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