VARIABLE AND ABSORPTION COSTING PART 1
D
A basic tenet of variable costing is that period costs should be currently expensed. What is the rationale behind this procedure? a. Period costs are uncontrollable and should not be charged to a specific product. b. Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits. c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by management. d. Because period costs will occur whether production occurs, it is improper to allocate these costs to production and defer a current cost of doing business.
A
A firm presently has total sales of $100,000. If its sales rise, its a. net income based on variable costing will go up more than its net income based on absorption costing. b. net income based on absorption costing will go up more than its net income based on variable costing. c. fixed costs will also rise. d. per unit variable costs will rise.
A
Actual overhead exceeds applied overhead and the amount is immaterial. Which of the following will be true? Upon closing, Overhead is Cost of Goods Sold will a. underapplied increase b. overapplied decrease c. overapplied increase d. underapplied decrease
C
All other things being equal, if actual cost per unit is greater than budgeted cost per unit, variable overhead will be a. overapplied. b. the same as fixed overhead. c. underapplied. d. applied to Finished Goods.
B
An actual cost system differs from a normal cost system in that an actual cost system a. assigns overhead as it occurs during the manufacturing cycle. b. assigns overhead at the end of the manufacturing process. c. does not assign overhead at all. d. does not use an Overhead Control account.
D
An ending inventory valuation on an absorption costing balance sheet would a. sometimes be less than the ending inventory valuation under variable costing. b. always be less than the ending inventory valuation under variable costing. c. always be the same as the ending inventory valuation under variable costing. d. always be greater than or equal to the ending inventory valuation under variable costing.
D
An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a a. mixed cost. b. predictor. c. direct cost. d. cost driver.
B
Another name for variable costing is a. full costing. b. direct costing. c. standard costing. d. adjustable costing.
A
Applied overhead consists of which of the following? a. actual activity times predetermined overhead rate b. estimated activity times predetermined overhead rate c. actual activity times actual overhead rate d. estimated activity times actual overhead rate
E
Consider the following comments about absorption- and variable-costing income statements: I. A variable-costing income statement discloses a firm's contribution margin. II. Cost of goods sold on an absorption-costing income statement includes fixed costs. III. The amount of variable selling and administrative cost is the same on absorption- and variable-costing income statements. Which of the above statements is (are) true? A. I only. B. II only. C. I and II. D. II and III. E. I, II, and III.
B
Gomez's inventory increased during the year. On the basis of this information, income reported under absorption costing: A. will be the same as that reported under variable costing. B. will be higher than that reported under variable costing. C. will be lower than that reported under variable costing. D. will differ from that reported under variable costing, the direction of which cannot be determined from the information given. E. will be less than that reported in the previous period.
C
How will a favorable volume variance affect net income under each of the following methods? Absorption Variable a. reduce no effect b. reduce increase c. increase no effect d. increase reduce
A
If a company used two overhead accounts (actual overhead and applied overhead), the one that would receive the most debits would be a. actual overhead. b. applied overhead. c. both would receive an equal number of debits. d. impossible to determine without additional information.
A
If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in a. higher income and assets. b. higher income but lower assets. c. lower income but higher assets. d. lower income and assets.
C
If a firm uses absorption costing, fixed manufacturing overhead will be included a. only on the balance sheet. b. only on the income statement. c. on both the balance sheet and income statement. d. on neither the balance sheet nor income statement.
B
If a firm uses variable costing, fixed manufacturing overhead will be included a. only on the balance sheet. b. only on the income statement. c. on both the balance sheet and income statement. d. on neither the balance sheet nor income statement.
D
If actual overhead is less than applied overhead, which of the following will be true? Upon closing, Overhead is Cost of Goods Sold is a. underapplied credited b. underapplied debited c. overapplied debited d. overapplied credited
D
If underapplied overhead is considered to be immaterial, it is closed to which of the following accounts? Work in Process Finished Goods Cost of Goods Sold a. yes yes yes b. no yes yes c. yes no no d. no no yes
C
In a normal cost system, which of the following is used? Actual direct materials Actual direct labor Actual overhead a. yes no yes b. yes yes yes c. yes yes no d. no yes no
B
In an income statement prepared as an internal report using the variable costing method, fixed manufacturing overhead would a. not be used. b. be used in the computation of operating income but not in the computation of the contribution margin. c. be used in the computation of the contribution margin. d. be treated the same as variable manufacturing overhead.
C
In the application of "variable costing" as a cost-allocation process in manufacturing, a. variable direct costs are treated as period costs. b. nonvariable indirect manufacturing costs are treated as product costs. c. variable indirect manufacturing costs are treated as product costs. d. nonvariable direct costs are treated as product costs.
D
In the formula y = a + bX, a represents a. mixed cost. b. variable cost. c. total cost. d. fixed cost.
B
In the formula y = a + bX, y represents a. fixed costs. b. total cost. c. variable costs. d. mixed costs.
D
In the variable costing income statement, which line separates the variable and fixed costs? a. selling expenses b. general and administrative expense c. product contribution margin d. total contribution margin
B
Income reported under absorption costing and variable costing is: A. always the same. B. typically different. C. always higher under absorption costing. D. always higher under variable costing. E. always the same or higher under absorption costing.
A
One reason annual overhead application rates are used is a. because of seasonal variability of overhead costs. b. to help budget overhead costs. c. to minimize the overhead cost assigned to products. d. to maximize the overhead cost assigned to products.
B
Orion's management recently committed to incurring direct labor and all manufacturing overhead charges regardless of the number of units produced. Under throughput costing, the company's cost of goods sold would include charges for: A. selling and administrative costs. B. direct materials. C. direct labor and manufacturing overhead. D. direct materials, direct labor, and manufacturing overhead. E. direct materials, direct labor, manufacturing overhead, and selling and administrative costs.
A
Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated? a. Change in the quantity of all units in inventory times the relevant fixed costs per unit. b. Change in the quantity of all units produced times the relevant fixed costs per unit. c. Change in the quantity of all units in inventory times the relevant variable cost per unit. d. Change in the quantity of all units produced times the relevant variable cost per unit.
D
The costing system that classifies costs by functional group only is a. standard costing. b. job order costing. c. variable costing. d. absorption costing.
B
The difference between the reported income under absorption and variable costing is attributable to the difference in the a. income statement formats. b. treatment of fixed manufacturing overhead. c. treatment of variable manufacturing overhead. d. treatment of variable selling, general, and administrative expenses.
A
The estimated maximum potential activity for a specified time is: a. theoretical capacity c. normal capacity b. practical capacity d. expected capacity
C
The following information regarding fixed production costs from a manufacturing firm is available for the current year: Fixed costs in the beginning inventory $ 16,000 Fixed costs incurred this period 100,000 Which of the following statements is not true? a. The maximum amount of fixed production costs that this firm could deduct using absorption costs in the current year is $116,000. b. The maximum difference between this firm's the current year income based on absorption costing and its income based on variable costing is $16,000. c. Using variable costing, this firm will deduct no more than $16,000 for fixed production costs. d. If this firm produced substantially more units than it sold in the current year, variable costing will probably yield a lower income than absorption costing.
B
The measure of activity that allows for routine variations in manufacturing activity is: a. theoretical capacity c. normal capacity b. practical capacity d. expected capacity
C
The measure of production that considers historical and estimated future production levels and cyclical fluctuations is referred to as: a. theoretical capacity c. normal capacity b. practical capacity d. expected capacity
C
The underlying difference between absorption costing and variable costing lies in the treatment of: A. direct labor. B. variable manufacturing overhead. C. fixed manufacturing overhead. D. variable selling and administrative expenses. E. fixed selling and administrative expenses.
A
The variable costing format is often more useful to managers than the absorption costing format because a. costs are classified by their behavior. b. costs are always lower. c. it is required for external reporting. d. it justifies higher product prices.
A
Unabsorbed fixed overhead costs in an absorption costing system are a. fixed manufacturing costs not allocated to units produced. b. variable overhead costs not allocated to units produced. c. excess variable overhead costs. d. costs that cannot be controlled.
D
Under absorption costing, fixed manufacturing overhead could be found in all of the following except the a. work-in-process account. b. finished goods inventory account. c. Cost of Goods Sold. d. period costs.
A
Under absorption costing, if sales remain constant from period 1 to period 2, the company will report a larger income in period 2 when a. period 2 production exceeds period 1 production. b. period 1 production exceeds period 2 production. c. variable production costs are larger in period 2 than period 1. d. fixed production costs are larger in period 2 than period 1.
A
Under variable costing, fixed manufacturing overhead is: A. expensed immediately when incurred. B. never expensed. C. applied directly to Finished-Goods Inventory. D. applied directly to Work-in-Process Inventory. E. treated in the same manner as variable manufacturing overhead.
B
Under variable costing, which of the following are costs that can be inventoried? a. variable selling and administrative expense b. variable manufacturing overhead c. fixed manufacturing overhead d. fixed selling and administrative expense
D
Variable costing considers which of the following to be product costs? Fixed Mfg. Costs Fixed Selling & Adm. Variable Mfg. Costs Variable Selling & Adm. a. yes no yes no b. yes no yes yes c. no no yes yes d. no no yes no
D
Variable costing has an advantage over absorption costing for which of the following purposes? a. analysis of profitability of products, territories, and other segments of a business b. determining the CVP relationship among the major factors of selling price, sales mix, and sales volume c. minimizing the effects of inventory changes on net income d. all of the above
D
Weaknesses of the high-low method include all of the following except a. only two observations are used to develop the cost function. b. the high and low activity levels may not be representative. c. the method does not detect if the cost behavior is nonlinear. d. the mathematical calculations are relatively complex.
B
What factor, related to manufacturing costs, causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing? a. Absorption costing considers all costs in the determination of net earnings, whereas variable costing considers fixed costs to be period costs. b. Absorption costing allocates fixed overhead costs between cost of goods sold and inventories, and variable costing considers all fixed costs to be period costs. c. Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period costs. d. Absorption costing "inventories" all fixed costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs.
B
Which of the following differs between absorption costing and variable costing? A. The number of units produced. B. The fixed-overhead volume variance. C. Sales revenues. D. The treatment of variable manufacturing overhead. E. Income tax rates.
C
Which of the following formulas can often reconcile the difference between absorption- and variable-costing net income? A. Change in inventory units x predetermined variable-overhead rate per unit. B. Change in inventory units ÷ predetermined variable-overhead rate per unit. C. Change in inventory units x predetermined fixed-overhead rate per unit. D. Change in inventory units ÷ predetermined fixed-overhead rate per unit. E. (Absorption-costing net income - variable-costing net income) x fixed-overhead rate per unit.
D
Which of the following is an argument against the use of direct (variable) costing? a. Absorption costing overstates the balance sheet value of inventories. b. Variable factory overhead is a period cost. c. Fixed manufacturing overhead is difficult to allocate properly. d. Fixed manufacturing overhead is necessary for the production of a product.
A
Which of the following is not a reason to use predetermined overhead rates? a. to overcome the problems of assigning overhead to diverse types of products b. to compensate for fluctuations in monthly overhead costs c. to provide a means for assigning overhead during the period rather than at the end of the period d. to smooth out the amount of overhead cost assigned to products when monthly production activity differs
D
Which of the following is not associated with absorption costing? a. functional format b. gross margin c. period costs d. contribution margin
A
Which of the following methods defines product cost as the unit-level cost incurred each time a unit is manufactured? A. Throughput costing. B. Indirect costing. C. Process costing. D. Absorption costing. E. Back-flush costing.
B
A functional classification of costs would classify "depreciation on office equipment" as a a. product cost. b. general and administrative expense. c. selling expense. d. variable cost.
B
Absorption costing differs from variable costing in all of the following except a. treatment of fixed manufacturing overhead. b. treatment of variable production costs. c. acceptability for external reporting. d. arrangement of the income statement.
C
Overapplied overhead will result if a. the plant is operated at less than expected capacity. b. overhead costs incurred were greater than estimated overhead costs. c. overhead costs incurred were less than overhead costs charged to production. d. overhead costs incurred were greater than overhead charged to production.
A
Predetermined overhead rates are computed based on estimated overhead costs estimated level of activity a. yes yes b. yes no c. no yes d. no no
A
Since overhead costs are indirect costs, a. they require some process of allocation. b. they can be easily traced to production. c. a predetermined overhead rate is not advantageous. d. they cannot be allocated.
B
Which of the following is a term more descriptive of the term "direct costing"? a. out-of-pocket costing b. variable costing c. relevant costing d. prime costing
D
An outlier is a. something that happens outside the organization that does not affect production. b. always used in analyzing a mixed cost. c. something that happens inside the organization that does not affect production. d. never used in analyzing a mixed cost.
A
Another name for absorption costing is a. full costing. b. direct costing. c. job order costing. d. fixed costing.
C
In relationship to changes in activity, fixed overhead changes in total per unit a. yes yes b. no no c. no yes d. yes no
D
In relationship to changes in activity, variable overhead changes in total per unit a. no no b. no yes c. yes yes d. yes no
C
On the variable costing income statement, the difference between the "contribution margin" and "income before income taxes" is equal to a. the total variable costs. b. the Cost of Goods Sold. c. total fixed costs. d. the gross margin.
D
The FASB requires which of the following to be used in preparation of external financial statements? a. variable costing b. standard costing c. activity-based costing d. absorption costing
C
Under throughput costing, the cost of a unit typically includes: A. selling costs. B. fixed manufacturing overhead. C. the direct costs incurred whenever a unit is manufactured. D. administrative costs. E. all of the above.
D
All of the following are inventoried under absorption costing except: A. direct labor. B. raw materials used in production. C. utilities cost consumed in manufacturing. D. sales commissions.
B
An income statement is prepared as an internal report. Under which of the following methods would the term contribution margin appear? Absorption costing Variable costing a. no no b. no yes c. yes no d. yes yes
C
The costing system that classifies costs by both functional group and behavior is a. process costing. b. job order costing. c. variable costing. d. absorption costing.
A
Under variable costing, a. all product costs are variable. b. all period costs are variable. c. all product costs are fixed. d. product costs are both fixed and variable.
B
What costs are treated as product costs under variable (direct) costing? a. only direct costs b. only variable production costs c. all variable costs d. all variable and fixed manufacturing costs
E
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? A. I only. B. II only. C. III only. D. I and II. E. I, II, and III.
E
Consider the following statements about absorption costing and variable costing: I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis. II. Variable 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? A. I only. B. II only. C. III only. D. I and II. E. I and III.
D
Consider the following statements about absorption- and variable-costing net income: I. Yearly income reported under absorption costing will differ from income reported under variable costing if production and sales volumes differ. II. Long-run, total income reported under absorption costing will often be close to that reported under variable costing. III. Differences in income under absorption and variable costing can often be reconciled by multiplying the change in inventory (in units) by the variable manufacturing overhead cost per unit. Which of the above statements is (are) true? A. I only. B. II only. C. III only. D. I and II. E. II and III.
D
Cost allocation is the assignment of ______ costs to one or more products using a reasonable basis. direct/indirect a. yes yes b. yes no c. no no d. no yes
C
If the level of activity increases, a. variable cost per unit and total fixed costs increase. b. fixed cost per unit and total variable cost increase. c. total cost will increase and fixed cost per unit will decrease. d. variable cost per unit and total cost increase.
C
If there is no "a" value in a linear cost equation, this is an indication that the cost is a. fixed. b. mixed. c. variable. d. either fixed or mixed.
C
The fixed-overhead volume variance under variable costing: A. coincides with the fixed manufacturing overhead that was applied to production. B. is deducted on the income statement. C. does not exist. D. will equal the fixed-overhead budget variance. E. must be unfavorable.
C
When a manufacturing company has a highly automated manufacturing plant producing many different products, which of the following is the more appropriate basis of applying manufacturing overhead costs to work in process? a. direct labor hours b. direct labor dollars c. machine hours d. cost of materials used
A
Which of the following conditions would cause absorption-costing net income to be lower than variable-costing net income? A. Units sold exceeded units produced. B. Units sold equaled units produced. C. Units sold were less than units produced. D. Sales prices decreased. E. Selling expenses increased.
D
Which of the following costs will vary directly with the level of production? a. total manufacturing costs b. total period costs c. variable period costs d. variable product costs
E
Which of the following costs would be treated differently under absorption costing and variable costing? Direct Labor Variable MOH Fixed Administrative Expenses A. Yes No Yes B. Yes Yes Yes C. No Yes No D. No No Yes E. No No No
A
Which of the following situations would cause variable-costing net income to be lower than absorption-costing net income? A. Units sold equaled 39,000 and units produced equaled 42,000. B. Units sold and units produced were both 42,000. C. Units sold equaled 55,000 and units produced equaled 49,000. D. Sales prices decreased by $7 per unit during the accounting period. E.Selling expenses increased by 10% during the accounting period
B
Which of the following statements is true for a firm that uses variable costing? a. The cost of a unit of product changes because of changes in the number of units manufactured. b. Profits fluctuate with sales. c. An idle facility variation is calculated. d. None of the above.
B
A mixed cost has which of the following components? Variable component Fixed component a. yes no b. yes yes c. no no d. no yes
D
A short-run measure of activity that represents a firm's anticipated activity level for an upcoming period based upon expected demand is referred to as: a. theoretical capacity c. normal capacity b. practical capacity d. expected capacity
A
All of the following are expensed under variable costing except: A. variable manufacturing overhead. B. fixed manufacturing overhead. C. variable selling and administrative costs. D. fixed selling and administrative costs. E. items "C" and "D" above.
D
All of the following are inventoried under variable costing except: A. direct materials. B. direct labor. C. variable manufacturing overhead. D. fixed manufacturing overhead. E. items "C" and "D" above.
E
All of the following costs are inventoried under absorption costing except: A. direct materials. B. direct labor. C. variable manufacturing overhead. D. fixed manufacturing overhead. E. fixed administrative salaries.
D
Consider the following three product costing alternatives: process costing, job order costing, and standard costing. Which of these can be used in conjunction with absorption costing? a. job order costing b. standard costing c. process costing d. all of the above
D
Consider the following three product costing alternatives: process costing, job order costing, and standard costing. Which of these can be used in conjunction with variable costing? a. job order costing b. standard costing c. process costing d. all of them
A
For external-reporting purposes, generally accepted accounting principles require that net income be based on: A. absorption costing. B. variable costing. C. direct costing. D. semivariable costing. E. activity-based costing
B
For financial reporting to the IRS and other external users, manufacturing overhead costs are a. deducted in the period that they are incurred. b. inventoried until the related products are sold. c. treated like period costs. d. inventoried until the related products have been completed.
A
Which of the following must be known about a production process in order to institute a variable costing system? a. the variable and fixed components of all costs related to production b. the controllable and non-controllable components of all costs related to production c. standard production rates and times for all elements of production d. contribution margin and break-even point for all goods in production
A
Why is variable costing not in accordance with generally accepted accounting principles? a. Fixed manufacturing costs are treated as period costs under variable costing. b. Variable costing procedures are not well known in industry. c. Net earnings are always overstated when using variable costing procedures. d. Variable costing ignores the concept of lower of cost or market when valuing inventory.