Cost Accounting QuizAbsorption and Variable Costing quiz 24/05/2026 1 min read Absorption and Variable Costing 12 questions in 12 minutes Pass Score 70% The questions change when you repeat the exam 1 / 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, 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, 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 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 the U.S. Internal Revenue Code 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. 3 / 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 and fixed manufacturing overhead 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 Under variable costing, only variable costs (direct materials, direct labor, and variable overhead) are considered product costs 4 / 12 When comparing absorption costing with variable costing, which of the following statements is nottrue? When sales volume is more than production volume, variable costing will result in higher operating profit Absorption costing enables managers to increase operating profits in the short run by increasing inventories Under absorption costing, operating profit is a function of both sales volume and production volume 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 5 / 12 Which one of the following is thebestreason for using variable 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 usually results in higher operating income than if a company uses absorption costing 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 6 / 12 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Variable costing Absorption costing Direct 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 7 / 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 Decreased output and constant sales result in increased profits Profits will always decrease with decreases in sales 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 8 / 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 Cash flow statements Absorption costing income statements Multi step income statements Variable (direct) costing income 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 9 / 12 The contribution margin is the excess of revenues over Direct cost Cost of goods sold All variable costs Manufacturing cost 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 10 / 12 The difference between the sales price and total variable costs is The contribution margin Gross operating profit Net 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 11 / 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 ? 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 Postpone $1.8 million of discretionary equipment maintenance until next year 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 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 budgeted fixed manufacturing cost per unit 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 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 🚀 Join Telegram Group 📢 Telegram Channel 📘 Facebook Group 👍 Facebook Page 📌 Pinterest
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