Question 1

The difference between the reported income under absorption and variable costing is attributable to the difference in the
A) income statement formats.
B) treatment of fixed manufacturing overhead.
C) treatment of variable manufacturing overhead.
D) treatment of variable selling, general, and administrative expenses.

Accepted Answer

The difference between reported income under absorption and variable costing is a result of the treatment of fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is included in the cost of goods sold, while under variable costing it is treated as a period expense and is not included in the cost of goods sold. This difference in treatment leads to different reported income levels. The other options (A, C, and D) are not the main drivers of the difference in reported income between the two methods.

Question 2

Variable costing considers which of the following to be product costs? 
A) yes no yes no
B) yes no yes yes
C) no no yes yes
D) no no yes no

Accepted Answer

The answer of Variable costing considers which of the following...

Question 3

The costing system that classifies costs by functional group only is
A) standard costing.
B) job order costing.
C) variable costing.
D) absorption costing.

Accepted Answer

Absorption costing is the costing system that classifies costs by functional group only. Job order costing is a system that assigns costs to specific units or jobs, while standard costing involves using pre-determined standards to calculate costs. Variable costing separates costs into fixed and variable components, rather than by functional group.

Question 4

What factor, related to manufacturing costs, causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing?
A) Absorption costing considers all costs in the determination of net earnings, whereas variable costing considers fixed costs to be period costs.
B) Absorption costing allocates fixed overhead costs between cost of goods sold and inventories, and variable costing considers all fixed costs to be period costs.
C) Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period costs.
D) Absorption costing "inventories" all fixed costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs.

Accepted Answer

The difference in net earnings computed using absorption costing and net earnings computed using variable costing is caused by the way fixed overhead costs are treated. Absorption costing allocates fixed overhead costs between cost of goods sold and inventories, resulting in different net earnings compared to variable costing which considers all fixed costs to be period costs.

Question 5

For financial reporting to the IRS and other external users, manufacturing overhead costs are
A) deducted in the period that they are incurred.
B) inventoried until the related products are sold.
C) treated like period costs.
D) inventoried until the related products have been completed.

Accepted Answer

Manufacturing overhead costs are indirect costs related to the production process, such as rent, utilities, and depreciation of machinery. These costs cannot be directly traced to specific units of production, so they are not included in the inventory cost of the individual units. Instead, manufacturing overhead costs are accumulated in an overhead account and then allocated to the products using a predetermined rate. The allocated manufacturing overhead costs are then included in the cost of the inventory until the products are sold. Therefore, the best choice is B, inventoried until the related products are sold.

Question 6

Another name for variable costing is
A) full costing.
B) direct costing.
C) standard costing.
D) adjustable costing.

Accepted Answer

Variable costing is also known as direct costing as it only considers direct costs such as materials, labor, and variable overhead in the cost of production. It does not include fixed overhead costs, which are treated as period expenses.

Question 7

Which of the following costs will vary directly with the level of production?
A) total manufacturing costs
B) total period costs
C) variable period costs
D) variable product costs

Accepted Answer

Variable product costs are costs that vary directly with the level of production, such as direct materials, direct labor, and variable overhead. Total manufacturing costs may include fixed costs, such as rent and salaries, that will not vary with changes in production. Total period costs include both fixed and variable costs that are not tied to production levels, such as advertising and administrative expenses. Variable period costs are expenses that will vary with changes in the period, such as changes in sales volume, but are not directly tied to production levels.

Question 8

On the variable costing income statement, the difference between the "contribution margin" and "income before income taxes" is equal to
A) the total variable costs.
B) the Cost of Goods Sold.
C) total fixed costs.
D) the gross margin.

Accepted Answer

The contribution margin represents the amount available to cover fixed costs and contribute to profit. Therefore, if we subtract total fixed costs from the contribution margin, we will arrive at the income before income taxes.

Question 9

Under variable costing, which of the following are costs that can be inventoried?
A) variable selling and administrative expense
B) variable manufacturing overhead
C) fixed manufacturing overhead
D) fixed selling and administrative expense

Accepted Answer

Under variable costing, only direct materials, direct labor, and variable manufacturing overhead costs are inventoriable as they directly contribute to the production of units. Variable selling and administrative expense and fixed costs are expensed in the period they are incurred and cannot be inventoried.

Question 10

When variable costing is used,
A) all product costs are treated as variable.
B) all period costs are treated as variable.
C) all product costs are treated as fixed.
D) product costs are treated as both fixed and variable.

Accepted Answer

The answer of When variable costing is used,
A) all product...

Question 11

The costing system that classifies costs by both functional group and behavior is
A) process costing.
B) job order costing.
C) variable costing.
D) absorption costing.

Accepted Answer

The costing system that classifies costs by both functional group (such as production, marketing, and administrative) and behavior (such as variable, fixed, or mixed) is referred to as activity-based costing or ABC costing, which is a type of variable costing. The other options listed (process costing, job order costing, and absorption costing) only classify costs by functional group, and may not differentiate between variable and fixed costs.

Question 12

Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated?
A) Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B) Change in the quantity of all units produced times the relevant fixed costs per unit.
C) Change in the quantity of all units in inventory times the relevant variable cost per unit.
D) Change in the quantity of all units produced times the relevant variable cost per unit.

Accepted Answer

The difference in profit under absorption costing and variable costing is due to the treatment of fixed overhead costs. Under absorption costing, fixed overhead costs are included in the cost of production and hence form a part of cost of goods sold. Whereas, under variable costing, fixed overhead costs are treated as period costs and are expensed off in the period in which they are incurred. As a result, the difference in profit between the two methods is equal to the change in the quantity of all units in inventory (closing inventory - opening inventory) multiplied by the relevant fixed costs per unit.

Question 13

The variable costing format is often more useful to managers than the absorption costing format because
A) costs are classified by their behavior.
B) costs are always lower.
C) it is required for external reporting.
D) it justifies higher product prices.

Accepted Answer

The variable costing format classifies costs by their behavior, separating fixed and variable costs. This can provide managers with insight into the true cost of producing a product or providing a service, as well as aid in decision-making regarding pricing and production levels. The other options provided (B, C, and D) are not accurate or relevant reasons for why the variable costing format may be more useful to managers.

Question 14

A basic concept of variable costing is that period costs should be currently expensed. What is the rationale behind this procedure?
A) Period costs are uncontrollable and should not be charged to a specific product.
B) Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits.
C) Allocation of period costs is arbitrary at best and could lead to erroneous decision by management.
D) Because period costs will occur whether production occurs, it is improper to allocate these costs to production and defer a current cost of doing business.

Accepted Answer

Variable costing treats period costs as expenses of the current period and not as product costs. This is because period costs will be incurred whether or not production occurs, and should not be deferred and allocated to products. Allocating these costs to products would result in misleading product costs and could lead to erroneous decision-making by management. Therefore, the rationale behind this procedure is that period costs should be currently expensed as they are part of the cost of doing business in the current period.

Question 15

Consider the following three product costing alternatives: process costing, job order costing, and standard costing. Which of these can be used in conjunction with variable costing?
A) job order costing
B) standard costing
C) process costing
D) all of them

Accepted Answer

Variable costing can be used in conjunction with process costing, job order costing, and standard costing. It is a method of inventory costing that includes all variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) in inventory. The choice of costing system (process, job order, or standard) primarily affects how costs are accumulated and assigned to products, but it does not restrict the use of variable costing.

Question 16

A functional classification of costs would classify "depreciation on office equipment" as a
A) product cost.
B) general and administrative expense.
C) selling expense.
D) variable cost.

Accepted Answer

Depreciation on office equipment is a general and administrative expense as it is associated with the everyday functioning of the business rather than being directly related to the production or sale of products. Product costs are associated with the direct costs of producing a product, selling expenses are associated with the costs of selling a product, and variable costs vary in relation to the level of production or sales.

Question 17

Which of the following is a term more descriptive of the term "direct costing"?
A) out-of-pocket costing
B) variable costing
C) relevant costing
D) prime costing

Accepted Answer

"Variable costing" is a more descriptive term of "direct costing" as it refers to the method of calculating costs that only includes direct variable costs such as materials, labor, and overheads that vary with production levels. This is in contrast to absorption costing which includes both variable and fixed costs in the calculation of product costs.

Question 18

In the application of "variable costing" as a cost-allocation process in manufacturing,
A) variable direct costs are treated as period costs.
B) nonvariable indirect manufacturing costs are treated as product costs.
C) variable indirect manufacturing costs are treated as product costs.
D) nonvariable direct costs are treated as product costs.

Accepted Answer

In variable costing, only variable manufacturing costs are treated as product costs, while fixed manufacturing costs are treated as period costs. Variable direct costs, such as direct materials and direct labor, are always treated as product costs in all costing methods. Nonvariable indirect manufacturing costs and nonvariable direct costs are always treated as period costs in variable costing.

Question 19

If a firm uses variable costing, fixed manufacturing overhead will be included
A) only on the balance sheet.
B) only on the income statement.
C) on both the balance sheet and income statement.
D) on neither the balance sheet nor income statement.

Accepted Answer

Fixed manufacturing overhead costs are treated as period costs and are expensed on the income statement under variable costing. They are not included in the inventory valuation or carried onto the balance sheet.

Question 20

How will a favorable volume variance affect net income under each of the following methods? 
A) reduce no effect
B) reduce increase
C) increase no effect
D) increase reduce

Accepted Answer

A favorable volume variance means the actual volume of units sold is higher than the budgeted volume, which implies higher sales revenue. Therefore, net income will increase under absorption costing and variable costing as both methods include sales revenue in their calculation of net income. However, under absorption costing, there will be an additional increase in net income due to the fixed manufacturing overhead being absorbed into inventory when the actual volume sold exceeds the budgeted volume, whereas variable costing only considers variable costs when calculating net income.

Quiz 3: Predetermined Overhead Rates, Flexible Budgets, and Absorptionvariable Costing

The difference between the reported income under absorption and variable costing is attributable to the difference in the

Variable costing considers which of the following to be product costs?

The costing system that classifies costs by functional group only is

What factor, related to manufacturing costs, causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing?

For financial reporting to the IRS and other external users, manufacturing overhead costs are

Another name for variable costing is

Which of the following costs will vary directly with the level of production?

On the variable costing income statement, the difference between the "contribution margin" and "income before income taxes" is equal to

Under variable costing, which of the following are costs that can be inventoried?

When variable costing is used,

The costing system that classifies costs by both functional group and behavior is

Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated?

The variable costing format is often more useful to managers than the absorption costing format because

A basic concept of variable costing is that period costs should be currently expensed. What is the rationale behind this procedure?

Consider the following three product costing alternatives: process costing, job order costing, and standard costing. Which of these can be used in conjunction with variable costing?

A functional classification of costs would classify "depreciation on office equipment" as a

Which of the following is a term more descriptive of the term "direct costing"?

In the application of "variable costing" as a cost-allocation process in manufacturing,

If a firm uses variable costing, fixed manufacturing overhead will be included

How will a favorable volume variance affect net income under each of the following methods?