Question 1

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

Accepted Answer

Absorption costing takes into account all costs, including fixed costs, which must be covered by sales in order for the company to make a profit. Therefore, it provides a more accurate picture of the total cost of production and helps in determining the appropriate selling price of products.

Question 2

When there are zero units in beginning Finished Goods Inventory and more units are produced than sold,the income will be lower under variable costing than under absorption costing.

Accepted Answer

Under variable costing, all variable costs are expensed in the period they are incurred, while fixed costs are treated as period expenses. Therefore, if there are zero units in beginning Finished Goods Inventory and more units are produced than sold, all fixed costs incurred during the production process will be expensed in the current period under absorption costing, leading to higher net income than under variable costing.

Question 3

Absorption costing is required under GAAP.

Accepted Answer

Absorption costing is a method of accounting that is required under GAAP (Generally Accepted Accounting Principles) for external financial reporting. It is used to allocate all production costs to the cost of goods sold, including both variable and fixed costs. This method requires the inclusion of fixed production overhead costs in the cost of each unit of product, rather than treating those costs as period expenses.

Question 4

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

Accepted Answer

Both absorption costing and variable costing provide information on the cost of producing a unit of product, which is essential in pricing decisions. Absorption costing considers all manufacturing costs, both fixed and variable, as part of the cost of a unit of product, while variable costing only considers variable manufacturing costs. By comparing the cost per unit of product under each method, managers can determine a reasonable selling price that covers all costs and generates a profit.

Question 5

When setting long-term sales prices for products,the sales price must cover all costs,including fixed costs.

Accepted Answer

When setting a long-term sales price, it is important to consider all costs, including both variable and fixed costs. This ensures that the price covers all expenses and allows for a profit to be made.

Question 6

Managers should accept special orders provided the special order price exceeds the product cost per unit under absorption costing.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to products, which can result in a higher product cost per unit. For special orders, it's more relevant to consider variable costs and contribution margin because fixed costs are typically unaffected by the order. The decision should be based on whether the special order price exceeds the variable costs per unit, not the absorption costing per unit.

Question 7

Under variable costing,product costs consist of direct labor,direct materials,and fixed overhead.

Accepted Answer

Under variable costing, product costs consist of only direct materials and direct labor, while fixed overhead is considered as a period cost and is expensed in the period incurred.

Question 8

Variable costing is required by Generally Accepted Accounting Principles (GAAP)for financial statement purposes.

Accepted Answer

Variable costing is not required by GAAP for financial statement purposes. Instead, GAAP requires absorption costing or full costing. However, some companies may choose to use variable costing for internal management purposes.

Question 9

Since fixed costs remain constant in the short run,special orders should be accepted as long as the order price is greater than the variable costs.

Accepted Answer

Since fixed costs remain the same in the short run, accepting special orders that cover variable costs is beneficial for generating additional revenue and covering those costs. As long as the order price is greater than the variable costs, it will contribute to the overall profit for the company.

Question 10

Variable costing treats fixed overhead cost as a period cost.

Accepted Answer

Variable costing only includes variable manufacturing costs in product costs and treats fixed overhead costs as a period cost to be expensed in the period incurred. This is in contrast to absorption costing, which includes both variable and fixed manufacturing costs in product costs.

Question 11

The absorption costing approach assigns all manufacturing costs to products.

Accepted Answer

Absorption costing includes direct materials, direct labor, and both fixed and variable manufacturing overhead costs in the product's cost. These costs are then absorbed into the units and included in inventory until the unit is sold.

Question 12

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

Accepted Answer

Absorption costing includes all manufacturing costs, whether they are variable or fixed, in the cost of the product. This can lead to overvaluing inventory and underestimating the cost of goods sold, resulting in misleading product cost information. Additionally, absorption costing does not account for the differences in production volumes or activity levels, which can also distort product cost information.

Question 13

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 14

Evaluating and rewarding managers based on absorption costing income can lead to overproduction.

Accepted Answer

Absorption costing includes fixed overhead costs in the cost of production, which means that producing more units will increase the reported income. This can incentivize managers to produce more than necessary in order to increase their reported income and potentially earn higher rewards or bonuses.

Question 15

Under absorption costing,a company had the following unit costs when 10,000 units were produced:
  The total product cost per unit under absorption costing if 25,000 units had been produced would be $11.

Accepted Answer

Absorption costing includes all manufacturing costs, including fixed overhead, in the unit cost calculation. Therefore, as production volume increases, the fixed overhead cost per unit decreases, resulting in a lower total product cost per unit. If the unit cost was $13 when 10,000 units were produced, it is likely that the unit cost would decrease to $11 or lower if 25,000 units were produced.

Question 16

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 manufacturing costs, including fixed manufacturing overhead, and allocates them to the products. This can result in a higher reported income compared to variable costing, which only includes variable manufacturing costs in product costs. As shareholders typically evaluate a company's performance based on its reported income, management may choose to use absorption costing for bonus calculations to align their interests with shareholder interests.

Question 17

When the number of units produced is equal to the number of units sold,net income reported under variable costing is identical to net income reported under absorption costing.

Accepted Answer

This statement is true. When production equals sales, all variable costs and fixed manufacturing overhead costs are expensed in the period in which they are incurred under both variable and absorption costing. Therefore, net income reported under both methods will be identical.

Question 18

Under variable costing,product costs consist of direct labor,direct materials,and variable overhead.

Accepted Answer

Variable costing only considers direct costs, which include direct labor, direct materials, and variable overhead. Fixed overhead costs are expensed as period costs.

Question 19

Assume a company had the following production costs:
  Under absorption costing,the total product cost per unit when 4,000 units are produced would be $22.50.

Accepted Answer

The answer of Assume a company had the following production...

Question 20

For short-term pricing decisions,absorption costing is an appropriate costing method to use.

Accepted Answer

Absorption costing includes fixed overhead costs in the calculation of product costs which can lead to incorrect pricing decisions in the short-term. For short-term pricing decisions, variable costing or marginal costing should be used.

Quiz 19: Variable Costing and Analysis