Chipter 9

______ method includes fixed manufacturing overhead costs as inventoriable costs

Absorption Costing

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

Absorption costing

What is true of absorption costing

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

The gross-margin format is used for

Absorption costing income statement

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

An unattainable and idealistic level of capacity

What would not lead to a build up inventory as a strategy to increase operating income

Cutting overhead costs as year-end approaches

What is a reason for companies adopting variable costing for internal reporting purposes

It reduces the incentives for undesirable buildup of inventories

What is true of variable costing

It treats direct manufacturing costs as a product cost

The marketing manager's performance evaluation is most fair when based on a denominator level using ________ as it is the principal short-run planning and control tool

Master-budget capacity utilization

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

Master-budget capacity utilization

Throughput is a variation of what system

Variable costing

The contribution-margin format is used for

Variable costing income statement

Customers expect to pay a price that includes

Only the cost of actual capacity used

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

Practical capacity

What 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

What cost is inventoried when using variable costing

Electricity consumed in manufacturing process

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

Fixed costs

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

Greater operating income and therefore increasing the manager's bonus

The budgeted fixed manufacturing cost rate is the lowest for

Theoretical capacity

What best describes how fixed costs are treated in a variable cost method

They are excluded from inventory cost and are treated as period costs

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

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

Absorption costing will report less operating income than variable costing

Under absorption costing, fixed manufacturing costs

Are inventoriable costs

What is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit?

A method of which fairly apportions indirect production costs among the various items produced

In ____, fixed manufacturing costs are included as inventoriable costs

Absorption costing

What inventory costing method is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting?

Absorption 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

To discourage producing for inventory, management can

Develop budgeting and planning activities that reduce management's freedom to inappropriately build inventory through increased production

What would be subtracted from sales while calculating margin in a variable costing format of an operating income statement

Direct labor in factory

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

Downward demand spiral

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

Advocates of throughput costing argue that

Including only direct materials as inventoriable costs provides less incentive than absorption costing to produce a build-up of inventory merely to increase profits

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

Increased unit costs

What step 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

What 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

What is true of normal capacity utilization?

It can result in setting selling prices that are not competitive

What is true of gross-margin format of the income statement

It distinguishes between manufacturing and nonmanufacturing costs

What is true of contribution-margin format of the income statement

It distinguishes between variable and fixed costs in its format

What is true of absorption costin

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

What is true of master-budget capacity utilization?

It hides the amount of unused capacity

What is true of absorption costing

It included fixed manufacturing overhead as an inventoriable cost

What is not one of the reasons why absorption costing might also be used for internal reporting

It is more useful for managerial decision making than variable costing

What 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

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

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

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

Normal capacity utilization

________ is based on the level of capacity utilization that satisfies average customer demand over

Normal capacity utilization

What 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

In planning and control of capacity costs, managers must consider possible capacity measures. What measure the available supply of capacity in a factory?

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

What assumes that capacity will be decreased because of slowdowns due to plant maintenance or other interruptions of the production lines?

Practical capacity

________ reduces theoretical capacity for unavoidable operating interruptions

Practical capacity

Practical capacity is the denominator-level concept that

Reduces theoretical capacity for unavoidable operating interruptions

Throughput contributes equals

Revenues minus all direct material cost of goods sold

What costs will be treated as period costs under absorption costing

Sales commission paid on sale of product

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

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

Switching production to products that absorb the most amounts of fixed manufacturing costs

For financial reporting, SFAS 151 requires:

The allocation of fixed manufacturing overhead to production must be based on normal capacity of the facilities

Top management at Gifford manufacturing are planning capacity levels and how to assign capacity costs for an upcoming period. What factor should be considered while developing this plan so that proper control can be achieved?

The level of uncertainty of expected costs and demand

What approach 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

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

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

What 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 that would show higher operating income

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

Variable Costing

___ are subtracted from sales to calculate gross margin

Variable and fixed manufacturing costs

In general, if inventory increases during an accounting period,

Variable costing will report less operating income than absorption costing

What cost is inventoried when using absorption costing

Variable manufacturing costs

What is true

When production is greater than sales, operating income will be lower under variable costing than absorption costing

Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a

Can result in a downward demand spiral

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

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

Cherry picking