Question 1

In absorption costing, fixed manufacturing overhead is treated as a period cost.

Accepted Answer

In absorption costing, fixed manufacturing overhead costs are inventoried.

Question 2

Aspen Manufacturing Company sells its products for $33 each. The current production level is 50,000 units, although only 40,000 units are anticipated to be sold.
  
Required:
a.Prepare an income statement using absorption costing.
b.Prepare an income statement using variable costing.

Accepted Answer

The answer of Aspen Manufacturing Company sells its products for...

Question 3

At the end of the accounting period, Armstrong Corporation reports operating income of $30,000. Which of the following statements is true, if Armstrong's inventory levels decrease during the accounting period?

Accepted Answer

When inventory levels decrease during the accounting period, absorption costing will report less operating income than variable costing. This is because under absorption costing, fixed manufacturing overhead is allocated to the cost of goods sold and ending inventory. If inventory decreases, more of the fixed manufacturing overhead costs are included in the cost of goods sold, reducing operating income compared to variable costing, which treats fixed manufacturing overhead as a period cost and does not allocate it to inventory.

Question 4

Jarvis Golf Company sells a special putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was:
  
Required:
a.Compute the cost per unit under both absorption and variable costing.
b.Compute the ending inventories under both absorption and variable costing.
c.Compute operating income under both absorption and variable costing.

Accepted Answer

The answer of Jarvis Golf Company sells a special putter...

Question 5

In variable costing, all nonmanufacturing costs are subtracted from contribution margin.

Accepted Answer

In variable costing, all fixed costs are subtracted from contribution margin.

Question 6

Beginning inventory + cost of goods manufactured = Cost of goods sold + Ending inventory.

Accepted Answer

This equation represents the basic accounting equation for inventory. Beginning inventory is added to the cost of goods manufactured (the cost of producing the goods during the accounting period), and the sum is equal to the cost of goods sold plus the ending inventory (the value of the goods that remain on hand at the end of the accounting period).

Question 7

The basis of the difference between variable costing and absorption costing is how fixed manufacturing costs are accounted for.

Accepted Answer

Variable costing only includes variable manufacturing costs in product costs, while absorption costing includes both variable and fixed manufacturing costs in product costs. This difference in accounting for fixed costs is the basis of the distinction between the two costing methods.

Question 8

Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10% of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 2017 when 50 lots were sold.
During 2018, the company bought another 2,000-acre island and developed it exactly the same way. Lot sales in 2018 totaled 300 with an average selling price of $160,000. All costs were the same as in 2017.
Required:
Prepare income statements for both years using both absorption and variable costing methods.

Accepted Answer

The answer of Johnson Realty bought a 2,000-acre island for...

Question 9

Ireland Corporation planned to be in operation for three years.
-During the first year, 2017, it had no sales but incurred $240,000 in variable manufacturing expenses and $80,000 in fixed manufacturing expenses.
-In 2018, it sold half of the finished goods inventory from 2017 for $200,000 but it had no manufacturing costs.
-In 2019, it sold the remainder of the inventory for $240,000, had no manufacturing expenses and went out of business.
-Marketing and administrative expenses were fixed and totaled $40,000 each year.
Required:
a.Prepare an income statement for each year using absorption costing.
b.Prepare an income statement for each year using variable costing.

Accepted Answer

The answer of Ireland Corporation planned to be in operation...

Question 10

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by ________.

Accepted Answer

In variable costing, the fixed costs are expensed in the period they are incurred, while the contribution margin per unit remains constant. Therefore, the period-to-period change in operating income is driven solely by changes in the quantity of units actually sold. The quantity of units produced and changes in ending inventory do not have a direct impact on operating income under variable costing. Changes in sales price per unit would affect the contribution margin per unit, but it is stated that the contribution margin is constant.

Question 11

The contribution-margin format of the income statement is used with absorption costing.

Accepted Answer

The contribution-margin format of the income statement is used with variable costing.

Question 12

Absorption costing enables managers to increase operating income by increasing the unit level of sales, as well as by producing more units.

Accepted Answer

Absorption costing includes fixed manufacturing overhead costs as part of the product cost, so as more units are produced and sold, the fixed costs are spread over a larger number of units, increasing the operating income.

Question 13

Fixed manufacturing overhead is a period cost both under variable costing and under absorption costing.

Accepted Answer

Under variable costing, fixed manufacturing costs are not inventoried; they are treated
as period costs, however under absorption costing they are treated as inventoriable costs.

Question 14

When production is less than sales, operating income will be the same regardless of whether variable cost or absorption costing is used.

Accepted Answer

When production is less than sales, the operating income will be higher under variable costing than under absorption costing.

Question 15

Absorption-costing income statements usually do not differentiate between variable and fixed costs.

Accepted Answer

Absorption costing income statements treat all costs, both variable and fixed, as part of the cost of goods sold and do not differentiate between them. This can lead to distortions in profitability reporting and decision-making.

Question 16

When production is greater than sales, operating income under variable costing will be less than what it would be under absorption costing.

Accepted Answer

In this situation, under variable costing, some fixed manufacturing costs are deferred to future periods as inventory carrying costs, resulting in lower operating income compared to absorption costing.

Question 17

The production-volume variance only exists under variable costing and not under absorption costing.

Accepted Answer

The production-volume variance only exists under absorption costing and not under variable costing.

Question 18

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually manufactured.

Accepted Answer

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually sold.

Question 19

The contribution-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs.

Accepted Answer

The contribution-margin format of the income statement distinguishes variable costs from fixed costs.

Question 20

The production-volume variance, which relates only to fixed manufacturing overhead, exists under absorption costing but not under variable costing.

Accepted Answer

The production-volume variance is a difference between the budgeted fixed overhead and the actual fixed overhead incurred due to the difference in the number of units produced. Since fixed manufacturing overhead is included in the cost of goods sold under absorption costing but not under variable costing, the production-volume variance exists only under absorption costing.

Quiz 9: Inventory Costing and Capacity Analysis