Question 1

Fixed manufacturing overhead is excluded from the cost of products under absorption costing.

Accepted Answer

Fixed manufacturing overhead is included in the cost of products under absorption costing.

Question 2

If a company uses the variable-costing approach, a manager might be tempted to produce unneeded units just to increase reported operating income.

Accepted Answer

The answer of If a company uses the variable-costing approach,...

Question 3

There is no production-volume variance only when expected production volume equals actual production volume.

Accepted Answer

Production-volume variance occurs when the actual production volume differs from the expected production volume. Therefore, there is no production-volume variance only when the expected production volume equals the actual production volume.

Question 4

Gross margin appears in a variable-costing income statement.

Accepted Answer

Gross margin is typically found in an absorption-costing income statement, not a variable-costing income statement. Variable costing focuses on direct costs and does not calculate gross margin in the traditional sense.

Question 5

An unfavorable production-volume variance decreases the manufacturing costs shown on the income statement.

Accepted Answer

An unfavorable production-volume variance means that actual production was lower than budgeted production, resulting in unused capacity and increased manufacturing costs per unit. Therefore, it would increase manufacturing costs shown on the income statement, rather than decrease them.

Question 6

When sales exceed production, variable-costing income is greater than absorption-costing income.

Accepted Answer

Variable costing only considers the costs directly attributable to producing a unit and excludes fixed overhead costs, while absorption costing includes both fixed and variable costs in the cost of a unit. Thus, when sales exceed production in a period, there will be a lower amount of fixed overhead cost per unit under absorption costing, leading to a lower cost of goods sold and higher ending inventory value compared to variable costing. This results in a higher variable-costing income than absorption-costing income.

Question 7

The absorption-costing method has fixed factory overhead appearing in only cost of goods sold.

Accepted Answer

In absorption costing method, fixed factory overhead appears in both cost of goods sold and inventory.

Question 8

When actual volume is more than expected volume, fixed overhead is underapplied.

Accepted Answer

When actual volume is more than expected volume, fixed overhead is overapplied because the fixed costs are spread over more units, reducing the cost per unit.

Question 9

A production-volume variance is calculated as the applied volume minus the actual volume multiplied by the actual overhead rate.

Accepted Answer

The formula for production-volume variance is (applied volume - actual volume) x predetermined overhead rate.

Question 10

It is possible for variable overhead to have a production-volume variance.

Accepted Answer

Variable overhead is typically associated with costs that vary with the level of production output, and its variances are usually analyzed in terms of spending and efficiency, not production volume, which is more relevant to fixed overhead.

Question 11

The variable-costing method does not include fixed overhead in a product's cost.

Accepted Answer

Variable costing only includes variable costs (such as materials and direct labor) in a product's cost, and does not allocate fixed overhead. Fixed overhead costs are treated as period expenses and are expensed in the period in which they are incurred.

Question 12

Most companies consider production-volume variances to be beyond immediate control.

Accepted Answer

Production-volume variances are often caused by external factors such as changes in customer demand or unexpected disruptions in the supply chain, making them difficult to control in the short term.

Question 13

Any difference in variable-costing and absorption-costing operating income can be explained by multiplying the fixed-overhead product-costing rate by the change in the total units in the beginning and ending inventories.

Accepted Answer

This is known as the reconciliation method which reconciles the operating income differences between variable costing and absorption costing by using the fixed overhead product-costing rate multiplied by the change in inventory levels.

Question 14

Production-volume variance = applied fixed overhead - budgeted fixed overhead.

Accepted Answer

The production-volume variance is the difference between the applied fixed overhead and the budgeted fixed overhead, therefore the statement is true.

Question 15

The variable-costing method regards fixed manufacturing costs as expenses in the period they are incurred.

Accepted Answer

Under the variable-costing method, only variable manufacturing costs are included in product costs, while fixed manufacturing costs are treated as period expenses and are expensed in the period they are incurred.

Question 16

Absorption costing is more widely used than variable costing.

Accepted Answer

Absorption costing is generally preferred by companies for external reporting purposes as it includes all the production costs in the cost of goods sold, whereas variable costing only includes the variable costs. However, variable costing is useful for internal decision-making as it provides a clearer picture of the contribution margin and the impact of changes in production levels on profitability.

Question 17

The production-volume variance measures the difference between applied and budgeted fixed overhead.

Accepted Answer

The production-volume variance measures the difference between applied fixed overhead (based on actual production level) and budgeted fixed overhead.

Question 18

Absorption-costing income is not affected by production volume.

Accepted Answer

Absorption costing assigns a portion of fixed manufacturing overhead to each unit produced, therefore as production volume increases, more fixed overhead costs are absorbed and allocated to each unit, resulting in a higher cost of goods sold and reducing net income.

Question 19

Underapplied and overapplied fixed overhead has two components: 1) a production-volume variance, and 2) a fixed-overhead flexible-budget variance.

Accepted Answer

Underapplied and overapplied fixed overhead are generally attributed to two components: 1) a production-volume variance, which is related to the actual number of units produced versus the budgeted number of units, and 2) a fixed-overhead flexible-budget variance, which is related to the difference between actual fixed overhead costs and the budgeted amount based on the flexible budget.

Question 20

In an absorption-costing statement, revenue less variable manufacturing cost is the gross margin.

Accepted Answer

In an absorption-costing income statement, gross margin is calculated as revenue less cost of goods sold, where cost of goods sold includes both variable and fixed manufacturing costs, not just variable manufacturing costs.

Quiz 13: Accounting for Overhead Costs