Reconciliation of 'Absorption' Income vs. 'Variable' Income

11. Income under absorption costing may differ from income determined under variable costing. How is this difference calculated?

a. Change in the quantity of units in inventory times the fixed factory overhead rate per unit

b. Number of units produced during the period times the fixed factory overhead rate per unit

c. Change in the quantity of units in inventory times the variable manufacturing cost per unit

d. Number of units produced during the period times the variable manufacturing cost per unit

12. Last year, Magenta Company produced 10,000 units and sold 9,000 units. Fixed manufacturing overhead costs were P 20,000, and variable manufacturing overhead costs were P 3 per unit. For the year, one would expect net income under the absorption costing method to be

a. P 2,000 more than net income under variable costing method

b. P 5,000 more than net income under variable costing method

c. P 2,000 less than net income under variable costing method

d. P 5,000 less than net income under variable costing method

13. Green Company has operating income of P 50,000 using direct costing for a given period. Beginning and ending inventories for that period were 13,000 units and 18,000 units, respectively. If the fixed factory overhead application rate is P 2 per unit, what is the operating income using the absorption costing?

a. P 40,000

c. P 60,000

b. P 50,000

d. P 70,000

14. Pink Co. had a net income of P 85,500 using variable costing and net income of P 90,000 using absorption costing. Total fixed manufacturing overhead cost was P 150,000, and production was 100,000 units. Between the beginning and end of the year, how did the inventory level change?

a. Increased by 4,500 units

c. Increased by 3,000 units

b. Decreased by 4,500 units

d. Decreased by 3,000 units

15. Lavender Company's income under absorption costing was P 3,600 lower than its income under variable costing. The company sold 10,000 units during the year, and its variable costs were P 9 per unit, P 1 of which represents the variable selling expense. If production cost was P 11 per unit under absorption costing, then how many units did the company produce during the year?

a. 8,200 units

c. 11,200 units

b. 8,800 units

d. 11,800 units

16. Yellow Company had 16,000 units in its beginning inventory. During the year, the company's variable production costs were P 6 per unit and its fixed manufacturing overhead costs were P 4 per unit. The company's net income for the year was P 24,000 higher under absorption costing than it was under variable costing. Given these facts, what is the number of units in the ending inventory?

a. 22,000 units

c. 6,000 units

b. 10,000 units

d. 4,000 units

17. Variable costing and absorption costing will show the same incomes when there are no

a. Beginning inventories

c. Variable costs

b. Ending inventories

d. Beginning and ending inventories

18. Absorption costing and variable costing differ in that

a. Absorption costing inventories are more correctly valued.

b. Companies using absorption costing have lower fixed costs.

c. Standards can be used with absorption costing, but not with variable costing.

d. Production influences income under absorption costing, but not under variable costing.

19. When sales are constant, but production fluctuates

a. Absorption costing will always show a net loss

b. Net income will be erratic under variable costing

c. Net income will be erratic under absorption costing

d. Variable costing will always show a positive net income

Application of Variable Costing

20. Variable costing is unacceptable for

a. Financial accounting

b. Cost-volume-profit analysis

c. Intersegment transfer pricing

d. Short-term non-routine decision making