Deck 7: Absorption, Variable and Throughput Costing

Question 1

When units produced are equal to units sold, operating profit under absorption costing will equal operating profit under variable costing.

Answer 1

True

Question 2

Absorption costing income statements typically include "gross margin" as a line item.

Answer 2

True

Question 3

Absorption costing systems subtract inventoried costs from revenues at the time of production.

Answer 3

False

Question 4

Normal capacity and budgeted capacity are demand-based capacity measurements.

Question 5

The Australian Tax office requires managers to use practical capacity for tax reporting because it is more stable over time and therefore less easy to manipulate.

Question 6

In absorption costing systems, costs on the income statement are classified by their behavior.

Question 7

Variable costing does not conform to GAAP because it does not match manufacturing costs with revenues.

Question 8

Theoretical capacity is a supply-based capacity measurement.

Question 9

Budgeted capacity is always greater than normal capacity.

Question 10

In a throughput costing income statement, the throughput contribution is calculated as revenues - direct materials costs.

Question 11

Throughput costing was an outgrowth of the Theory of Constraints.

Question 12

Throughput costing is a modified form of absorption costing that treats direct labor and variable overhead as period expenses.

Question 13

Variable costing income statements include fixed manufacturing overhead as part of the costs of ending inventory.

Question 14

Variable costing data can often be used for making non-routine operating decisions.

Question 15

Synonyms for variable costing include direct costing and marginal costing.

Question 16

Practical capacity is always less than theoretical capacity.

Question 17

Theoretical capacity and practical capacity are demand-based capacity measurements.

Question 18

Absorption costing statements conform to generally accepted accounting principles.

Question 19

On a variable costing income statement, costs are grouped according to their behavior.

Question 20

"Cost" and "expense" are two terms for describing the same concept.

Question 21

Improved information technology has increased the availability of variable costing and throughput costing income statements.

Question 22

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The product cost per unit using absorption costing is

A) $1,600
B) $2,800
C) $2,000
D) $2,400

Question 23

Because absorption costing capitalises fixed manufacturing overhead costs to inventory, managers using it may build up inventories unnecessarily.

Question 24

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Ending inventory for year 2 using variable costing would be

A) $2,200
B) $1,100
C) $1,175
D) $800

Question 25

Throughput costing income statements help managers determine the most efficient uses of resources in the short term.

Question 26

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using variable costing when 500 units are produced and 400 units are sold is

A) $840,000 loss
B) $160,000 profit
C) $480,000 profit
D) $720,000 loss

Question 27

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using absorption costing when 500 units are produced and 400 units are sold is

A) $840,000 loss
B) $160,000 profit
C) $480,000 profit
D) $720,000 loss

Question 28

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000.
In which month(s) was variable costing profit lower than absorption costing profit?

A) 4
B) 1, 2, and 3
C) 2 and 3
D) 3 and 4

Question 29

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000.
Compared to using absorption costing, using variable costing will result in operating profit for the 4-month period to be

A) Higher
B) Lower
C) Same
D) Cannot be determined

Question 30

Throughput costing income statements cannot be used to evaluate management performance.

Question 31

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Operating profit for year 1 using variable costing would be

A) $1,600
B) $(2,800)
C) $2,200
D) $400

Question 32

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000. In which month(s) was variable costing profit higher than absorption costing profit?

A) 4
B) l, 2, and 3
C) 2 and 3
D) 3 and 4

Question 33

Fixed overhead costs are treated differently under variable costing and throughput costing.

Question 34

JIT systems are incompatible with absorption costing systems.

Question 35

Throughput costing assumes that product costs other than materials tend to be fixed in the short run.

Question 36

Direct materials costs are treated similarly under variable costing and throughput costing.

Question 37

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The product cost per unit during year 1 using absorption would be

A) $67,000
B) $73,000
C) $82,000
D) $85,000

Question 38

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Cost of goods sold for year 1 using variable costing would be

A) $6,400
B) $8,800
C) $8,000
D) $7,600

Question 39

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The product cost per unit using variable costing is

A) $1,600
B) $2,800
C) $2,000
D) $2,400

Question 40

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Operating profit for year 2 using variable costing would be

A) $1,000
B) $1,600
C) $4,000
D) $1,450

Question 41

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 2 using absorption costing would be

A) $(9,800)
B) $600
C) $(9,000)
D) $6,000

Question 42

During its first year of operations, Kima Ltd. experienced the following: If Kima calculates operating profit under the variable costing method as opposed to the absorption costing method, operating profit will be

A) $45,000 lower
B) $270,000 lower
C) $315,000 higher
D) $270,000 higher

Question 43

Under which costing method(s) are administrative and selling costs considered period expenses? I Absorption costing
II Throughput costing
III Variable costing

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 44

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: In how many months would variable costing profit be equal to absorption costing profit?

A) 0
B) 1
C) 2
D) 3

Question 45

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: In how many months would variable costing profit be lower than absorption costing profit?

A) 1
B) 2
C) 3
D) 4

Question 46

Rubble Ltd develops an annual overhead budget at the start of each year (which has remained unchanged for the last 2 years), and closes any over- or underapplied overhead at year-end. For the firm's single product the following ending inventory levels have been experienced during the last 7 months: For how many months would variable costing profit be higher than absorption?

A) 1
B) 2
C) 3
D) 4

Question 47

The chief executive officer told Nick, the production manager at BRS Ltd, to reduce costs and increase profits. In response, Nick decided to produce more units for inventory. BRS is most likely using

A) Variable costing.
B) Throughput costing.
C) Absorption costing.
D) Capacity-based costing.

Question 48

Which costing method matches costs and revenues most appropriately for generally accepted accounting principles?

A) Throughput costing
B) Absorption costing
C) Variable costing
D) Activity-based costing

Question 49

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The ending inventory for year 2 using absorption costing would be

A) $51,000
B) $34,000
C) $22,000
D) $17,000

Question 50

Variable production overhead is allocated to inventory when using

A) Absorption costing and variable costing
B) Absorption costing and throughput costing
C) Variable costing and throughput costing
D) Absorption costing, variable costing, and throughput costing

Question 51

During its first year of operations, Kima Ltd. experienced the following: The amount of variable costs deducted from revenues under the variable costing approach would be

A) $847,000
B) $831,000
C) $726,000
D) $742,000

Question 52

Variable costing profit for the period 1^st July through 30^th September was $400. Inventory data are as follows: What is the profit if absorption costing is used?

A) $300
B) $500
C) $400
D) $600

Question 53

During its first year of operations, Kima Ltd. experienced the following: The cost of goods sold under absorption costing would be

A) $585,000
B) $735,000
C) $945,000
D) $900,000

Question 54

Direct materials costs are deducted from revenues when units are sold under which of the following costing method(s)? I Absorption
II Throughput
III Variable

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 55

Any costs traced or allocated to inventory are expensed when units are sold in which of the following costing method(s)? I Absorption
II Throughput
III Variable

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 56

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity: The volume variance was favorable in quarter(s)?

A) 2, 3, and 4
B) 2 and 3
C) 3 and 4
D) 3

Question 57

Total production overhead is treated as a product cost when using

A) Absorption costing
B) Throughput costing
C) Variable costing
D) Throughput costing and absorption costing

Question 58

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 1 using absorption costing would be

A) $6,000
B) $(9,000)
C) $(9,800)
D) $600

Question 59

During its first year of operations, Kima Ltd. experienced the following: The amount of fixed costs deducted from revenues under the absorption costing approach would be

A) $410,000
B) $455,000
C) $390,000
D) $435,000

Question 60

Philpott's operating profit using absorption costing is $100. Its inventories using both absorption and variable costing are as follows: Under variable costing, operating profit would be:

A) $102
B) $94
C) $100
D) $96

Question 61

In variable costing

A) Only variable production costs are considered product costs
B) All non-variable production costs are treated as product costs
C) Direct costs are considered to be period costs
D) All variable costs are considered product costs

Question 62

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year-end. The company experienced the following activity: The volume variance in quarter 1 was

A) $2,500 Unfavorable
B) $10,000 Unfavorable
C) $7,500 Favorable
D) $5,000 Favorable

Question 63

An estimated fixed overhead allocation rate

A) Is unrealistically large if determined using theoretical capacity
B) Can be considered an estimated cost of capacity per unit
C) Is usually based on theoretical capacity
D) Does not provide information about opportunity costs of unused capacity

Question 64

Under generally accepted accounting principles, absorption costing is used for

A) Yes/Yes
B) No/No
C) No/Yes
D) Yes/No

Question 65

Throughput costing is a modified form of

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

Question 66

The capacity level which assumes continuous, uninterrupted production 365 days per year is called

A) Budgeted capacity
B) Normal capacity
C) Practical capacity
D) Theoretical capacity

Question 67

When calculating an estimated fixed production cost overhead allocation rate, accountants choose the

A) Allocation base to use as the denominator
B) Allocation base to use as the numerator
C) Allocation base to use as the rate
D) Allocation base that minimises total fixed production overhead

Question 68

General Ltd. budgeted fixed overhead costs of $25,000 per quarter and 1,000 units per quarter in its normal absorption costing system. Any volume variance is carried forward and closed at year end. The company experienced the following activity: The volume variance for the year was

A) -0-
B) Favorable
C) Unfavorable
D) Cannot be determined

Question 69

Absorption costing will produce a larger operating profit than variable costing if

A) Fixed production overhead increases
B) Fixed production overhead decreases
C) Units produced exceed units sold
D) Units sold exceed units produced

Question 70

Which of the following types of capacity can result in an unrealistically small fixed overhead allocation rate if used as an allocation base?

A) Normal capacity
B) Theoretical capacity
C) Budgeted capacity
D) Practical capacity

Question 71

The difference between practical capacity and theoretical capacity is

A) Budgeted fixed costs
B) Expected downtimes
C) Excess capacity
D) Nothing, because the two terms have the same meaning

Question 72

Under the variable costing method, fixed production overhead is

A) Included in inventory
B) Expensed in the period incurred
C) Expensed as a product cost
D) Expensed when the inventory is sold

Question 73

The volume variance is calculated as

A) Difference between estimated fixed overhead costs and allocated fixed overhead costs
B) Sum of estimated fixed overhead costs and allocated fixed overhead costs
C) Difference between estimated fixed overhead costs and actual fixed overhead costs
D) Difference between actual fixed overhead costs and allocated fixed overhead costs

Question 74

Absorption costing

A) Is used for external reporting purposes
B) Includes variable and fixed period costs in inventory
C) Is the method in which the fixed overhead cost is not included in inventory
D) Treats production costs as expenses in the period in which they are incurred

Question 75

What type of capacity is the upper capacity limit that takes into account the organisation's regularly scheduled times for production?

A) Tax capacity
B) Practical capacity
C) Scheduled capacity
D) Normal capacity

Question 76

Which of the following are demand-based capacity levels? I Normal capacity
II Budgeted capacity
III Practical capacity

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 77

In throughput costing, direct labor and variable overhead are treated as

A) Measures of capacity
B) Fixed costs
C) Period costs
D) Product costs

Question 78

Practical capacity is estimated based on

A) Engineering studies and labor use patterns
B) The behavior of fixed costs
C) The behavior of variable costs
D) Demand patterns

Question 79

Exter Manufacturing experienced the following activity over the last four years. The firm's estimated fixed overhead allocation rate was unchanged over the 4 years at $200 per unit, based on budgeted fixed overhead of $200,000 and 1,000 units of output. The volume variance is closed to the cost of goods sold each year. Exter maintains an absorption costing system. The volume variance for Year 2 is

A) $40,000 Unfavorable
B) $60,000 Favorable
C) $100,000 Unfavorable
D) $20,000 Favorable

Question 80

Supply-based capacity levels include I Normal capacity
II Practical capacity
III Theoretical capacity

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III