Managerial Accounting Quiz: Variable Vs Absorption Costing Income
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Variable Vs Absorption Costing IncomeQuestion 1 of 6

Zenith Manufacturing produces a single product with the following cost structure: direct materials $15 per unit, direct labor $12 per unit, variable manufacturing overhead $8 per unit, and fixed manufacturing overhead $240,000 per year. Variable selling and administrative expenses are $5 per unit, and fixed selling and administrative expenses are $80,000 per year. Normal capacity is 20,000 units per year.

During 2024, Zenith produced 18,000 units and sold 16,500 units at $75 per unit. There was no beginning inventory. What is the difference between absorption costing net income and variable costing net income for 2024?

Absorption costing net income is $18,000 higher than variable costing net income
Variable costing net income is $18,000 higher than absorption costing net income
Absorption costing net income is $20,000 higher than variable costing net income
Variable costing net income is $20,000 higher than absorption costing net income
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Managerial Accounting Quiz

Managerial Accounting Quiz: Variable Vs Absorption Costing Income

Practice Variable Vs Absorption Costing Income in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Variable Vs Absorption Costing Income, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

Zenith Manufacturing produces a single product with the following cost structure: direct materials $15 per unit, direct labor $12 per unit, variable manufacturing overhead $8 per unit, and fixed manufacturing overhead $240,000 per year. Variable selling and administrative expenses are $5 per unit, and fixed selling and administrative expenses are $80,000 per year. Normal capacity is 20,000 units per year.

During 2024, Zenith produced 18,000 units and sold 16,500 units at $75 per unit. There was no beginning inventory. What is the difference between absorption costing net income and variable costing net income for 2024?

  1. Absorption costing net income is $18,000 higher than variable costing net income (correct answer)
  2. Variable costing net income is $18,000 higher than absorption costing net income
  3. Absorption costing net income is $20,000 higher than variable costing net income
  4. Variable costing net income is $20,000 higher than absorption costing net income
Explanation: The fixed overhead rate per unit is $240,000 ÷ 20,000 = $12 per unit. Since 18,000 units were produced and 16,500 were sold, 1,500 units remain in ending inventory. Under absorption costing, the fixed overhead in ending inventory (1,500 × $12 = $18,000) is deferred to the next period, making absorption costing income $18,000 higher than variable costing income. Choice B reverses the relationship. Choices C and D incorrectly use production volume (18,000 - 16,500 = 1,500, then 1,500 × $12 = $18,000) but arrive at $20,000, likely confusing unit calculations.

Question 2

Phoenix Corp produces widgets with variable manufacturing costs of $18 per unit and fixed manufacturing overhead of $360,000 annually. Normal capacity is 24,000 units. The company also incurs variable selling costs of $6 per unit and fixed selling costs of $120,000 annually.

In a year when Phoenix produces 26,000 units but sells only 22,000 units (with no beginning inventory), and considering that actual fixed manufacturing overhead was $375,000 instead of budgeted $360,000, how much higher is absorption costing net income compared to variable costing net income?

  1. $60,000 higher due to deferred fixed overhead in ending inventory using standard rates (correct answer)
  2. $45,000 higher after considering both inventory effects and overhead spending variances
  3. $75,000 higher because actual overhead costs are deferred in proportion to inventory levels
  4. $52,500 higher due to the combined impact of volume and spending variances on inventory
Explanation: Under standard absorption costing, the fixed overhead rate is $360,000 ÷ 24,000 = $15 per unit. Ending inventory is 4,000 units (26,000 - 22,000), which defers $60,000 of fixed overhead under absorption costing. The 15,000spendingvariance(15,000 spending variance (375,000 - $360,000) is typically expensed in the current period and affects both methods equally, so it doesn't impact the difference between methods. Choice B incorrectly reduces the difference by some variance amount. Choice C incorrectly uses actual rather than standard overhead rates for inventory valuation. Choice D uses a hybrid calculation that doesn't reflect standard absorption costing principles.

Question 3

Acme Corp uses a normal capacity of 50,000 units to establish its fixed overhead rate. In Year 1, actual production was 45,000 units and sales were 48,000 units. In Year 2, actual production was 55,000 units and sales were 52,000 units. Fixed manufacturing overhead was $300,000 each year. Assuming no beginning inventory in Year 1, how does the two-year cumulative net income compare between absorption and variable costing?

  1. Absorption costing cumulative income exceeds variable costing by $6,000 due to inventory level changes
  2. Variable costing cumulative income exceeds absorption costing by $6,000 due to production volume variances
  3. Absorption costing cumulative income exceeds variable costing by $18,000 due to deferred overhead costs
  4. The cumulative net income is identical under both methods since total production equals total sales (correct answer)
Explanation: Over the two-year period, total production was 100,000 units (45,000 + 55,000) and total sales were 100,000 units (48,000 + 52,000). When cumulative production equals cumulative sales over multiple periods, the total amount of fixed overhead expensed under both methods is identical, resulting in equal cumulative net income. The timing differences in individual years cancel out. Choices A and C incorrectly focus on inventory changes in individual periods rather than cumulative results. Choice B incorrectly attributes differences to production volume variances rather than recognizing the cumulative equality.

Question 4

Delta Manufacturing's absorption costing income statement shows net income of $85,000. The company produced 12,000 units, sold 10,000 units, and had no beginning inventory. Fixed manufacturing overhead totaled $180,000, and the company uses normal capacity of 15,000 units to set overhead rates. Variable manufacturing costs are $30 per unit. What would net income be under variable costing?

  1. $61,000 because fixed overhead in ending inventory increases absorption costing income (correct answer)
  2. $109,000 because the unfavorable volume variance reduces absorption costing income
  3. $85,000 because the volume variance exactly offsets the inventory effect
  4. $73,000 because both inventory deferrals and volume variances affect the comparison
Explanation: Fixed overhead rate = $180,000 ÷ 15,000 = $12 per unit. Under absorption costing, ending inventory of 2,000 units defers $24,000 of fixed overhead (2,000 × $12). However, there's also an unfavorable volume variance of $36,000 because actual production (12,000) was less than normal capacity (15,000), and this variance is expensed in the current period under absorption costing. The net effect is that absorption costing income is 24,000higherthanvariablecostingincome(24,000 higher than variable costing income (85,000 - $24,000 = $61,000). Choice B incorrectly adds the variance effect. Choice C incorrectly assumes the effects cancel. Choice D uses an arbitrary combination.

Question 5

Apex Manufacturing produces at varying levels throughout the year. In Q1, they produced 30,000 units and sold 25,000 units. In Q2, they produced 20,000 units and sold 35,000 units. Fixed manufacturing overhead is 480,000annually(480,000 annually (120,000 per quarter), and normal capacity is 25,000 units per quarter. Variable manufacturing cost is $16 per unit. Assuming no beginning inventory, what is the difference in reported net income between absorption and variable costing for the first half of the year?

  1. Absorption costing shows $48,000 higher income due to overhead deferred in Q1 inventory
  2. Variable costing shows $24,000 higher income due to volume variances in both quarters
  3. The methods show identical income since production equals sales over the six-month period (correct answer)
  4. Absorption costing shows $24,000 higher income after considering both inventory and variance effects
Explanation: Over the six-month period, total production equals total sales (50,000 units each). When cumulative production equals cumulative sales, the total fixed overhead expensed under both methods is identical, resulting in equal net income. Q1 defers overhead in inventory under absorption costing, while Q2 releases it, and these effects exactly offset over the combined period. Volume variances affect both methods equally since they're expensed in the period incurred. Choices A and D incorrectly focus on individual quarter effects rather than cumulative results. Choice B incorrectly suggests volume variances create differences between the methods.

Question 6

Meridian Corp has been using variable costing for internal reporting. The controller is preparing absorption costing statements for external use and provides this data: beginning inventory 2,000 units, production 15,000 units, sales 14,000 units, variable manufacturing cost $22 per unit, fixed manufacturing overhead $225,000, normal capacity 18,000 units.

If the beginning inventory was produced when the fixed overhead rate was $10 per unit, and Meridian uses FIFO inventory flow, what adjustment to variable costing net income is needed to arrive at absorption costing net income?

  1. Add $37,500 because ending inventory defers more fixed overhead than beginning inventory contained
  2. Add $12,500 because the net increase in inventory units carries the current period's fixed overhead rate (correct answer)
  3. Subtract $25,000 because beginning inventory had a lower fixed overhead rate than current production
  4. Add $50,000 because current period production exceeded sales by 1,000 units at the current standard rate
Explanation: Current fixed overhead rate = $225,000 ÷ 18,000 = $12.50 per unit. Under FIFO, beginning inventory (2,000 units) is sold first. Ending inventory is 3,000 units (2,000 + 15,000 - 14,000) from current production. The net increase in inventory is 1,000 units (3,000 - 2,000). This net increase carries current period overhead at $12.50 per unit, creating a $12,500 increase in deferred overhead costs, making absorption costing income higher by this amount.