Deck 8: Alternative Inventory Costing Methods: a Decision-Making Perspective

Question 1

Net income under variable costing is unaffected by changes in production levels.

Answer 1

True

Question 2

Full costing is equivalent to absorption costing.

Answer 2

True

Question 3

Net income under GAAP highlights differences between variable and fixed costs.

Answer 3

False

Question 4

If normal costing is used when preparing an absorption costing income statement, the fixed manufacturing overhead assigned to inventory is based on a predetermined fixed manufacturing overhead rate.

Question 5

In full or absorption costing, all manufacturing costs are charged to the product.

Question 6

Fixed manufacturing overhead is a period cost under absorption costing.

Question 7

Companies that use just-in-time processing techniques will have significant differences between absorption and variable costing net income.

Question 8

The use of absorption costing facilitates cost-volume-profit analysis.

Question 9

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Question 10

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Question 11

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Question 12

Fixed manufacturing costs are NOT charged to the product under variable costing.

Question 13

When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Question 14

GAAP requires that absorption costing be used for the costing of inventory for external reporting purposes.

Question 15

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Question 16

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Question 17

Net income under variable costing is closely tied to changes in sales levels.

Question 18

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Question 19

Selling and administrative costs are period costs under both absorption and variable costing.

Question 20

When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

Question 21

Which of the following statements about absorption costing is true?

A)As manufacturing output increases, the per unit manufacturing cost remains constant.
B)As manufacturing output increases, the per unit manufacturing cost decreases.
C)As manufacturing output increases, the per unit manufacturing cost increases.
D)As manufacturing output increases, the change in the per unit manufacturing cost is negated by the change in the per unit selling cost.

Question 22

Under absorption costing

A)selling and administration overhead costs are inventoried.
B)selling and administration overhead costs are expensed as incurred.
C)only variable selling and administration costs are expensed while fixed selling and administration costs are inventoried.
D)only fixed selling and administration costs are expensed while variable selling and administration costs are inventoried.

Question 23

EKP's unit production cost under variable costing is $5, and $7 under absorption costing.Net income under variable costing was $10,000 and $12,000 under absorption costing last year.EKP sold 15,000 units.How many units did it produce?

A)16,000
B)14,000
C)17,000
D)13,000

Question 24

Use the following information for items
Obama Company sells its product for $25 per unit.During 2016, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
The per unit manufacturing cost under variable costing is

A)$12.
B)$27.
C)$29.50.
D)$32.

Question 25

A customer wants to purchase a large quantity of your product at a price below your normal selling price.Which of the following would be most helpful in assessing the offer?

A)cost-volume-profit
B)either variable or absorption costing
C)absorption costing
D)variable costing

Question 26

Under variable costing

A)only direct variable manufacturing costs are inventoriable.
B)only direct fixed manufacturing costs are inventoriable.
C)all manufacturing costs are inventoriable.
D)no manufacturing costs are inventoriable.

Question 27

Which of the following terms would be found on an Income Statement using absorption costing?

A)Contribution margin
B)Variable manufacturing overhead
C)Fixed manufacturing overhead
D)Gross profit

Question 28

Which of the following statements about variable costing is true?

A)As manufacturing output increases, the per unit manufacturing cost remains constant.
B)As manufacturing output increases, the per unit manufacturing cost decreases.
C)As manufacturing output increases, the per unit manufacturing cost increases.
D)As manufacturing output increases, the change in the per unit manufacturing cost is negated by the change in the per unit selling cost.

Question 29

Under absorption costing, what amount of fixed overhead is deferred to a future period?

A)$70,000
B)$75,000
C)$225,000
D)$300,000

Question 30

How are fixed manufacturing costs handled under variable costing?

A)They are subtracted from the variable cost of goods sold to determine the ending inventory value that will be recorded on the Balance Sheet.
B)They are not recorded, which is why variable costing is not used for external reporting.
C)They are recorded directly on the Balance Sheet.
D)They are treated as period costs.

Question 31

Use the following information for items
Obama Company sells its product for $25 per unit.During 2016, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
The per unit manufacturing cost under absorption costing is

A)$12.
B)$27.
C)$29.50.
D)$32.

Question 32

Throughput costing is also called super absorption costing.

Question 33

Which of the following terms would be found on an Income Statement using variable costing?

A)Contribution margin
B)Variable manufacturing overhead
C)Fixed manufacturing overhead not included in cost of goods sold
D)Gross profit

Question 34

When production is greater than sales

A)net income under absorption costing will be greater than or less than net income under variable costing depending on the selling and administration costs.
B)net income under absorption costing will be equal to net income under variable costing.
C)net income under absorption costing will be less than net income under variable costing.
D)net income under absorption costing will be greater than net income under variable costing.

Question 35

Under absorption costing

A)only the quantity of products sold determines cost of goods sold.
B)only the quantity of products produced determines cost of goods sold.
C)both the quantity of products produced and sold determines cost of goods sold.
D)neither the quantity of products produced or sold determines cost of goods sold.

Question 36

Use the following information for items
Obama Company sells its product for $25 per unit.During 2016, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
Ending inventory under variable costing is

A)$60,000.
B)$240,000.
C)$360,000.
D)$410,000.

Question 37

Under variable costing

A)only the quantity of products sold determines cost of goods sold.
B)only the quantity of products produced determines cost of goods sold.
C)both the quantity of products produced and sold determines cost of goods sold.
D)neither the quantity of products produced or sold determines cost of goods sold.

Question 38

Use the following information for items
Obama Company sells its product for $25 per unit.During 2016, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
Cost of goods sold under absorption costing is

A)$180,000.
B)$405,000.
C)$442,500.
D)$540,000.

Question 39

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/14.Production was 20 units per year in 2014-2016.Sales were 20 units in 2014, 16 units in 2015, and 24 units in 2016.
Income under absorption costing for 2015 is

A)$ 8,000.
B)$14,000.
C)$16,000.
D)$22,000.

Question 40

Under absorption costing

A)only direct variable manufacturing costs are inventoriable.
B)only direct fixed manufacturing costs are inventoriable.
C)all manufacturing costs are inventoriable.
D)no manufacturing costs are inventoriable.

Question 41

Use the following information for items
The Colin Division of Mochrie Company sells its product for $30 per unit.Variable costs per unit are: manufacturing, $12; and selling and administrative, $2.Fixed costs are: $200,000 manufacturing overhead, and $50,000 selling and administrative.There was no beginning inventory.Expected sales for next year are 40,000 units.Ryan Stiles, the manager of the Colin Division, is under pressure to improve the performance of the Division.As he plans for next year, he has to decide whether to produce 40,000 units or 50,000 units.

-What would the manufacturing cost per unit be under absorption costing for each alternative? $\quad$$\quad$$\quad$$\underline{40,000 \text { units }} \quad \underline{50,000 \text { units }}$
a) $\quad$$\quad$$\quad$$\quad$ $12.00 $\quad$$\quad$$\quad$ $12.00
b) $\quad$$\quad$$\quad$$\quad$ $14.00 $\quad$$\quad$$\quad$ $14.00
c) $\quad$$\quad$$\quad$$\quad$ $16.00 $\quad$$\quad$$\quad$ $17.00
d) $\quad$$\quad$$\quad$$\quad$ $17.00 $\quad$$\quad$$\quad$ $16.00

Question 42

Use the following information for items
The Colin Division of Mochrie Company sells its product for $30 per unit.Variable costs per unit are: manufacturing, $12; and selling and administrative, $2.Fixed costs are: $200,000 manufacturing overhead, and $50,000 selling and administrative.There was no beginning inventory.Expected sales for next year are 40,000 units.Ryan Stiles, the manager of the Colin Division, is under pressure to improve the performance of the Division.As he plans for next year, he has to decide whether to produce 40,000 units or 50,000 units.

-What would the manufacturing cost per unit be under variable costing for each alternative? $\quad$$\quad$$\quad$$\underline{40,000 \text { units }} \quad \underline{50,000 \text { units }}$
a) $\quad$$\quad$$\quad$$\quad$ $12.00 $\quad$$\quad$$\quad$ $12.00
b) $\quad$$\quad$$\quad$$\quad$ $14.00 $\quad$$\quad$$\quad$ $14.00
c) $\quad$$\quad$$\quad$$\quad$ $16.00 $\quad$$\quad$$\quad$ $17.00
d) $\quad$$\quad$$\quad$$\quad$ $17.00 $\quad$$\quad$$\quad$ $16.00

Question 43

Absorption costing

A)is preferred to variable costing for external reporting purposes, but either method is acceptable.
B)normally results in higher net income than variable costing, and is therefore required for income tax purposes.
C)is not allowed for external reporting purposes.
D)is required under GAAP.

Question 44

If a division manager's compensation is based upon the division's net income, the manager may decide to meet the net income targets by increasing production

A)when using variable costing, in order to increase net income.
B)when using variable costing, in order to decrease net income.
C)when using absorption costing, in order to increase net income.
D)when using absorption costing, in order to decrease net income.

Question 45

Under absorption costing when production equals sales in a year,

A)inventory values and cost of goods sold are higher than under variable costing.
B)inventory values and cost of goods sold are lower than under variable costing.
C)inventory values and cost of goods sold are the same as under variable costing.
D)inventory values are higher and cost of goods sold is lower than under variable costing.

Question 46

M&H's unit production cost under variable costing is $25, and $32 under absorption costing.Net income under variable costing was $250,000 and $187,000 under absorption costing last year.Production equalled 63,000 units.How many units did M&H sell?

A)72,000
B)54,000
C)70,000
D)56,000

Question 47

When production exceeds sales

A)ending inventory under variable costing will exceed ending inventory under absorption costing.
B)ending inventory under absorption costing will exceed ending inventory under variable costing.
C)ending inventory under absorption costing will be equal to ending inventory under variable costing.
D)ending inventory under absorption costing may either exceed, be equal to, or be less than ending inventory under variable costing.

Question 48

The computation of absorption costing gross profit always involves subtracting

A)all current-year fixed manufacturing overhead.
B)some, but not all, current-year fixed manufacturing overhead.
C)all fixed manufacturing overhead applied to units sold in the current year.
D)no fixed manufacturing overhead.

Question 49

Expected sales for next year for the Brady Division are 120,000 units.Drew Carey, the manager of the Brady Division, is under pressure to improve the performance of the Division.As he plans for next year, he has to decide whether to produce 120,000 units or 140,000 units.The Brady Division will have higher net income, if Drew Carey decides to

A)produce 140,000 units if income is measured under absorption costing.
B)produce 140,000 units if income is measured under variable costing.
C)produce 120,000 units if income is measured under absorption costing.
D)produce 120,000 units if income is measured under variable costing.

Question 50

When units produced exceeds units sold

A)net income under absorption costing is higher than net income under variable costing.
B)net income under absorption costing is lower than net income under variable costing.
C)net income under absorption costing equals net income under variable costing.
D)the relationship between net income under absorption costing and net income under variable costing cannot be predicted.

Question 51

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/14.Production was 20 units per year in 2014-2016.Sales were 20 units in 2014, 16 units in 2015, and 24 units in 2016.
Income under absorption costing for 2016 is

A)$33,000.
B)$39,000.
C)$41,000.
D)$47,000.

Question 52

Management may be tempted to overproduce

A)when using variable costing, in order to increase net income.
B)when using variable costing, in order to decrease net income.
C)when using absorption costing, in order to increase net income.
D)when using absorption costing, in order to decrease net income.

Question 53

In income statements prepared under absorption costing and variable costing, where would you find the terms contribution margin and gross profit? $\quad$$\quad$$\quad$$\begin{array}{llcc} \underline{ \text { Contribution margin }} &\quad\quad\quad\quad\quad\quad\quad\quad \underline{\text { Gross profit }} \\\end{array}$
a) $\text { In absorption costing income statement } \quad \text { In variable costing income statement }$
b) $\text { In absorption costing income statement } \quad \text { In both income statements }$
c) $\text { In variable costing income statement } \quad\quad \text { In absorption costing income statement }$
d) $\text {In both income statements }\quad\quad\quad\quad\quad \quad \text {In variable costing income statement}$

Question 54

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/14.Production was 20 units per year in 2014-2016.Sales were 20 units in 2014, 16 units in 2015, and 24 units in 2016.
Income under variable costing for 2016 is

A)$33,000.
B)$39,000.
C)$41,000.
D)$47,000.

Question 55

When units sold exceeds units produced

A)net income under absorption costing is higher than net income under variable costing.
B)net income under absorption costing is lower than net income under variable costing.
C)net income under absorption costing equals net income under variable costing.
D)the relationship between net income under absorption costing and net income under variable costing cannot be predicted.

Question 56

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/14.Production was 20 units per year in 2014-2016.Sales were 20 units in 2014, 16 units in 2015, and 24 units in 2016.
Income under variable costing for 2015 is

A)$ 8,000.
B)$14,000.
C)$16,000.
D)$22,000.

Question 57

Use the following information for items
The Colin Division of Mochrie Company sells its product for $30 per unit.Variable costs per unit are: manufacturing, $12; and selling and administrative, $2.Fixed costs are: $200,000 manufacturing overhead, and $50,000 selling and administrative.There was no beginning inventory.Expected sales for next year are 40,000 units.Ryan Stiles, the manager of the Colin Division, is under pressure to improve the performance of the Division.As he plans for next year, he has to decide whether to produce 40,000 units or 50,000 units.

-What would the net income be under variable costing for each alternative? $\quad$$\quad$$\quad$$\underline{40,000 \text { units }} \quad \underline{50,000 \text { units }}$
a) $\quad$$\quad$$\quad$$\quad$ $390.00 $\quad$$\quad$$\quad$ $390.00
b) $\quad$$\quad$$\quad$$\quad$ $390.00 $\quad$$\quad$$\quad$ $430.00
c) $\quad$$\quad$$\quad$$\quad$ $390.00 $\quad$$\quad$$\quad$ $440.00
d) $\quad$$\quad$$\quad$$\quad$ $430.00 $\quad$$\quad$$\quad$ $390.00

Question 58

Under absorption costing when production exceeds sales in a year,

A)inventory values and cost of goods sold are higher than under variable costing.
B)inventory values and cost of goods sold are lower than under variable costing.
C)inventory values are lower and cost of goods sold are higher than under variable costing.
D)inventory values are higher and cost of goods sold are lower than under variable costing.

Question 59

Use the following information for items
The Colin Division of Mochrie Company sells its product for $30 per unit.Variable costs per unit are: manufacturing, $12; and selling and administrative, $2.Fixed costs are: $200,000 manufacturing overhead, and $50,000 selling and administrative.There was no beginning inventory.Expected sales for next year are 40,000 units.Ryan Stiles, the manager of the Colin Division, is under pressure to improve the performance of the Division.As he plans for next year, he has to decide whether to produce 40,000 units or 50,000 units.

-What would the net income be under absorption costing for each alternative? $\quad$$\quad$$\quad$$\underline{40,000 \text { units }} \quad \underline{50,000 \text { units }}$
a) $\quad$$\quad$$\quad$$\quad$ $390.00 $\quad$$\quad$$\quad$ $390.00
b) $\quad$$\quad$$\quad$$\quad$ $390.00 $\quad$$\quad$$\quad$ $430.00
c) $\quad$$\quad$$\quad$$\quad$ $390.00 $\quad$$\quad$$\quad$ $440.00
d) $\quad$$\quad$$\quad$$\quad$ $430.00 $\quad$$\quad$$\quad$ $390.00

Question 60

Under absorption costing when inventory increases in a year,

A)there are more fixed costs charged to income.
B)there are less fixed costs charged to income.
C)fixed costs in inventory remain the same regardless of inventory changes.
D)fixed costs in inventory are reduced.

Question 61

Which of the following is NOT a potential advantage of variable costing relative to absorption costing?

A)Net income calculated under variable costing is unaffected by changes in production levels.
B)It is easier to understand the impact of fixed and variable costs on the computation of net income when variable costing is used.
C)The use of variable costing is consistent with cost-volume-profit analysis.
D)Net income calculated under variable costing is not closely tied to changes in sales levels.

Question 62

The use of normal costing with absorption costing

A)is used because it is easier than actual costing with absorption costing.
B)is used because it is more practical than actual costing.
C)is essentially the same as using actual costing; accountants have created the term for the sake of semantics.
D)means that only normal costs are used in assigning costs to production; any unexpected costs that occur are immediately expenses as period costs.

Question 63

Advantages of throughput costing include all of the following EXCEPT

A)throughput costing reduces management's tendency to build inventory levels over which to spread fixed manufacturing costs of production.
B)throughput costing motivates managers to reduce operating costs such as direct labour and variable overhead, which are treated as period costs rather than product costs.
C)throughput costing is simpler than normal costing or absorption costing since all manufacturing overhead is expensed as a period cost immediately.
D)throughput costing motivates managers to reduce operating costs such as direct materials and variable overhead, which are treated as period costs rather than product costs.

Question 64

Under normal costing

A)only direct variable manufacturing costs are inventoriable.
B)only direct fixed manufacturing costs are inventoriable.
C)a predetermined overhead rate is used to allocate overheads.
D)overhead costs are charged directly as incurred.

Question 65

A major conceptual difference between throughput costing and variable costing is

A)under variable costing, direct labour and variable manufacturing overhead are charged to income as period expenses.
B)under throughput costing, direct labour and variable manufacturing overhead are deferred in inventory rather than charged to income as period expenses.
C)under throughput costing, direct labour and variable manufacturing overhead are charged to income as period expenses.
D)there are no conceptual differences between the two methods.

Question 66

Using normal costing to cost units of productions, Steven Harper Co.has gathered the following information: Fixed manufacturing overhead was estimated to be $120,000 for the year.
Actual production was 40,000 units.
Actual fixed manufacturing overhead costs incurred were $125,000.
What is the result of this difference between the estimated fixed overhead and actual fixed overhead?

A)The difference is expensed as a period cost the way variable costing immediately expenses fixed overhead as a period cost.
B)The difference is over or under-applied overhead that if immaterial, will be closed out to cost of goods sold at year end.
C)The difference will be held in inventory and taken to cost of goods sold when the units are sold next year.
D)There is no difference.

Question 67

Choose the answer that is FALSE regarding throughput costing.

A)Throughput costing treats all costs as period costs except direct labour.
B)Throughput costing treats all costs as period costs except direct materials.
C)Throughput costing is also known as super-variable costing for its close relationship to variable costing.
D)Assembly line and continuously automated companies are most likely to choose this method of costing than other companies.

Question 68

Normal costing uses

A)actual costs for direct materials, direct labour and variable and fixed overhead.
B)actual costs for direct materials, and direct labour, and a predetermined overhead rate for allocating variable and fixed overhead costs to production units.
C)actual costs for direct materials, direct labour and variable overhead, and a predetermined overhead rate for fixed overhead.
D)variable costing for direct materials, direct labour and variable overhead and a predetermined overhead rate for fixed overhead.