Question 1

A major advantage to the JIT inventory approach is that it decreases carrying costs.

Accepted Answer

JIT (Just-In-Time) inventory approach aims to minimize inventory carrying costs by having materials and products delivered exactly when needed in the production process, thereby reducing the need for large inventory holding.

Question 2

Inventory using the absorption costing method includes direct materials, direct labour, variable manufacturing overhead, and fixed manufacturing overhead.

Accepted Answer

Absorption costing requires all production costs to be assigned to units of output, including direct materials, direct labour, variable manufacturing overhead, and fixed manufacturing overhead.

Question 3

Absorption costing income statements and variable costing income statements may differ because of their treatment of fixed manufacturing overhead costs.

Accepted Answer

Absorption costing includes fixed manufacturing overhead costs as part of the cost of goods sold, while variable costing treats fixed manufacturing overhead costs as a period expense and does not include them in the cost of goods sold. This can result in different reported net income numbers between the two methods.

Question 4

Which of the following best defines variable costing?
A) a useful tool for external reporting purposes
B) a useful tool for management decision making
C) a good way to value inventories for the balance sheet
D) not a useful tool for companies with multiple segments

Accepted Answer

Variable costing is a method of cost accounting that only includes variable manufacturing costs (direct materials, direct labor, and variable overhead) in the cost of a product. It is primarily used for management decision making as it provides insight into how changes in production levels, selling prices, and variable costs affect profitability. It is not a preferred method for external reporting purposes or valuing inventories for the balance sheet, as it does not include all costs associated with producing a product. It can be used by companies with multiple segments but requires separate calculations for each segment.

Question 5

All other things being equal, if the number of units produced in a period is larger than the number of units sold in a period, absorption costing income will be higher than variable costing income.

Accepted Answer

In absorption costing, fixed manufacturing costs are included in the cost of each unit produced and are expensed only when the unit is sold. Therefore, if the number of units produced is larger than the number of units sold, more fixed manufacturing costs will be deferred to future periods, leading to a higher absorption costing income compared to variable costing which only includes variable manufacturing costs in the cost of each unit.

Question 6

Which cost is NOT included in inventory using the absorption costing method?
A) direct labour
B) direct materials
C) fixed selling expenses
D) fixed manufacturing overhead

Accepted Answer

Fixed selling expenses are not included in inventory using the absorption costing method. Only direct materials, direct labor, and fixed manufacturing overhead costs are included in inventory using this method.

Question 7

JIT relies on a push system to control Finished Goods Inventory.

Accepted Answer

JIT relies on a pull system, not a push system, to control Finished Goods Inventory. This means that production is initiated based on customer demand rather than pushing products into inventory without a known demand.

Question 8

Which type of cost does NOT appear on a variable costing income statement?
A) direct labour
B) direct materials
C) opportunity cost
D) variable selling expense

Accepted Answer

Opportunity cost is not a cost that would appear on a variable costing income statement, as it is not an actual expense incurred in the production of goods or services. Variable selling expenses, direct labor and direct materials are all costs that would be included in a variable costing income statement.

Question 9

Which type of cost is NOT included in product cost?
A) direct materials
B) variable selling expense
C) manufacturing overhead
D) fixed manufacturing overhead

Accepted Answer

Variable selling expenses are not included in product cost as they are incurred after the product is manufactured and relate to the selling and distribution of the product. Product cost includes direct materials, manufacturing overhead, and fixed manufacturing overhead.

Question 10

On a segmented income statement, fixed costs are broken down into direct fixed costs and overall fixed costs.

Accepted Answer

The answer of On a segmented income statement, fixed costs...

Question 11

If the demand for a product is known, total inventory-related costs consist of ordering costs and carrying costs.

Accepted Answer

Total inventory-related costs are typically comprised of two main components: ordering costs and carrying costs. Ordering costs include expenses related to the ordering process, such as the cost of placing an order, processing an order, and receiving goods. Carrying costs, on the other hand, include expenses related to holding inventory, such as storage fees, insurance, and obsolescence costs. Knowing the demand for a product can help a company optimize its inventory levels and reduce overall inventory-related costs.

Question 12

Which of the following reflects the primary difference between variable and absorption costing?
A) inclusion of fixed selling expenses in period costs
B) inclusion of fixed selling expenses in product costs
C) inclusion of fixed manufacturing overhead in product costs
D) inclusion of variable manufacturing overhead in period costs

Accepted Answer

The primary difference between variable and absorption costing is the treatment of fixed manufacturing overhead costs. Under variable costing, fixed manufacturing overhead costs are treated as period costs and expensed in the period in which they are incurred. In contrast, under absorption costing, fixed manufacturing overhead costs are included in the product costs and remain in the inventory until the products are sold. Choices A, B, and D are not correct as they do not reflect the primary difference between variable and absorption costing.

Question 13

All other things being equal, if the number of units produced in a period is smaller than the number of units sold in period, absorption costing income will be higher than variable costing income.

Accepted Answer

When units sold exceed units produced, inventory decreases, releasing fixed costs deferred in inventory under absorption costing, leading to lower income compared to variable costing.

Question 14

Which accounting method is used for external reporting?
A) variable costing
B) absorption costing
C) transfer price costing
D) responsibility costing

Accepted Answer

Absorption costing is the accounting method used for external reporting as it complies with Generally Accepted Accounting Principles (GAAP) and provides a more accurate representation of the cost of goods sold and the net income. Variable costing is not accepted for external reporting as it fails to include fixed manufacturing costs in the cost of goods sold calculation. Transfer price costing and responsibility costing are not accounting methods used for external reporting, but rather for internal management purposes.

Question 15

Direct fixed expenses are fixed expenses that are directly traceable to a segment.

Accepted Answer

Direct fixed expenses are those that can be easily traced to a specific segment or product line. These expenses are fixed, meaning they do not vary with changes in production or sales volume, but can be allocated to a specific segment based on usage or need. Examples of direct fixed expenses include rent for a retail store or the salary of a manager solely responsible for a particular segment.

Question 16

Inventory costs using the variable costing method include only direct materials, direct labour, and fixed manufacturing overhead.

Accepted Answer

Inventory costs using the variable costing method include direct materials, direct labour, and variable manufacturing overhead. Fixed manufacturing overhead is treated as a period cost and is expensed in the period incurred rather than included in inventory costs.

Question 17

Direct fixed expenses are avoidable if a segment is eliminated.

Accepted Answer

Direct fixed expenses are expenses that are directly tied to a specific segment or product line, and can be avoided if that segment or product line is eliminated. Therefore, the statement is true.

Question 18

Common fixed expenses are avoidable if a segment is eliminated.

Accepted Answer

Common fixed expenses cannot be avoided or eliminated by simply eliminating a segment. Common fixed expenses are expenses that are incurred regardless of the presence or absence of a particular segment or product line. They are fixed costs that are allocated across all segments or products based on some predetermined allocation method.

Question 19

Product cost includes all costs of the company.

Accepted Answer

Product cost only includes costs directly related to the production of the product, such as materials and labor. Other company costs such as rent, salaries of management, and marketing expenses are not included in product cost.

Question 20

The costs of NOT having a product available when demanded by a customer are called setup costs.

Accepted Answer

The costs of NOT having a product available when demanded by a customer are called stockout costs, not setup costs. Setup costs refer to the expenses incurred in preparing a machine or system for a particular production run or process.

Quiz 8: Absorption and Variable Costing, and Inventory Management