Question 1

In the application of "variable costing" as a cost-allocation process in manufacturing,

Accepted Answer

Variable costing is a method of cost allocation in which only variable manufacturing costs are considered as product costs, while fixed manufacturing costs are considered as period costs. Variable indirect manufacturing costs, such as direct materials, direct labor, and other costs tied directly to production volume, are treated as product costs under variable costing. Non-variable indirect manufacturing costs, such as rent, depreciation, and utilities, are treated as period costs under this method. Therefore, option C is the correct answer.

Question 2

Consider the following three product costing alternatives: process costing,job order costing,and standard costing.Which of these can be used in conjunction with variable costing?

Accepted Answer

Variable costing can be used in conjunction with process costing, job order costing, and standard costing. It is a method of inventory costing that includes all variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) in inventory. The choice of costing system (process, job order, or standard) primarily affects how costs are accumulated and assigned to products, but it does not restrict the use of variable costing.

Question 3

Under variable costing,which of the following are costs that can be inventoried?

Accepted Answer

Under variable costing, only variable manufacturing overhead is considered a product cost that can be inventoried. Variable selling and administrative expense and fixed manufacturing and selling/administrative expenses are considered period costs and are expensed in the period in which they are incurred.

Question 4

How will a favorable volume variance affect net income under each of the following methods? Absorption Variable

Accepted Answer

A favorable volume variance means the company sold more units than anticipated, leading to higher revenue. This increase in revenue will result in an increase in net income under the absorption costing method (where fixed overheads are included in the cost of goods sold) but will have no effect on net income under the variable costing method (where fixed overheads are treated as period costs). Therefore, the best choice is C, which indicates an increase in net income without any reduction.

Question 5

The costing system that classifies costs by both functional group and behavior is

Accepted Answer

The costing system that classifies costs by both functional group (such as production, marketing, and administration) and behavior (variable, fixed, or mixed) is called a variable costing system. In this system, variable costs are assigned to products produced, while fixed costs are charged to the period in which they are incurred. This method is different from absorption costing (D), which assigns both fixed and variable costs to products, and from process costing (A) and job order costing (B), which primarily focus on the production process and assign costs to products based on the specific production process used.

Question 6

Which of the following costs will vary directly with the level of production?

Accepted Answer

Variable product costs will vary directly with the level of production, as they are costs that change based on the volume of output produced. Examples of variable product costs include direct materials and direct labor costs.

Question 7

A basic concept of variable costing is that period costs should be currently expensed.What is the rationale behind this procedure?

Accepted Answer

The rationale behind currently expensing period costs is that they will occur regardless of production and it would be incorrect to allocate them to production and defer a current cost of doing business. In variable costing, only variable costs are assigned to products, and period costs are treated as expenses in the period incurred. This allows for a better understanding of the total cost of production and helps in making informed decisions about pricing and production levels.

Question 8

The difference between the reported income under absorption and variable costing is attributable to the difference in the

Accepted Answer

The difference between absorption and variable costing is mainly due to the treatment of fixed manufacturing overhead costs. Absorption costing includes fixed overhead costs as part of the cost of goods sold while variable costing treats fixed overhead as a period cost and excludes it from the cost of goods sold. Therefore, the reported income under absorption costing will be higher when production exceeds sales, while variable costing will report a higher income when sales exceed production. The other options listed do not contribute to the difference in reported income between these two costing methods.

Question 9

What factor,related to manufacturing costs,causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing?

Accepted Answer

The difference in net earnings computed using absorption costing and net earnings computed using variable costing is caused by the fact that absorption costing allocates fixed overhead costs between cost of goods sold and inventories, whereas in variable costing all fixed costs are considered to be period costs. This leads to differences in the valuations of ending inventory and cost of goods sold, and ultimately to differences in net earnings.

Question 10

The costing system that classifies costs by functional group only is

Accepted Answer

Absorption costing is the costing system that classifies costs by functional group only. This system assigns all manufacturing costs, including both variable and fixed costs, to the cost of a product. This system is also known as full costing. Standard costing, job order costing, and variable costing all classify costs in different ways.

Question 11

On the variable costing income statement,the difference between the "contribution margin" and "income before income taxes" is equal to

Accepted Answer

The contribution margin represents the amount of revenue remaining after variable costs have been deducted. Therefore, it only covers variable costs and does not include fixed costs. The income before income taxes includes both fixed and variable costs and represents the overall profitability of the company. The difference between the contribution margin and income before income taxes is equal to the total fixed costs.

Question 12

If a firm uses variable costing,fixed manufacturing overhead will be included

Accepted Answer

In variable costing, fixed manufacturing overhead is expensed as a period cost and is included in the calculation of cost of goods sold on the income statement. It is not included on the balance sheet as an inventory cost since it is not allocated to units produced under this costing method. Therefore, fixed manufacturing overhead will only be included on the income statement.

Question 13

For financial reporting to the IRS and other external users,manufacturing overhead costs are

Accepted Answer

Manufacturing overhead costs are not directly attributable to a specific product, so they are not expensed as they are incurred. Instead, they are included in inventory as part of the cost of the product until it is sold. Therefore, option B is the correct choice.

Question 14

Another name for variable costing is

Accepted Answer

Variable costing is also called direct costing because it only considers the direct costs of production, such as materials, labor, and variable overhead expenses, and excludes any fixed overhead costs.

Question 15

When variable costing is used,

Accepted Answer

When variable costing is used, product costs are separated into fixed and variable components. This allows for a better understanding of how changes in production volume affect costs and profitability. Period costs, on the other hand, are expensed as they are incurred and are not included in product costs under variable costing.

Question 16

The variable costing format is often more useful to managers than the absorption costing format because

Accepted Answer

The variable costing format categorizes costs by their behavior, allowing managers to better understand and analyze the costs associated with producing and selling products. This can help with decision-making, such as whether to continue producing certain products or to adjust pricing strategies. Additionally, absorption costing may allocate fixed manufacturing overhead costs to products, which can create distorted product costs and mislead managers in their decision-making.

Question 17

Which of the following is a term more descriptive of the term "direct costing"?

Accepted Answer

"Variable costing" is a term that is more descriptive of "direct costing" because in both cases, only variable costs are included in the cost of production. "Out-of-pocket costing" refers to the actual costs incurred, including both variable and fixed costs, while "relevant costing" refers to identifying the most relevant costs for decision-making. "Prime costing" refers to the sum of direct material, direct labor, and direct expenses, and is not necessarily limited to variable costs only.

Question 18

Profit under absorption costing may differ from profit determined under variable costing.How is this difference calculated?

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of each unit produced and are only expensed when the units are sold. This means that the value of ending inventory includes a portion of fixed overhead costs that have not yet been expensed. In contrast, variable costing only includes variable costs in the cost of each unit produced and treats fixed overhead costs as period expenses. Therefore, the difference in profit between absorption and variable costing can be calculated by multiplying the change in the quantity of all units in inventory by the relevant fixed costs per unit. This represents the amount of fixed overhead costs that are included in the ending inventory value under absorption costing but are expensed immediately under variable costing.

Question 19

A functional classification of costs would classify "depreciation on office equipment" as a

Accepted Answer

Depreciation on office equipment is a type of general and administrative expense, which is a cost incurred to support the overall functioning of the business and not directly tied to the production or sale of a specific product.

Question 20

Variable costing considers which of the following to be product costs?

Fixed Mfg. Costs

Fixed Selling & Adm.

Variable Mfg. Costs

Variable Selling & Adm.

Accepted Answer

Variable costing includes only variable manufacturing costs as product costs. Fixed manufacturing costs, fixed selling & administrative expenses, and variable selling & administrative expenses are not considered product costs under this method.

Quiz 3: Predetermined Overhead Rates, Flexible Budgets, and Absorptionvariable Costing