CH 19

Loudon Company has the following unit costs: direct materials $6, direct labor $3, variable overhead $2, fixed overhead $1. Under absorption costing, total unit cost is:

$12 All costs counted

Brother Company uses variable costing. Their direct materials are $8, direct labor is $6 and total overhead is $5 of which $3 is variable. What is Brother Company's total unit cost?

$17 Reason: $8 + $6 + $3. Total overhead did not count

Which costing method can be helpful to management in setting prices because it reflects full costs that sales must exceed for the company to be profitable?

Absorption costing shows the full cost.

Commonwealth Company has the following unit costs: direct materials $2, direct labor $4, variable overhead $1, fixed overhead $3. Under the absorption costing method, what is the total unit cost?

Add them all together since they all calculate absorption costing Reason: $2 + $4 + $1 + $3.

An income statement which shows the excess of sales over variable costs is referred to as a

Contribution Margin

Sales minus variable costs is called

Contribution Margin

____________________ format income statement reports variable costs separately from fixed costs.

Contribution Margin

Hamilton Company has decided to use variable costing and has identified the following costs: direct materials $5, direct labor $10, variable overhead $3, fixed overhead $2. What is Hamilton Company's total unit cost?

Don't count fixed overhead $ 18

If management incentives are tied to income under absorption costing, which of the following may occur (select all that apply):

Due to over production: possible obsolescence increased financing costs increased storage costs.

The key difference between absorption and variable costing is

Fixed Overhead

The main difference between absorption and variable costing is their treatment of

Fixed Overhead Costs

Which of the following is not a product cost under variable costing?

Fixed overhead.

Under absorption costing, fixed overhead is allocated to products sold, so when production is greater than units sold, net income will be (greater, less) __________________than income calculated under variable costing.

Great bc under Absorption fixed Overhead would be a lesser cost bc there is less sold.

Which of the following statements is true regarding absorption costing?

It assigns all manufacturing costs to products.

Given net income of $900,000 based on variable costing. Beginning and ending inventories were 55,000 units and 52,000 units, respectively. Assume the fixed overhead per unit was $1.25 for both the beginning and ending inventory. What is net income under absorption costing?

Net income under absorption = = N.I. under variable costing - {(Beginning Inventory - Ending Inventory) * Fixed overhead } = 896,250 One must assume there are no units produced since it is not given.

Under Absorption costing, fixed overhead is EXPENSED when units are sold {as part of the cost of goods sold}. Under Variable Costing fixed overhead is e EXPENSED when units are ____________

Produced

Under Variable Costing fixed overhead is e EXPENSED when units are produced. Under Absorption costing, fixed overhead is EXPENSED when units are ___________ {as part of the cost of goods sold}.

SOLD

Contribution margin is the excess of

Sales - Variable Costs Reason: Contribution margin is sales minus variable costs.

A contribution margin income statement shows:

Sales - Variable Costs A contribution margin income statement shows sales minus variable costs.

True or false: When units produced are less than units sold, net income under absorption costing will be less than net income computed under variable costing.

True Reason: Net income under absorption costing will be less than net income under variable costing when units produced are less than units sold.

The absorption costing approach assigns all manufacturing costs to products.

True = The absorption costing method applies all the costs of manufacturing to the products irrespective of their nature as variable or fixed.

Service firms should focus on _____ costs in managerial decisions.

Variable Reason: Service firms should focus on variable costs.

Using absorption costing, which of the following manufacturing costs are assigned to products?

Variable overhead, direct materials, direct labor, and fixed overhead.

Cost information from _______ (neither, both) costing method(s) is helpful to management in setting prices.

both

Cost information from _____________________ (neither, both) costing method(s) is helpful to management in setting prices.

both

A _______ format income statement reports variable costs separately from fixed costs.

contribution

An income statement which separately reports variable costs from fixed costs is known as a(n)

contribution format

Makum Company is using variable costing. Which of the items below would you see on Makum's income statement?

contribution margin variable expenses net income

Regardless of whether variable costing or absorption costing is used, if quantity produced differs from quantity sold, income will be ___________ (similar, different, indeterminable).

different

The variable costing method includes all of the following costs (select all that apply):

direct labor direct materials variable overhead

When using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:

ending inventory

When units produced equals units sold, income under absorption costing will be ________ (>,<,=) net income under variable costing.

equal Production = sales

When units produced equals units sold, income under variable costing as compared to net income under absorption costing will be

equal to

Production planning is important because producing too much can lead to _________ (excess, insufficient) inventory.

excess

A system of rewarding managers by linking bonuses to income computed under absorption costing may result in:

excess inventory buildup

When units produced are less than units sold, net income computed under variable costing will be ________ (greater, less) than net income computed under absorption.

greater

Managers should accept special orders if the special-order price

is greater than variable cost

When units produced are greater than units sold, variable costing net income will be ________ (greater / less) than net income calculated under absorption costing.

less

When units produced are greater than units sold, variable costing net income will be ________ (less, greater) than net income calculated under absorption costing.

less

Over the __________, selling prices must cover both fixed and variable costs.

long-run

When units produced are greater than units sold under variable costing, fixed overhead is an expense and results in _______________ (lower, higher) net income than under absorption costing.

lower

Makum Company is using a traditional (absorption) costing system. Which of the items below would you see on Makum's income statement?

net income gross profit cost of goods sold

Makum Company is using variable costing. Which of the items below would you see on Makum's income statement?

net income variable expenses contribution margin

If management incentives are tied to income under absorption costing, which of the following may occur:

possible inventory obsolescence

Differences in income between variable costing and absorption costing is due to

timing

Since service firms do not produce inventory, they should focus primarily on _________________________

variable costs

A contribution margin income statement shows sales minus variable costs.

variable overhead direct materials direct labor