Managerial Accounting Quiz: Fixed Overhead In Inventory
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Fixed Overhead In InventoryQuestion 1 of 20

Marvel Corp uses both absorption and variable costing systems. Fixed manufacturing overhead is $8 per unit. During the year, the company had the following inventory changes: Q1 inventory increased by 2,000 units, Q2 inventory decreased by 1,500 units, Q3 inventory increased by 3,500 units, and Q4 inventory decreased by 2,500 units. What is the difference in annual operating income between the two costing methods?

Absorption costing shows $4,000 higher operating income than variable costing for the year
Variable costing shows $12,000 higher operating income than absorption costing for the year
Absorption costing shows $12,000 higher operating income than variable costing for the year
Variable costing shows $4,000 higher operating income than absorption costing for the year
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Managerial Accounting Quiz

Managerial Accounting Quiz: Fixed Overhead In Inventory

Practice Fixed Overhead In Inventory in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Fixed Overhead In Inventory, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

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Question 1

Marvel Corp uses both absorption and variable costing systems. Fixed manufacturing overhead is $8 per unit. During the year, the company had the following inventory changes: Q1 inventory increased by 2,000 units, Q2 inventory decreased by 1,500 units, Q3 inventory increased by 3,500 units, and Q4 inventory decreased by 2,500 units. What is the difference in annual operating income between the two costing methods?

  1. Absorption costing shows $4,000 higher operating income than variable costing for the year
  2. Variable costing shows $12,000 higher operating income than absorption costing for the year
  3. Absorption costing shows $12,000 higher operating income than variable costing for the year (correct answer)
  4. Variable costing shows $4,000 higher operating income than absorption costing for the year
Explanation: The difference is based on the net change in inventory for the year. Net inventory change = +2,000 - 1,500 + 3,500 - 2,500 = +1,500 units. Since inventory increased by 1,500 units net, absorption costing will show higher income by 1,500 units × $8 = $12,000. This is because fixed overhead costs are deferred in ending inventory under absorption costing but expensed immediately under variable costing.

Question 2

A company's absorption costing income statement reported sales of $1,000,000 (for 20,000 units), cost of goods sold of $600,000, and a gross margin of $400,000. The company's fixed manufacturing overhead application rate is $8 per unit. During the period, the company's finished goods inventory decreased by 3,000 units. What was the net operating income under variable costing, assuming total selling and administrative expenses were $250,000?

  1. $126,000
  2. $150,000
  3. $174,000 (correct answer)
  4. $400,000
Explanation: First, calculate the absorption costing net operating income: (\text{Gross Margin} - \text{S&A Expenses} = 400,000−400,000 - 250,000 = 150,000\). The difference between absorption and variable costing income is due to the change in inventory. Since inventory decreased by 3,000 units, variable costing income will be higher than absorption costing income. The amount of the difference is the inventory decrease multiplied by the fixed overhead rate: \(3,000\text{ units} \times 8/\text{unit} = 24,000\). Therefore, the variable costing net operating income is \(150,000 + 24,000=24,000 = 174,000).

Question 3

A company reported the following for the year: beginning inventory, 0 units; production, 15,000 units; sales, 12,000 units. Total variable manufacturing costs were $180,000, and total fixed manufacturing overhead was $90,000. What is the difference between the Cost of Goods Sold (COGS) reported under absorption costing versus variable costing?

  1. $18,000
  2. $72,000 (correct answer)
  3. $90,000
  4. $144,000
Explanation: First, calculate the fixed manufacturing overhead (FMOH) rate per unit produced: (90,000/15,000 units=90,000 / 15,000\text{ units} = 6) per unit. Next, calculate the variable manufacturing cost per unit: (180,000/15,000 units=180,000 / 15,000\text{ units} = 12) per unit. Under absorption costing, COGS includes both variable and fixed manufacturing costs for the units sold: (12,000\text{ units} \times (12+12 + 6) = 216,000\). Under variable costing, COGS includes only the variable manufacturing costs: \(12,000\text{ units} \times 12 = 144,000\). The difference is \(216,000 - 144,000=144,000 = 72,000). Alternatively, the difference is simply the amount of fixed overhead included in absorption costing COGS: (12,000\text{ units sold} \times 6 FMOH/unit=6\text{ FMOH/unit} = 72,000).

Question 4

Over the entire life of an enterprise, if inventory levels at the beginning and end of its life are zero, what will be the relationship between the cumulative net operating income reported under absorption costing and variable costing?

  1. Cumulative absorption costing income will be higher by the total fixed manufacturing overhead incurred.
  2. Cumulative variable costing income will be higher due to the immediate expensing of fixed costs.
  3. The cumulative incomes reported under both methods will be identical. (correct answer)
  4. The relationship is indeterminate without knowing the year-to-year fluctuations in production and sales.
Explanation: The difference in reported income between the two methods is caused by the deferral and release of fixed manufacturing overhead in inventory. While the timing of the expense recognition differs, the total amount of fixed manufacturing overhead incurred over the company's life must eventually be expensed under both methods. If the company starts with zero inventory and ends with zero inventory, there is no net deferral of fixed costs. Therefore, over the long run, the cumulative net operating income will be the same under both absorption and variable costing.

Question 5

When comparing absorption costing and variable costing, which of the following costs is treated differently between the two methods, leading to different inventory valuations and net operating incomes?

  1. Variable selling and administrative expenses
  2. Direct materials and direct labor
  3. Fixed manufacturing overhead (correct answer)
  4. Fixed selling and administrative expenses
Explanation: The sole difference between absorption costing and variable costing lies in the treatment of fixed manufacturing overhead (FMOH). Under absorption costing, FMOH is treated as a product cost, meaning it is included in the cost of inventory and is expensed through cost of goods sold only when the inventory is sold. Under variable costing, FMOH is treated as a period cost and is expensed in its entirety in the period it is incurred, regardless of how many units are produced or sold. All other costs (direct materials, direct labor, variable manufacturing overhead, and all selling and administrative expenses) are treated identically under both methods.

Question 6

A company began operations this year. It produced 40,000 units and sold 36,000 units. Costs for the year were: total fixed manufacturing overhead, $200,000; variable manufacturing cost per unit, $15. What is the value of ending inventory on the year-end balance sheet if the company uses absorption costing?

  1. $60,000
  2. $80,000 (correct answer)
  3. $540,000
  4. $720,000
Explanation: First, calculate the fixed manufacturing overhead (FMOH) rate per unit produced: (200,000/40,000 units=200,000 / 40,000\text{ units} = 5) per unit. Under absorption costing, the full product cost per unit is the sum of variable manufacturing cost and allocated fixed manufacturing overhead: (15+15 + 5 = 20\) per unit. Next, determine the number of units in ending inventory: 40,000\text{ produced} - 36,000\text{ sold} = 4,000\text{ units}. Finally, calculate the value of ending inventory: \(4,000\text{ units} \times 20/\text{unit} = $80,000).

Question 7

For the year just ended, a company's variable costing net income was $300,000. Beginning and ending inventories were 10,000 and 15,000 units, respectively. The fixed manufacturing overhead cost per unit was $12. What was the net income under absorption costing?

  1. $240,000
  2. $300,000
  3. $360,000 (correct answer)
  4. $480,000
Explanation: The difference between absorption and variable costing net income is the fixed manufacturing overhead (FMOH) deferred in or released from inventory. The change in inventory is an increase of 15,000−10,000=5,000 units15,000 - 10,000 = 5,000\text{ units}. Since inventory increased, production exceeded sales, and FMOH was deferred in inventory. The amount of deferred FMOH is (5,000\text{ units} \times 12/unit=12/\text{unit} = 60,000). When FMOH is deferred, absorption costing income is higher than variable costing income. Therefore, absorption costing net income is (300,000+300,000 + 60,000 = $360,000).

Question 8

A company's inventory level increased by 2,500 units during the year. Its absorption costing net operating income was $220,000. The fixed manufacturing overhead rate is $6 per unit. What was the company's net operating income under variable costing?

  1. $15,000
  2. $205,000 (correct answer)
  3. $220,000
  4. $235,000
Explanation: When inventory increases, it means production exceeded sales. Under absorption costing, a portion of the period's fixed manufacturing overhead (FMOH) is attached to the unsold units and remains in inventory, rather than being expensed. This deferral of FMOH makes absorption costing income higher than variable costing income. The amount of the difference is the inventory increase in units multiplied by the FMOH rate: (2,500\text{ units} \times 6/unit=6/\text{unit} = 15,000). Since absorption costing income is higher, the variable costing income is (220,000−220,000 - 15,000 = $205,000).

Question 9

A company produces a single product. For the most recent year, production was 12,000 units while sales were 10,000 units. Total fixed manufacturing overhead was $60,000. The company's reported net operating income was $30,000 under absorption costing. What would the company's net operating income have been under variable costing?

  1. $20,000 (correct answer)
  2. $25,000
  3. $40,000
  4. $42,000
Explanation: Under absorption costing, fixed manufacturing overhead is a product cost. The fixed overhead rate is the total fixed overhead divided by the number of units produced: (60,000/12,000 units=60,000 / 12,000\text{ units} = 5) per unit. When production exceeds sales (12,000 > 10,000), inventory increases. The increase in inventory is 2,000 units. Under absorption costing, (2,000\text{ units} \times 5/unit=5/\text{unit} = 10,000) of fixed overhead is deferred in ending inventory. This means absorption costing income is 10,000 higher than variable costing income. Therefore, variable costing net operating income is \(30,000 - $10,000 = $20,000).

Question 10

Over a two-year period, a company reported the following production and sales data:

  • Year 1: Produced 20,000 units, Sold 17,000 units.
  • Year 2: Produced 18,000 units, Sold 21,000 units. The fixed manufacturing overhead rate was constant at $10 per unit in both years. Which statement correctly describes the relationship between total absorption costing income (ACI) and total variable costing income (VCI) over the entire two-year period?
  1. Total ACI is $30,000 higher than total VCI.
  2. Total VCI is $30,000 higher than total ACI.
  3. Total ACI and total VCI are identical. (correct answer)
  4. Total ACI is $60,000 higher than total VCI.
Explanation: The difference in income between the two methods is driven by the change in inventory. In Year 1, production (20,000) exceeded sales (17,000) by 3,000 units, so ACI was (3,000 \times 10=10 = 30,000) higher than VCI. In Year 2, sales (21,000) exceeded production (18,000) by 3,000 units, so VCI was (3,000 \times 10=10 = 30,000) higher than ACI. Over the two-year period, the total number of units produced (38,000) equals the total number of units sold (38,000). Because the cumulative change in inventory is zero, the total fixed overhead expensed is the same under both methods, resulting in identical total net operating income over the two years.

Question 11

Titan Corp. applies fixed manufacturing overhead (FMOH) at a rate of $8 per unit, based on a practical capacity of 50,000 units. In the current year, Titan produced 45,000 units and sold 48,000 units. What is the amount of fixed manufacturing overhead released from inventory during the year?

  1. $24,000 (correct answer)
  2. $36,000
  3. $40,000
  4. $64,000
Explanation: When sales exceed production, a company sells all of the units it produced in the current period plus some units from beginning inventory. The fixed overhead associated with those beginning inventory units is 'released' and charged to cost of goods sold. The number of units released from inventory is the decrease in inventory: 48,000 sold−45,000 produced=3,000 units48,000\text{ sold} - 45,000\text{ produced} = 3,000\text{ units}. The amount of FMOH released is this unit decrease multiplied by the FMOH rate: (3,000\text{ units} \times 8/unit=8/\text{unit} = 24,000). This amount represents the difference in income between the two methods for the period, with variable costing income being higher.

Question 12

For a given period, a company's absorption costing net operating income was $110,000, while its variable costing net operating income was $125,000. The fixed manufacturing overhead rate was $5 per unit. Which of the following statements is consistent with these results?

  1. The company sold 3,000 more units than it produced. (correct answer)
  2. The company produced 3,000 more units than it sold.
  3. The company's production volume variance was $15,000 favorable.
  4. The company sold 25,000 units during the period.
Explanation: Variable costing income (125,000)ishigherthanabsorptioncostingincome(125,000) is higher than absorption costing income (110,000) by 15,000. This occurs when a company sells more units than it produces, causing inventory levels to decrease. When inventory decreases, fixed manufacturing overhead (FMOH) that was deferred in prior periods is released from inventory and expensed in the current period's cost of goods sold under absorption costing. The difference in income is equal to the decrease in inventory (in units) multiplied by the FMOH rate. Therefore, \(15,000 = \text{Inventory decrease} \times 5/\text{unit}\). Solving for the inventory decrease gives \(15,000 / $5 = 3,000\text{ units}). An inventory decrease of 3,000 units means the company sold 3,000 more units than it produced.

Question 13

At the beginning of the year, a company had 4,000 units in inventory, valued under absorption costing at $25 per unit, which included $5 of allocated fixed manufacturing overhead (FMOH). During the year, the company produced 20,000 units and incurred total FMOH of $110,000. If the company sold 22,000 units, what is the total FMOH included in the cost of goods sold for the year?

  1. $110,000
  2. $119,000 (correct answer)
  3. $121,000
  4. $130,000
Explanation: First, determine the FMOH rate for the current period's production: $110,000 ÷ 20,000 units produced = $5.50 per unit. The 22,000 units sold are assumed to come first from beginning inventory (4,000 units) and then from current production (18,000 units) under a FIFO assumption. The FMOH cost from beginning inventory is 4,000 × $5.00 = $20,000. The FMOH cost from current production sold is 18,000 × $5.50 = $99,000. Total FMOH in COGS is $20,000 + $99,000 = 119,000.ChoiceC(119,000. Choice C (121,000) represents a common error of applying the current period rate to all units sold (22,000 × $5.50).

Question 14

A company produces a product with a variable manufacturing cost of $10 per unit. Budgeted fixed manufacturing overhead (FMOH) is $150,000 based on a denominator level of 30,000 units. During the year, the company produced 32,000 units and sold 28,000 units. How does the ending inventory valuation under absorption costing compare to its valuation under variable costing?

  1. It is $20,000 higher. (correct answer)
  2. It is $40,000 higher.
  3. It is $18,750 higher.
  4. It is $44,000 higher.
Explanation: First, calculate the predetermined FMOH rate: (150,000/30,000 units=150,000 / 30,000\text{ units} = 5) per unit. Ending inventory consists of 32,000 produced−28,000 sold=4,000 units32,000\text{ produced} - 28,000\text{ sold} = 4,000\text{ units}. The value of this inventory under variable costing is (4,000\text{ units} \times 10/unit=10/\text{unit} = 40,000). Under absorption costing, the inventory cost includes the FMOH rate: (4,000\text{ units} \times (10+10 + 5)/\text{unit} = 60,000\). The difference in valuation is \(60,000 - 40,000=40,000 = 20,000). Alternatively, the difference is simply the FMOH deferred in ending inventory: (4,000\text{ units} \times 5/unit=5/\text{unit} = 20,000).

Question 15

A company reports the following financial results:

  • Absorption costing net income: $75,000
  • Variable costing net income: $63,000
  • Units produced: 20,000
  • Units in ending inventory: 6,000 Assuming the company started the period with no inventory, what was the total fixed manufacturing overhead for the period?
  1. $21,000
  2. $40,000 (correct answer)
  3. $50,000
  4. $60,000
Explanation: First, find the difference in income: (75,000−75,000 - 63,000 = 12,000\). Since absorption income is higher, production must have exceeded sales. The change in inventory is the ending inventory of 6,000 units (since beginning inventory was zero). The income difference is equal to the change in inventory multiplied by the fixed overhead (FMOH) rate: \(12,000 = 6,000\text{ units} \times \text{FMOH rate}). Solving for the rate gives (12,000/6,000=12,000 / 6,000 = 2) per unit. The FMOH rate is also calculated as Total FMOH divided by units produced. Therefore, (2/\text{unit} = \text{Total FMOH} / 20,000\text{ units}\). Solving for Total FMOH gives \(2 \times 20,000 = $40,000).

Question 16

A manufacturing firm is making a strategic shift from a traditional, forecast-driven production model to a just-in-time (JIT) system. Assuming all other factors like sales demand and cost structures remain stable, what is the most likely effect of this operational change on the company's reported financial results?

  1. The amount of fixed overhead deferred in inventory each period will increase, boosting absorption costing income.
  2. The cost of goods sold under absorption costing will become less representative of current manufacturing costs.
  3. Variable costing will consistently report higher net income than absorption costing.
  4. The discrepancy between net income calculated under absorption and variable costing will diminish significantly. (correct answer)
Explanation: A just-in-time (JIT) system aims to minimize inventory levels by producing goods only as they are needed to meet customer demand. This means that the number of units produced will be very close to the number of units sold in any given period. The difference between absorption costing income and variable costing income is determined by the change in inventory levels. As inventory levels and changes in those levels approach zero under JIT, the amount of fixed overhead deferred in or released from inventory also approaches zero. Consequently, the net operating income reported under the two methods will become nearly identical.

Question 17

A manager's annual bonus is based on the division's net operating income calculated using absorption costing. The company applies a predetermined fixed overhead rate based on expected production. In the final month of the year, with sales lagging behind forecasts, which of the following actions would most directly lead to an increase in the manager's bonus, even if it is not in the company's best long-term interest?

  1. Aggressively cutting variable production costs, even if it compromises product quality.
  2. Implementing a just-in-time inventory system to reduce inventory holding costs.
  3. Requesting a transfer of allocated fixed administrative costs to another division.
  4. Increasing production to a level substantially higher than current sales demand. (correct answer)
Explanation: Under absorption costing, fixed manufacturing overhead is treated as a product cost and is inventoried. When production exceeds sales, inventory levels increase, and a portion of the period's fixed manufacturing overhead is deferred in the ending inventory balance rather than being expensed. This deferral reduces the cost of goods sold and increases reported net operating income for the period. Therefore, a manager can temporarily boost absorption costing income by overproducing.

Question 18

Phoenix Industries produces luxury furniture using absorption costing. The fixed manufacturing overhead rate is $25 per unit. During Year 1, Phoenix produced 15,000 units and sold 12,000 units. During Year 2, Phoenix produced 18,000 units and sold 20,000 units. All units sold in Year 2 that exceeded current production came from Year 1 ending inventory.

If Phoenix had used variable costing instead of absorption costing, what would be the difference in reported operating income over the two-year period?

  1. Variable costing would show $25,000 higher total operating income over both years combined
  2. Absorption costing would show $75,000 higher total operating income over both years combined
  3. Variable costing would show $50,000 higher total operating income over both years combined
  4. Absorption costing would show $25,000 higher total operating income over both years combined (correct answer)
Explanation: Year 1: Inventory increased by 3,000 units (15,000 - 12,000), so absorption costing shows $75,000 higher income (3,000 × $25). Year 2: Inventory decreased by 2,000 units (20,000 - 18,000), so absorption costing shows $50,000 lower income (2,000 × $25). Net effect over two years: $75,000 - $50,000 = $25,000 higher under absorption costing.

Question 19

Company Z switched from variable costing to absorption costing for external reporting. In the first year after the switch, production exceeded sales by 8,000 units, and fixed manufacturing overhead was $5 per unit. In the second year, sales exceeded production by 12,000 units. Assuming all other factors remain constant, what is the cumulative effect on reported operating income over the two-year period?

  1. Operating income increased by $40,000 compared to variable costing over the two-year period
  2. Operating income decreased by $20,000 compared to variable costing over the two-year period (correct answer)
  3. Operating income decreased by $60,000 compared to variable costing over the two-year period
  4. Operating income increased by $100,000 compared to variable costing over the two-year period
Explanation: Year 1: Production > Sales by 8,000 units, so inventory increased by 8,000 units × $5 = $40,000 higher income under absorption costing. Year 2: Sales > Production by 12,000 units, so inventory decreased by 12,000 units × $5 = $60,000 lower income under absorption costing. Cumulative effect: $40,000 - 60,000=−60,000 = -20,000, meaning absorption costing shows $20,000 lower operating income over the two-year period.

Question 20

Delta Manufacturing is considering switching from absorption costing to variable costing for internal reporting. The controller notes that over the past three years, production has consistently exceeded sales by an average of 2,000 units annually, with fixed manufacturing overhead of $15 per unit. However, the company expects that over the next three years, sales will consistently exceed production by an average of 1,800 units annually. What should the controller expect regarding the impact on reported operating income?

  1. Operating income will decrease by $30,000 annually on average under variable costing during the next three years
  2. Operating income will increase by $27,000 annually on average under variable costing during the next three years (correct answer)
  3. Operating income will decrease by $27,000 annually on average under variable costing during the next three years
  4. Operating income will increase by $57,000 annually on average under variable costing during the next three years
Explanation: When sales exceed production (inventory decreases), variable costing shows higher income than absorption costing because fixed overhead is released from inventory under absorption costing. With sales exceeding production by 1,800 units annually and fixed overhead of $15 per unit, variable costing will show $27,000 higher income annually (1,800 × $15) compared to absorption costing.