ACG6309 Ch 8

Razor Technologies reported $106,000 of income for the year by using variable costing. The company had no beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was $150,000. If there were no variances, income under absorption costing would be:

$115,000. Fixed costs per unit = $150,000 ÷ 50,000 = $3; Variable costing income + (Difference in unit sales × fixed cost per unit) = Absorption costing income; $106,000 + [(50,000 − 47,000) × $3] = $115,000.

Foxtrot reported $65,000 of income for the year by using absorption costing. The company had no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was $100,000. If there were no variances, income under variable costing would be:

$55,000. Fixed costs per unit = $100,000 ÷ 20,000 = $5; Absorption-costing income − (Difference in unit sales × fixed cost per unit) = Variable-costing income; $65,000 − [(20,000 − 18,000) × $5] = $55,000.

Vega Enterprises has computed the following unit costs for the year just ended: Direct material used $ 12 Direct labor 18 Variable manufacturing overhead 25 Fixed manufacturing overhead 29 Variable selling and administrative cost 10 Fixed selling and administrative cost 17 Under variable costing, each unit of the company's inventory would be carried at:

$55. Direct materials + Direct labor + Variable Manufacturing Overhead = $12 + $18 + $25 = $55

Which of the following statements about environmental costs is false?

Remediation costs include offsite, but not onsite, remediation costs. This statement is false because remediation costs include both offsite and onsite costs.

Programs that monitor, measure and report quality costs are called ______ programs.

TQM

Which of the following conditions would cause absorption-costing income to be lower than variable-costing income?

Units sold exceeded units produced. When units sold exceed units produced, absorption-costing income will be lower than variable-costing income.

When net income is the same under variable and absorption costing, ______ during the year.

a. all of the units produced in the year were sold b. there has been no change in inventory

Most companies that use cost-based pricing base their prices on ______ costing data.

absorption

The only period expenses on an income statement prepared using ______ costing are the selling and administrative expenses.

absorption

Both variable and fixed manufacturing overhead are treated as product costs when using

absorption costing

Some managers find the inconsistency between ______ costing and CVP analysis troubling enough to warrant using ______ costing for internal income reporting.

absorption, variable

An argument in favor of variable costing for pricing decisions is ______.

any positive contribution margin by a product favorably impacts net income

Absorption costing is inconsistent with CVP analysis because fixed overhead is ______.

applied to goods as a product cost on a per-unit basis

On the variable-costing income statement, fixed manufacturing overhead is ______.

deducted as a lump-sum period cost

The cost of complying with government regulations and laws regarding the protection of resources are referred to as ______ costs

environmental

The strategic implementation of systems for identifying, measuring, controlling and reducing environmental costs borne by individuals or companies is called ______ cost management

environmental

ISO 14000 standards relate to ______ and management.

environmental sustainability

Private environmental cost category classifications are ______.

monitoring, abatement or remediation

When using variable costing, ______ manufacturing overhead is (are) treated as a product cost.

only variable

The traditional view of quality costs hold that finding the optimal level of product quality is a balancing act between incurring costs of ______ and ______ on one hand and incurring costs of failure on the other.

prevention, appraisal

How well a product is conceived is the ______.

quality of design

All of the following are expensed under variable costing except:

variable manufacturing overhead. Variable manufacturing overhead is not expensed under variable costing.

The contemporary view of quality costs focuses on both observable and hidden costs and suggests the optimal level of product quality occurs at the ______ ______ level.

zero defect

The zero-defect perspective of optimal quality considers ______ and ______ quality costs in evaluating product quality costs.

hidden and observable

Since the costs of production are stored in the finished goods account until sold, these costs are called

inventoriable costs

When inventories decrease during the period, income under absorption costing will be ______ under variable costing.

less than

When inventories increase during the period, income under variable costing will be ______ under absorption costing.

less than

External failure costs include ______.

a. customer complaints b. replacing a product under warranty

ISO standards require ______.

a. documentation of the quality control system b. measurement and reporting of product life-cycle costs c. measurement of costs and benefits of the quality control system

Under variable-costing, ______ cost.

a. fixed manufacturing overhead is a period b. variable manufacturing overhead is a product

Proponents of absorption costing argue that ______.

a. fixed overhead costs have future service potential since inventory can be sold in the future to generate revenue b. fixed overhead costs comprise part of the cost of production and inventory should be valued at its full cost of production

Absorption costing is required for ______.

a. income tax reporting b. external financial reporting

Absorption costing is inconsistent with CVP analysis because absorption costing accounts for fixed manufacturing overhead ______.

a. on a per unit basis b. as a product cost

When inventories decrease, net income under variable costing will be ______ under absorption costing.

greater than

An example of an environmental cost to a company is ______.

implementing a system to preserve the habitat of an endangered species

ISO 14000 standards ______.

include guidelines for establishing an operating an environmental management system

On an absorption costing income statement, fixed manufacturing overhead cost is ______.

included in the total manufacturing cost per unit using a predetermined fixed overhead rate

As the percentage of defective products decreases, the costs of prevention and appraisal ______.

increase

Romano Corporation has computed the following unit costs for the year just ended: Direct material used $ 11 Direct labor 17 Variable manufacturing overhead 21 Fixed manufacturing overhead 23 Variable selling and administrative cost 5 Fixed selling and administrative cost 27 Under absorption costing, each unit of the company's inventory would be carried at:

$72. Direct materials + Direct labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead = $11 + $17 + $21 + $23 = $72.

Assuming the number of units sold and produced are the same, which of the following statements is true when comparing net income using absorption and variable costing?

Net income will be the same under both methods. Net income will be the same under both methods when the number of units sold and produced are the same.

Environmental cost management focuses on reducing ______ environmental costs.

private

Environmental costs borne by a company or individual are ______ costs.

private environmental

Sustainable development is the process of ______.

producing the currently needed the goods and services without limiting the ability of future generations to meet their needs

How well a product meets the specification of its design is called ______.

quality of conformance

An example of a prevention cost is ______.

quality training

The extent of a products capabilities in relation to other products with the same functional use is the product's

grade

The following information is available for Brooks Manufacturing: Finished goods Inventory was 10,000 units at the beginning of the year and 12,000 units at the end of the year. The total variable costs per unit were $18. The predetermined fixed manufacturing overhead rate was $6. Variable selling and administrative costs per unit were $3. Total fixed selling and administrative costs per unit were $2. Calculate the difference between absorption costing net income and variable costing net income

$12,000 higher under absorption. Increase in inventory: 12,000 - 10,000 = 2,000 increase; 2,000 x $6 fixed manufacturing overhead rate = $12,000 more under absorption

The following information is available for Brooks Manufacturing: Finished goods Inventory was 10,000 units at the beginning of the year and 8,000 units at the end of the year. The total variable costs per unit were $18. The fixed manufacturing overhead rate was based on total fixed manufacturing overhead costs of $300,000 and a planned production of 50,000 units. Variable selling and administrative costs per unit were $3. Total fixed selling and administrative costs were $100,000 or $2 per unit. Calculate the difference between absorption costing net income and variable costing net income

$12,000 less under absorption. Predetermined rate for fixed overehead = $300,000 ÷ 50,000 or $6 per unit x 2,000 decrease in inventory = $12,000 less under absorption

Montana Industries has the following costs for the year just ended: Beginning variable manufacturing overhead in inventory $ 30,000 Beginning fixed manufacturing overhead in inventory 60,000 Ending variable manufacturing overhead in inventory $ 14,250 Ending fixed manufacturing overhead in inventory 45,000 Fixed selling and administrative costs $ 724,000 Units produced 5,000 units Units sold 4,800 units What is the difference between operating incomes under absorption costing and variable costing?

$15,000. The difference between absorption costing and variable costing is $15,000 = $60,000 − $45,000.

Riverton Corp., which began business at the start of the current year, had the following data: Planned and actual production: 40,000 unitsSales: 37,000 units at $15 per unitProduction costs:Variable: $4 per unitFixed: $260,000Selling and administrative costs:Variable: $1 per unitFixed: $32,000 The gross margin that the company would disclose on an absorption-costing income statement is:

$166,500. Fixed production per unit = $260,000 ÷ 40,000 = $6.50; Sales − Variable costs − fixed costs = $15 − $4 − $6.50 = $4.50 × 37,000 = $166,500.

Favaz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data follow: Planned production in units 10,000 Actual production in units 10,000 Number of units sold 8,500 There were no variances.The income (loss) under absorption costing is:

$18,000. Fixed manufacturing per unit = $60,000 ÷ 10,000 = $6; (Per Unit: Sales − Variable costs − Fixed OH =$45 − $9 − $2 − $6 = $28 × 8,500 = $238,000); $238,000 − fixed S & A = $238,000 − $220,000 = $18,000.

Sawyer Industries began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were: Variable manufacturing overhead per unit $ 8 Fixed manufacturing overhead 150,000 Variable selling and administrative cost per unit 2 Fixed selling and administrative cost 100,000 If there were no variances, the company's absorption-costing income would be:

$208,000. Fixed manufacturing per unit = $150,000 ÷ 25,000 = $6; (Per Unit: Sales − Variable costs − Fixed OH = $30 − $2 − $8 − $6 = $14 × 22,000 = $308,000); $308,000 − fixed S & A = $308,000 − $100,000 = $208,000.

ProTech began business at the start of the current year. The company planned to produce 40,000 units, and actual production conformed to expectations. Sales totaled 37,000 units at $42 each. Costs incurred were: Variable manufacturing overhead per unit $ 19 Fixed manufacturing overhead 240,000 Variable selling and administrative cost per unit 7 Fixed selling and administrative cost per unit 140,000 If there were no variances, the company's absorption-costing income would be:

$230,000. Fixed manufacturing per unit = $240,000 ÷ 40,000 = $6; (Per Unit: Sales − Variable costs − Fixed OH = $42 − $19 − $7 − $6 = $10 × 37,000 = $370,000); $370,000 − fixed S & A = $370,000 − $140,000 = $230,000.

Fort Smith Technologies incurred the following costs during the past year when planned production and actual production each totaled 20,000 units: Direct material used $ 280,000 Direct labor 120,000 Variable manufacturing overhead 160,000 Fixed manufacturing overhead 100,000 Variable selling and administrative cost 60,000 Fixed selling and administrative cost 90,000 Fort Smith's per-unit inventoriable cost under variable costing is:

$28.00. Total variable costs ÷ units = $560,000 ÷ 20,000 = $28.00

Cagney Industries has the following cost information for the year just ended: Direct materials $ 1.00 per unit Direct labor $ 2.00 per unit Variable manufacturing overhead $ 1.50 per unit Fixed manufacturing overhead $ 30,000 Variable selling and administrative cost $ 0.50 per unit Fixed selling and administrative cost $ 25,000 During the year, Cagney produced 6,000 units, out of which 5,400 were sold for $20 each.What is net income under absorption costing?

$29,000. Net income under absorption costing is $29,000 = ($20 × 5,400) − [($5.00 × 5,400) + $25,000 + (($30,000 / 6,000) × 5,400)].

Fort Smith Technologies incurred the following costs during the past year when planned production and actual production each totaled 20,000 units: Direct material used $ 280,000 Direct labor 120,000 Variable manufacturing overhead 160,000 Fixed manufacturing overhead 100,000 Variable selling and administrative cost 60,000 Fixed selling and administrative cost 90,000 Fort Smith's per-unit inventoriable cost under absorption costing is:

$33.00. Total absorption costs ÷ units = $660,000 ÷ 20,000 = $33.00

Although the income statement formats differ between variable and absorption costing, net income will always be the same.

False

Due to the complex reporting requirements of ISO 9000, companies must use external, independent accounting firms (i.e. CPAs) to meet them.

False

Studies have shown that many environmental costs are hidden because management refuses to recognize them.

False

Consider the following statements about absorption costing and variable costing: I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis. II. Absorption costing must be used for external financial reporting. III. A number of companies use both absorption costing and variable costing. Which of the above statements is (are) true?

I, II, and III.

A set of quality control standards for companies selling products in Europe that has been widely adopted in the United States is the ______ Standards.

ISO 9000

Which of the following is not a hidden social environmental cost?

Impact on health care costs of cancers caused by smoking.

Which of the following is not part of the ISO 9000 quality management principles?

Improvement of the organization's overall performance is only necessary for identified problems

Product costs are also called ______ costs.

Inventoriable

The GRI sustainability framework ______.

a. requires companies to define specific environmental goals b. provides specific guidance on environmental reporting c. defines specific performance indicators for many categories

Consequences of hidden quality costs are ______.

a. tarnished reputation b. lost sales

Because fixed overhead is applied to goods as a product cost on a per unit basis, ______ costing is inconsistent with CVP analysis.

absorption

Generally accepted accounting principles require that ______ costing be used for income reporting.

absorption

Costs of determining whether defects exist are called:

appraisal costs.

Absorption costing assigns direct materials, direct labor and ______ to products

both variable and fixed manufacturing overhead

Which of the following is a hidden quality cost?

customer dissatisfaction

Under variable costing, fixed manufacturing overhead is:

expensed immediately when incurred. Under variable costing, fixed manufacturing overhead is expensed immediately when incurred.

When inventories increase, net income under absorption costing will be greater than under variable costing because some of the ______ remain in inventory.

fixed manufacturing overhead costs

Many managers prefer to use absorption-costing data in cost-based pricing decisions under the argument that ______.

fixed manufacturing overhead is a necessary production cost

The purpose of a TQM program is to ______.

focus the entire organization on providing products that do the best possible job of satisfying the customer

A product's grade is defined as ______.

its capabilities in performing an intended purpose in comparison to other products with the same purpose

A visible social environmental cost is ______.

known and clearly identified as an environmental issue

Creating an environment in which personnel are fully involved in achieving the organization's objectives is the ISO ______ principle.

leadership

The clean up costs from the Gold King Mine accident that released mining waste water into the Animas and San Juan rivers is an example of ______ costs.

remediation

Standards to guide companies in defining specific goals and performance measures relating to their sustainability performance are found in the GRI's Sustainability

reporting framework

Business activity which produces the goods and services currently needed without limiting the ability of future generations to meet their needs is called

sustainable development

The ISO 9000 principle that requires the identifying, understanding and managing interrelated processes is ______.

system approach to management

Studies have shown that many environmental costs are hidden because ______.

the accounting system does not identify and report them

A social environmental cost is a cost borne by ______.

the public at large

ISO 9000 standards focus on the process a company uses to match ______.

the quality of design and conformance with the expectations of customers

When there is no change in inventory during the year (i.e. product produced is equal to product sold), net income under absorption costing will be ______ net income under variable costing.

the same as

The optimal product quality level is the point that minimizes ______.

total quality costs

The optimum level of product quality is where:

total quality costs are at a minimum.

Period expenses on an income statement prepared using ______ costing include fixed manufacturing overhead.

variable

When internal operational analysis require a differentiation of cost behavior, ______ costing more closely meets managers' needs

variable

The position that only costs that will not be repeated in the future should be included in inventory cost is an argument for the use of

variable costing

When fixed manufacturing overhead is not applied to product costs, the costing system being used is

variable costing