Chapter 9 Cost Accounting

Which of the following statements is true of absorption costing?

Absorption costing allocates fixed manufacturing overhead to actual units produced during the period.

Which of the following is true of capacity costs?

Capacity costs are difficult to estimate.

________ is the level of capacity based on producing at full efficiency all the time.

Theoretical capacity

________ are subtracted from sales to calculate gross margin.

Variable manufacturing costs

The gross-margin format is used for ________.

absorption costing income statement

Using master-budget capacity to set selling prices ________.

can result in a downward demand spiral

Which of the following capacity levels should a company choose, from a long-run product costing perspective, to allocate budgeted fixed manufacturing costs to products?

practical capacity for pricing decisions

________ method includes fixed manufacturing overhead costs as inventoriable costs.

Absorption costing

Which of the following is a reason for companies adopting variable costing for internal reporting purposes?

It reduces the incentives for undesirable buildup of inventories.

Switching production to products that absorb the highest amount of fixed manufacturing costs is also called ________.

cherry picking

________ is subtracted from sales while calculating contribution margin.

Direct labor in factory

Assume a manufacturing company that has started production in the current year. Which of the following would result in the highest profit being reported if the company has 1,000 units of ending inventory?

absorption costing

Which of the following inventory costing methods shown below is most likely to cause undesirable incentives for managers to build up finished goods inventory?

absorption costing

The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on ________.

an unattainable level of capacity

The difference between operating incomes under variable costing and absorption costing centers on how to account for ________.

fixed manufacturing costs

The only difference between variable and absorption costing is the expensing of ________.

fixed manufacturing costs

Advocates of throughput costing maintain that ________.

fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units

There is no output-level variance for variable costing, when ________.

fixed manufacturing overhead is not allocated to work in process

If the unit level of inventory increases during an accounting period, then ________.

more operating income will be reported under absorption costing than variable costing

Which of the following measures capacity levels in terms of demand for the output of the plant?

normal capacity utilization and master-budget capacity utilization

Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in ________.

not affecting the manager's bonus

Variable costing regards fixed manufacturing overhead as a(n) ________.

period cost

One possible means of determining the difference between operating incomes for absorption costing and variable costing is by ________.

subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory

Which of the following inventory costing methods results in the least amount of costs being inventoried?

throughput costing

Many companies have switched from absorption costing to variable costing for internal reporting ________.

to reduce the undesirable incentive to build up inventories

At the end of the accounting period, Armstrong Corporation reports operating income of $30,000. Which of the following statements is true, if Armstrong's inventory levels decrease during the accounting period?

Absorption costing will report less operating income than variable costing.

________ is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs.

Absorption costing

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

Downward demand spiral

Which of the following steps can a management take to reduce the undesirable effects of absorption costing?

It can encourage using nonfinancial measures such as units in ending inventory compared to units in sales.

Which of the following is a reason for companies to use absorption costing for internal accounting?

It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders.

Which of the following is true of normal capacity utilization?

It can result in setting selling prices that are not competitive.

Which of the following statements is true of gross-margin format of the income statement?

It distinguishes between manufacturing and nonmanufacturing costs.

Which of the following is true of absorption costing?

It enables a manager to increase margins and operating income by producing more ending inventory.

Which of the following is true of master-budget capacity utilization?

It hides the amount of unused capacity.

Which of the following statements is true of contribution-margin format of the income statement?

It highlights the lump sum of fixed manufacturing costs.

Which of the following is true of absorption costing?

It includes fixed manufacturing overhead as an inventoriable cost.

Which of the following is true of unused capacity?

It is intended for future use.

Which of the following best describes practical capacity?

It is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays.

Which of the following is true of theoretical capacity?

It results in the lowest cost estimate of the four capacity options when used for product costing.

Which of the following is true of variable costing?

It treats direct manufacturing costs as a product cost.

________ is the level of capacity utilization that managers expect for the current budget period, which is typically one year.

Master-budget capacity utilization

________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year.

Normal capacity utilization

________ provides the lowest estimate of denominator-level capacity in case demand of the product is not a limiting factor.

Practical capacity

________ reduces theoretical capacity for unavoidable operating interruptions.

Practical capacity

________ is a method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as inventoriable costs and all fixed manufacturing costs are excluded.

Variable costing

________ is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs.

Variable costing

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by ________.

changes in the quantity of units actually sold

Critics of absorption costing suggest evaluating management on its ability to ________.

decrease fixed costs

Ways to "produce for inventory" that result in increasing operating income include ________.

deferring maintenance to accelerate production

Which of the following costs is inventoried when using variable costing?

electricity consumed in manufacturing process

Product-sustaining costs in activity-based costing are similar to ________.

fixed costs

To discourage producing for inventory, management can ________.

incorporate a carrying charge for inventory in the internal accounting system

The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in ________.

increased unit costs

Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in ________.

increasing the manager's bonus

The higher the denominator level, the ________.

lower the amount of fixed manufacturing costs allocated to each unit produced

The marketing manager's performance evaluation is most fair when based on a denominator level using ________.

master-budget capacity utilization

It is most difficult to estimate ________ because of the need to predict demand for the next few years.

normal capacity utilization

Advocates of throughput costing argue that ________.

only direct material costs are included as inventoriable costs

Customers expect to pay a price that includes ________.

only the cost of actual capacity used

The Internal Revenue Service requires the use of ________ for calculating fixed manufacturing costs per unit.

practical capacity

Using ________ as the denominator level also gives the manager a more accurate idea of the resources needed and used to produce a unit by excluding the cost of unused capacity

practical capacity

Which of the following capacity levels do proponents of activity-based costing recommend to be used as the denominator level to calculate activity cost rates?

practical capacity

An favorable production-volume variance occurs when ________.

production exceeds the denominator level

Practical capacity is the denominator-level concept that ________.

reduces theoretical capacity for unavoidable operating interruptions

Budgeted fixed manufacturing costs of a product using practical capacity ________.

represents the cost per unit of supplying capacity

Throughput contribution equals ________.

revenues minus all direct material cost of goods sold

Which of the following costs will be treated as period costs under absorption costing?

sales commission paid on sale of product

Throughput costing is also called ________.

super-variable costing

Which of the following approaches spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold?

the proration approach

Operating income reported on the end-of-period financial statements is changed when ________ is used to handle the production-volume variance at the end of the accounting period.

the write-off variances to cost of goods sold approach

The budgeted fixed manufacturing cost rate is the lowest for ________.

theoretical capacity

If 1,000 units are produced and only 700 units are sold, ________ results in the greatest amount of expense reported on the income statement.

throughput costing

If 800 units are produced and 1,200 units are sold, the costing method which will result in the greatest operating income is ________.

throughput costing

The contribution-margin format is used for ________.

variable costing income statement

In general, if inventory increases during an accounting period, ________.

variable costing will report less operating income than absorption costing

Which of the following costs is inventoried when using absorption costing?

variable manufacturing costs

In ________, fixed manufacturing costs are included as inventoriable costs.

absorption costing

Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting?

absorption costing

When comparing the operating incomes between absorption costing and variable costing, and ending finished inventory exceeds beginning finished inventory, it may be assumed that ________.

absorption costing operating income exceeds variable costing operating income

Under absorption costing, fixed manufacturing costs ________.

are inventoriable costs