Chapter 7
Variable net income differs from absorption net income because under absorption costing some fixed costs are retained in inventory rather than being expensed. true or false
true
Working capital tends to be lower under variable net income than under absorption net income. true or false
true
Which of the following correctly represents how to calculate absorption net income? A. variable net income + (change an inventory units X fixed overhead rate) B. variable net income - (change and inventory units X fixed overhead rate) C. variable net income + (change and inventory units X variable overhead rate) D. variable net income - (change in inventory units X variable overhead rate) E. none of the above
A
Which of the following costs would be applied to Manufactured inventory under variable costing? A. cost of raw materials B. rental payments on administrative offices C. salary of factory manager D. rental payments on Factory E. commissions to salespersons
A
Which of the following is not a way to calculate absorption net income? A. contribution margin - selling and administrative expenses B. gross profit - non-manufacturing costs C. variable net income + (changing inventory units X fixed overhead rate) D. all the above equal absorption net income E. none of the above equal absorption net income
A
which of the following is not a disadvantage of using variable costing as opposed to absorption costing? A. only variable costs are assigned to inventory, making poor management decisions (such as dropping a profitable product line) more likely to occur B. variable accounting records do not conform to GAAP, so two sets of records must be maintained if the company is required to file their statements publicly C. owner's equity tends to be understated D. accounting records are more costly to maintain E. none of the above are disadvantages
A
Which of the following costs would not be subtracted from revenue to calculate gross profit on an absorption income statement? A. direct materials costs B. sales commissions C. variable manufacturing overhead D. direct labor wages E. all of the above would be subtracted
B
Which of the following is a disadvantage of using variable costing? A. inventory values tend to be overstated B. two sets of accounting records must be maintained C. CVP relationships are more difficult to determine than under absorption costing D. per customer or per product contribution margin is obscured E. all of the above
B
Which of the following is a drawback to absorption costing as opposed to variable costing? A. management cannot accurately price products because non-manufacturing overhead he's not applied to inventory B. managers can manipulate earnings by simply producing more than is sold in a period C. fixed overhead is simply expensed as a period cost without being properly considered as a cost of inventory D. absorption costing is not allowed for GAAP purposes E. there is no drawback: absorption costing is always preferable to variable costing
B
Under absorption costing, which of the following costs are applied to Manufactured inventory? A. all fixed costs B. all variable costs C. all manufacturing costs D. all period costs E. all administrative costs
C
Which of the following will not affect net income under variable costing? A. incurring additional fixed costs B. production levels not being the same as sales C. a change in the fixed overhead application rate D. a change in the price paid for direct materials E. none of the above will affect net income
C
Absorption costing is required for reporting to which of the following groups? A. the SEC B. the IRS C. Senior Management D. the IMA E. A and B only
E
The equation to find contribution margin under absorption costing is: A. sales minus variable cost B. sales- fixed costs C. sales minus variable cost minus fixed cost D. gross profit plus fixed cost E. absorption costing does not calculate contribution margin
E
Under variable costing, gross profit is equal to: A. sales - variable cost B. sales- fixed costs C. sales minus variable cost minus fixed cost D. contribution margin - fixed costs E. variable costing does not calculate gross profit
E
Which of the following costs would be subtracted from revenue to calculate contribution margin on a variable income statement? A. direct materials costs B. sales commissions C. variable manufacturing overhead D. direct labor wages E. all of the above
E
Which of the following will not affect net income under absorption costing? A. a change in the levels of inventory from the beginning to the end of the period B. production levels not being the same as sales C. a change in the fixed overhead application rate D. an increase in the amount of fixed costs incurred by the company E. all of the above will affect net income
E
Variable costing is required by GAAP for publicly reported Financial results. true or false
False
Under absorption costing, a company can wait to recognize fixed costs as expense simply by selling more than they produced that period. true or false
False reason: all manufacturing costs are capitalized as inventory during the production period and recognized as expense cost of goods sold only when the related merchandise is sold.
Under variable costing, a company expenses all fixed overhead costs in the same period that it incurs them. true or false
True
Under variable costing, a change in the level of production will affect the amount of fixed costs reported on the variable income statement for the period. true or false
false reason: fixed costs of production are all expensed under variable costing.
If inventory increases in the period, and variable net income will typically be higher than absorption net income. true or false
false
If production is greater than sales, cost of goods sold will be higher under absorption costing than under variable costing. true or false
false
Variable costing tends to make CVP analysis more difficult than absorption costing. true or false
false reason: cost volume profit (CVP) relationships are more easily discerned from variable costing income statements.
The difference between variable and net income and absorption net income may be computed by multiplying the change and inventory by the total overhead application rate. true or false
false reason: the difference in income may be computed by multiplying the change and inventory by the fixed manufacturing cost per unit
One of the advantages of variable costing is that this costing method may be used for management decisions as well as external reporting. true or false
false reason: variable costing may not be used for external reporting purposes
An advantage of variable costing is the ability to conduct break-even analysis using information from the financial statements. true or false
true
If sales exceed production, then previous period costs will be released to the income statement and will decrease the level of absorption net income relative to variable net income. true or false
true
One of the disadvantages of variable costing is that it may lead management to underpriced products, leading to loss of long-term profits. true or false
true
Under absorption costing a company applies all overhead costs associated with manufacturing to the inventory produced in the period in which the costs are incurred. true or false
true
Under absorption costing, a change in the level of production will affect the amount of fixed costs reported on the income statement for the period. true or false
true
Under absorption costing, managers may have an incentive to manipulate earnings through production levels. true or false
true
Under variable costing, a change in the level of production will affect the contribution margin reported on the variable income statement for the period. true or false
true
