Deck 7: Variable Costing: A Tool for Decision Making

Question 1

Under absorption costing, a company can wait to recognize fixed costs as expense simply by selling more than they produced that period.

Answer 1

False

Question 2

Under variable costing, a company expenses all fixed overhead costs in the same period that it incurs them.

Answer 2

True

Question 3

Variable costing is required by GAAP for publicly reported financial results.

Answer 3

False

Question 4

Under absorption costing, a company applies all overhead costs associated with manufacturing to the inventory produced in the period in which the costs are incurred.

Question 5

Under absorption costing, a change in the level of production will affect the amount of fixed costs reported on the income statement for the period.

Question 6

Under variable costing, a change in the level of production will affect the amount of fixed costs reported on the variable income statement for the period.

Question 7

Under variable costing, a change in the level of sales will affect the contribution margin reported on the variable income statement for the period.

Question 8

If production is greater than sales, Cost of Goods Sold will be higher under absorption costing than under variable costing.

Question 9

Variable net income differs from absorption net income because under absorption costing some fixed costs are retained in inventory rather than being expensed.

Question 10

The difference between variable net income and absorption net income may be computed by multiplying the change in inventory by the total overhead application rate.

Question 11

If inventory increases in the period, then variable net income will typically be higher than absorption net income.

Question 12

If sales exceed production, then previous period costs will be released to the income statement and will decrease the level of absorption net income relative to variable net income.

Question 13

One of the advantages of variable costing is that this costing method may be used for management decisions as well as external reporting.

Question 14

An advantage of variable costing is the ability to conduct break-even analysis using information from the financial statements.

Question 15

One of the disadvantages of variable costing is that it may lead management to underprice products, leading to loss of long-term profits.

Question 16

Under absorption costing, managers may have an incentive to manipulate earnings through production levels.

Question 17

Variable costing tends to make CVP analysis more difficult than absorption costing.

Question 18

Working capital tends to be lower under variable net income than under absorption net income.

Question 19

Under absorption costing, which of the following costs are applied to manufactured inventory?

A) All fixed costs
B) All variable costs
C) All period costs
D) All manufacturing costs
E) All administrative costs

Question 20

Which of the following costs would be applied to manufactured inventory under variable costing?

A) Salary of factory manager
B) Cost of raw materials
C) Rental payments on administrative offices
D) Rental payments on factory
E) Commissions to sales persons

Question 21

Absorption costing is required for reporting to which of the following groups?

A) The SEC
B) The IRS
C) Senior Management
D) A and B only
E) A, B, and C

Question 22

Which of the following is a drawback to absorption costing as opposed to variable costing?

A) Managers can manipulate earnings by simply producing more than is sold in a period
B) Management cannot accurately price products because non-manufacturing overhead is not applied to inventory
C) Fixed overhead is simply expensed as a period cost without being properly considered as a cost of inventory
D) Absorption costing is not allowed for GAAP purposes
E) There is no drawback: absorption costing is always preferable to variable costing

Question 23

Which of the following will not affect Net Income under variable costing?

A) Incurring additional fixed costs
B) A change in the fixed overhead application rate
C) Production levels not being the same as sales
D) A change in the price paid for direct materials
E) None of the above will affect Net Income

Question 24

Which of the following will not affect Net Income under absorption costing?

A) A change in the levels of inventory from the beginning to the end of the period
B) Production levels not being the same as Sales
C) A change in the fixed overhead application rate
D) An increase in the amount of fixed costs incurred by the company
E) All of the above will affect Net Income

Question 25

Under variable costing, contribution margin is equal to:

A) Sales - Variable Costs
B) Sales - Fixed Costs
C) Sales - Variable Costs - Fixed Costs
D) Contribution Margin - Fixed Costs
E) Variable costing does not calculate contribution margin

Question 26

The equation to find contribution margin under absorption costing is:

A) Sales - Variable Costs
B) Sales - Fixed Costs
C) Sales - Variable Costs - Fixed Costs
D) Gross Profit + Fixed Costs
E) Absorption costing does not calculate Contribution Margin

Question 27

Which of the following costs would be subtracted from Revenue to calculate Contribution Margin on a Variable Income Statement?

A) Direct Materials costs
B) Sales salaries
C) Fixed Manufacturing Overhead
D) All of the above

Question 28

Which of the following correctly represents how to calculate absorption net income assuming no change in the fixed overhead rate?

A) Variable net income - (Change in Inventory units x Fixed Overhead Rate)
B) Variable net income + (Change in Inventory units x Fixed Overhead Rate)
C) Variable net income - (Change in Inventory units x Variable Overhead Rate)
D) Variable net income + (Change in Inventory units x Variable Overhead Rate)
E) None of the above

Question 29

Which of the following costs would not be subtracted from Revenue to calculate Gross Profit on an Absorption Income Statement?

A) Direct Materials costs
B) Direct Labor Wages
C) Sales commissions
D) Variable Manufacturing Overhead
E) All of the above would be subtracted

Question 30

Which of the following is not a way to calculate Absorption Net Income?

A) Gross Profit - Non-Manufacturing Costs
B) Variable Net Income + (Change in Inventory units x Fixed Overhead Rate)
C) Contribution Margin - Selling and Administrative Expenses
D) All of the above equal Absorption Net Income
E) None of the above equal Absorption Net Income

Question 31

Which of the following is a disadvantage of using variable costing?

A) Two sets of accounting records must be maintained.
B) Inventory values tend to be overstated.
C) CVP relationships are more difficult to determine than under absorption costing.
D) Per-customer or per-product contribution margin is obscured.
E) All of the above

Question 32

Which of the following is not a disadvantage of using variable costing as opposed to absorption costing?

A) Variable accounting records do not conform to GAAP, so two sets of records must be maintained if the company is required to file their statements publicly.
B) Owners' Equity tends to be understated.
C) Accounting records are more costly to maintain.
D) Only variable costs are assigned to inventory, making poor management decisions (such as dropping a profitable product line) more likely to occur.
E) None of the above are disadvantages.

Question 33

CoolBreeze Manufacturing produces a single product, a tabletop fan. They reported the following information from their operations last period:
Under absorption costing what was the per-unit cost of the units produced?

A) $23.75
B) $11.25
C) $8.75
D) $12.50
E) None of the above

Question 34

Woodstuff Inc. produces hardwood flooring for homes and businesses. They reported the following financial information for the previous period:
What is the per-board-foot cost of inventory produced under variable costing? Round your answer to the nearest cent.

A) $3.26
B) $3.96
C) $6.74
D) $7.99
E) None of the above

Question 35

Wet Pets Inc. makes 100-gallon plexiglass aquariums. They reported the following financial information for last year:
Assume that the fixed costs were the same on a per-unit basis during the prior period.
What would Operating Income be under variable costing? (Round per-unit costs to the nearest cent.)

A) $188,340
B) $219,660
C) $190,000
D) $218,000
E) None of the above

Question 36

Aquatic Pets Inc. makes 100-gallon plexiglass aquariums. They reported the following financial information for last year:
Assume that the fixed costs were the same on a per-unit basis during the prior period.
What would Operating Income be under variable costing? (Round per-unit costs to the nearest cent.)

A) $180,510
B) $227,490
C) $183,000
D) $225,000
E) None of the above

Question 37

Patrick's Water Pets Inc. makes 100-gallon plexiglass aquariums. They reported the following financial information for last year:
Assume that the fixed costs were the same on a per-unit basis during the prior period.
What would Operating Income be under absorption costing? (Round per-unit costs to the nearest cent.)

A) $188,340
B) $219,660
C) $190,000
D) $218,000
E) None of the above

Question 38

Andy's Water Pets Inc. makes 100-gallon plexiglass aquariums. They reported the following financial information for last year:
Assume that the fixed costs were the same on a per-unit basis during the prior period.
What would Operating Income be under absorption costing? (Round per-unit costs to the nearest cent.)

A) $180,510
B) $227,490
C) $183,000
D) $225,000
E) None of the above

Question 39

H3 Co. is a farming corporation that grows and sells sugar beets. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes. The company reported the following financial information for the past month:
The company tracks harvested crops that have not yet been shipped out as "in-process." This inventory of sugar beets increased from the equivalent of 50 full truckloads at the beginning of the month to 70 full truckloads at the end of the month.
What was Absorption Net Income?

A) $1,988,000
B) $2,012,000
C) $1,990,000
D) $2,020,000
E) None of the above

Question 40

Beet Co. is a farming corporation that grows and sells sugar beets. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes. The company reported the following financial information for the past month:
The company tracks harvested crops that have not yet been shipped out as "in-process." This inventory of sugar beets decreased from 50 truckloads at the beginning of the month to 40 truckloads at the end of the month.
What was Variable Net Income?

A) $1,795,000
B) $2,205,000
C) $1,995,000
D) $2,005,000
E) None of the above

Question 41

Sunlight Manufacturing produces a single product, fluorescent lightbulbs. They reported the following information from their operations last period:
Under absorption costing, what was the per-unit cost of the units produced?

Question 42

Sunlight Manufacturing produces a single product, fluorescent lightbulbs. They reported the following information from their operations last period:
Under variable costing, what was the per-unit cost of the units produced?

Question 43

Smart Shades Inc. produces venetian blinds for homes and business. They reported the following financial information for the previous period:
What is the per-unit cost of inventory produced under absorption costing?

Question 44

Smart Shades Inc. produces venetian blinds for homes and business. They reported the following financial information for the previous period:
What is the per-unit cost of inventory produced under variable costing?

Question 45

FourSquare Mfg manufactures tables and chairs, which are sold in sets of 4 chairs to a table to businesses, schools, and public facilities. They reported the following financial information for last year:
What would Operating Income be under variable costing if there were no table and chair sets in beginning inventory? (Round per-unit costs to the nearest cent.)

Question 46

FourSquare Mfg manufactures tables and desks, which are sold in sets of 4 chairs to a table to businesses, schools, and public facilities. They reported the following financial information for last year:
What would Operating Income be under variable costing? (Round per-unit costs to the nearest cent.)

Question 47

LaSoho Inc. produces training videos for other companies. They hire actors, and record all films in rented facilities, which are rented on a temporary basis for each filming engagement. LaSoho reported the following financial information for last year:
What would Operating Income be under absorption costing? (round per-unit costs to the nearest cent)

Question 48

LaSoho Inc. produces training videos for other companies. They hire actors, and record all films in rented facilities, which are rented on a temporary basis for each filming engagement. LaSoho reported the following financial information for last year:
What would Operating Income be under absorption costing assuming no videos were in process at the beginning of the year? (round per-unit costs to the nearest cent)

Question 49

AgRanch Co. is a farming corporation that grows and sells crops in the Midwest. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes.
The company reported the following financial information for the past month:
The company tracks harvested crops that have not yet been shipped out as "in-process." This inventory of food increased from the equivalent of 50 full truckloads at the beginning of the month to 75 full truckloads at the end of the month.
What was Absorption Net Income?

Question 50

AgRanch Co. is a farming corporation that grows and sells crops in the Midwest. The company is publically traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes.
The company reported the following financial information for the past month:
The company tracks harvested crops that have not yet been shipped out as "in-process." This inventory of food decreased from 50 truckloads at the beginning of the month to 45 truckloads at the end of the month.
What was Variable Net Income?

Question 51

CookieClub Co. uses variable costing for managerial purposes and absorption costing for external reporting. These past two months, CCC has had an even number of sales at $100,000, at a price of $10/unit. However, in an effort to reduce the risk of stock-outs, management increased production from the regular 10,000 units to 12,500 units for last month only. CCC has fixed costs of $40,000 per month.
Assuming that sales continue to hold constant and production returns to normal levels, if absorption net income was $30,000 last month, what will it be this month? (Round per-unit costs to the nearest cent.)

Question 52

CookieClub Co. uses variable costing for managerial purposes and absorption costing for external reporting. These past two months, CCC has had an even number of sales at $100,000, at a price of $10 per unit. However, in an effort to reduce inventory levels, management decreased production from the regular 10,000 units to 7,500 units for last month only. CCC has fixed costs of $40,000 per month.
Assuming that sales continue to hold constant and production returns to normal levels, if absorption net income was $30,000 last month, what will it be this month? (Round per-unit costs to the nearest cent.)

Question 53

PackALot Manufacturing produces a single product, small metal containers. They reported the following information from their operations last period:
Under absorption costing what was the per-unit cost of the units produced?

Question 54

PackALot Manufacturing produces a single product, small metal containers. They reported the following information from their operations last period:
Under variable costing what was the per-unit cost of the units produced?

Question 55

Agrabah Inc. produces luxury carpets for homes and businesses. They reported the following financial information for the previous period:
What is the per-unit cost of inventory produced under absorption costing?

Question 56

Happy Meals Mfg. manufactures dining sets, which are sold in sets of 4 chairs to a table to furniture stores and businesses. They reported the following financial information for last year:
What would Operating Income be under variable costing? (Round per-unit costs to the nearest cent.)

Question 57

Dining Sets, Inc. manufactures dining sets, which are sold in sets of 4 chairs to a table to furniture stores and businesses. They reported the following financial information for last year:
What would Operating Income be under variable costing? (Round per-unit costs to the nearest cent.)

Question 58

TBody Inc. produces exercise workout videos for private distribution. They hire fitness professionals, and record all films in rented facilities, which are rented on a temporary basis for each filming engagement. TBody reported the following financial information for last period:
Assume that the fixed costs were the same on a per-unit basis during the prior period.
What would Operating Income be under absorption costing? (round per-unit costs to the nearest cent)

Question 59

Workout, Inc. produces exercise workout videos for private distribution. They hire fitness professionals, and record all films in rented facilities. Workout reported the following financial information for last year:
Assume that the fixed costs were the same on a per-unit basis during the prior period.
What would Operating Income be under absorption costing? (round per-unit costs to the nearest cent)

Question 60

Split Yellow Co. is a banana plantation that grows and sells bananas in Florida. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes. The company reported the following financial information for the past month:
The company tracks harvested bananas that have not yet been shipped out as "in-process." This inventory of food increased from the equivalent of 40 full truckloads at the beginning of the month to 70 full truckloads at the end of the month.
What was Absorption Net Income?

Question 61

Sunshine Yellow Co. is a banana plantation that grows and sells bananas in Florida. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes. The company reported the following financial information for the past month:
The company tracks harvested crops that have not yet been shipped out as "in-process." This inventory of food decreased from 40 truckloads at the beginning of the month to 33 truckloads at the end of the month.
What was Variable Net Income?

Question 62

Dumpling Makers Co., (DMC), uses variable costing for managerial purposes and absorption costing for external reporting. These past two months, DMC has had an even number of sales at $70,000, at a price of $35/unit. However, in an effort to reduce the risk of stock-outs, management increased production from the regular 2,000 units to 3,000 units for last month only. DMC has fixed costs of $15,000 per month.
If absorption net income was $25,000 last month, what will it be this month (assuming that sales continue to hold constant and production returns to normal levels)? (Round per-unit costs to the nearest cent.)

Question 63

Wonton Makers Co., (WMC), uses variable costing for managerial purposes and absorption costing for external reporting. These past two months, WMC has had an even number of sales at $70,000, at a price of $35/unit. However, in an effort to reduce inventory levels, management decreased production from the regular 2,000 units to 1,700 units for last month only. WMC has fixed costs of $15,000 per month.
If absorption net income was $25,000 last month, what will it be this month (assuming that sales continue to hold constant and production returns to normal levels)? (Round per-unit costs to the nearest cent.)

Question 64

How does absorption costing create the opportunity for "earnings management"?

Question 65

What costs are not assigned to products under variable costing?

Question 66

What are some of the drawbacks of absorption costing?

Question 67

Which costing type calculates Gross Profit?

Question 68

Which costing type calculates Contribution Margin?

Question 69

How does Net Income respond to changes in production (assuming a constant level of sales) under absorption costing?

Question 70

How does Net Income respond to changes in production (assuming a constant level of sales) under variable costing?

Question 71

When production is less than sales, is net income higher or lower under absorption costing than under variable costing? Why?

Question 72

When production is greater than sales, is net income higher or lower under variable costing than under absorption costing? Why?

Question 73

What is the shortcut to find the difference between absorption net income and variable net income?

Question 74

How are variable selling and administrative costs treated under variable costing?

Question 75

How can variable costing lead to underpricing of products?

Question 76

How can variable costing mitigate the pressure to manage earnings?

Question 77

How might working capital be understated under variable costing?

Question 78

Why does variable costing cause the cost of keeping accounting records to increase?

Question 79

Home Resorts, a residential pool installation company, is trying to prepare their financial statements for the year. The company uses variable costing to track all expenses, in an effort to maintain competitive prices. However, the bank requires Home Resorts to submit audited financial statements in accordance with GAAP in order to continue receiving funding.
Home Resorts has the following information regarding their work for the period:
Pools in Process at the beginning of the month: $84,000 (14 partially completed pools, with $40,000 of fixed overhead costs applied).
Pools in Process at the end of the month: $90,000 (15 partially completed pools, with $24,000 of fixed overhead costs applied)
Home Resorts prepared the following variable costing income statement for the month:
What is the amount of net operating income or loss that Home Resorts will have to report to the bank on their audited financial statements?

Question 80

Glitter Inc. is a fashion designer company that serves both individuals and companies (mostly in the entertainment industry). Glitter recorded the following information for last month's transactions:
Projects in Process at the beginning of the month: 20 projects, 15% complete, with $30,000 of fixed overhead costs allocated.
Projects in Process at the end of the month: 40 projects, 50% complete
All projects in process at the beginning of the month are considered completed by the end of the month, and costs are tracked for each project individually. This month, fixed overhead was allocated at a rate of $6,000/project (applied evenly over the production process).
Management is concerned about their costs, and wants to get a short-term bank loan-just enough to cover their variable operating loss from this past month while projects are completed. The bank requires Glitter to submit GAAP-compliant financial statements and will only grant a loan if they can show absorption operating income at least $15,000 greater than the loan requested.
Will Glitter be able to receive the loan needed?