Chapter 9: Inventory Costing and Capacity Analysis

Which of the following statements is true of absorption costing? A) Absorption costing allocates fixed manufacturing overhead to actual units produced during the period. B) Absorption costing carries over nonmanufacturing costs to the future periods. C) Absorption costing shows the same level of profit as variable costing irrespective of the level of inventories. D) Absorption costing allocates total manufacturing cost using the budgeted level of production for a particular year.

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

Which of the following statements is true of gross-margin format of the income statement? A) It distinguishes between manufacturing and nonmanufacturing costs. B) It distinguishes variable costs from fixed costs. C) It is used for variable costing. D) It calculates the contribution margin from sales.

It distinguishes between manufacturing and nonmanufacturing costs.

Which of the following statements is true of contribution-margin format of the income statement? A) It is used for absorption costing. B) It distinguishes between variable and fixed costs in its format. C) It distinguishes manufacturing costs from nonmanufacturing costs. D) It calculates gross margin.

It distinguishes between variable and fixed costs in its format.

In planning and control of capacity costs, managers must consider possible capacity measures. Which of the following measures the available supply of capacity in a factory? A) Theoretical capacity B) Practical capacity C) Normal capacity D) Master-budget capacity

Practical capacity

________ 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

Variable costing

The gross-margin format is used for ________. A) variable costing income statement B) mixed costing income statement C) absorption costing income statement D) standard costing income statement

absorption costing income statement

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

absorption costing operating income exceeds variable costing operating income

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

changes in the quantity of units actually sold

Which of the following costs is inventoried when using absorption costing? A) variable selling costs B) fixed administrative costs C) variable manufacturing costs D) fixed selling costs

variable manufacturing costs

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

Absorption costing

________ method includes fixed manufacturing overhead costs as inventoriable costs. A) Variable costing B) Absorption costing C) Throughput costing D) Activity-based costing

Absorption costing

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? 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 since the cost of goods sold is the same. D) Variable costing and absorption costing will report the same operating income since the total costs are the same

Absorption costing will report less operating income than variable costing.

Which of the following would not lead to a build up inventory as a strategy to increase operating income? A) Cutting overhead costs as year-end approaches. B) Plant manager switching to make products that absorb the highest amounts of fixed cists C) Plant manager accepting an order to increase production and build up inventory when another plant in the same company would be better suited to take on the order D) Allocating resources to production by deferring maintenance of equipment and building beyond the current period

Cutting overhead costs as year-end approaches.

Which of the following is true of master-budget capacity utilization? A) It hides the amount of unused capacity. B) It represents the maximum units of production intended for current capacity. C) It provides the best cost estimate for benchmarking purposes. D) It is an average that provides no meaningful feedback to a firm's marketing manager for a particular year.

It hides the amount of unused capacity.

Which of the following is true of absorption costing? A) It expenses marketing costs as cost of goods sold. B) It treats direct manufacturing costs as a period cost. C) It includes fixed manufacturing overhead as an inventoriable cost. D) It treats indirect manufacturing costs as a period cost.

It includes fixed manufacturing overhead as an inventoriable cost.

Which of the following is a reason for companies adopting variable costing for internal reporting purposes? A) It is cost-effective to use variable costing for both internal and external reporting. B) It reduces the incentives for undesirable buildup of inventories. C) It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory. D) It assists in accurate pricing decisions in case of long-run pricing.

It reduces the incentives for undesirable buildup of inventories.

Which of the following is true of variable costing? A) It expenses administrative costs as cost of goods sold. B) It treats direct manufacturing costs as a product cost. C) It includes fixed manufacturing overhead as an inventoriable cost. D) It is required for external reporting to shareholders.

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. A) Practical capacity B) Master-budget capacity utilization C) Theoretical capacity D) Normal capacity utilization

Master-budget capacity utilization

________ 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

Normal capacity utilization

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

Variable and fixed manufacturing costs

Which of the following assumes that capacity will be decreased because of slowdowns due to plant maintenance or other interruptions of the production lines? A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization

Practical capacity

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

Practical capacity

Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a A) stable measure; avoiding the recalculation of unit costs when expected demand levels change B) fixed costs spread over available capacity C) can result in a downward demand spiral D) in fixed overhead costs calculated based on capacity available

can result in a downward demand spiral

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

cherry picking

Which of the following would be subtracted from sales while calculating contribution margin in a variable costing format of an operating income statement? A) Direct labor in factory B) Rent on factory building C) Rent on the headquarters building D) Sales commission on incremental sales

Direct labor in factory

________ 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) Competitor pricing pressure C) Continuous step down demand D) Super-demand cutback

Downward demand spiral

Which of the following steps can a management take to reduce the undesirable effects of absorption costing? A) It can evaluate managers on quarterly basis rather than the usual yearly period thereby mitigating the undesirable effects of absorption costing. B) It can delegate powers to managers to decide which orders they want to accept so that any order which will lead to inventory build-up can be rejected. C) It can empower managers to decide the timings of maintenance of plants thereby ensuring that the production is not affected. D) It can encourage using nonfinancial measures such as units in ending inventory compared to units in sales.

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

Top management at Gifford manufacturing are planning capacity levels and how to assign capacity costs for an upcoming period. Which of the following factors should be considered while developing this plan so that proper control can be achieved? A) The IRS tax implications of such decisions B) The level of uncertainty of expected costs and demand C) The GAAP rules requiring absorption costing D) The requirements of SFAS 151

The level of uncertainty of expected costs and demand

________ 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

Theoretical capacity

Which of the following best describes how fixed cost are treated in a variable cost method? A) They are part of the product cost B) They are excluded from inventory cost and are treated as period costs C) They are allocated to the product cost using a denominator-level capacity choice D) They are classified as nonmanufacturing costs

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

Which of the following is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit? A) a method of which fairly apportions indirect production costs among the various items produced B) requires that theoretical capacity be used as a means of allocating indirect manufacturing costs C) requires the use of master-budget capacity utilization D) requires the use of normal capacity utilization

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

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? A) throughput costing B) variable costing C) absorption costing D) standard costing

absorption costing

In ________, fixed manufacturing costs are included as inventoriable costs. A) variable costing B) absorption costing C) throughput costing D) activity-based costing

absorption costing

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

absorption costing

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 and idealistic level of capacity C) normal capacity utilization D) normal costing

an unattainable and idealistic level of capacity

Under absorption costing, fixed manufacturing costs ________. A) are period costs B) are inventoriable costs C) are treated as an expense D) are sunk costs

are inventoriable costs

To discourage producing for inventory, management can ________. A) discourage using nonfinancial measures such as units in ending inventory compared to units in sales as nonfinancial measures may not be congruent with management performance goals B) evaluate performance over a quarterly period rather than a single year C) develop budgeting and planning activities that reduce management's freedom to inappropriately build inventory through increased production D) implement absorption costing across all departments

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

Which of the following costs is inventoried when using variable costing? A) rent on factory building B) electricity consumed in manufacturing process C) sales commission paid on each sale D) advertising costs incurred for the product

electricity consumed in manufacturing process

Product-sustaining costs in activity-based costing are similar to ________. A) mixed costs B) variable costs C) semi-variable costs D) fixed costs

fixed costs

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) except direct labor no other costs are truly variable in output

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 ________. A) the inventory level decreases during the period B) the inventory level increases during the period C) fixed manufacturing overhead is allocated to work in process D) fixed manufacturing overhead is not allocated to work in process

fixed manufacturing overhead is not allocated to work in process

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) greater operating income and therefore increasing the manager's bonus B) less operating income and therefore 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

greater operating income and therefore increasing the manager's bonus

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. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

master-budget capacity utilization

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

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. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization

normal capacity utilization

Which of the following measures capacity levels in terms of demand for the output of the plant? A) practical capacity and theoretical capacity B) theoretical capacity and normal capacity utilization C) normal capacity utilization and master-budget capacity utilization D) master-budget capacity utilization and practical capacity

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 ________. 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

not affecting the manager's bonus

Customers expect to pay a price that includes ________. A) the cost of unused capacity B) only the cost of actual capacity used C) variable costs but not capacity costs D) the cost of direct materials, direct labor, and fixed overhead

only the cost of actual capacity used

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

period cost

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. A) practical capacity B) normal capacity utilization C) theoretical capacity D) master-budget capacity utilization

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? A) practical capacity B) normal capacity utilization C) theoretical capacity D) master-budget capacity utilization

practical capacity

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? 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

practical capacity for pricing decisions

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

reduces theoretical capacity for unavoidable operating interruptions

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

revenues minus all direct material cost of goods sold

Which of the following costs will be treated as period costs under absorption costing? A) raw materials used in the production B) sales commission paid on sale of product C) depreciation on factory equipment D) rent for factory building

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 ________. 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

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 ________. 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) switching production to products that absorb the most amounts of fixed manufacturing costs D) undervaluing ending inventory by not recording certain costs that have been incurred

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

For financial reporting, SFAS 151 requires: A) the allocation of fixed manufacturing overhead to production must be based on theoretical capacity of the facilities B) the allocation of fixed manufacturing overhead to production must be based on normal capacity of the facilities C) the allocation of fixed manufacturing overhead to production must be based on practical capacity of the facilities D) the allocation of fixed manufacturing overhead to production must be based on the average of the capacity of the facilities over the three most recent period

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

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? A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) the reinstatement approach

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. A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) the reinstatement approach

the write-off variances to cost of goods sold approach

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

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. A) throughput costing B) variable costing C) absorption costing D) job costing

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 ________. A) throughput costing B) variable costing C) absorption costing D) period costing

throughput costing

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

throughput costing

Many companies have switched from absorption costing to variable costing for internal reporting ________. A) to comply with external reporting requirements as required by GAAP B) to increase bonuses for managers C) to reduce the undesirable incentive to build up inventories that would show higher operating income D) so the denominator level is more accurate

to reduce the undesirable incentive to build up inventories that would show higher operating income

Throughput is a variation of which of the following systems? A) absorption costing B) variable costing C) job costing D) standard costing

variable costing

The contribution-margin format is used for ________. A) variable costing income statement B) mixed costing income statement C) absorption costing income statement D) job order costing income statement

variable costing income statement

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) both variable costing and absorption costing will show losses

variable costing will report less operating income than absorption costing

Which of the following is a reason for companies to use absorption costing for internal accounting? A) It is the required inventory method for internal accounting as per GAAP. B) It measures the cost of all resources, whether manufacturing or nonmanufacturing, necessary to produce inventory. C) It does not take into account fixed manufacturing overhead while valuing inventory and hence is more suited for decision making. D) It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders.

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? A) It will almost always show results that are very close to that of practical capacity utilization B) It can result in setting selling prices that are not competitive. C) It results in the lowest cost estimate of the four capacity options when used for product costing. D) It is also called master-budget capacity utilization

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

Which of the following is true of absorption costing? A) It enables a manager to decrease margins and operating income by producing more beginning inventory. B) It enables a manager to increase margins and operating income by producing more beginning inventory. C) It enables a manager to decrease margins and operating income by producing more and building ending inventory. D) It enables a manager to increase margins and operating income by producing more and building ending inventory.

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

Which of the following is not one of the reasons why absorption costing might also be used for internal reporting? A) It is more useful for managerial decision making than variable costing B) It is cost effective and less confusing for managers to use one common method for both internal and external reporting C) It can help prevent managers from making decisions that make their performance look good to the detriment of income reported to shareholders D) For long-term decision making both variable and fixed costs must be considered for inventory related decisions

It is more useful for managerial decision making than variable costing

Which of the following best describes practical capacity? A) It is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays. B) It is the level of capacity based on producing at full efficiency all the time. C) It is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors. D) It is the level of capacity utilization that managers expect for the current budget period, which is typically one year.

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 statements is true? A) When production is equal to sales, operating income will be greater under variable costing than under absorption costing. B) When production is greater than sales, operating income will be lower under variable costing than absorption costing. C) When production is less than sales, operating income is higher under absorption costing than variable costing. D) When production is greater than sales, operating income is greater under absorption cost than under variable costing.

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

Advocates of throughput costing argue that ________. A) fixed manufacturing costs must be included as inventoriable costs and provide less incentive than absorption costing to build-up inventory to increase profits B) direct manufacturing labor is relatively fixed and therefore should not be included in inventory costs C) direct materials costs are a cost of the period and therefore should not be included in inventoriable costs D) including only direct materials as inventoriable costs provides less incentive than absorption costing to produce a build-up of inventory merely to increase profits

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 ________. A) greater utilization of capacity B) increased unit costs C) more competitive selling prices D) greater demand for the product

increased unit costs