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 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 Variable costing is acceptable for income tax reporting purposes 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 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 2 / 12 Which one of the following is an advantage of using variable costing ? Variable costing makes cost-volume relationships more easily apparent Variable costing complies with generally accepted accounting principles Variable costing is more relevant to long-run pricing strategies Variable costing complies with the U.S. Internal Revenue Code 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 When a firm prepares financial reports by using absorption costing : Profits will always increase with increases in sales Decreased output and constant sales result in increased profits 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 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 4 / 12 The primary difference between absorption and variable costing is that variable costing treats Only direct materials and direct labor as product cost Direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs Only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs Only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost Variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs 5 / 12 ELG Company‟s management would like to determine profitability of its Alpha Doll product line. To eliminate the possibility of profit distortion due to changes in production, the managers should primarily review Absorption costing income statements Multi step income statements Variable (direct) costing income statements Cash flow statements Variable costing income statements will help determine profitability of just the Alpha Doll product line. Fixed costs will not change because they are sunk, so they are not important in determining profitability. The variable portion of a fixed cost will already be taken into consideration in the variable costing income statements 6 / 12 Which of the following statements is true for a firm that uses variable costing ? Product costs include variable administrative costs Profits fluctuate with sales An idle facility variation is calculated The cost of a unit of product changes because of changes in number of units manufactured In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales 7 / 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? None of these situations If more units were produced than were sold during a given year If more units were sold than were produced during a given year In all cases when ending finished goods inventory exists The monetary value of ending inventory is never higher under direct costing than under absorption costing because fewer costs are capitalized under direct costing 8 / 12 Which one of the following statements is true regarding absorption costing and variable costing? Gross margins are the same under both costing methods Overhead costs are treated in the same manner under both costing methods Variable manufacturing costs are lower under variable costing If finished goods inventory increases, absorption costing results in higher income 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 9 / 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 Fuel, food service, and airport landing fees Airplane depreciation, baggage handling, and airline marketing Flight crew salary, fuel, and engine maintenance Fuel, food service, and airport landing fees are all variable and traceable to individual flights 10 / 12 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Conversion costing Direct costing Absorption costing Variable 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 11 / 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 Defer expenses such as maintenance to a future period Decrease production of those items requiring the most direct labor 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 12 / 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 unit sales price Ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Absorption and Variable Costing quizabsorption costingabsorption costing exam questions
