Absorption and Variable Costing quiz Cost Accounting Quiz On May 4, 2024 Share /9 123456789 Absorption and Variable Costing 10 questions in 10 minutes Answers at the end of the exam Pass Score 70% The questions change when you repeat the exam enter full-screen mode by pressing the icon located in the top- right comer of the exam 1 / 9 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 2 / 9 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 and direct labor 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 Under variable costing, only variable costs (direct materials, direct labor, and variable overhead) are considered product costs 3 / 9 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 4 / 9 Which one of the following is an advantage of using variable costing ? 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 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. 5 / 9 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 6 / 9 When comparing absorption costing with variable costing, which of the following statements is not true? 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 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 Under absorption costing, operating profit is a function of both sales volume and production volume 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 7 / 9 Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs? Direct costing Conversion costing Variable costing Absorption 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 8 / 9 The contribution margin is the excess of revenues over All variable costs Direct cost Cost of goods sold 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 9 / 9 Which one of the following statements is true regarding absorption costing and variable costing? Variable manufacturing costs are lower under variable costing Overhead costs are treated in the same manner under both costing methods Gross margins are the same 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Absorption and Variable Costing quizabsorption costingabsorption costing exam questions