Quiz 2

A company's net income recently increased by 30% while its inventory increased to equal a full year's sales requirements. Which of the following accounting methods would be most likely to produce the favorable income results?

Absorption costing.

In an insourcing vs. outsourcing decision, the decision process favors the use of total costs rather than unit costs. The reason is that...

All of the answers are correct.

When a multiproduct plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the highest...

Contribution margin per unit of the constraining resource.

A company pays bonuses to its managers based on operating income. The company uses absorption costing, and overhead is applied on the basis of direct labor hours. To increase bonuses, the managers may do all of the following except:

Decrease production of those items requiring the most direct labor.

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component?

Depreciation

When considering a special order that will enable a company to make use of currently idle capacity, which of the following costs is irrelevant?

Depreciation.

Net profit under absorption costing may differ from net profit determined under variable costing. This difference equals the change in the quantity of all units...

In inventory time the relevant fixed costs per unit.

Using absorption costing, fixed manufacturing overhead costs are best described as...

Indirect product costs.

A company's approach to an insourcing vs. outsourcing decision...

Involves an analysis of avoidable costs.

Total unit costs are...

Irrelevant in marginal analysis.

Which of the following qualitative factors favors the buy choice in an insourcing vs. outsourcing decision?

Maintaining a long-run relationship with suppliers is desirable.

In a manufacturing environment, the best short term profit maximizing approach is to...

Maximize contribution per unit times the number of units sold.

What costs are treated as product costs under variable costing?

Only variable production costs.

A decision making concept, described as "the contribution to income that is forgone by not using a limited resource for its best alternative use." is called..

Opportunity Cost.

Absorption costing and variable costing are two different methods of assigning costs to units produced Of the four cost items listed below, identify the one that is not correctly accounted for as a product cost...

Packaging and shipping: Absorption cost: YES Variable cost: YES

Cay Co.'s fixed manufacturing overhead costs for the month just ended totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should these costs be classified?

Period costs: $180,000 Product costs: $0

The relevance of a particular cost to a decision is determined by the...

Potential effect on the decision.

Which of the following statements is true for a firm that used variable costing?

Profits fluctuate with sales.

When using a variable costing system, the contribution margin discloses the excess of...

Revenues over variable costs.

The management of a company computes net income using both absorption and variable costing. This year, the net income under the variable costing approach was greater than the net income under the absorption costing approach. This difference is most likely the result of...

Sales volume exceeding production volume.

A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income increase is that, compared to budget, actual...

Selling and administrative fixed expenses had decreased.

Dowell Co. manufactures a wooden item. Which of the following is included with the inventorial cost under absorption costing and excluded from the inventorial cost under variable costing?

Straight-line depreciation on factory equipment.

Production of a special order will increase gross profit when the additional revenue from the special order is greater than...

The marginal cost of producing the order.

Which of the following must be known about a production process to institute a variable costing system?

The variable and fixed components of all costs related to production.

In an income statement prepared as an internal report using the variable costing method, variable selling and administrative expenses are...

Used in the computation of the contribution margin.

Which of the following is a term more descriptive of the type of cost accounting often called direct costing?

Variable Costing

The costing method that Is properly classified for both external and internal reporting purposes is...

Variable costing: External reporting = NO Internal reporting = YES

In the application of variable costing as a cost-allocation process in manufacturing,

Variable indirect costs are treated as product costs.

When is the opportunity cost of making a component part in a factory given no alternative use of the capacity?

Zero.

Under the variable-costing concept, unit production cost would most likely be increased by...

A decrease in the remaining useful life of factory machinery depreciated on the units-of-production method.

In a company, products pass through some or all of the production departments during manufacturing, depending upon the product being manufactured. Direct material and direct labor costs are traced directly to the products as they flow through each production department. Manufacturing overhead is assigned in each department using separate departmental manufacturing overhead rates. The inventory costing method that the manufacturing company is using in this situation is...

Absorption Costing.

In an income statement prepared as an internal report, total fixed costs normally are shown separately under...

Absorption costing: NO Variable costing: YES

In an income statement prepared using the variable-costing method, fixed factory overhead would...

Be used in the computation of operating income but not in the computation of the contribution margin.

A basic tenet of variable costing is that period costs should be currently expensed. What is the rationale behind this procedure?

Because period costs will occur whether or not production occurs, it is improper to allocate these costs to production and defer a current cost of doing business.

Relevant or differential cost analysis...

Considers all variable and fixed costs as they change with each decision alternative.

The term relevant cost applied to all the following decision situations except the...

Determination of a product price

Which one of the following is most relevant to a manufacturing equipment replacement decision?

Disposal price of the old equipment.

Which of the following is an argument against the use of variable costing?

Fixed manufacturing overhead is necessary for the production of a product.

When applying the cost-benefit approach to a decision, the primary criterion is how well management goals will be achieved in relation to costs. Costs include all expected...

Future costs that differ among the alternative courses of action plus all qualitative factors that cannot be measured in numerical terms.

In an income statement prepared as an internal report using the variable costing method, which of the following terms should appear?

Gross profit (margin): NO Operating income: YES

If a U.S. manufacturers price n the U.S. market is below an appropriate measure of costs and the seller has a reasonable prospect of recovering the resulting loss in the future through higher prices or a greater market share, the seller has engaged in...

Predatory pricing.

The term that refers to costs incurred in the past that are not relevant to a future decision is...

Sunk cost.

Using the variable costing method, which of the following costs are assigned to inventory?

Variable selling and admin costs: NO Variable factory overhead costs: YES

Which of the following cost allocation methods is used to determine the lowest price that can be quoted for a special order that will use idle capacity within a production area?

Variable.

When comparing absorption costing with variable costing, which of the following statements is not true?

A manager who is evaluated based on variable costing operating profit would be tempted to increase production at the end of a period in order to get a more favorable review.

When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that...

Acceptance of the order will not affect regular sales.

In an insourcing vs. outsourcing situation, which of the following qualitative factors is usually considered?

All of the answers are correct.

Costs relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well as...

Avoidable fixed costs.

Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For the month just ended, unit standard costs were unchanged from the precious month. In the month just ended, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn's ratios using absorption costing compare with those using variable costing?

Current ratio: Greater Return on Equity: Smaller