Deck 9: Income Effects of Denominator Level on Inventory Valuation

Question 1

Using either the theoretical capacity or practical capacity as the denominator-level concept will result in the same production-volume variance.

Answer 1

False

Question 2

Answer the following question(s)using the information below.
A manufacturing firm is able to produce 1,000 pairs of shoes per hour,at maximum efficiency.There are three eight-hour shifts each day.Due to unavoidable operating interruptions,production averages 800 units per hour.In the month of June the plant actually operated only 25 days due to avoidable shut downs.
What is the theoretical capacity for the month of April?

A)600,000 units
B)720,000 units
C)744,400 units
D)576,000 units
E)480,000 units

Answer 2

B

Question 3

A major reason for choosing ________ utilization over ________,is the difficulty in forecasting.

A)theoretical capacity;master-budget
B)practical capacity;master-budget
C)normal capacity utilization;master-budget
D)master-budget;theoretical capacity
E)master-budget;normal capacity utilization

Answer 3

E

Question 4

The budgeted fixed manufacturing cost rate is the lowest for

A)practical capacity.
B)supply capacity.
C)master-budget capacity utilization.
D)normal capacity utilization.
E)theoretical capacity.

Question 5

Normal capacity utilization is not the same as master-budget capacity utilization.

Question 6

________ provides the denominator-level capacity based on demand for more than one budget cycle .

A)Practical capacity
B)Theoretical capacity
C)Master-budget capacity utilization
D)Normal capacity utilization
E)Supply capacity

Question 7

Off-limits idle capacity refers to the unused capacity in facilities that are not located on the company's primary location.

Question 8

Both ASPE/IFRS and the CRA accept practical capacity for external reporting purposes.

Question 9

Answer the following question(s)using the information below.
A manufacturing firm is able to produce 1,000 pairs of shoes per hour,at maximum efficiency.There are three eight-hour shifts each day.Due to unavoidable operating interruptions,production averages 800 units per hour.In the month of June the plant actually operated only 25 days due to avoidable shut downs.
What is the practical capacity for the month of April?

A)600,000 units
B)720,000 units
C)744,400 units
D)576,000 units
E)480,000 units

Question 10

Normal capacity utilization is the expected level of capacity utilization for the current budget period,which is typically one year.

Question 11

Determining the "right" level of capacity is an important strategic decision.

Question 12

________ is the level of capacity based on producing at full capacity all the time.

A)Practical capacity
B)Theoretical capacity
C)Normal capacity
D)Demand capacity
E)Master-budget capacity

Question 13

The denominator-level concept based on capacity utilization that satisfies average customer demand that includes seasonal and cyclical factors is called

A)theoretical capacity.
B)practical capacity.
C)normal capacity.
D)master-budget capacity.
E)supply capacity.

Question 14

Answer the following question(s)using the information below.
A manufacturing firm is able to produce 2,000 pairs of shoes per hour,at maximum efficiency.There are three eight-hour shifts each day.Production is actually 1,600 pairs of shoes per hour due to unavoidable operating interruptions.The plant is expected to run every day but was only able to operate for 27 days in September.
What is the practical capacity for the month of September?

A)1,488,000 pairs of shoes
B)1,440,000 pairs of shoes
C)1,036,800 pairs of shoes
D)1,296,000 pairs of shoes
E)1,152,000 pairs of shoes

Question 15

The denominator-level concept based on capacity utilization for the anticipated level of output that will satisfy customer demand for a single operating cycle is the

A)theoretical budget capacity.
B)practical budget capacity.
C)normal capacity.
D)master-budget capacity.
E)supply capacity.

Question 16

Both theoretical and practical capacity measure capacity in terms of demand for the output.

Question 17

Theoretical capacity is based on which of the following assumptions?

A)that absorption costing is used
B)that variable costing is used
C)production will occur at peak capacity all the time
D)production will occur at peak capacity where feasible (e.g. ,except for maintenance downtime)
E)production can never occur at peak capacity

Question 18

Practical capacity is based on which of the following assumptions?

A)that absorption costing is used
B)that variable costing is used
C)Production will occur at peak efficiency all the time.
D)Production will occur at peak capacity where feasible (e.g. ,except for maintenance downtime,repairs,holidays,etc. ).
E)Production can never occur at peak capacity.

Question 19

The Canada Revenue Agency requires companies to use practical capacity as the denominator-level concept.

Question 20

Answer the following question(s)using the information below.
A manufacturing firm is able to produce 2,000 pairs of shoes per hour,at maximum efficiency.There are three eight-hour shifts each day.Production is actually 1,600 pairs of shoes per hour due to unavoidable operating interruptions.The plant is expected to run every day but was only able to operate for 27 days in September.
What is the theoretical capacity for the month of September?

A)1,488,000 shoes
B)1,440,000 shoes
C)1,036,800 shoes
D)1,296,000 shoes
E)1,152,000 shoes

Question 21

Wallace's Wrench Company manufactures socket wrenches.For next month the vice-president of production plans on producing 4,400 wrenches per day.The company can produce as many as 5,000 wrenches per day,but are more likely to produce 4,500 per day.The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.Fixed manufacturing costs per month total $336,600.The company works 20 days a month due to local zoning restrictions.Fixed manufacturing overhead is charged on a per wrench basis.
Required:
a.What is the theoretical fixed manufacturing overhead rate per wrench?
b.What is the practical fixed manufacturing overhead rate per wrench?
c.What is the normal fixed manufacturing overhead rate per wrench?
d.What is the master-budget fixed manufacturing overhead rate per wrench?

Question 22

External reporting requires the use of ________ capacity in the denominator,taking into account off-limits idle capacity.

A)theoretical
B)practical
C)budget
D)normal
E)practical or normal

Question 23

Master-budget capacity utilization can be more reliably estimated than normal capacity utilization.

Question 24

Theoretical capacity is rarely used to calculate the budgeted fixed manufacturing cost per case because it departs significantly from the real capacity available to a company.

Question 25

From the perspective of long-run product costing it is best to use

A)master-budget capacity utilization to highlight unused capacity.
B)normal capacity utilization for benchmarking purposes.
C)practical capacity for pricing decisions.
D)theoretical capacity for performance evaluation.
E)supply capacity to satisfy customer demand.

Question 26

Sierra Tool Manufacturing Ltd.manufactures hammers at their Hamilton facility.For next month the vice-president of production plans on producing 2,700 hammers per day.The company can produce as many as 4,000 hammers per day,but are more likely to produce 3,500 per day.The demand for wrenches for the next three years is expected to average 3,100 wrenches per day.Fixed manufacturing costs per month total $282,400.The company works 22 days a month due to local zoning restrictions.Fixed manufacturing overhead is charged on a per wrench basis.
Required:
a.What is the theoretical fixed manufacturing overhead rate per wrench?
b.What is the practical fixed manufacturing overhead rate per wrench?
c.What is the normal fixed manufacturing overhead rate per wrench?
d.What is the master-budget fixed manufacturing overhead rate per wrench?

Question 27

Master-budget capacity utilization

A)hides the amount of unused capacity.
B)represents the maximum units of production for current capacity.
C)provides the best cost estimate for benchmarking purposes.
D)when used for product costing results in the lowest cost estimate of the four capacity options.
E)represents the long-term utilization expected to meet customer demand.

Question 28

Explain how using master-budget capacity utilization for setting prices can lead to a downward demand spiral.

Question 29

Using ________ capacity fixes the cost of capacity at the cost of supplying the capacity regardless of the demand for capacity.

A)practical
B)theoretical
C)supply
D)demand
E)master-budget

Question 30

How does the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume variance?

Question 31

Unused capacity is considered wasted resources and the result of poor planning.

Question 32

________ utilization is an average that provides no meaningful feedback to the marketing manager for a particular year.

A)Normal capacity
B)Master-budget capacity
C)Practical capacity
D)Flexible budget capacity
E)Planned unused capacity

Question 33

The marketing manager's performance evaluation is most fair when based on a denominator level using

A)practical capacity.
B)theoretical capacity.
C)master-budget capacity.
D)normal capacity.
E)supply capacity.

Question 34

Which denominator-level concept results in the highest amount of fixed manufacturing overhead costs per unit of ending inventory when seasonal demand is low?

A)theoretical capacity
B)practical capacity
C)normal capacity
D)master-budget capacity
E)supply capacity

Question 35

The Canada Revenue Agency effectively eliminates the use of certain denominator-level concepts through its income tax rulings.The accepted concept(s)for tax purpose is (are)

A)theoretical capacity and practical capacity.
B)master-budget capacity and theoretical capacity.
C)practical capacity.
D)master-budget capacity.
E)normal capacity or master-budget capacity.

Question 36

Using practical capacity is best for evaluating the marketing manager's performance for a particular year.

Question 37

a.List the four different measures of capacity.
b.Which measure of capacity is best for setting prices? Why?
c.Which measure of capacity is best for evaluating the performance of the marketing manager for the current year? Why?

Question 38

The master-budget capacity utilization,rather than normal capacity utilization or practical capacity,is what
should be used for evaluating a marketing manager's performance in the current year.

Question 39

The downward demand spiral for a company is the continuing reduction in the demand for its products that occurs when prices of competitors' products are not met and higher unit costs result in more reluctance to meet competitors' prices.

Question 40

Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup its costs?

Question 41

The difference between variable costing and absorption costing centres on accounting for variable costs.

Question 42

The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted.

Question 43

Direct costing is not truly synonymous with variable costing since variable costing does not include all direct costs as inventoriable costs.

Question 44

Another common term used by some companies for variable costing is direct costing.

Question 45

Absorption costing can be criticized as a method that encourages managers to make decisions that may be contrary to the long-term interest of the company.

Question 46

Variable costing will generally report less operating income than absorption costing when the inventory level decreases.

Question 47

The gross-margin format of the income statement highlights the lump sum of fixed manufacturing costs.

Question 48

Each unit in inventory under absorption costing absorbs fixed manufacturing costs.

Question 49

Absorption costing defers the fixed manufacturing costs in ending inventory to a future period,but variable costing expenses these costs in the current period.

Question 50

Companies using absorption costing do not need to make any distinction between variable and fixed costs in their accounting system for inventory costing purposes.

Question 51

Variable costing does not include variable indirect manufacturing costs as inventoriable costs.

Question 52

Absorption costing prevents managers from increasing production to levels above customer demand,as a means of inflating operating income.

Question 53

Variable manufacturing costs are accounted for in the same manner on the income statement regardless of whether absorption or variable costing is used.

Question 54

Absorption-costing income statements cannot easily differentiate between variable and fixed costs.

Question 55

Variable costing includes all direct manufacturing costs and all manufacturing overhead costs.

Question 56

The distinction between variable costs and fixed costs is highlighted in variable costing via the contribution-margin format while the distinction between manufacturing and nonmanufacturing costs is central to absorption and is highlighted by the gross-margin format.

Question 57

The period-to-period change in operating income under variable costing is driven by unit level of sales,if the fixed costs are constant.

Question 58

Variable costs of value chain areas other than manufacturing are typically written off as period costs regardless of the costing method used.

Question 59

Changes in inventory levels do not affect income amounts between variable and absorption costing because the difference in accounting for fixed manufacturing overhead offsets the affect.

Question 60

Full product costs under absorption costing include only inventoriable costs and upstream costs.

Question 61

When all fixed manufacturing costs and variable manufacturing costs are included as inventoriable costs,the method being used is

A)absorption costing.
B)fixed overhead costing.
C)manufacturing overhead costing.
D)variable costing.
E)direct costing.

Question 62

The method of costing that excludes fixed manufacturing costs from inventoriable costs is known as

A)absorption costing.
B)fixed overhead costing.
C)manufacturing overhead costing.
D)variable costing.
E)full manufacturing costing.

Question 63

Direct costing is a perfect way to describe the variable-costing inventory method.

Question 64

Use the information below to answer the following question(s).
Honda Heaven produces and sells an auto part for $20.00 per unit.Direct materials are $8 per unit,while direct manufacturing labour averages $1.50 per unit.Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year.Administrative expenses,all fixed,run $90,000 per year,with sales commissions of $2 per part.Production is 100,000 parts per year.And this year,75,000 boxes were sold.
What is Honda Heaven's inventoriable cost per box using absorption costing?

A)$9.50
B)$10.00
C)$12.50
D)$13.40
E)$15.40

Question 65

Under variable costing,which of the following expenses is inventoriable?

A)variable manufacturing overhead
B)direct manufacturing labour and fixed manufacturing overhead
C)marketing and direct manufacturing labour
D)variable manufacturing overhead and administrative
E)variable and fixed manufacturing overhead

Question 66

When the distinction between variable and fixed costs is one of the important elements in the preparation of the income statement,the method used should be the

A)capitalization method.
B)contribution margin method.
C)gross margin method.
D)inventoriable method.
E)absorption method.

Question 67

Absorption costing is also known as

A)direct costing.
B)full absorption costing.
C)non-traditional costing.
D)manufacturing costing.
E)variable costing.

Question 68

Which of the following variances exists only under absorption costing?

A)spending variance
B)efficiency variances
C)sales-volume variance
D)variable overhead flexible budget variance
E)production-volume variance

Question 69

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo.The supervisor has provided the following information and stated that standard costing is used for manufacturing,marketing,and administrative costs.
There were no beginning or ending inventories of materials or work-in-process.
What would Beauty Supply Company's operating income (loss)be for January and February,respectively,using the variable costing approach?

A)$18,000 and $24,200
B)$(45,000)and $(35,500)
C)$(44,000)and $(33,809)
D)$(42,000)and $(35,800)
E)$(22,000)and $(15,800)

Question 70

Use the information below to answer the following question(s).
Honda Heaven produces and sells an auto part for $20.00 per unit.Direct materials are $8 per unit,while direct manufacturing labour averages $1.50 per unit.Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year.Administrative expenses,all fixed,run $90,000 per year,with sales commissions of $2 per part.Production is 100,000 parts per year.And this year,75,000 boxes were sold.
What is Honda Heaven's inventory cost per box using variable costing?

A)$9.50
B)$10.00
C)$12.50
D)$13.40
E)$15.40

Question 71

The distinction between absorption costing and variable costing is most important for which type of industry?

A)manufacturing
B)marketing
C)retail
D)service
E)educational

Question 72

Variable costing regards fixed manufacturing overhead as

A)an unexpired cost.
B)an inventoriable cost.
C)a period expense.
D)a product cost.
E)a deferred asset.

Question 73

Advanced Lighting's total variable costs are $102 and total manufacturing costs are $98.Standard variable marketing/administrative costs constitute 20 percent of the total variable costs.Respectively,what are Advanced Lighting's standard variable manufacturing costs and standard fixed manufacturing costs?

A)$77.60 and $81.60
B)$78.40 and $98.00
C)$81.60 and $16.40
D)$81.60 and $77.60
E)$78.40 and $16.40

Question 74

Which of the following is correct concerning variable vs absorption costing?

A)Absorption costing income statement classifies fixed costs as period costs.
B)The absorption costing income statement combines costs by cost behaviour.
C)Absorption costing income statements need to differentiate between variable and fixed costs.
D)The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory minus fixed manufacturing costs in opening inventory.
E)The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory minus variable manufacturing costs in ending inventory.

Question 75

Period-to-period changes in operating income under absorption costing are driven by variations in both the unit level of sales and the unit level of production.

Question 76

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo.The supervisor has provided the following information and stated that standard costing is used for manufacturing,marketing,and administrative costs.
There were no beginning or ending inventories of materials or work-in-process.
What would Beauty Supply Company's operating income (loss)be for January and February,respectively,using the absorption costing approach?

A)$(22,000)and $(15,800)
B)$(24,750)and $(33,275)
C)$(15,750)and $(21,175)
D)$(24,500)and $(26,050)
E)$18,000 and $24,200

Question 77

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo.The supervisor has provided the following information and stated that standard costing is used for manufacturing,marketing,and administrative costs.
There were no beginning or ending inventories of materials or work-in-process.
What is the per unit manufacturing cost using absorption costing?

A)$23.00
B)$18.00
C)$27.00
D)$12.00
E)$10.00

Question 78

Use the information below to answer the following question(s).
Beauty Supply Company manufactures shampoo.The supervisor has provided the following information and stated that standard costing is used for manufacturing,marketing,and administrative costs.
There were no beginning or ending inventories of materials or work-in-process.
What is the per unit variable cost?

A)$22.00
B)$18.00
C)$14.00
D)$12.00
E)$11.00

Question 79

The heart of the difference between variable and absorption costing for financial reporting is accounting for fixed manufacturing and variable non-manufacturing costs.

Question 80

In absorption costing,all nonmanufacturing costs are subtracted from gross margin.