Deck 8: Alternative Inventory Costing Methods: a Decision-Making Perspective

Question 1

Use the following information for items
Obama Company sells its product for $25 per unit.During 2020, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
The per-unit manufacturing cost under variable costing is

A)$12.
B)$27.
C)$29.50.
D)$32.

Answer 1

A

Question 2

Use the following information for items
Obama Company sells its product for $25 per unit.During 2020, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
Cost of goods sold under absorption costing is

A)$180,000.
B)$405,000.
C)$442,500.
D)$540,000.

Answer 2

B

Question 3

Which of the following statements about absorption costing is true?

A)As manufacturing output increases, the per-unit manufacturing cost remains constant.
B)As manufacturing output increases, the per-unit manufacturing cost decreases.
C)As manufacturing output increases, the per-unit manufacturing cost increases.
D)As manufacturing output increases, the change in the per-unit manufacturing cost is negated by the change in the per-unit selling cost.

Answer 3

B

Question 4

Which of the following terms would be found on an income statement using variable costing but never not on an income statement prepared using absorption costing?

A)contribution margin
B)variable manufacturing overhead
C)fixed manufacturing overhead
D)gross profit

Question 5

Under variable costing

A)only direct variable manufacturing costs are inventoriable.
B)only direct fixed manufacturing costs are inventoriable.
C)all manufacturing costs are inventoriable.
D)no manufacturing costs are inventoriable.

Question 6

Which of the following terms would be found on an income statement using absorption costing but not on an income statement prepared using variable costing?

A)contribution margin
B)variable manufacturing overhead
C)fixed manufacturing overhead
D)gross profit

Question 7

Use the following information for items
Obama Company sells its product for $25 per unit.During 2020, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
Ending inventory under variable costing is

A)$60,000.
B)$240,000.
C)$360,000.
D)$410,000.

Question 8

When comparing absorption and variable costing which of the following is false?

A)The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.
B)Selling and administrative costs are period costs under both absorption and variable costing.
C)Companies that use just-in-time processing techniques will have significant differences between absorption and variable-costing net income.
D)Absorption costing will show a higher net income than variable costing whenever there are more units produced than sold.

Question 9

A customer wants to purchase a large quantity of your product at a price below your normal selling price.You have a labour-intensive production process.Which of the following would be most helpful in assessing the offer?

A)throughput costing
B)either variable or absorption costing
C)absorption costing
D)variable costing

Question 10

Under variable costing

A)only the quantity of products sold determines cost of goods sold.
B)only the quantity of products produced determines cost of goods sold.
C)both the quantity of products produced and sold determines cost of goods sold.
D)neither the quantity of products produced or sold determines cost of goods sold.

Question 11

Under absorption costing

A)selling and administration overhead costs are inventoried.
B)selling and administration overhead costs are expensed as incurred.
C)only variable selling and administration costs are expensed while fixed selling and administration costs are inventoried.
D)only fixed selling and administration costs are expensed while variable selling and administration costs are inventoried.

Question 12

When production is greater than sales

A)net income under absorption costing will be greater than or less than net income under variable costing depending on the selling and administration costs.
B)net income under absorption costing will be equal to net income under variable costing.
C)net income under absorption costing will be less than net income under variable costing.
D)net income under absorption costing will be greater than net income under variable costing.

Question 13

Under absorption costing

A)only the quantity of products sold determines cost of goods sold.
B)only the quantity of products produced determines cost of goods sold.
C)both the quantity of products produced and sold determines cost of goods sold.
D)neither the quantity of products produced or sold determines cost of goods sold.

Question 14

Which of the following statements if false?

A)In full or absorption costing, all manufacturing costs are charged to the product.
B)Fixed manufacturing costs are not charged to the product under variable costing.
C)Fixed manufacturing overhead is a period cost under absorption costing.
D)Full costing is equivalent to absorption costing.

Question 15

Use the following information for items
Obama Company sells its product for $25 per unit.During 2020, it produced 20,000 units and sold 15,000 units (there was no beginning inventory).Costs per unit are: direct materials $5, direct labour $4, and variable overhead $3.Fixed costs are: $300,000 manufacturing overhead, and $50,000 selling and administrative expenses.
The per-unit manufacturing cost under absorption costing is

A)$12.
B)$27.
C)$29.50.
D)$32.

Question 16

Under absorption costing

A)only direct variable manufacturing costs are inventoriable.
B)only direct fixed manufacturing costs are inventoriable.
C)all manufacturing costs are inventoriable.
D)no manufacturing costs are inventoriable.

Question 17

How are fixed manufacturing costs handled under variable costing?

A)They are subtracted from the variable cost of goods sold to determine the ending inventory value that will be recorded on the Balance Sheet.
B)They are not recorded, which is why variable costing is not used for external reporting.
C)They are recorded directly on the Balance Sheet.
D)They are treated as period costs.

Question 18

Which of the following statements about variable costing is true?

A)As manufacturing output increases, the per-unit manufacturing cost remains constant.
B)As manufacturing output increases, the per-unit manufacturing cost decreases.
C)As manufacturing output increases, the per-unit manufacturing cost increases.
D)As manufacturing output increases, the change in the per-unit manufacturing cost is negated by the change in the per-unit selling cost.

Question 19

Which of the following is false?

A)When units produced exceed units sold, income under absorption costing is higher than income under variable costing.
B)When units sold exceed units produced, income under absorption costing is higher than income under variable costing.
C)Net income under variable costing is closely tied to changes in sales levels.
D)When units produced equal units sold, income under absorption costing and variable costing will be the same.

Question 20

Under absorption costing, what amount of fixed overhead is deferred to a future period?

A)$70,000
B)$75,000
C)$225,000
D)$300,000

Question 21

Under absorption costing when production equals sales in a year,

A)inventory values and cost of goods sold are higher than under variable costing.
B)inventory values and cost of goods sold are lower than under variable costing.
C)inventory values and cost of goods sold are the same as under variable costing.
D)inventory values are higher and cost of goods sold is lower than under variable costing.

Question 22

When units sold exceeds units produced

A)net income under absorption costing is higher than net income under variable costing.
B)net income under absorption costing is lower than net income under variable costing.
C)net income under absorption costing equals net income under variable costing.
D)the relationship between net income under absorption costing and net income under variable costing cannot be predicted.

Question 23

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/18.Production was 20 units per year in 2018-2020.Sales were 20 units in 2018, 16 units in 2019, and 24 units in 2020.
Income under absorption costing for 2019 is

A)$ 8,000.
B)$14,000.
C)$16,000.
D)$22,000.

Question 24

When units produced exceeds units sold

A)net income under absorption costing is higher than net income under variable costing.
B)net income under absorption costing is lower than net income under variable costing.
C)net income under absorption costing equals net income under variable costing.
D)the relationship between net income under absorption costing and net income under variable costing cannot be predicted.

Question 25

The computation of absorption-costing gross profit always involves subtracting

A)all current-year fixed manufacturing overhead.
B)some, but not all, current-year fixed manufacturing overhead.
C)all fixed manufacturing overhead applied to units sold in the current year.
D)no fixed manufacturing overhead.

Question 26

When absorption costing is used

A)for external reporting, variable costing can still be used for internal reporting purposes.
B)management may be tempted to overproduce in a given period in order to decrease net income.
C)it facilitates cost-volume-profit analysis.
D)and production exceeds sales, absorption costing reports a lower net income than variable costing.

Question 27

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/18.Production was 20 units per year in 2018-2020.Sales were 20 units in 2018, 16 units in 2019, and 24 units in 2020.
Income under absorption costing for 2020 is

A)$33,000.
B)$39,000.
C)$41,000.
D)$47,000.

Question 28

Under absorption costing when inventory increases in a year,

A)there are more fixed costs charged to income.
B)there are less fixed costs charged to income.
C)fixed costs in inventory remain the same regardless of inventory changes.
D)fixed costs in inventory are reduced.

Question 29

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/18.Production was 20 units per year in 2018-2020.Sales were 20 units in 2018, 16 units in 2019, and 24 units in 2020.
Income under variable costing for 2019 is

A)$ 8,000.
B)$14,000.
C)$16,000.
D)$22,000.

Question 30

Management may be tempted to overproduce

A)when using variable costing, in order to increase net income.
B)when using variable costing, in order to decrease net income.
C)when using absorption costing, in order to increase net income.
D)when using absorption costing, in order to decrease net income.

Question 31

In income statements prepared under absorption costing and variable costing, where would you find the terms contribution margin and gross profit? $\quad$$\quad$$\quad$$\quad$$\begin{array}{llcc} \underline{ \text { Contribution margin } }&\quad\quad\quad\quad\quad \underline{ \text { Gross profit } }\\\end{array}$
a) $\begin{array}{llcc} \text {in absorption-costing income statement } & \text { in variable-costing income statement} \\\end{array}$
b) $\begin{array}{llcc} \text { in absorption-costing income statement } & \text { in both income statements} \\\end{array}$
c) $\begin{array}{llcc} \text { in variable-costing income statement } & \text { in absorption-costing income statement } \\\end{array}$
d) $\begin{array}{llcc} \text { in both income statements } & \quad\quad\quad\quad\quad\text { In variable-costing income statement} \\\end{array}$

Question 32

EKP's unit production cost under variable costing is $5, and $7 under absorption costing.Net income under variable costing was $10,000 and $12,000 under absorption costing last year.EKP sold 15,000 units.How many units did it produce?

A)16,000
B)14,000
C)17,000
D)13,000

Question 33

M&H's unit production cost under variable costing is $25, and $32 under absorption costing.Net income under variable costing was $250,000 and $187,000 under absorption costing last year.Production equalled 63,000 units.How many units did M&H sell?

A)72,000
B)54,000
C)70,000
D)56,000

Question 34

Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/18.Production was 20 units per year in 2018-2020.Sales were 20 units in 2018, 16 units in 2019, and 24 units in 2020.
Income under variable costing for 2020 is

A)$33,000.
B)$39,000.
C)$41,000.
D)$47,000.

Question 35

Absorption costing

A)is preferred to variable costing for external reporting purposes, but either method is acceptable.
B)normally results in higher net income than variable costing, and is therefore required for income tax purposes.
C)is not allowed for external reporting purposes.
D)is required under GAAP.

Question 36

Under absorption costing when production exceeds sales in a year,

A)inventory values and cost of goods sold are higher than under variable costing.
B)inventory values and cost of goods sold are lower than under variable costing.
C)inventory values are lower and cost of goods sold are higher than under variable costing.
D)inventory values are higher and cost of goods sold are lower than under variable costing.

Question 37

When production exceeds sales

A)ending inventory under variable costing will exceed ending inventory under absorption costing.
B)ending inventory under absorption costing will exceed ending inventory under variable costing.
C)ending inventory under absorption costing will be equal to ending inventory under variable costing.
D)ending inventory under absorption costing may either exceed, be equal to, or be less than ending inventory under variable costing.

Question 38

Under GAAP,

A)absorption costing is required to be used for the costing of inventory for external reporting purposes.
B)net income highlights differences between variable and fixed costs.
C)measured net income is often used externally to evaluate performance, justify cost increases, or evaluate new projects.
D)measured net income is often used internally to evaluate performance, justify cost increases or evaluate new projects.