Ch. 9 Inventory Costing & Capacity Analysis

Absorption costing: A) expenses marketing costs as cost of goods sold B) treats direct manufacturing costs as a period cost C) includes fixed manufacturing overhead as an inventoriable cost D) is required for internal reports to managers

c

Advocates of throughput costing maintain that: A) both variable and fixed are necessary to produce goods; therefore, both types of costs should be inventoried B) all manufacturing costs plus some design costs should be inventoried C) fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units D) Both A and C are correct.

c

All of the following are examples of drawbacks of using absorption costing EXCEPT: A) management has the ability to manipulate operating income via production schedules B) manipulation of operating income may ultimately increase the company's costs incurred over the long run C) operating income solely reflects income from the sale of units and excludes the effects of manipulating production schedules D) decreasing maintenance activities and increasing production result in increased operating income

c

Critics of absorption costing suggest to evaluate management on their ability to: A) exceed production quotas B) increase operating income C) decrease inventory costs D) All of these answers are correct.

c

From the perspective of long-run product costing it is best to use: A) master-budget capacity utilization to highlight unused capacity B) normal capacity utilization for benchmarking purposes C) practical capacity for pricing decisions D) theoretical capacity for performance evaluation

c

Many companies have switched from absorption costing to variable costing for internal reporting: A) to comply with external reporting requirements B) to increase bonuses for managers C) to reduce the undesirable incentive to build up inventories D) so the denominator level is more accurate

c

Operating income reported on the end-of-period financial statements is changed when ________ is (are) used to handle the production-volume variance at the end of the accounting period. A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) All of these answers are correct.

c

The marketing manager's performance evaluation is most fair when based on a denominator level using: A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

c

The only difference between variable and absorption costing is the expensing of: A) direct manufacturing costs B) variable marketing costs C) fixed manufacturing costs D) Both A and C are correct.

c

Theoretical capacity: A) represents real capacity available to the company B) provides the best perspective of actual long-run costs C) when used for product costing results in the lowest cost estimate of the four capacity options D) replicates the cost of capacity in a competitor's cost structure

c

Throughput contribution equals: A) variable costs minus fixed costs B) revenues minus all direct labor costs C) revenues minus all direct material cost of goods sold D) revenues minus manufacturing overhead

c

Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in: A) increasing the manager's bonus B) decreasing the manager's bonus C) not affecting the manager's bonus D) being unable to determine the manager's bonus using only the above information

c

Using master-budget capacity to set selling prices: A) avoids the recalculation of unit costs when expected demand levels change B) spreads fixed costs over available capacity C) can result in a downward demand spiral D) uses the perspective of long-run product pricing

c

Variable costing regards fixed manufacturing overhead as a(n): A) administrative cost B) inventoriable cost C) period cost D) product cost

c

Ways to "produce for inventory" that result in increasing operating income include: A) switching production to products that absorb the least amounts of fixed manufacturing costs B) delaying items that absorb the greatest amount of fixed manufacturing costs C) deferring maintenance to accelerate production D) All of these answers are correct.

c

Which of the following inventory costing methods results in the LEAST amount of costs being inventoried? A) absorption costing B) variable costing C) throughput costing D) direct costing

c

Which of the following inventory costing methods shown below is LEAST likely to cause undesirable incentives for managers to build up finished goods inventory? A) absorption costing B) variable costing C) throughput costing D) direct costing

c

________ provides the lowest estimate of denominator-level capacity. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization

c

Advocates of throughput costing argue that: A) only direct materials are truly variable B) direct manufacturing labor is relatively fixed C) variable manufacturing costs are a cost of the period D) All of these answers are correct.

d

Companies have recently been able to reduce inventory levels because: A) there is better sharing of information between suppliers and manufacturers B) just-in-time production strategies are being implemented C) production quotas are being implemented D) Both A and B are correct.

d

Differences between absorption costing and variable costing are much smaller when a: A) large part of the manufacturing process is subcontracted out B) just-in-time inventory strategy is implemented C) significant portion of manufacturing costs are fixed D) Both A and B are correct.

d

It is most difficult to estimate ________ because of the need to predict demand for the next few years. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

d

Managers face uncertainty when estimating: A) demand of the product B) the denominator level for practical capacity C) total fixed manufacturing costs for the next accounting period D) All of these answers are correct.

d

The contribution-margin format of the income statement: A) is used with absorption costing B) calculates gross margin C) distinguishes between manufacturing and nonmanufacturing costs D) is used with variable costing

d

Theoretical capacity allows for: A) preventive machine maintenance B) interruptions due to uncontrollable power failures C) rework of the expected number of defective units D) None of these answers is correct.

d

Theoretical capacity: A) is unattainable in the real world B) represents an ideal goal of capacity usage C) is based on engineering studies that provide information about the technical capabilities of machines used in production D) All of these answers are correct.

d

There is NOT an output-level variance for variable costing, because: A) the inventory level decreased during the period B) the inventory level increased during the period C) fixed manufacturing overhead is allocated to work in process D) fixed manufacturing overhead is not allocated to work in process

d

To discourage producing for inventory, management can: A) evaluate nonfinancial measures such as units in ending inventory compared to units in sales B) evaluate performance over a three- to five-year period rather than a single year C) incorporate a carrying charge for inventory in the internal accounting system D) All of these answers are correct.

d

Unused capacity: A) is a definite sign of wasted resources B) is intended for future use C) provides capacity for potential demand surges D) Both B and C are correct.

d

When comparing the operating incomes between absorption costing and variable costing, and ending finished inventory exceeds beginning finished inventory, it may be assumed that: A) sales decreased during the period B) variable cost per unit is more than fixed cost per unit C) there is a favorable production-volume variance D) absorption costing operating income exceeds variable costing operating income

d

Which method is NOT a way to discourage producing for inventory? A) incorporate a carrying charge for inventory B) focus on careful budgeting and inventory planning C) include nonfinancial measures when evaluating performance D) evaluate performance on a quarterly basis only

d

Which of the following cost(s) are inventoried when using absorption costing? A) direct manufacturing costs B) variable marketing costs C) fixed manufacturing costs D) Both A and C are correct.

d

________ are subtracted from sales to calculate contribution margin. A) Variable manufacturing costs B) Variable selling and administrative costs C) Fixed manufacturing costs D) Both A and B are correct.

d

________ are subtracted from sales to calculate gross margin. A) Variable manufacturing costs B) Variable selling and administrative costs C) Fixed manufacturing costs D) Both A and C are correct.

d

________ is (are) based on the demand for the output of the plant. A) Practical capacity B) Master-budget capacity utilization C) Normal capacity utilization D) Both B and C are correct.

d

________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization

d

________ method(s) expense(s) direct material costs as cost of goods sold. A) Variable costing B) Absorption costing C) Throughput costing D) All of these answers are correct.

d

________ method(s) expense(s) variable marketing costs in the period incurred. A) Variable costing B) Absorption costing C) Throughput costing D) All of these answers are correct.

d

Explain the difference between the gross margin format and the contribution margin format for the income statement. What information is highlighted with each?

The gross margin format divides costs into product and period costs while the contribution format divides costs into variable and fixed costs. The gross margin format highlights cost function while the contribution format highlights cost behavior.

What is throughput costing? What advantages is it purported to have over variable and absorption costing?

Throughput costing treats all costs except direct materials as costs of the period in which they are incurred. Throughput costing results in a lower amount of manufacturing cost put into inventory than either variable or absorption costing. Supporters of throughput costing claim that it provides less incentive to produce for inventory than absorption costing or even variable costing.

Budgeted fixed manufacturing costs of a product using practical capacity: A) represents the cost per unit of supplying capacity B) can result in setting selling prices that are not competitive C) includes the cost of unused capacity D) should be used to evaluate a marketing manager's performance in the current year

a

Capacity costs: A) are difficult to estimate B) don't provide a useful planning tool for nonmanufacturing firms C) cannot be used with activity-based costing D) All of these answers are correct.

a

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: A) changes in the quantity of units actually sold B) changes in the quantity of units produced C) changes in ending inventory D) changes in sales price per unit

a

If 1,000 units are produced and only 700 units are sold, ________ results in the greatest amount of expense reported on the income statement. A) throughput costing B) variable costing C) absorption costing D) period costing

a

If 800 units are produced and 1,200 units are sold, ________ results in the greatest amount of operating income. A) throughput costing B) variable costing C) absorption costing D) period costing

a

In general, if inventory increases during an accounting period, A) variable costing will report less operating income than absorption costing. B) absorption costing will report less operating income than variable costing. C) variable costing and absorption costing will report the same operating income. D) None of the above are correct.

a

Master-budget capacity utilization: A) hides the amount of unused capacity B) represents the maximum units of production intended for current capacity C) provides the best cost estimate for benchmarking purposes D) when used for product costing results in the lowest cost estimate of the four capacity options

a

Practical capacity is the denominator-level concept that: A) reduces theoretical capacity for unavoidable operating interruptions B) is the maximum level of operations at maximum efficiency C) is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year D) is based on anticipated levels of capacity utilization for the coming budget period

a

Practical capacity may: A) increase over time due to improvements in plant layout B) decrease over time due to efficiencies offered by new technologies C) cannot be altered unless there is a major plant expansion D) Both A and B are correct.

a

The Internal Revenue Service requires the use of ________ for calculating fixed manufacturing costs per unit. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

a

The gross-margin format of the income statement: A) distinguishes between manufacturing and nonmanufacturing costs B) distinguishes variable costs from fixed costs C) is used with variable costing D) calculates contribution margin

a

Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in: A) increasing the manager's bonus B) decreasing the manager's bonus C) not affecting the manager's bonus D) being unable to determine the manager's bonus using only the above information

a

Variable and absorption costing may be combined with all costing systems EXCEPT: A) mixed costing B) actual costing C) normal costing D) standard costing

a

When large differences exist between practical capacity and master-budget capacity utilization, companies may: A) classify the difference as planned unused capacity B) use master-budget capacity utilization for setting selling prices C) use practical capacity for meaningful feedback to the marketing manager D) All of these answers are correct.

a

Which of the following cost(s) are inventoried when using variable costing? A) direct manufacturing costs B) variable marketing costs C) fixed manufacturing costs D) Both A and B are correct.

a

Which of the following inventory costing methods shown below is most likely to cause undesirable incentives for managers to build up finished goods inventory? A) absorption costing B) variable costing C) throughput costing D) direct costing

a

Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting? A) absorption costing B) variable costing C) throughput costing D) direct costing

a

________ 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. A) Variable costing B) Mixed costing C) Absorption costing D) Standard costing

a

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are NOT met. A) Downward demand spiral B) Theoretical capacity C) Normal capacity D) Practical capacity

a

________ is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors. A) Normal capacity utilization B) Theoretical capacity C) Master-budget capacity utilization D) Practical capacity

a

________ reduces theoretical capacity for unavoidable operating interruptions. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization

a

Absorption costing is required for all of the following except: A) generally accepted accounting principles B) determining a competitive selling price C) external reporting to shareholders D) income tax reporting

b

An favorable production-volume variance occurs when: A) the denominator level exceeds production B) production exceeds the denominator level C) production exceeds unit sales D) unit sales exceed production

b

At the end of the accounting period Bumsted Corporation reports operating income of $30,000. If Bumstead's inventory levels decrease during the accounting period A) variable costing will report less operating income than absorption costing. B) absorption costing will report less operating income than variable costing. C) variable costing and absorption costing will report the same operating income. D) None of the above are correct.

b

Customers expect to pay a price that includes: A) the cost of unused capacity B) the cost of actual capacity used C) no capacity costs D) Both A and B are correct.

b

If the unit level of inventory increases during an accounting period, then: A) less operating income will be reported under absorption costing than variable costing B) more operating income will be reported under absorption costing than variable costing C) operating income will be the same under absorption costing and variable costing D) the exact effect on operating income cannot be determined

b

Normal capacity utilization: A) represents real capacity available to the company B) can result in setting selling prices that are not competitive C) when used for product costing results in the lowest cost estimate of the four capacity options D) represents the maximum units of production intended for current capacity

b

One possible means of determining the difference between operating incomes for absorption costing and variable costing is by: A) subtracting sales of the previous period from sales of this period B) subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory C) multiplying the number of units produced by the budgeted fixed manufacturing cost rate D) adding fixed manufacturing costs to the production-volume variance

b

Switching production to products that absorb the highest amount of fixed manufacturing costs is also called: A) cost reduction B) cherry picking C) producing for sales D) throughput costing

b

The breakeven point using absorption costing depends on all of the following factors, EXCEPT: A) the number of units sold during the current period B) the budgeted level of production C) the denominator level chosen for the fixed manufacturing overhead rate D) fulfillment of current production quotas

b

The budgeted fixed manufacturing cost rate is the lowest for: A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

b

The contribution-margin format of the income statement: A) is used with absorption costing B) highlights the lump sum of fixed manufacturing costs C) distinguishes manufacturing costs from nonmanufacturing costs D) calculates gross margin

b

The difference between operating incomes under variable costing and absorption costing centers on how to account for: A) direct materials costs B) fixed manufacturing costs C) variable manufacturing costs D) Both B and C are correct.

b

The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in: A) greater utilization of capacity B) increased unit costs C) more competitive selling prices D) greater demand for the product

b

The gross-margin format of the income statement: A) is used with variable costing B) is used with absorption costing C) calculates contribution margin D) distinguishes variable costs from fixed costs

b

The higher the denominator level, the: A) higher the budgeted fixed manufacturing cost rate B) lower the amount of fixed manufacturing costs allocated to each unit produced C) higher the favorable production-volume variance D) more likely actual output will exceed the denominator level

b

The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on: A) real available capacity B) an unattainable level of capacity C) normal capacity utilization D) normal costing

b

Throughput costing is also called: A) absorption costing B) super-variable costing C) mixed costing D) direct costing

b

Variable costing: A) expenses administrative costs as cost of goods sold B) treats direct manufacturing costs as a product cost C) includes fixed manufacturing overhead as an inventoriable cost D) is required for external reporting to shareholders

b

Which of the following statements is FALSE? A) Absorption costing allocates fixed manufacturing overhead to actual units produced during the period. B) Nonmanufacturing costs are expensed in the future under variable costing. C) Fixed manufacturing costs in ending inventory are expensed in the future under absorption costing. D) Operating income under absorption costing is higher than operating income under variable costing when production units exceed sales units.

b

________ is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs. A) Fixed costing B) Variable costing C) Absorption costing D) Mixed costing

b

________ is the level of capacity based on producing at full efficiency all the time. A) Practical capacity B) Theoretical capacity C) Normal capacity D) Demand capacity

b

________ method(s) include(s) fixed manufacturing overhead costs as inventoriable costs. A) Variable costing B) Absorption costing C) Throughput costing D) All of these answers are correct.

b

________ method(s) is required for tax reporting purposes. A) Variable costing B) Absorption costing C) Throughput costing D) All of these answers are correct.

b