Absorption and Variable Costing quiz Cost Accounting Quiz On Dec 24, 2025 Share Absorption and Variable Costing 12 questions in 12 minutes Pass Score 70% The questions change when you repeat the exam 1 / 12 When comparing absorption costing with variable costing, which of the following statements is not true? 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 When sales volume is more than production volume, variable costing will result in higher operating profit 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 2 / 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 ? Postpone $1.8 million of discretionary equipment maintenance until next year Cut $2.3 million of advertising and marketing costs Step up production so that more manufacturing costs are deferred into inventory Implement, with the aid of the controller, an activity-based costing and activity-based management system 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 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? Communication system operation, food service, and ramp personnel Flight crew salary, fuel, and engine maintenance Airplane depreciation, baggage handling, and airline marketing Fuel, food service, and airport landing fees Fuel, food service, and airport landing fees are all variable and traceable to individual flights 4 / 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 Produce those products requiring the most direct labor Increase production schedules independent of customer demands Decrease production of those items requiring the most direct labor Defer expenses such as maintenance to a future period 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 5 / 12 The contribution margin is the excess of revenues over Direct cost All variable costs Manufacturing cost Cost of goods sold 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 6 / 12 When comparing absorption costing with variable costing, the difference in operating income can be explained by the difference between the Ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit Ending inventory in units and the beginning inventory in units, multiplied by the unit sales price Units sold and the units produced, multiplied by the unit sales price Units sold and the units produced, multiplied by the budgeted variable manufacturing cost per unit Absorption and variable costing differ in their treatment of fixed overhead: It is capitalized as inventory under absorption costing and not under variable costing. Thus, the difference in operating income between the two can be calculated as the difference between the ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit 7 / 12 Which one of the following is the best reason for using variable costing? Variable costing usually results in higher operating income than if a company uses absorption costing All costs are variable in the long term Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units Variable costing is acceptable for income tax reporting purposes Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units. Variable costing thus more accurately depicts the variations in cost resulting from changes in the level of output 8 / 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 difference in the treatment of fixed selling and administrative costs Internal income figures that vary closely with sales and external income figures that are influenced by both units sold and productive output A higher inventoriable unit cost reported to management than to the shareholders A contribution margin rather than gross margin in the reports released to shareholders 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 9 / 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. 10 / 12 Which one of the following statements is true regarding absorption costing and variable costing? If finished goods inventory increases, absorption costing results in higher income Overhead costs are treated in the same manner under both costing methods Gross margins are the same under both costing methods Variable manufacturing costs are lower under variable costing Under variable costing, inventories are charged only with the variable costs of production. Fixed manufacturing costs are expensed as period costs. Absorption costing charges to inventory all costs of production. If finished goods inventory increases, absorption costing results in higher income because it capitalizes some fixed costs that would have been expensed under variable costing. When inventory declines, variable costing results in higher income because some fixed costs capitalized under the absorption method in prior periods are expensed in the current period 11 / 12 When a firm prepares financial reports by using absorption costing : Profits may decrease with increased sales even if there is no change in selling prices and costs Profits will always decrease with decreases in sales Decreased output and constant sales result in increased profits Profits will always increase with increases in sales 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 12 / 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Follow the Facebook page Accountants Quiz and join the group Accounting Quiz Absorption and Variable Costing quizabsorption costingabsorption costing exam questions
