Chapter 8 LearnSmart

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

greater than Reason: Under absorption costing, when inventories decrease, costs from prior periods as well as the current period are expensed, thereby decreasing absorption income more than variable income.

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

Under variable cost, fixed overhead costs are expensed when ______.

incurred

Product costs are also called

inventoriable costs

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

inventoriable or inventoried

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

less than Reason: When inventories decrease, under absorption costing, fixed costs from prior years, in addition to current fixed costs, are expensed, resulting in a lower net income under absorption costing.

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

less than Reason: Because all fixed costs incurred are expensed under variable costing and some remain in inventory under absorption costing, variable costing net income will be lower.

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

only variable

Under absorption costing, fixed overhead costs are expensed when ______.

the product is sold

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

the same as

The difference between absorption and variable costing is ______.

the timing of when fixed overhead is expensed

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

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 _____ costing.

variable or direct

When internal operational analysis requires a differentiation of cost behavior, _____ costing more closely meets managers' needs.

variable or direct

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 Reason: Increase in inventory: 12,000 − 10,000 = 2,000 increase; 2,000 × $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 Reason: Predetermined rate for fixed overhead = $300,000 ÷ 50,000 or $6 per unit × 2,000 decrease in inventory = $12,000 less under absorption.

Absorption costing is required for ______.

-external financial reporting -income tax reporting

Under just-in-time (JIT) manufacturing, the differences between absorption and variable costing income will generally be insignificant because ______.

-finished-goods inventories are kept very low -there is little change in -finished-goods inventories between periods

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

any positive contribution margin by a product favorably impacts net income

Under just-in-time (JIT) manufacturing, the differences between absorption and variable costing income will generally be insignificant because ______.

-there is little change in finished-goods inventories between periods -finished-goods inventories are kept very low

Given a sufficiently long time period, net income under variable-costing and absorption-costing will be approximately the same if ______.

-there is no change in inventory -production and sales are almost equal

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

Blank 1: absorption or full Blank 2: variable or direct

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

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

True or false: The shorter the time period over which income is measured under absorption and variable costing, the more likely the net incomes under the two methods will differ.

True Reason: Over a sufficiently long time period, it is likely that production will more closely equal sales, thereby decreasing the differences in net income under the two methods.

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

Variable

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

absorption

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

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 under Blank______ costing.

absorption full

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

absorption or full

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

deducted as a lump-sum period cost

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

false Reason: Net income is only the same when there is no change in inventory during the year.

True or false: The difference between variable and absorption costing is always significant over a short period of time.

false Reason: When a company uses JIT, the income differences will be insignificant over both the short and long term.

When inventories increase, net income under absorption costing will be greater than under variable costing because some of the Blank______ 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 Reason: 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.

Proponents of absorption costing argue that ______.

fixed overhead costs have future service potential since inventory can be sold in the future to generate revenue Reason: Proponents of absorption costing argue that fixed overhead costs have future service potential since inventory can be sold in the future to generate revenue. fixed overhead costs comprise part of the cost of production and inventory should be valued at its full cost of production Reason: Proponents of absorption costing argue that fixed overhead costs comprise part of the cost of production and inventory should be valued at its full cost of production.

Both variable and fixed manufacturing overhead are treated as product costs under_____ costing.

full absorption