Chapter 7

What does absorption costing count manufacturing as during the production period and when they are sold?

Absorption costing counts manufacturing as inventory during the period, and expenses / cost of goods sold when they are sold.

Describe accounting measures under variable costing?

Accounting measures under variable costing are not in accordance with generally accepted accounting principles, nor are they acceptable for tax reporting.

Under absorption costing, which of the following costs are applied to manufactured inventory? Select one: A. All variable costs B. All manufacturing costs C. All period costs D. All fixed costs E. All administrative costs

B. All manufacturing costs

Which of the following is a drawback to absorption costing as opposed to variable costing? Select one: A. Management cannot accurately price products because non-manufacturing overhead is 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. Managers can manipulate earnings by simply producing more than is sold in a period

Why is variable costing more costly?

Because variable costing requires the maintenance of a "second set" of books, it is more costly.

If production is greater than sales, Cost of Goods Sold will be higher under absorption costing than under variable costing.

False

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.

False

What does absorption costing include in computation of the Cost of Goods Sold?

For absorption costing, include the fixed costs and variable costs of manufacturing in the computation of cost of goods sold.

For variable costing, what do we do with the variable costs in computing the cost of goods sold?

For variable costing, only include the variable costs of manufacturing in the computation of cost of goods sold. Expense all fixed costs, including fixed manufacturing costs, in the period.

What is the difference between absorption income and variable income?

The difference between absorption income and variable income will be the amount of fixed manufacturing costs either added to or subtracted from work-in-process inventory during the period.

What is the primary advantage of variable costing?

The primary advantage of variable costing is that reported income follows changes in production volume, reducing the risk of "death spiral" decisions.

What is the primary disadvantage of variable costing?

The primary disadvantage of variable costing is that it is not acceptable for financial statement or tax reporting.

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

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

Under absorption costing, managers may have an incentive to manipulate earnings through production levels.

True

Under variable costing, a company expenses all fixed overhead costs in the same period that it incurs them

True

Variable net income differs from absorption net income because under absorption costing some fixed costs are retained in inventory rather than being expensed.

True

Working capital tends to be lower under variable net income than under absorption net income.

True

How does variable costing assign fixed manufacturing overhead?

Variable costing does not assign fixed manufacturing overhead as a product cost, but expenses it in the period incurred.

When production exceeds sales volume, what happens to absorption income relative to variable income? Vice Versa?

When production exceeds sales volume, absorption income will be greater than variable income. When production is less than sales volume, absorption income will be less than variable income.

Does variable costing provide all of the information required for CVP analysis?

Yes. Variable costing provides all of the information required for CVP analysis.