Question 1

If a decision must be made to replace a machine,the book value of the existing machine is a sunk cost.

Accepted Answer

The book value of an existing machine is a historical cost that has already been incurred and cannot be recovered regardless of the decision to replace or keep the machine. Therefore, it is considered a sunk cost and should not be used as a factor in the decision-making process.

Question 2

Direct costing is extremely useful in setting prices of products in special-order situations.

Accepted Answer

Direct costing allows for companies to identify the direct costs associated with producing a product, which is useful in setting prices for special-order situations where costs may be unique or different from regular production.

Question 3

The difference in net income reported under direct costing versus reported under absorption costing is calculated based on the change in the inventory levels times the unit fixed manufacturing overhead cost.

Accepted Answer

The difference in net income reported under direct costing versus absorption costing is calculated based on the change in inventory levels multiplied by the unit fixed manufacturing overhead cost per unit. This is known as the fixed overhead variance.

Question 4

The contribution margin income statement with segment margin information assists management in making sound decisions regarding whether to drop,keep or add a segment.

Accepted Answer

The contribution margin income statement with segment margin information provides insight into the profitability of each segment, allowing management to analyze whether a segment should be dropped, kept, or added.

Question 5

Segment managers can never control fixed costs.

Accepted Answer

While segment managers have limited control over fixed costs, they can take steps to manage them by reducing inefficiencies, negotiating with suppliers, and optimizing resource utilization. However, some fixed costs, such as rent or overhead expenses, may be beyond their control.

Question 6

In managerial decisions,nonmanufacturing costs can be ignored.

Accepted Answer

Nonmanufacturing costs cannot be ignored in managerial decisions as they can significantly impact the overall profitability and success of the organization. These costs include expenses related to selling, marketing, research and development, administrative activities, and other indirect costs. Ignoring these costs can lead to faulty decision-making and hinder the organization's ability to achieve its goals.

Question 7

Net income under variable costing will differ from reported net income under absorption costing when finished good inventory levels change.

Accepted Answer

Under variable costing, fixed manufacturing costs are not included in the cost of goods sold but are treated as period expenses. As a result, changes in finished goods inventory levels do not affect the cost of goods sold and, therefore, the net income reported under variable costing. However, under absorption costing, fixed manufacturing costs are included in the cost of goods sold, and changes in finished goods inventory levels can affect the cost of goods sold and, therefore, the net income reported under absorption costing.

Question 8

If the finished goods inventory decreases during the period,the reported net income will be larger under variable costing than under absorption costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are included in the cost of goods sold, while fixed manufacturing costs are treated as period expenses. Therefore, if the finished goods inventory decreases, the fixed manufacturing costs that were deferred in the inventory will be recognized as period expenses, leading to a smaller cost of goods sold and a larger net income under absorption costing. However, under variable costing, these fixed manufacturing costs will already have been expensed and will not affect the cost of goods sold.

Question 9

When inventories increase,the direct costing income statement will report lower net income than reported under absorption costing.

Accepted Answer

Under direct costing, only variable manufacturing costs are included in inventory, while fixed manufacturing costs are expensed immediately. Therefore, if inventories increase, a portion of fixed manufacturing costs will be expensed, resulting in lower net income compared to absorption costing which includes all manufacturing costs in inventory.

Question 10

The difference in net income reported under direct costing versus reported under absorption costing is calculated based on the increase or decrease in the units available for sale.

Accepted Answer

The difference in net income reported under direct costing versus reported under absorption costing is calculated based on the change in the level of production during the accounting period, not the units available for sale.

Question 11

Opportunity costs are calculated as the difference between two alternatives.

Accepted Answer

The answer of Opportunity costs are calculated as the difference...

Question 12

If the finished goods inventory increases during the period,the reported net income will be larger under direct costing than under absorption costing.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold, while under direct costing, they are treated as period expenses. When finished goods inventory increases, it means some of the fixed manufacturing overhead costs have been deferred to a future period under absorption costing. This deferral results in lower cost of goods sold and higher net income under absorption costing compared to direct costing.

Question 13

When inventories decrease,the absorption costing income statement will report lower net income than reported under variable costing.

Accepted Answer

Absorption costing includes fixed manufacturing overhead in the cost of goods sold, whereas variable costing only includes variable manufacturing costs. When inventories decrease, absorption costing will recognize less fixed overhead as an expense compared to variable costing, resulting in a lower cost of goods sold and higher net income under variable costing.

Question 14

Manufacturing margin less the sum of variable manufacturing overhead and variable selling and administrative expenses equals marginal income.

Accepted Answer

Manufacturing margin is calculated by subtracting the cost of goods sold (which includes variable manufacturing costs) from sales revenue. Marginal income, often referred to as contribution margin, is calculated by subtracting all variable expenses (including variable manufacturing overhead and variable selling and administrative expenses) from sales revenue, not by subtracting these expenses from the manufacturing margin.

Question 15

Net income under direct costing and absorption costing approaches will always equal.

Accepted Answer

Net income under direct costing and absorption costing approaches can differ due to the treatment of fixed manufacturing overhead costs. Direct costing considers fixed manufacturing overhead costs as period costs and does not assign them to products, while absorption costing includes these costs in the cost of the product. Therefore, the difference in treatment of fixed manufacturing overhead costs can result in different net income figures under the two approaches.

Question 16

Manufacturing margin less variable selling and administrative expenses equal marginal income.

Accepted Answer

This statement is true. Marginal income is the amount of revenue that remains after deducting variable costs from the total revenue. In this case, the manufacturing margin is the gross profit from manufacturing operations, which does not vary with changes in sales volume. Therefore, if the selling and administrative expenses are also variable (meaning they change with sales volume) and equal in amount to the manufacturing margin, then the marginal income would be zero.

Question 17

Under direct costing,all fixed costs are expensed in the period incurred,including fixed selling and administrative costs.

Accepted Answer

Under direct costing, fixed costs are expensed in the period incurred, including fixed selling and administrative costs.

Question 18

The profitability of a segment is judged by its contribution margin.

Accepted Answer

Contribution margin is the revenue earned by a segment minus its variable costs. It indicates the amount of revenue that can be used to cover fixed costs and generate profits. Therefore, higher contribution margins signify more profitable segments.

Question 19

Irrelevant costs are those that will not impact the decision maker's options and thus can be eliminated from analyses.

Accepted Answer

Irrelevant costs are not relevant to the decision making process and can be ignored. Therefore, they will not have an impact on the decision maker's options and can be eliminated from analyses.

Question 20

Under the contribution margin approach,common costs are deducted from the total of all segment contributions to determine the company's profit.

Accepted Answer

The answer of Under the contribution margin approach,common costs are...

Quiz 30: Cost-Revenue Analysis for Decision Making