Absorption and Variable Costing quiz Cost Accounting Quiz On Aug 1, 2024 Share /12 123456789101112 Absorption and Variable Costing 12 questions in 12 minutes Pass Score 70% The questions change when you repeat the exam 1 / 12 The contribution margin is the excess of revenues over Manufacturing cost All variable costs Cost of goods sold Direct cost Contribution margin is the excess of revenues over all variable costs (including both manufacturing and nonmanufacturing variable costs) that vary with an output-related cost driver. The contribution margin equals the revenues that contribute toward covering the fixed costs and providing a net income 2 / 12 Which one of the following is an advantage of using variable costing ? Variable costing complies with the U.S. Internal Revenue Code Variable costing is more relevant to long-run pricing strategies Variable costing complies with generally accepted accounting principles Variable costing makes cost-volume relationships more easily apparent Under variable costing, only the variable costs of manufacturing attach to the units of output; fixed costs are expensed in the period in which they are incurred. Thus, the variations in cost directly attributable to changes in production level are immediately apparent under variable costing. 3 / 12 Manchester Airlines is in the process of preparing a contribution margin income statement that will allow a detailed look at its variable costs and profitability of operations. Which one of the following cost combinations should be used to evaluate the variable cost per flight of the company‟s Boston Las Vegas flights? Flight crew salary, fuel, and engine maintenance Communication system operation, food service, and ramp personnel Fuel, food service, and airport landing fees Airplane depreciation, baggage handling, and airline marketing Fuel, food service, and airport landing fees are all variable and traceable to individual flights 4 / 12 When comparing absorption costing with variable costing, which of the following statements is not true? When sales volume is more than production volume, variable costing will result in higher operating profit Under absorption costing, operating profit is a function of both sales volume and production volume Absorption costing enables managers to increase operating profits in the short run by increasing inventories 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 Absorption (full) costing is the accounting method that considers all manufacturing costs as product costs. These costs include variable and fixed manufacturing costs whether direct or indirect. Variable (direct) costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are considered period costs and are expensed as incurred. If production is increased without increasing sales, inventories will rise. However, all fixed costs associated with production will be an expense of the period under variable costing. Thus, this action will not artificially increase profits and improve the manager‟s review 5 / 12 When a firm prepares financial reports by using absorption costing : Profits will always decrease with decreases in sales Profits will always increase with increases in sales Profits may decrease with increased sales even if there is no change in selling prices and costs Decreased output and constant sales result in increased profits In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing due to fixed overhead carried over from the prior inventory. If sales increase over production, more than one period‟s overhead is recognized as expense. Accordingly, if the increase in overhead expensed is greater than the contribution margin of the increased units sold, profit may be lower with an increased level of sales 6 / 12 a manufacturing company uses variable costing to cost inventories, which of the following costs are considered inventoriable costs? Only raw material, direct labor, variable manufacturing overhead, and variable selling and administrative costs Only raw material, direct labor, and variable manufacturing overhead costs Only raw material and direct labor costs Only raw material, direct labor, and variable and fixed manufacturing overhead costs Under variable costing, only variable costs (direct materials, direct labor, and variable overhead) are considered product costs 7 / 12 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Variable costing Conversion costing Direct costing Absorption costing Absorption (full) costing considers all manufacturing costs to be inventoriable as product costs. These costs include variable and fixed manufacturing costs, whether direct or indirect. The alternative to absorption is known as variable (direct) costing 8 / 12 Dawn Company has significant fixed overhead costs in the manufacturing of its sole product, auto mufflers. For internal reporting purposes, in which one of the following situations would ending finished goods inventory be higher under direct (variable) costing rather than under absorption costing? In all cases when ending finished goods inventory exists If more units were produced than were sold during a given year None of these situations If more units were sold than were produced during a given year The monetary value of ending inventory is never higher under direct costing than under absorption costing because fewer costs are capitalized under direct costing 9 / 12 The primary difference between absorption and variable costing is that variable costing treats Only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost Only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs Direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs Only direct materials and direct labor as product cost Variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs 10 / 12 Huntington Corporation pays bonuses to its managers based on operating income, as calculated under variable costing. It is now 2 months before year end, and earnings have been depressed for some time. Which one of the following actions should Wanda Richards, production manager, definitely implement if she desires to maximize her bonus for this year ? Cut $2.3 million of advertising and marketing costs Postpone $1.8 million of discretionary equipment maintenance until next year Implement, with the aid of the controller, an activity-based costing and activity-based management system Step up production so that more manufacturing costs are deferred into inventory Because the production manager wishes to maximize her bonus for the coming year, the action she must take will necessarily have most of its effect in the short run. The action she should take to achieve this goal is to defer costs under her control until the following period 11 / 12 Z Company uses direct (variable) costing for internal reporting and absorption costing for the external financial statements. A review of the firm‟s internal and external disclosures will likely find A contribution margin rather than gross margin in the reports released to shareholders A difference in the treatment of fixed selling and administrative costs A higher inventoriable unit cost reported to management than to the shareholders Internal income figures that vary closely with sales and external income figures that are influenced by both units sold and productive output Under variable costing, only costs that vary with the level of production are treated as product costs. Thus, internal income figures will vary closely with sales. Under absorption costing, all production costs (both variable and fixed) are treated as product costs. Thus, external income figures are influenced by both units sold and productive output 12 / 12 beta, Inc., 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, beta‟s managers may do all of the following except Decrease production of those items requiring the most direct labor Defer expenses such as maintenance to a future period Increase production schedules independent of customer demands Produce those products requiring the most direct labor Under an absorption costing system, income can be manipulated by producing more products than are sold because more fixed manufacturing overhead will be allocated to the ending inventory. When inventory increases, some fixed costs are capitalized rather than expensed. Decreasing production, however, will result in lower income because more of the fixed manufacturing overhead will be expensed Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Absorption and Variable Costing quizabsorption costingabsorption costing exam questions
