Question 1

Net income under variable costing is unaffected by changes in production levels.

Accepted Answer

Under variable costing, net income is affected by sales levels, not production levels, because fixed manufacturing costs are expensed in the period incurred rather than being allocated to inventory.

Question 2

Full costing is equivalent to absorption costing.

Accepted Answer

Full costing is another term used for absorption costing. It is a method of costing where all the manufacturing costs, which include direct materials, direct labor, and both variable and fixed overhead costs, are fully absorbed into the cost of a product.

Question 3

Net income under GAAP highlights differences between variable and fixed costs.

Accepted Answer

Net income under GAAP does not specifically highlight differences between variable and fixed costs; it focuses on overall profitability, while cost behavior is typically analyzed in managerial accounting.

Question 4

If normal costing is used when preparing an absorption costing income statement, the fixed manufacturing overhead assigned to inventory is based on a predetermined fixed manufacturing overhead rate.

Accepted Answer

When preparing an absorption costing income statement, fixed manufacturing overhead assigned to inventory is based on a predetermined fixed manufacturing overhead rate calculated using normal costing.

Question 5

In full or absorption costing, all manufacturing costs are charged to the product.

Accepted Answer

Full or absorption costing includes all manufacturing costs (direct materials, direct labor, and manufacturing overhead) in the cost of a product.

Question 6

Fixed manufacturing overhead is a period cost under absorption costing.

Accepted Answer

Fixed manufacturing overhead is a product cost under absorption costing and is included in the cost of inventory until the inventory is sold, at which point it is recognized as an expense in the period in which it is sold.

Question 7

Companies that use just-in-time processing techniques will have significant differences between absorption and variable costing net income.

Accepted Answer

The answer of Companies that use just-in-time processing techniques will...

Question 8

The use of absorption costing facilitates cost-volume-profit analysis.

Accepted Answer

Absorption costing allocates all manufacturing costs to products, making it difficult to directly analyze the impact of changes in production volume on costs and profitability, which is central to cost-volume-profit analysis. Variable costing is more suited for this purpose as it separates variable and fixed costs.

Question 9

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Accepted Answer

Variable costing is not the approach used for external reporting under generally accepted accounting principles. The approach used for external reporting is absorption costing. Variable costing is often used for internal decision making and management accounting purposes.

Question 10

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Accepted Answer

Manufacturing cost per unit will be lower under variable costing than absorption costing because fixed overhead costs are not included in the per-unit cost calculation under variable costing, resulting in a lower total cost per unit.

Question 11

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Accepted Answer

This is because absorption costing is required by generally accepted accounting principles (GAAP) for external reporting, but variable costing can still provide useful information for internal decision making purposes.

Question 12

Fixed manufacturing costs are NOT charged to the product under variable costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are charged to the product. Fixed manufacturing costs are considered period costs and are expensed in the period in which they are incurred, rather than being allocated to the products.

Question 13

When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Accepted Answer

This is because under absorption costing, fixed manufacturing overhead costs are included in the cost of each unit produced and are expensed when the units are sold. Therefore, if units produced exceed units sold, there is some fixed overhead cost that is not expensed in the current period and is carried forward as part of inventory. This increases the value of ending inventory and, correspondingly, reduces the cost of goods sold, resulting in a higher reported income under absorption costing as compared to variable costing, where fixed overhead costs are expensed in the period they are incurred.

Question 14

GAAP requires that absorption costing be used for the costing of inventory for external reporting purposes.

Accepted Answer

GAAP requires that absorption costing, which includes all manufacturing costs, be used for the costing of inventory for external reporting purposes.

Question 15

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Accepted Answer

When absorption costing is used, fixed manufacturing overhead costs are included in the product cost. Therefore, producing more units will increase the net income for the period as more fixed costs are absorbed by the units produced. This creates an incentive for management to overproduce, which can lead to excess inventory and other problems.

Question 16

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are assigned to inventory. Fixed manufacturing costs are expensed in the period they are incurred, not deferred to future periods through ending inventory.

Question 17

Net income under variable costing is closely tied to changes in sales levels.

Accepted Answer

Under variable costing, net income is calculated as the contribution margin (sales revenue minus variable costs) minus fixed costs. Since variable costs are directly tied to changes in sales levels, net income under variable costing is also closely tied to changes in sales levels. This is in contrast to absorption costing, where fixed manufacturing overhead costs are included in the calculation of net income, creating a disconnect between changes in sales levels and net income.

Question 18

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Accepted Answer

Absorption costing treats fixed manufacturing overhead as a product cost and includes it in the cost of goods sold. Variable costing treats fixed manufacturing overhead as a period cost and does not include it in the cost of goods sold but instead as a separate expense in the period it was incurred.

Question 19

Selling and administrative costs are period costs under both absorption and variable costing.

Accepted Answer

Selling and administrative costs are considered as period costs that are expensed in the period in which they are incurred. This is true for both absorption costing and variable costing methods.

Question 20

When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

Accepted Answer

The answer of When units sold exceed units produced, income...

Quiz 8: Alternative Inventory Costing Methods: a Decision-Making Perspective