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 Which one of the following is an advantage of using variable costing ? Variable costing is more relevant to long-run pricing strategies Variable costing makes cost-volume relationships more easily apparent Variable costing complies with generally accepted accounting principles 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. 2 / 12 The contribution margin is the excess of revenues over Manufacturing cost Cost of goods sold Direct cost All variable costs 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 3 / 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 If more units were produced than were sold during a given year In all cases when ending finished goods inventory exists None of these situations The monetary value of ending inventory is never higher under direct costing than under absorption costing because fewer costs are capitalized under direct costing 4 / 12 Which of the following statements istruefor 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 5 / 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 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 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 6 / 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 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 A difference in the treatment of fixed selling and administrative costs 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 7 / 12 Which one of the following statements istrueregarding absorption costing and variable costing? 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 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 8 / 12 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Direct costing Absorption costing Variable costing Conversion 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 9 / 12 Which one of the following is thebestreason 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 10 / 12 The primary difference between absorption and variable costing is that variable costing treats 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 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 Variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs 11 / 12 When comparing absorption costing with variable costing, the difference in operating income can be explained by the difference between the 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 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 12 / 12 The difference between the sales price and total variable costs is The contribution margin Net profit Gross operating profit The breakeven point 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Absorption and Variable Costing quizabsorption costingabsorption costing exam questions
