Ch9

The main trouble with variable costing is that it ignores the increasing importance of fixed costs in manufacturing companies. Do you​ agree? Why?

​No, variable costing does not view fixed costs as unimportant.​ Rather, variable costing maintains that the distinction between behaviors of different costs is crucial for certain decisions.

What is the​ IRS's requirement for tax reporting regarding the choice of a​ denominator-level capacity​ concept?

For tax reporting in the United​ States, the IRS requires only that indirect production costs are​ "fairly" apportioned among all items produced.

What are two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant​ manager?

Include nonfinancial as well as financial variables in the measures used to evaluate performance. 2. Extend the time period used to evaluate performance. By evaluating performance over a longer time period​ (say, 3 to 5​ years), the incentive to take​ short-run actions that reduce​ long-term income is lessened.

Differences in operating income between variable costing and absorption costing are due solely to accounting for fixed costs. Do you​ agree?

No, differences in operating income between variable costing and absorption costing are due to accounting for fixed manufacturing costs.

​"The difference between practical capacity and​ master-budget capacity utilization is the best measure of​ management's ability to balance the costs of having too much capacity and having too little​ capacity." Do you​ agree? If​ not, explain.

No, the costs of having too much​ capacity/too little capacity involve revenue opportunities potentially forgone as well as costs of money tied up in plant assets.

Give an example of​ how, under absorption​ costing, operating income could fall even though the unit sales level rises.

Under absorption​ costing, heavy reductions of inventory during the accounting period might combine with low production and a large production volume variance. This combination could result in lower operating income even if the unit sales level rises.

Determine which costing method​ (variable costing or absorption​ costing) accounts for fixed manufacturing costs as costs of the​ period: a. at the time of​ incurrence, or b. at the time the finished units to which the fixed overhead relates are sold.

Variable costing uses​ (a) and absorption costing uses​ (b).

Why is the term direct costing a​ misnomer?

Variable​ (direct) costing does not include all direct costs as inventoriable costs. Only variable direct manufacturing costs are included. Any fixed direct manufacturing​ costs, and any direct nonmanufacturing costs​ (either variable or​ fixed), are excluded from inventoriable costs. B. Variable​ (direct) costing includes as inventoriable costs not only direct manufacturing costs but also some indirect costs​ (variable indirect manufacturing​ costs). Both a and b are correct.

​"Companies that make no​ variable-cost/fixed-cost distinctions must use absorption​ costing, and those that do make​ variable-cost/fixed-cost distinctions must use variable​ costing." Do you​ agree? Explain.

No. A company that makes a​ variable-cost/fixed-cost distinction is not forced to use variable costing for internal reporting purposes. It can use variable​ costing, absorption​ costing, or throughput costing.

Will the financial statements of a company always differ when different choices at the start of the accounting period are made regarding the​ denominator-level capacity​ concept?

No. It depends on how a company handles the​ production-volume variance in the​ end-of-period financial statements. For​ example, if the adjusted​ allocation-rate approach is​ used, each​ denominator-level capacity concept will give the same financial statement numbers at​ year-end.

Do companies in either the service sector or the merchandising sector make choices about absorption costing versus variable​ costing?

No. Since service and merchandising companies have no fixed manufacturing​ costs, these companies do not make choices between absorption costing and variable costing.

Which of the following is an example that critics of absorption costing may use to show its potential for leading to undesirable incentives for​ managers?

Plant managers may accept a particular order to increase production even though another plant in the same company is better suited to handle that order. B. Plant managers may switch production to those orders that absorb the highest amount of fixed manufacturing​ overhead, irrespective of the demand by customers. C. Plant managers may defer maintenance beyond the current period to free up more time for production. D. All of the above.

Describe the downward demand spiral and its implications for pricing decisions.

The downward demand spiral is the continuing reduction in demand for a​ company's product that occurs when the prices of​ competitors' products are not​ met; as demand drops​ further, higher and higher unit costs result in more and more reluctance to meet​ competitors' prices.

What​ denominator-level capacity concepts emphasize the output a plant can​ supply? What​ denominator-level capacity concepts emphasize the output customers demand for products produced by a​ plant?

The theoretical capacity and the practical capacity concepts emphasize the output a plant can supply. The normal capacity utilization and the​ master-budget capacity utilization concepts emphasize the demand for a​ plant's output.

What are the factors that affect the breakeven point under​ (a) variable costing and​ (b) absorption​ costing? 1. Fixed​ (manufacturing and​ operating) costs. 2. Contribution margin per unit. 3. Production level in units in excess of breakeven sales in units. 4. Denominator level chosen to set the fixed manufacturing cost rate.

What are the factors that affect the breakeven point under​ (a) variable​ costing? 1. and 2. What are the factors that affect the breakeven point under​ (b) absorption​ costing? All of the factors affect the breakeven point.