produces a product that has the following data per annum

Unit sales price P400 per unit

Unit variable costs P260 per unit

Total fixed cost P7,000,000

Units sold 70,000 units

If sales increase by P450,000, how much would you expect profit to increase?

450k x 35% = 157.5k

Company X sells a product to retailers for P200. The unit variable cost is P40 with a selling commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed selling and administrative costs total P420,000. The income tax rate is 30%. The target sales if after tax income is P123,200 would be

a. 10,950 units

b. 13,750 units

c. 11,400 units

d. 15,640 units

c. 11,400 units

[1.42M + 176k]/140

{200-40-20 = 140}

Company X has sales of P200,000, a contribution margin of 20%, and a margin of safety of P80,000. What is the company's fixed cost?

a. P16,000

b. P80,000

c. P24,000

d. P96,000

c. P24,000

80k = 200k - 120k

120 x 20% = 24k

If sales are P525,000, variable costs are 64% of sales, and operating income is P50,000, what is the contribution margin ratio?

a. 36%

b. 26.5%

c. 9.5%

d. 64%

a. 36%

SALES: 100

V. COST: 64

CM: 36

If the contribution margin ratio for Company X is 37%, sales were P425,000. and fixed costs were P100,000, what is the income from operations?

a. P167,750

b. P57,250

c. P54,730

d. P125,310

b. P57,250

425k x 37% = 157,250

157,250 - 100k = 57,250

If fixed costs are P1,400,000, the unit selling price is P220, and the unit variable costs are P120, what is the amount of sales required to realize an operating income of P200,000?

a. 14,000 units

b. 12,000 units

c. 16,000 units

d. 13,333 units

c. 16,000 units

[1.4M + 200k]/100 = 16k

A company sells two products X and Y. The sales mix consists of a composite unit of two (2) units of X for every five (5) units of Y. Fixed costs are P49,500. The unit contribution margins for X and Y are P2.50 and P1.20, respectively.

Considering the company as a whole, the number of composite units to break even is

a. 31,500

b. 4,500

c. 8,250

d. 9,900

a. 31,500

If the company had an operating income of P22,000, the unit sales for Product X and Product Y must have been

a. 5,000; 12,500

b. 13,000; 32,500

c. 23,800; 59,500

d. 28,600; 71,500

b. 13,000; 32,500

In an income statement prepared as an internal report using the variable (direct) costing method, fixed selling and administrative expenses would

a. Not be used

b. Be used in the computation of the contribution margin

c. Be used in the computation of operating income but not in the computation of the contribution margin

d. Be treated the same as variable selling and administrative expenses

c. Be used in the computation of operating income but not in the computation of the contribution margin

Which of the following statements is correct?

a. When production is higher than sales, absorption costing profit is lower than variable costing profit

b. If all the products manufactured during the period are sold in that period, variable costing profit is equal to absorption costing profit

c. When production is lower than sales, variable costing profit is lower than absorption costing profit higher

d. When production and sales level are equal, variable costing profit is lower than absorption costing profit

b. If all the products manufactured during the period are sold in that period, variable costing profit is equal to absorption costing profit

WHY?

a. When production is higher than sales, absorption costing profit is lower than variable costing profit → HIGHER

c. When production is lower than sales, variable costing profit is lower than absorption costing profit higher → HIGHER

d. When production and sales level are equal, variable costing profit is lower than absorption costing profit → EQUAL

Variable costing and absorption costing will show the same income when there are no

a. Beginning inventories

b. Ending inventories

c. Variable costs

d. Beginning and ending inventories

d. Beginning and ending inventories

Under variable costing, which of the following are costs that can be inventoried?

a. Variable selling and administrative expense

b. Variable manufacturing overhead

c. Fixed manufacturing overhead

d. Fixed selling and administrative expense

b. Variable manufacturing overhead

Under absorption costing, fixed manufacturing overhead could be found in all of the following except the

a. Work-in-process account

b. Finished goods inventory account

c. Cost of Goods Sold

d. Period costs

d. Period costs

Identify the following statements as true or false

Statement 1: In variable costing, fixed factory overhead forms part of the inventory value.

Statement 2: The difference in profit between variable costing and absorption costing is due entirely to the treatment of fixed manufacturing overhead.

a. Statement 1 is true, Statement 2 is true

b. Statement 1 is true, Statement 2 is false

c. Statement 1 is false, Statement 2 is true

d. Statement 1 is false, Statement 2 is false

c. Statement 1 is false, Statement 2 is true

Which of the following statements is true?

a. Depreciation expense is always a product cost

b. Depreciation expense is always a period cost

c. Selling and administrative costs, whether variable or fixed, are always treated as period costs under both the absorption and variable costing systems

d. Income under absorption costing is always greater than income under variable costing

c. Selling and administrative costs, whether variable or fixed, are always treated as period costs under both the absorption and variable costing systems

An ending inventory valuation on an absorption costing balance sheet would

a. Sometimes be less than the ending inventory valuation under variable costing

b. Always be less than the ending inventory valuation under variable costing

c. Always be the same as the ending inventory valuation under variable costing

d. Always be greater than or equal to the ending inventory valuation under variable costing

d. Always be greater than or equal to the ending inventory valuation under variable costing

→ because FOH is capitalizable

Corporation X has the following data available to you:

Sales (P50 selling price) P500,000

Direct materials 20,000

Direct labor 30,000

Overhead:

Variable 10,000

Fixed 60,000

Selling & Admin:

Variable 15,000

Fixed 25,000

Units:

Beg. Inventory 2,000

Production 12,000

Compute for the following:

Net income - abs. costing

360k

Corporation X has the following data available to you:

Sales (P50 selling price) P500,000

Direct materials 20,000

Direct labor 30,000

Overhead:

Variable 10,000

Fixed 60,000

Selling & Admin:

Variable 15,000

Fixed 25,000

Units:

Beg. Inventory 2,000

Production 12,000

Compute for the following:

Net income - var. costing

350k

Corporation X has the following data available to you:

Sales (P50 selling price) P500,000

Direct materials 20,000

Direct labor 30,000

Overhead:

Variable 10,000

Fixed 60,000

Selling & Admin:

Variable 15,000

Fixed 25,000

Units:

Beg. Inventory 2,000

Production 12,000

Compute for the following:

Ending inventory - abs. costing

40k

Corporation X has the following data available to you:

Sales (P50 selling price) P500,000

Direct materials 20,000

Direct labor 30,000

Overhead:

Variable 10,000

Fixed 60,000

Selling & Admin:

Variable 15,000

Fixed 25,000

Units:

Beg. Inventory 2,000

Production 12,000

Compute for the following:

Ending inventory - var. costing

20k

Corporation X has the following data available to you:

Sales (P50 selling price) P500,000

Direct materials 20,000

Direct labor 30,000

Overhead:

Variable 10,000

Fixed 60,000

Selling & Admin:

Variable 15,000

Fixed 25,000

Units:

Beg. Inventory 2,000

Production 12,000

Compute for the following:

Reconciliation of net income

10k

Corporation X has the following standard costs associated with the manufacture and sale of one of its products:

Direct material P3.00 per unit

Direct labor 2.50 per unit

Variable manufacturing overhead

1.80 per unit

Fixed manufacturing overhead

4.00 per unit (based on an estimate of 50,000 units per year)

Variable selling expenses 0.25 per unit

Fixed SG&A expense P75,000 per year

During its first year of operations, the company manufactured 50,000 units and sold 48,000. The selling price per unit was P25. All costs were equal to standard.

Under absorption costing, the standard production cost per unit was

a. P11.30

b. P7.30

c. P11.55

d. P13.05

a. P11.30

Corporation X has the following standard costs associated with the manufacture and sale of one of its products:

Direct material P3.00 per unit

Direct labor 2.50 per unit

Variable manufacturing overhead

1.80 per unit

Fixed manufacturing overhead

4.00 per unit (based on an estimate of 50,000 units per year)

Variable selling expenses 0.25 per unit Fixed SG&A expense P75,000 per year

During its first year of operations, the company manufactured 50,000 units and sold 48,000. The selling price per unit was P25. All costs were equal to standard.

Under variable costing, the standard production cost per unit was

a. P11.30

b. P7.30

c. P7.55

d. P11.5

b. P7.30

Corporation X has the following standard costs associated with the manufacture and sale of one of its products:

Direct material P3.00 per unit

Direct labor 2.50 per unit

Variable manufacturing overhead

1.80 per unit

Fixed manufacturing overhead

4.00 per unit (based on an estimate of 50,000 units per year)

Variable selling expenses 0.25 per unit

Fixed SG&A expense P75,000 per year

During its first year of operations, the company manufactured 50,000 units and sold 48,000. The selling price per unit was P25. All costs were equal to standard.

Based on variable costing, the income before income taxes for the year was

a. P570,600

b. P560,000

c. P562,600

d. P547,500

c. P562,600

Corporation X has the following standard costs associated with the manufacture and sale of one of its products:

Direct material P3.00 per unit

Direct labor 2.50 per unit

Variable manufacturing overhead

1.80 per unit

Fixed manufacturing overhead

4.00 per unit (based on an estimate of 50,000 units per year)

Variable selling expenses 0.25 per unit

Fixed SG&A expense P75,000 per year

During its first year of operations, the company manufactured 50,000 units and sold 48,000. The selling price per unit was P25. All costs were equal to standard.

Based on absorption costing, the income before income taxes for the year was

a. P570,600

b. P560,000

c. P562,600

d. P547,500

a. P570,600

Use the following information for the next two questions: The following information is available for Company X for its first year of operations:

Sales in units 5,000

Production in units 8,000

Manufacturing costs:

Direct labor P3 per unit

Direct material 5 per unit

Variable overhead 1 per unit

Fixed overhead P100,000

Net income (absorption method) P30,000

Sales price per unit P40

What would Company X have reported as its income before income taxes if it had used variable costing?

a. P30,000

b. (P7,500)

c. P67,500

d. None of the choices

b. (P7,500)

Use the following information for the next two questions: The following information is available for Company X for its first year of operations:

Sales in units 5,000

Production in units 8,000

Manufacturing costs:

Direct labor P3 per unit

Direct material 5 per unit

Variable overhead 1 per unit

Fixed overhead P100,000

Net income (absorption method) P30,000

Sales price per unit P40

What was the total amount of SG&A expense incurred by Company X?

a. P30,000

b. P62,500

c. P6,000

d. None of the choice

b. P62,500