ACCT 2302 CH 21

When all of the units produced are​ sold, the operating income is the same under both the absorption and variable costing methods. Assume no beginning and ending inventories. Which of the following gives the correct reason for the above​ statement?

All costs incurred have been recorded as expenses.

Service companies do not have fixed costs; all costs incurred by service companies are variable costs.

False

The calculation of contribution margin ratio for service companies is significantly different from that of manufacturing companies

False

Winters, Inc. is preparing financial statements to be distributed to investors and creditors. The company should prepare the income statement using

absorption costing because it follows GAAP

When determining the product costs for long term production planning, ________.

absorption costing is more appropriate

Variable costing is more appropriate than absorption costing when the decision ______.

relates to production planning within the capacity limits in the short run

Variable costing considers only _____ costs when determining product costs.

variable manufacturing

Variable Costing Product Cost:

- Direct Materials - Direct Labor - Var. Manufacturing Overhead

Variable Costing Period Cost:

- Fixed Manufacturing Overhead - Var. selling and administrative costs - Fixed selling and administrative costs

Absorption Costing Product Costs:

-Direct Materials -Direct Labor -Var. Manufacturing Overhead -Fixed Manufacturing Overhead

Absorption Costing Period Costs:

-Var. selling and administrative costs -Fixed selling and administrative costs

Which of the following statements is true of absorption costing?

It considers fixed manufacturing overhead cost as product costs.

Which of the following statements is true of variable costing?

It considers fixed selling and administrative costs as period costs.

Which of the following is true of the traditional format of the income statement?

It is prepared under the absorption costing method

When there are no units in the beginning Finished Goods Inventory and the units produced are more than the units​ sold, the operating income will be higher under absorption costing than variable costing.

True

For which of the following decisions is absorption costing most​ appropriate?

decisions related to setting sales prices in the long run

The primary difference between variable costing and absorption costing is

in absorption costing, fixed manufacturing overhead is a product cost

In its first year of​ business, Lakota, Inc. produced 600 units and sold 400 units. If Lakota uses variable​ costing, ________.

its operating income for the period will be lower than under absorption costing

In its first year of business, Talula, Inc. produced and sold 600 units. If Talula uses variable costing, _______.

its operating income will be the same under absorption costing.