Deck 6: Variable Costing and Analysis

Question 1

The absorption costing approach assigns all manufacturing costs to products.

Answer 1

True

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Many companies link manager bonuses to income computed under absorption costing because this is how income is reported to shareholders.

Question 6

Variable costing treats fixed overhead cost as a period cost.

Question 7

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

Question 8

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.

Question 9

Absorption costing is required under GAAP.

Question 10

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

Question 11

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

Question 12

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.

Question 13

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

Question 14

The biggest problems with producing too much are lost sales and customer dissatisfaction.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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.

Question 20

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.

Question 21

The data needed for cost-volume-profit analysis is readily available if the income statement is prepared under absorption costing.

Question 22

Given the following data, total product cost per unit under absorption costing is $11.40.

Question 23

The data needed for cost-volume-profit analysis is readily available if the income statement is prepared using a contribution format.

Question 24

A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.

Question 25

Assuming fixed costs remain constant, and a company produces more units than it sells, then income under absorption costing is less than income under variable costing.

Question 26

Fixed costs change in the short run depending upon management's decision to accept or reject special orders.

Question 27

Assuming fixed costs remain constant, and a company produces and sells the same number of units, then income under absorption costing is less than income under variable costing.

Question 28

Given the following data, total product cost per unit under absorption costing is $9.14.

Question 29

Absorption costing is usually used for internal management purposes, and variable costing is usually used for external reporting purposes.

Question 30

Given the following data, total product cost per unit under variable costing is $7.09.

Question 31

Given the following data, total product cost per unit under absorption costing will be $400 greater than total product cost per unit under variable costing.

Question 32

If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.

Question 33

Variable costing separates variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.

Question 34

Given the following data, total product cost per unit under variable costing is $10.75.

Question 35

A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

Question 36

The traditional income statement format used for financial reporting is called the contribution margin format.

Question 37

Given the following data, total product cost per unit under variable costing will be greater than total product cost under absorption costing.

Question 38

Assuming fixed costs remain constant, and a company sells more units than it produces, then income under absorption costing is less than income under variable costing.

Question 39

The variable costing income statement classifies costs based on cost behavior rather than function.

Question 40

Given the following data, total product cost per unit under absorption costing will be greater than total product cost per unit under variable costing.

Question 41

Which of the following costing methods charges all manufacturing costs to its products?

A) Direct costing
B) ABC costing
C) Variable costing
D) Absorption costing
E) Period costing

Question 42

The bottom line of a contribution margin report is net income.

Question 43

Information presented in a variable costing format can assist management when making short-term pricing decisions.

Question 44

Reporting contribution margin by market segment is useful in assessing the profitability of each segment.

Question 45

Under absorption costing, fixed manufacturing overhead is expensed at the time the units are produced. Under variable costing, fixed manufacturing overhead is expensed at the time the units are sold.

Question 46

Contribution margin is the excess of sales over total variable costs.

Question 47

Contribution margin is also known as gross margin.

Question 48

Under an income statement prepared using absorption costing, expenses are grouped according to cost behavior.

Question 49

When units produced equal units sold, reported income is identical under absorption costing and variable costing.

Question 50

Under variable costing, fixed manufacturing overhead is expensed at the time the units are produced. Under absorption costing, fixed manufacturing overhead is expensed at the time the units are sold.

Question 51

When units produced are less than units sold, income under absorption costing is higher than income under variable costing.

Question 52

Sales less total variable costs equals manufacturing margin.

Question 53

Variable costing is the only acceptable basis for both external reporting and tax reporting.

Question 54

When the number of units produced exceeds the number of units sold, absorption costing defers some of the fixed costs incurred.

Question 55

Which of the following is not a product cost under variable costing?

A) Direct materials.
B) Fixed manufacturing overhead.
C) Direct labor.
D) Variable manufacturing overhead.
E) All variable manufacturing costs.

Question 56

Income under absorption costing will always be different than income under variable costing.

Question 57

It is not possible to convert reports prepared using variable costing to absorption costing reports.

Question 58

A variable costing income statement focuses attention on the relationship between costs and sales that is not evident from the absorption costing format.

Question 59

To convert variable costing income to absorption costing income, management will need to add fixed overhead cost deferred in ending inventory and subtract fixed overhead cost recognized from beginning inventory.

Question 60

When units produced exceed the units sold, income under absorption costing is higher than income under variable costing.

Question 61

A company is currently operating at 75% capacity and producing 3,000 units. Current cost information relating to this production is shown in the table below: The company has been approached by a customer with a request for a 200-unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

A) Any amount over $43 per unit.
B) Any amount over $17 per unit.
C) Any amount over $21 per unit.
D) Any amount over $13 per unit.
E) Any amount over $22 per unit.

Question 62

Under absorption costing, a company had the following unit costs when 9,000 units were produced. Compute the total product cost per unit under variable costing if 30,000 units had been produced.

A) $31.75
B) $28.25
C) $23.45
D) $15.25
E) $20.75

Question 63

Which of the following best describes costs assigned to the product under the absorption costing method? Direct labor (DL)
Direct materials (DM)
Variable selling and administrative (VSA)
Variable manufacturing overhead (VOH)
Fixed selling and administrative (FSA)
Fixed manufacturing overhead (FOH)

A) DL, DM, VSA, and VOH.
B) DL, DM, and VOH.
C) DL, DM, VOH, and FOH.
D) DL and DM.
E) DL, DM, FSA, and FOH.

Question 64

Which of the following would be reported on a variable costing income statement?

A) Gross margin
B) Cost of goods available for sale
C) Total cost of goods sold
D) Contribution margin
E) Work-in-process inventory

Question 65

Mentor Corp. has provided the following information for the current year: Calculate the unit product cost using variable costing.

A) $245
B) $275
C) $55
D) $145
E) $125

Question 66

Mentor Corp. has provided the following information for the current year: Calculate the unit product cost using absorption costing.

A) $245
B) $275
C) $55
D) $145
E) $125

Question 67

Under absorption costing, which of the following statements is not true?

A) Over production and inventory buildup can occur because of how managers are evaluated and rewarded.
B) The fixed costs per unit decline as more units are produced.
C) Variable inventory costs are treated in the same manner as they are under variable costing.
D) Fixed inventory costs are treated in the same manner as they are under variable costing.
E) All manufacturing costs are assigned to products.

Question 68

Under absorption costing, a company had the following unit costs when 9,000 units were produced. Compute the total product cost per unit under absorption costing if 25,000 units had been produced.

A) $28.25
B) $23.45
C) $26.25
D) $20.75
E) $15.25

Question 69

Using absorption costing, which of the following manufacturing costs are assigned to products?

A) Direct materials and direct labor.
B) Direct labor and variable manufacturing overhead.
C) Fixed manufacturing overhead, direct materials, and direct labor.
D) Variable manufacturing overhead, direct materials, and direct labor.
E) Variable manufacturing overhead, direct materials, direct labor, and fixed manufacturing overhead.

Question 70

Geneva Company manufactures dolls that are sold to various customers. The company works at full capacity for half the year to meet peak demand, and operates at 80% capacity for the other half of the year. The following information is provided: Geneva receives a purchase order to make 5,000 dolls as a one-time event. The good news is that this order is during a period when Geneva does have sufficient excess capacity. What is the lowest selling price Geneva should accept for this purchase order?

A) $35.00
B) $26.00
C) $29.50
D) $23.50
E) $25.00

Question 71

Which of the following best describes costs assigned to the product under the variable costing method? Direct labor (DL)
Direct materials (DM)
Variable selling and administrative (VSA)
Variable manufacturing overhead (VOH)
Fixed selling and administrative (FSA)
Fixed manufacturing overhead (FOH)

A) DL, DM, VSA, and VOH.
B) DL, DM, and VOH.
C) DL, DM, VOH, and FOH.
D) DL and DM.
E) DL, DM, FSA, and FOH.

Question 72

Which of the following statements is true?

A) Variable costing treats fixed overhead as a period cost.
B) Absorption costing treats fixed overhead as a period cost.
C) Absorption costing treats fixed overhead as an expense in the period it is incurred.
D) Variable costing excludes all overhead from product costs.
E) Managers can manipulate earnings more easily under variable costing by varying the production level.

Question 73

Which of the following statements is true regarding variable costing?

A) It is a traditional costing approach.
B) Only manufacturing costs that change in total with changes in production level are included in product costs.
C) It is not permitted to be used for managerial reporting.
D) It treats overhead in the same manner as absorption costing.
E) It makes it easier to manipulate earnings with changes in production levels.

Question 74

Which of the following statements is true?

A) Under variable costing, direct materials and direct labor are expensed as period expenses.
B) Under variable costing, fixed manufacturing overhead is expensed as period expenses.
C) Fixed manufacturing overhead costs are treated the same under both absorption costing and variable costing.
D) Reported income under absorption costing is not affected by production level changes.
E) Under absorption costing, fixed manufacturing overhead is expensed as period expenses.

Question 75

Which of the following statements is true regarding absorption costing?

A) It is not the traditional costing approach.
B) It is not permitted to be used for financial reporting.
C) It is not permitted to be used for tax reporting.
D) It assigns all manufacturing costs to products.
E) It requires only variable costs to be treated as product costs.

Question 76

A company is currently operating at 80% capacity producing 5,000 units. Current cost information relating to this production is shown in the table below: The company has been approached by a customer with a request for a 100-unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

A) Any amount over $34 per unit.
B) Any amount over $20 per unit.
C) Any amount over $14 per unit.
D) Any amount over $9 per unit.
E) Any amount over $5 per unit.

Question 77

Income ________ when there is zero beginning inventory and all inventory units produced are sold.

A) Will be lower under variable costing than absorption costing
B) Will be the same under both variable and absorption costing
C) Will be higher under variable costing than absorption costing
D) Will be higher than gross margin under variable costing
E) Will be lower than administrative costs under absorption costing

Question 78

When evaluating a special order, management should:

A) Only accept the order if the incremental revenue exceeds all product costs.
B) Only accept the order if the incremental revenue exceeds fixed product costs.
C) Only accept the order if the incremental revenue exceeds total variable product costs.
D) Only accept the order if the incremental revenue exceeds full absorption product costs.
E) Only accept the order if the incremental revenue exceeds regular sales revenue.

Question 79

When the number of units sold exceed the number of units produced, income reported under absorption costing will be lower than variable costing. Which of the following gives the best justification of the above statement?

A) Income under absorption costing is always less than income reported using variable costing, regardless of the number of units produced.
B) Income under absorption costing is always more than income reported using variable costing, regardless of the number of units produced.
C) The fixed overhead cost deferred in ending inventory is greater than the fixed overhead cost recognized from beginning inventory.
D) The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.
E) Fixed overhead is treated as a period cost under absorption costing.

Question 80

Under absorption costing, a company had the following unit costs when 8,000 units were produced. Compute the total production cost per unit under variable costing if 25,000 units had been produced.

A) $31.75
B) $27.25
C) $26.25
D) $24.25
E) $17.50