Question 1

Under absorption costing, a company can wait to recognize fixed costs as expense simply by selling more than they produced that period.

Accepted Answer

"…all manufacturing costs…are capitalized as inventory during the production period and recognized as expense (cost of goods sold) only when the related merchandise is sold."

Question 2

Under variable costing, a company expenses all fixed overhead costs in the same period that it incurs them.

Accepted Answer

Under variable costing, only variable costs are included in product costs, and all fixed overhead costs are expensed in the period they are incurred, rather than being allocated to the products produced.

Question 3

Variable costing is required by GAAP for publicly reported financial results.

Accepted Answer

"These standards require that published financial reports attested to by CPAs be prepared on an absorption costing basis."

Question 4

Under absorption costing, a company applies all overhead costs associated with manufacturing to the inventory produced in the period in which the costs are incurred.

Accepted Answer

Under absorption costing, all manufacturing costs, including both variable and fixed overhead costs, are allocated to the products produced. This means that the inventory absorbs all costs of production, not just the direct costs.

Question 5

Under absorption costing, a change in the level of production will affect the amount of fixed costs reported on the income statement for the period.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to each unit produced. Therefore, when production levels change, the total amount of fixed costs allocated to units and reported on the income statement as part of the cost of goods sold will also change, even though the total fixed costs themselves do not change.

Question 6

Under variable costing, a change in the level of production will affect the amount of fixed costs reported on the variable income statement for the period.

Accepted Answer

"…fixed manufacturing costs are treated as a period cost...."

Question 7

Under variable costing, a change in the level of sales will affect the contribution margin reported on the variable income statement for the period.

Accepted Answer

Under variable costing, the contribution margin is calculated by subtracting variable costs from sales. Therefore, a change in the level of sales directly affects the contribution margin reported.

Question 8

If production is greater than sales, Cost of Goods Sold will be higher under absorption costing than under variable costing.

Accepted Answer

See Exhibit 7-4.

Question 9

Variable net income differs from absorption net income because under absorption costing some fixed costs are retained in inventory rather than being expensed.

Accepted Answer

Under variable costing, all fixed manufacturing costs are expensed in the period they are incurred. Under absorption costing, fixed manufacturing costs are allocated to the products produced and are only expensed as the inventory is sold, meaning some fixed costs can be retained in inventory.

Question 10

The difference between variable net income and absorption net income may be computed by multiplying the change in inventory by the total overhead application rate.

Accepted Answer

The difference in income may be computed by multiplying the change in inventory by the fixed manufacturing cost per unit.

Question 11

If inventory increases in the period, then variable net income will typically be higher than absorption net income.

Accepted Answer

See Exhibit 7.4.

Question 12

If sales exceed production, then previous period costs will be released to the income statement and will decrease the level of absorption net income relative to variable net income.

Accepted Answer

When sales exceed production, the company sells products that were produced in previous periods, leading to the release of fixed manufacturing costs from inventory to the income statement. This decreases absorption net income because these costs were not matched against revenues in the period they were incurred, making absorption net income lower relative to variable net income, where such costs are expensed when incurred.

Question 13

One of the advantages of variable costing is that this costing method may be used for management decisions as well as external reporting.

Accepted Answer

Variable costing may not be used for external reporting purposes.

Question 14

An advantage of variable costing is the ability to conduct break-even analysis using information from the financial statements.

Accepted Answer

Variable costing separates fixed and variable costs, making it easier to perform break-even analysis by identifying the contribution margin per unit and the total fixed costs, which are essential for calculating the break-even point.

Question 15

One of the disadvantages of variable costing is that it may lead management to underprice products, leading to loss of long-term profits.

Accepted Answer

Variable costing only includes variable costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold and excludes fixed manufacturing overhead, which can result in lower product costs. This might lead management to set lower prices than necessary, potentially harming long-term profitability by not covering all costs.

Question 16

Under absorption costing, managers may have an incentive to manipulate earnings through production levels.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to products. Therefore, by increasing production, managers can spread these fixed costs over more units, reducing the cost per unit and increasing inventory values, which can temporarily boost reported earnings even without an increase in sales.

Question 17

Variable costing tends to make CVP analysis more difficult than absorption costing.

Accepted Answer

"Cost-volume-profit (CVP) relationships are more easily discerned from variable costing income statements…"

Question 18

Working capital tends to be lower under variable net income than under absorption net income.

Accepted Answer

Working capital tends to be lower under variable costing because it only includes variable manufacturing costs in inventory values, whereas absorption costing includes both fixed and variable manufacturing costs, leading to higher inventory values and, consequently, higher working capital.

Question 19

Under absorption costing, which of the following costs are applied to manufactured inventory?
A) All fixed costs
B) All variable costs
C) All period costs
D) All manufacturing costs
E) All administrative costs

Accepted Answer

Under absorption costing, all manufacturing costs, both fixed and variable, are applied to manufactured inventory. Period costs and administrative costs are not included in product costs under this method.

Question 20

Which of the following costs would be applied to manufactured inventory under variable costing?
A) Salary of factory manager
B) Cost of raw materials
C) Rental payments on administrative offices
D) Rental payments on factory
E) Commissions to sales persons

Accepted Answer

The answer of Which of the following costs would be...

Quiz 7: Variable Costing: A Tool for Decision Making