Question 1

The biggest problems with producing too much are lost sales and customer dissatisfaction.

Accepted Answer

The biggest problems with producing too much are typically increased inventory costs, wasted resources, and potential obsolescence of products, rather than lost sales and customer dissatisfaction, which are more directly related to producing too little.

Question 2

The traditional costing approach assigns all manufacturing costs to products.

Accepted Answer

The traditional costing approach involves assigning all manufacturing costs, including direct materials, direct labor, and overhead, to products using predetermined overhead rates based on a single cost driver, such as direct labor hours or machine hours.

Question 3

Managers should accept special orders provided the special order price exceeds full cost.

Accepted Answer

Managers should accept special orders if the special order price exceeds the variable costs and contributes to covering fixed costs, not necessarily the full cost.

Question 4

Fixed costs change in the short run depending upon management's decision to accept or reject special orders.

Accepted Answer

Fixed costs do not change in the short run regardless of management's decision to accept or reject special orders.

Question 5

If a company has excess capacity,increases in production level will increase variable production costs but not fixed production costs.

Accepted Answer

Fixed production costs are those that do not vary with changes in production level, such as rent, salary of permanent staff, etc. Excess capacity means that a company has already incurred these fixed costs, and increasing production level will not lead to an increase in these costs. On the other hand, variable production costs, such as raw materials, labor costs, energy costs, etc., will increase with an increase in production level.

Question 6

Variable costing treats fixed overhead cost as a period cost.

Accepted Answer

In variable costing, fixed overhead costs are treated as a period cost and expensed in the period they are incurred, rather than being allocated to the cost of goods sold. This differs from absorption costing which does allocate fixed overhead costs to the cost of goods sold.

Question 7

Manufacturing overhead costs are those that can be traced directly to the product.

Accepted Answer

Manufacturing overhead costs are indirect costs that cannot be traced directly to the product, such as rent, utilities, and maintenance.

Question 8

The use of absorption costing can result in misleading product cost information.

Accepted Answer

Absorption costing includes all manufacturing costs, including fixed overhead costs, in the product cost. This can result in overestimation or underestimation of product cost depending on the volume of production and the level of fixed overhead costs allocated to each unit. As a result, the use of absorption costing can result in misleading product cost information.

Question 9

Variable costing separates the variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.

Accepted Answer

Variable costing only considers variable costs as expenses and separates them from fixed costs. This allows for better identification and control of variable costs, which can be useful in decision-making and cost management.

Question 10

Many companies link manager bonuses to income computed under absorption costing because this is how income is reported to shareholders.

Accepted Answer

Companies often link manager bonuses to income computed under absorption costing because this is how income is reported to shareholders. Absorption costing takes into account all costs of production, including fixed overhead costs, and is considered a more accurate reflection of a company's financial performance. Therefore, linking manager bonuses to income computed under absorption costing incentivizes managers to control and reduce costs, leading to higher profits and greater shareholder value.

Question 11

Product costs consist of direct labor,direct materials,and overhead.

Accepted Answer

This is because direct labor, direct materials and overhead are the three main components of product costs. Direct labor refers to the wages and benefits paid to workers who are directly involved in manufacturing a product, while direct materials are the costs of the materials used to make the product. Overhead refers to indirect costs such as rent, utilities, and taxes that are necessary for production but cannot be directly traced to a specific product. Together, these three elements represent the total cost of producing a product.

Question 12

Under absorption costing,a company had the following unit costs when 10,000 units were produced:
 $\begin{array}{ll}
\text { Direct labor } & \$ 2 \text { per unit } \
\text { Direct material } & \$ 3 \text { per unit } \
\text { Variable overhead } & \$ 4 \text { per unit } \
\cline { 2 - 2 } \text { Total variable } & \$ 9 \text { per unit } \
\text { Fixed overhead }(\$ 50,000 / 10,000 \text { units) } & \$ 5 \text { per unit } \
\text { Total production cost } & \$ 14 \text { per unit }
\end{array}$
 
The total production cost per unit under absorption costing if 25,000 units had been produced would be $11.

Accepted Answer

Under absorption costing, fixed overhead is applied to units produced. If more units are produced, the fixed overhead cost per unit will decrease.

Question 13

During a given year if a company produces and sells the same number of units,then beginning inventory units equal ending inventory units.

Accepted Answer

This is true as the number of units produced and sold will be equal to the beginning and ending inventory units if there is no change in demand or production during the year.

Question 14

Absorption costing is useful because it reflects the full costs that sales must exceed for the company to be profitable.

Accepted Answer

Absorption costing includes all direct and indirect costs associated with producing a product, including fixed overhead costs. By including these costs, absorption costing provides a more accurate representation of the total cost of producing a product and therefore the minimum sales price necessary for a company to break even and make a profit.

Question 15

A company normally sells a product for $25 per unit.Variable per unit costs for this product are: $3 direct materials,$5 direct labor,and $2 variable overhead.The company is currently operating at 100% of capacity producing 30,000 units per year.Total fixed costs are $75,000 per year.The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

Accepted Answer

No unused capacity is available

Question 16

The traditional income statement format used for financial reporting is called the contribution margin format.

Accepted Answer

The traditional income statement format used for financial reporting is actually called the traditional or functional format. The contribution margin format is an alternative format that separates fixed and variable costs to calculate contribution margin as the sales revenue minus variable costs, and then subtracts fixed costs to determine net income.

Question 17

Absorption costing is not permitted under GAAP.

Accepted Answer

Absorption costing is permitted under GAAP and is commonly used for external reporting purposes.

Question 18

A company normally sells a product for $20 per unit.Variable per unit costs for this product are: $2 direct materials,$4 direct labor,and $1.50 variable overhead.The company is currently operating at 70% of capacity producing 14,000 units per year.Total fixed costs are $42,000 per year.The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.

Accepted Answer

14,000/.7 - 14,000 = 6,000 unit capacity remaining
Per unit variable costs = $2 DM + $4 DL + $1.50 VOH = $7.50
Per unit incremental income = $10.00 - $7.50 = $2.50

Question 19

Assume a company had the following production costs:
 $\begin{array}{ll}
\text { Direct labor } & \$ 20,000 \
\text { Direct material } & \$ 30,000 \
\text { Variable overhead } & \$ 40,000 \
\text { Fixed overhead } & \$ 50,000
\end{array}$
 
Under absorption costing,the total production cost per unit when 4,000 units are produced would be $22.50.

Accepted Answer

Under absorption costing, total production cost includes direct labor, direct material, variable overhead, and fixed overhead. The total cost is $140,000 ($20,000 + $30,000 + $40,000 + $50,000). Dividing by 4,000 units gives a cost per unit of $35.00, not $22.50.

Question 20

Cost information from both absorption costing and variable costing can aid managers in pricing.

Accepted Answer

Cost information from absorption costing and variable costing can aid managers in determining the total cost of production and the cost per unit. This information is important when setting prices to ensure that a profit is made while still remaining competitive in the market. Both methods provide different perspectives on the cost structure of a product, and managers may use a combination of the two methods to make pricing decisions.

Quiz 19: Variable Costing and Performance Reporting