Absorption and Variable Costing quiz Cost Accounting Quiz On Mar 25, 2026 Share Absorption and Variable Costing 12 questions in 12 minutes Pass Score 70% The questions change when you repeat the exam 1 / 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 ? 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 Postpone $1.8 million of discretionary equipment maintenance until next year Cut $2.3 million of advertising and marketing costs 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 2 / 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 Increase production schedules independent of customer demands Defer expenses such as maintenance to a future period 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 3 / 12 The contribution margin is the excess of revenues over All variable costs Direct cost 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 4 / 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? If more units were sold than were produced during a given year None of these situations If more units were produced than were sold 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 5 / 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 6 / 12 a manufacturing company uses variable costing to cost inventories, which of the following costs are considered inventoriable costs? Only raw material and direct labor costs Only raw material, direct labor, and variable manufacturing overhead costs Only raw material, direct labor, variable manufacturing overhead, and variable selling and administrative 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 of the following statements is true for a firm that uses variable costing ? Product costs include variable administrative costs Profits fluctuate with sales The cost of a unit of product changes because of changes in number of units manufactured 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 8 / 12 Which one of the following is the best reason for using variable costing? Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units All costs are variable in the long term Variable costing is acceptable for income tax reporting purposes Variable costing usually results in higher operating income than if a company uses absorption costing 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 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 complies with generally accepted accounting principles Variable costing is more relevant to long-run pricing strategies 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 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 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 A difference in the treatment of fixed selling and administrative costs 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 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 increase with increases in sales Profits will always decrease with decreases in sales 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 12 / 12 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Conversion costing Variable costing Absorption costing Direct 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Absorption and Variable Costing quizabsorption costingabsorption costing exam questions
