Question 1

Net income under GAAP highlights differences between variable and fixed costs.

Accepted Answer

Net income under GAAP does not differentiate between variable and fixed costs. It simply calculates total revenue minus total expenses to determine the company's profitability.

Question 2

GAAP requires that absorption costing be used for the costing of inventory for external reporting purposes.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) requires that absorption costing be used for the costing of inventory for external reporting purposes. This means that all manufacturing costs, both fixed and variable, are included in the cost of each unit of inventory.

Question 3

Net income under variable costing is unaffected by changes in production levels.

Accepted Answer

True

Question 4

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

Accepted Answer

The answer of When units sold exceed units produced, income...

Question 5

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are assigned to inventory. Fixed manufacturing costs are expensed in the period they are incurred, not deferred to future periods through ending inventory.

Question 6

Net income under variable costing is closely tied to changes in sales levels.

Accepted Answer

This is because variable costing only includes variable costs (direct materials, direct labor, and variable overhead) in calculating net income, while fixed costs are expensed in the period when they are incurred. Therefore, as sales levels increase, variable costs also increase, and net income from variable costing will change accordingly.

Question 7

Full costing is equivalent to absorption costing.

Accepted Answer

Full costing is also known as absorption costing because it absorbs all the manufacturing costs, including direct materials, direct labor, and both variable and fixed overhead, into the cost of a product.

Question 8

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

Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of goods sold when units are sold, while under variable costing, fixed manufacturing costs are treated as a period expense and are not included in the cost of goods sold. Therefore, if units produced exceed units sold, more fixed manufacturing costs will be included in the cost of goods sold under absorption costing, resulting in higher income compared to variable costing.

Question 9

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Accepted Answer

Absorption costing includes fixed manufacturing overhead as a product cost, while variable costing treats fixed manufacturing overhead as a period cost.

Question 10

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Accepted Answer

This is because under absorption costing, fixed manufacturing costs are included in the cost of each unit produced. As a result, producing more units will spread these fixed costs over a larger number of units, reducing the cost per unit and increasing net income. This can lead to overproduction and an increase in inventory levels, which may not necessarily be desirable for the business.

Question 11

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Accepted Answer

Manufacturing cost per unit will be lower under variable costing than under absorption costing because variable costing only considers direct materials, direct labor, and variable manufacturing overhead as product costs, while absorption costing includes fixed manufacturing overhead as well.

Question 12

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Accepted Answer

This is true. While absorption costing is required for external reporting purposes (such as financial statements), a company may choose to use variable costing for internal reporting purposes (such as management reports or decision-making).

Question 13

In full or absorption costing, all manufacturing costs are charged to the product.

Accepted Answer

Full or absorption costing is a method of accounting where all manufacturing costs, such as direct materials, direct labor, and overhead costs, are allocated to the product being produced. Therefore, the statement is true.

Question 14

Fixed manufacturing overhead is a period cost under absorption costing.

Accepted Answer

Fixed manufacturing overhead is an example of a manufacturing cost and is treated as a product cost under absorption costing, not a period cost.

Question 15

Selling and administrative costs are period costs under both absorption and variable costing.

Accepted Answer

Selling and administrative costs are period costs that are expensed in the current period and are not included in the cost of goods sold. Therefore, they are treated as period costs under both absorption and variable costing.

Question 16

Companies that use just-in-time processing techniques will have significant differences between absorption and variable costing net income.

Accepted Answer

The answer of Companies that use just-in-time processing techniques will...

Question 17

A customer wants to purchase a large quantity of your product at a price below your normal selling price.Which of the following would be most helpful in assessing the offer?
A)Cost-volume-profit
B)Either variable or absorption costing
C)Absorption costing
D)Variable costing

Accepted Answer

The answer of A customer wants to purchase a large...

Question 18

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Accepted Answer

Variable costing is not used for external reporting under generally accepted accounting principles. Instead, absorption costing is typically used for external reporting. Variable costing is primarily used for internal management decision making.

Question 19

Fixed manufacturing costs are not charged to the product under variable costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are charged to the product, while fixed costs are treated as period expenses and are not included in the cost of goods sold.

Question 20

The use of absorption costing facilitates cost-volume-profit analysis.

Accepted Answer

Absorption costing allocates all manufacturing costs to products, making it difficult to directly analyze the impact of changes in production volume on costs and profitability, which is central to cost-volume-profit analysis. Variable costing is more suited for this purpose as it separates variable and fixed costs.

Quiz 8: Variable Costing: a Decision-Making Perspective