Ch. 9 Cost ACCT TB
16) 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
3) 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
34) 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
A
36) 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
6) 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
C
42) The basis of the difference between variable costing and absorption costing is how fixed manufacturing costs are accounted for.
TRUE
27) a. Explain the difference between the variable and absorption costing methods. b. Which method(s) are required for external reporting? For internal reporting?
a. Absorption costing includes both fixed and variable manufacturing costs as inventoriable costs, whereas variable costing only includes variable manufacturing costs as inventoriable costs. b. Absorption costing is required for external reporting to shareholders and for income tax reporting. A company may use whichever method it chooses for internal reporting purposes.
1) Throughput costing is also called ________. A) absorption costing B) super-variable costing C) mixed costing D) direct costing
B
1) 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
B
10) Under absorption costing, fixed manufacturing costs ________. A) are period costs B) are inventoriable costs C) are treated as an expense D) are sunk costs
B
10) 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.
B
11) ________ 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
12) 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
13) 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
14) 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
15) 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
15) 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
B
16) 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) selling and administrative costs
B
1) 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
1) 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
A
11) 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
A
12) 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
13) 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
18) 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
19) 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.
A
2) 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
A
2) ________ reduces theoretical capacity for unavoidable operating interruptions. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization
A
3) ________ 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
4) Which of the following is true of capacity costs? A) Capacity costs are difficult to estimate. B) Capacity costs don't provide a useful planning tool for nonmanufacturing firms. C) Capacity costs cannot be used with activity-based costing. D) Capacity costs do not arise in the nonmanufacturing parts of the value chain.
A
4) 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.
A
5) 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
5) 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.
A
5) ________ is subtracted from sales while calculating contribution margin. A) Direct labor in factory B) Rent on factory building C) Rent on the headquarterʹs building D) Sales commission on incremental sales
A
6) 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
A
6) ________ are subtracted from sales to calculate gross margin. A) Variable manufacturing costs B) Fixed administrative costs C) Variable administrative costs D) Fixed selling costs
A
7) 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
7) 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.
A
9) ________ 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-variable costing
A
9) ________ provides the lowest estimate of denominator-level capacity in case demand of the product is not a limiting factor. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization
A
17) 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
2) 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
3) Which of the following is true of unused capacity? A) It is a definite sign of wasted resources. B) It is intended for future use. C) It is not possible to reduce or eliminate unused capacity costs. D) It does not provide capacity for potential demand surges.
B
3) Which of the following statements is true of contribution-margin format of the income statement? A) It is used for absorption costing. B) It highlights the lump sum of fixed manufacturing costs. C) It distinguishes manufacturing costs from nonmanufacturing costs. D) It calculates gross margin.
B
35) 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.
B
4) 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
4) Which of the following is true of normal capacity utilization? A) It will be less than the real capacity available to a company. 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 represents the maximum units of production intended for current capacity.
B
4) ________ 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
B
5) ________ 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
6) 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.
B
7) 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) both actual and unused capacity costs
B
7) In ________, fixed manufacturing costs are included as inventoriable costs. A) variable costing B) absorption costing C) throughput costing D) activity-based costing
B
8) 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
8) ________ method includes fixed manufacturing overhead costs as inventoriable costs. A) Variable costing B) Absorption costing C) Throughput costing D) Activity-based costing
B
9) 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
B
44) Absorption costing enables managers to increase operating income by increasing the unit level of sales, as well as by producing more units.
TRUE
45) As a company reduces its inventory levels, operating income differences between absorption costing and variable costing become immaterial.
TRUE
46) Fixed manufacturing costs included in cost of goods available for sale + the production-volume variance will always = total fixed manufacturing costs under absorption costing.
TRUE
49) Absorption-costing income statements do not need to differentiate between variable and fixed costs.
TRUE
50) The production-volume variance, which relates only to fixed manufacturing overhead, exists under absorption costing but not under variable costing.
TRUE
1) Which of the following is true of theoretical capacity? A) It will be less than the real capacity available to a company. B) It provides the best perspective of actual long-run costs. C) It results in the lowest cost estimate of the four capacity options when used for product costing. D) It replicates the cost of capacity in a competitor's cost structure.
C
10) 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
12) Variable costing regards fixed manufacturing overhead as a(n) ________. A) administrative cost B) inventoriable cost C) period cost D) product cost
C
12) 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
13) 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) variable administrative costs
C
14) 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
C
2) 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 D) so the denominator level is more accurate
C
2) 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
C
2) 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
C
3) 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
C
3) 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) undervaluing ending inventory by not recording certain costs that have been incurred
C
4) 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
4) ________ 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
C
5) To discourage producing for inventory, management can ________. A) discourage using nonfinancial measures such as units in ending inventory compared to units in sales B) evaluate performance over a quarterly period rather than a single year C) incorporate a carrying charge for inventory in the internal accounting system D) implement absorption costing across all departments
C
5) 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.
C
6) 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
C
7) 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
C
8) 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
8) 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
9) Critics of absorption costing suggest evaluating management on its ability to ________. A) exceed production quotas B) increase operating income C) decrease fixed costs D) decrease variable costs
C
1) 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
1) 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.
D
11) 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 ending inventory. D) It enables a manager to increase margins and operating income by producing more ending inventory.
D
18) 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
2) Advocates of throughput costing argue that ________. A) fixed manufacturing costs are also to be included as inventoriable costs B) direct manufacturing labor is relatively fixed C) direct materials costs are a cost of the period D) only direct material costs are included as inventoriable costs
D
3) ________ 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
5) Product-sustaining costs in activity-based costing are similar to ________. A) mixed costs B) variable costs C) semi-variable costs D) fixed costs
D
6) 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
D
6) 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.
D
