Absorption and Variable Costing quiz Cost Accounting Quiz 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 nottrue? 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 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 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 Step up production so that more manufacturing costs are deferred into inventory Cut $2.3 million of advertising and marketing costs 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 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 4 / 12 The difference between the sales price and total variable costs is The contribution margin The breakeven point Gross operating profit Net profit The contribution margin is calculated by subtracting all variable costs from sales revenue. It represents the portion of sales that is available for covering fixed costs and profit 5 / 12 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Absorption costing Conversion costing Direct 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 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 unit sales price Units sold and the units produced, 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 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 a manufacturing company uses variable costing to cost inventories, which of the following costs are considered inventoriable costs? Only raw material, direct labor, and variable manufacturing overhead costs Only raw material, direct labor, and variable and fixed manufacturing overhead costs Only raw material, direct labor, variable manufacturing overhead, and variable selling and administrative costs Only raw material and direct labor costs Under variable costing, only variable costs (direct materials, direct labor, and variable overhead) are considered product costs 8 / 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 makes cost-volume relationships more easily apparent Variable costing is more relevant to long-run pricing strategies Variable costing complies with generally accepted accounting principles 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. 9 / 12 Which of the following statements istruefor a firm that uses variable costing ? The cost of a unit of product changes because of changes in number of units manufactured Profits fluctuate with sales Product costs include variable administrative costs An idle facility variation is calculated 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 10 / 12 Which one of the following statements istrueregarding absorption costing and variable costing? Gross margins are the same under both costing methods Variable manufacturing costs are lower under variable costing Overhead costs are treated in the same manner under both costing methods 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 11 / 12 The primary difference between absorption and variable costing is that variable costing treats 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 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 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 Produce those products requiring the most direct labor Increase production schedules independent of customer demands 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Absorption and Variable Costing quizabsorption costingabsorption costing exam questions
