Deck 15: Topic Focus Variable and Absorption Costing

Question 1

Absorption costing is also referred to as full costing.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

In variable costing,fixed manufacturing overhead is treated as a product cost.

Answer 3

False

Question 4

Which of the following is $\textbf{ not }$ a product cost?

A)Direct material
B)Direct labor
C)Selling expenses
D)Manufacturing overhead

Question 5

The matching principle states that expenses should be matched with the revenues they generate.

Question 6

The cost accumulation method required by generally accepted accounting principles is referred to as

A)Full costing
B)Absorption
C)Either full costing or absorption
D)Neither full costing nor absorption

Question 7

Which of the following items is more complicated for a manufacturing company than for a retail operation?

A)Accounting for inventory costs
B)Trying to forecast the effects of financial decisions on the income statement
C)Both accounting for inventory costs and trying to forecast the effects of financial decisions on the income statement
D)Neither accounting for inventory costs nor trying to forecast the effects of financial decisions on the income statement

Question 8

The underlying principle that absorption costing satisfies is the historical cost principle.

Question 9

The difference between absorption and variable costing is the timing difference in the expensing of fixed overhead costs.

Question 10

When production volume equals sales volume,fixed overhead expensed is higher using absorption costing than with variable costing.

Question 11

Absorption costing is used for managerial accounting,but is not allowed for reporting in accordance with generally accepted accounting principles.

Question 12

Mixed costs are divided into their direct and indirect components.

Question 13

The difference between absorption and variable costing is the timing difference in the expensing of variable overhead costs.

Question 14

When production volume exceeds sales volume,net income will be higher when using absorption costing than when using variable costing.

Question 15

The process of classifying all the costs incurred in the production of a product is referred to as absorption costing.

Question 16

The underlying principle that absorption costing satisfies is the

A)Matching principle
B)Relevance principle
C)Historical cost principle
D)Understandability principle

Question 17

To make predictions about costs and income,you must first separate costs by their behavior.

Question 18

Absorption costing is also referred to as

A)Variable costing
B)Full costing
C)Nominal costing
D)None of these ans choices are correct

Question 19

Absorption costing is also referred to as variable costing.

Question 20

The only difference between variable and absorption costing is the treatment of variable overhead costs.

Question 21

The only difference between absorption costing and variable costing is the treatment of

A)All variable costs.
B)Variable overhead costs.
C)All fixed costs.
D)Fixed overhead costs.

Question 22

Based on the matching principle,all product costs flow through

A)Raw materials Inventory
B)Work in Process
C)Finished Goods
D)All of these ans choices are correct.

Question 23

Under variable costing,subtract variable costs from sales to arrive at

A)Gross profit
B)Gross margin
C)Contribution margin
D)Net income

Question 24

Variable costing is acceptable for which of the following purposes?

A)GAAP reporting
B)Internal reporting
C)Reporting to the IRS
D)All of these ans choices are correct

Question 25

To make predictions about costs and income,you must first separate costs by their behavior,

A)Fixed or variable
B)Product or selling and administrative
C)Direct material,direct labor or manufacturing overhead
D)Direct or indirect

Question 26

When the units produced equals the units sold

A)Operating income is higher under absorption costing than under variable costing.
B)Operating income is lower under absorption costing than under variable costing.
C)Operating is the same under absorption costing and variable costing.
D)Cannot be determined with the information given.

Question 27

When the units produced exceeds the units sold

A)Ending inventory on the balance sheet is lower under absorption costing than under variable costing.
B)Ending inventory on the balance sheet is higher under absorption costing than under variable costing.
C)Ending inventory on the balance sheet is the same under absorption costing and variable costing.
D)Cannot be determined with the information given.

Question 28

When using variable costing,which of the following costs are treated as period costs?

A)Selling
B)Administrative
C)Fixed manufacturing overhead
D)All of these ans choices are correct

Question 29

The costing method in which only variable product costs are accumulated in inventory is called

A)Absorption costing
B)Normal costing
C)Direct costing
D)Full costing

Question 30

Fixed manufacturing overhead is treated as a period expense in which of the following costing methods?

A)Absorption costing
B)Normal costing
C)Full costing
D)Variable costing

Question 31

Variable costing is also referred to as

A)Absorption costing
B)Normal costing
C)Direct costing
D)Full costing

Question 32

When the units produced equals the units sold

A)Operating income is higher under absorption costing than under variable costing.
B)Operating income is lower under absorption costing than under variable costing.
C)Operating is the same under absorption costing and variable costing.
D)Cannot be determined with the information given.

Question 33

The matching principle states that

A)Expenses should be matched with specific jobs.
B)Expenses should be matched with revenues they generate.
C)Revenues should be recorded in the period in which the payment is received.
D)Expenses should be matched to assets which generated the expenses.

Question 34

When using variable costing,fixed manufacturing overhead is treated as which of the following types of costs?

A)Product
B)Mixed
C)Period
D)Variable

Question 35

When the units produced equals the units sold

A)Operating income is higher under absorption costing than under variable costing.
B)Operating income is lower under absorption costing than under variable costing.
C)Operating is the same under absorption costing and variable costing.
D)Cannot be determined with the information given.

Question 36

Based on the matching principle,all product cost flow through

A)Raw Material Inventory,Work in Process Inventory and Finished Goods until the goods are sold.
B)Raw Material Inventory,Work in Process Inventory and Manufacturing Overhead until the goods are sold.
C)Raw Material Inventory,Direct Materials and Conversion,and Work in Process.
D)Raw Material Inventory,Conversion,and Finished Goods until the goods are sold.

Question 37

When the units produced is less than the units sold

A)Ending inventory on the balance sheet is lower under absorption costing than under variable costing.
B)Ending inventory on the balance sheet is higher under absorption costing than under variable costing.
C)Ending inventory on the balance sheet is the same under absorption costing and variable costing.
D)Cannot be determined with the information given.

Question 38

Mixed costs must be divided into which of the following components?

A)Period and product
B)Fixed and variable
C)Direct and indirect
D)Cost and profit

Question 39

Walker’s Manufacturing began its operations on January 1 of the current year. Walker produced 10,000 units during the year, sold 8,000 units at an average cost of $22 per unit, and had 2,000 units in ending inventory. Variable production costs were $14 per unit, variable selling expenses were $2 per unit, fixed overhead totaled $12,000, and fixed selling and administrative expenses totaled $30,000. Under absorption costing, what was Walker’s operating income?

A) $26,000
B) $6,000
C) $8,400
D) $10,000

Question 40

In absorption costing,all manufacturing costs are considered to be

A)Product costs
B)Period costs
C)Variable costs
D)Mixed costs

Question 41

Describe the format for a variable costing income statement.

Question 42

Walker’s Manufacturing began its operations on January 1 of the current year. Walker produced 10,000 units during the year, sold 8,000 units at an average cost of $22 per unit, and had 2,000 units in ending inventory. Variable production cost were $14 per unit, variable selling expenses were $2 per unit, fixed overhead totaled $12,000, and fixed selling and administrative expenses totaled $30,000. Under variable costing, what was Walker’s ending inventory on the balance sheet?

A) $8,000
B) $28,000
C) $30,000
D) $30,400

Question 43

Etters Manufacturing Company has provided the following financial data for its most recent month.

Required:

Prepare an income statement using an absorption costing format.

Question 44

Etters Manufacturing Company has provided the following financial data for its most recent month.

Required:

Prepare an income statement using a variable costing format.

Question 45

The following table shows inventory balances, in units, for years 1, 2 and 3. Total fixed costs were $20,000 for each of the last three years. The units in year 1 beginning inventory were based on production of 500 units.
Required:

For each year, calculate the difference between absorption costing and variable costing operating income. Indicate which costing system has the highest income each year. Assume the LIFO method is used in year three.

Question 46

Walker’s Manufacturing began its operations on January 1 of the current year. Walker produced 10,000 units during the year, sold 8,000 units at an average cost of $22 per unit, and had 2,000 units in ending inventory. Variable production cost were $14 per unit, variable selling expenses were $2 per unit, fixed overhead totaled $12,000, and fixed selling and administrative expenses totaled $30,000. Under variable costing, what was Walker’s operating income?

A) $26,000
B) $6,000
C) $8,400
D) $10,000

Question 47

Walker’s Manufacturing began its operations on January 1 of the current year. Walker produced 10,000 units during the year, sold 8,000 units at an average cost of $22 per unit, and had 2,000 units in ending inventory. Variable production cost were $14 per unit, variable selling expenses were $2 per unit, fixed overhead totaled $12,000, and fixed selling and administrative expenses totaled $30,000. Under absorption costing, what was Walker’s ending inventory on the balance sheet?

A) $8,000
B) $28,000
C) $30,000
D) $30,400

Question 48

For each item below,identify whether the item applies to an absorption costing or variable costing income statement by marking an "X" in the appropriate column.

Question 49

Monroe Corporation produced 20,000 units during the last period. The company incurred the following total costs to produce these units.

Required:

a. Under the absorption costing method, what is the average unit product cost?

b. Under the variable costing method, what is the average unit product cost?

Question 50

What managerial behavior does variable costing render ineffective?

Question 51

You are assigned to a team responsible for reviewing the financial statements with lower-level departmental managers.Some of your team members want to use the absorption costing income statement generally distributed by the accounting department.You believe a variable costing income statement will be more appropriate to use in explaining items to lower-level managers.Your team has requested more information on the variable costing format.
Required:

Write a memo to your team members explaining why you believe the variable costing income statement should be used.