Question 1

Improved information technology has increased the availability of variable costing and throughput costing income statements.

Accepted Answer

Improved information technology has made it easier and more efficient to track and allocate variable costs and measure throughput, resulting in an increased availability of income statements using these costing methods.

Question 2

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each.  The product cost per unit using absorption costing is
A) $1,600
B) $2,800
C) $2,000
D) $2,400

Accepted Answer

The answer of Shipp Ltd. budgets the following costs for...

Question 3

Because absorption costing capitalises fixed manufacturing overhead costs to inventory, managers using it may build up inventories unnecessarily.

Accepted Answer

Absorption costing includes fixed manufacturing overhead costs in the cost of inventory, which can incentivize managers to produce and store more inventory than needed in order to spread out those overhead costs.

Question 4

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Ending inventory for year 2 using variable costing would be
A) $2,200
B) $1,100
C) $1,175
D) $800

Accepted Answer

Under variable costing, ending inventory is valued at variable production cost per unit. In year 2, 100 units remain in inventory (1,000 produced in year 1 + 800 produced in year 2 - 800 sold in year 1 - 900 sold in year 2). At $8 per unit, the ending inventory is $800.

Question 5

Throughput costing income statements help managers determine the most efficient uses of resources in the short term.

Accepted Answer

Throughput costing income statements focus on identifying constraints in the production process and finding ways to maximize the output of those constraints. By understanding which resources are limiting production, managers can allocate resources more efficiently and increase overall profitability in the short term.

Question 6

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using variable costing when 500 units are produced and 400 units are sold is
A) $840,000 loss
B) $160,000 profit
C) $480,000 profit
D) $720,000 loss

Accepted Answer

The answer of Shipp Ltd. budgets the following costs for...

Question 7

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using absorption costing when 500 units are produced and 400 units are sold is
A) $840,000 loss
B) $160,000 profit
C) $480,000 profit
D) $720,000 loss

Accepted Answer

To calculate the profit (loss) using absorption costing, we need to determine the total cost and total revenue for producing and selling 500 units, and then adjust for the fact that only 400 units were actually sold.

Total cost = Fixed costs + (Variable costs per unit x number of units produced)
Total cost = $1,000,000 + ($2,000 x 500)
Total cost = $2,000,000

Total revenue = Sales price per unit x number of units sold
Total revenue = $4,000 x 400
Total revenue = $1,600,000

To adjust for the fact that only 400 units were sold, we need to calculate the cost of goods sold (COGS) for those units, and then subtract it from the adjusted revenue:

COGS = Total cost / number of units produced x number of units sold
COGS = $2,000,000 / 500 x 400
COGS = $1,600,000

Adjusted revenue = Total revenue - COGS
Adjusted revenue = $1,600,000 - $1,600,000
Adjusted revenue = $0

Since the adjusted revenue is $0, the profit (loss) using absorption costing is equal to the total cost for producing the 500 units, which is $2,000,000. However, since only 400 units were sold, the company incurred a loss of $720,000 (500-400 units) using absorption costing. Therefore, the correct answer is choice D.

Question 8

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000.
In which month(s) was variable costing profit lower than absorption costing profit?
A) 4
B) 1, 2, and 3
C) 2 and 3
D) 3 and 4

Accepted Answer

Variable costing profit is lower than absorption costing profit when production is less than sales. In this case, production is less than sales in months 1, 2, and 3.

Question 9

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000.
Compared to using absorption costing, using variable costing will result in operating profit for the 4-month period to be
A) Higher
B) Lower
C) Same
D) Cannot be determined

Accepted Answer

The answer of Exeter Ltd. introduced a new mass-produced specialty...

Question 10

Throughput costing income statements cannot be used to evaluate management performance.

Accepted Answer

Throughput costing income statements can be used to evaluate management performance by focusing on the contribution of throughput to cover operating expenses and generate profit, thus providing insights into operational efficiency and decision-making.

Question 11

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Operating profit for year 1 using variable costing would be
A) $1,600
B) $(2,800)
C) $2,200
D) $400

Accepted Answer

To calculate the operating profit using variable costing, we need to subtract only the variable costs (i.e., the cost of goods sold) from the sales revenue.

Year 1: 
Operating profit using variable costing = revenue - variable costs 
= (800 units sold x $12 per unit) - (1,000 units produced x $8 per unit) 
= $9,600 - $8,000 
= $1,600

Therefore, the correct answer is D.

Question 12

Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows:  The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000. In which month(s) was variable costing profit higher than absorption costing profit?
A) 4
B) l, 2, and 3
C) 2 and 3
D) 3 and 4

Accepted Answer

The answer of Exeter Ltd. introduced a new mass-produced specialty...

Question 13

Fixed overhead costs are treated differently under variable costing and throughput costing.

Accepted Answer

The answer of Fixed overhead costs are treated differently under...

Question 14

JIT systems are incompatible with absorption costing systems.

Accepted Answer

JIT (Just-In-Time) systems focus on reducing inventory levels and improving efficiency, while absorption costing allocates all manufacturing costs to products. They can be used together, as JIT can help reduce costs that are then absorbed into product costs under absorption costing.

Question 15

Throughput costing assumes that product costs other than materials tend to be fixed in the short run.

Accepted Answer

Throughput costing is a method of costing that focuses on the extent to which the production process adds value to the product. It assumes that in the short run, fixed costs - which include expenses such as rent, salaries, and insurance - remain relatively constant, regardless of changes in the level of production. This means that changes in throughput (i.e. the number of units produced) will have a greater impact on the variable costs of production (such as direct materials and direct labor), and therefore on the overall cost of producing the product.

Question 16

Direct materials costs are treated similarly under variable costing and throughput costing.

Accepted Answer

Direct materials costs are considered a variable cost and are therefore included in both variable costing and throughput costing.

Question 17

Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below:  The product cost per unit during year 1 using absorption would be
A) $67,000
B) $73,000
C) $82,000
D) $85,000

Accepted Answer

The answer of Taylor Ltd just finished its second year...

Question 18

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were:  Cost of goods sold for year 1 using variable costing would be
A) $6,400
B) $8,800
C) $8,000
D) $7,600

Accepted Answer

The answer of Bella Ltd has operated for 2 years....

Question 19

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The product cost per unit using variable costing is
A) $1,600
B) $2,800
C) $2,000
D) $2,400

Accepted Answer

The answer of Shipp Ltd. budgets the following costs for...

Question 20

Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Operating profit for year 2 using variable costing would be
A) $1,000
B) $1,600
C) $4,000
D) $1,450

Accepted Answer

To calculate the operating profit using variable costing, we need to use the following formula:

Operating Profit = Sales - Variable Costs - Fixed Costs

First, we need to calculate the variable costs for year 2:

Variable Costs = Cost per unit x Number of units produced

Variable Costs = $8 x 800

Variable Costs = $6,400

Now, we can calculate the operating profit for year 2:

Operating Profit = Sales - Variable Costs - Fixed Costs

Operating Profit = $8,000 - $6,400 - $150

Operating Profit = $1,450

Therefore, the correct answer is D) $1,450.

Quiz 7: Absorption, Variable and Throughput Costing

Improved information technology has increased the availability of variable costing and throughput costing income statements.

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The product cost per unit using absorption costing is

Because absorption costing capitalises fixed manufacturing overhead costs to inventory, managers using it may build up inventories unnecessarily.

Throughput costing income statements help managers determine the most efficient uses of resources in the short term.

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using variable costing when 500 units are produced and 400 units are sold is

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using absorption costing when 500 units are produced and 400 units are sold is

Throughput costing income statements cannot be used to evaluate management performance.

Fixed overhead costs are treated differently under variable costing and throughput costing.

JIT systems are incompatible with absorption costing systems.

Throughput costing assumes that product costs other than materials tend to be fixed in the short run.

Direct materials costs are treated similarly under variable costing and throughput costing.

Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The product cost per unit using variable costing is