Question 1

Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and the company sells approximately 500,000 gears each year. Unit cost data for the year follows:  The unit cost of gears for variable costing inventory purposes is:
A)$14.
B)$17.
C)$20.
D)$24.

Accepted Answer

Under variable costing, only variable manufacturing costs are assigned to the product. These costs include:
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Question 2

Which of the following does not appear on an income statement prepared using variable costing?
A)Gross margin/profit.
B)Manufacturing margin
C)Fixed production costs.
D)Variable production costs.

Accepted Answer

The term commonly used in variable costing to designate the difference between sales and variable cost of goods sold is manufacturing margin. It is a absorption costing statement that would be expected to show gross margin/profit.

Question 3

The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs are:
A)Sunk costs.
B)Product costs.
C)Fixed as to the total cost.
D)Period costs.

Accepted Answer

The variable costing method assigns all fixed costs to the period in which they originated; therefore, they are all classified as period costs.

Question 4

Which of the following is true about absorption costing?
A)No fixed factory overhead is charged to production.
B)It is also known as direct costing.
C)The term used to designate the difference between sales and cost of goods sold is the "manufacturing margin."
D)Over-applied factory overhead is reflected in the income statement as a reduction cost of goods sold.

Accepted Answer

Overapplied factory overhead occurs only with absorption costing. Choices a, b and c are characteristics of variable costing.

Question 5

A basic tenet of variable costing is that fixed overhead costs should be currently expensed. What is the basic rationale behind this procedure?
A)Fixed overhead costs will occur whether or not production occurs and so it presents a clearer picture of how changes in production volume affect costs and income.
B)Fixed overhead costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits.
C)Allocation of fixed overhead costs is arbitrary at best and could lead to erroneous decisions by management.
D)Fixed overhead costs are uncontrollable and should not be charged to a specific product.

Accepted Answer

Variable costing assumes that the category of costs defined as fixed costs will occur with or without production and should be charged as expenses in the period in which they are incurred as a current cost. It highlights the relationship between sales and variable production costs thus providing a clearer picture of how changes in production volume affect costs and income.

Question 6

When evaluating profitability of a segment, costs that would disappear if the company eliminated the segment are called:
A)Direct costs.
B)Common costs.
C)Indirect costs.
D)Fixed costs.

Accepted Answer

Direct costs are costs, variable or fixed, that are directly identifiable with a specific segment, so they would disappear if that segment was eliminated.

Question 7

Absorption cost is required for:
A)income tax purposes.
B)external financial reporting but not income tax purposes.
C)both external financial reporting and income tax purposes.
D)neither external financial reporting nor income tax purposes.

Accepted Answer

Although variable costing may provide useful information for internal decision making, it is not a generally accepted accounting method of reporting inventory for external financial statements nor is it permitted by the Internal Revenue Service to compute taxable income.

Question 8

The excess of revenue over variable costs, including manufacturing, selling and administrative, is called:
A)Gross margin.
B)Manufacturing margin.
C)Contribution margin.
D)Segment margin.

Accepted Answer

Contribution margin is defined as sales less variable costs.

Question 9

What costs are treated as product costs under direct costing?
A)Only direct costs
B)Only variable manufacturing costs
C)All variable costs
D)All variable and fixed manufacturing costs

Accepted Answer

Only variable production costs are treated as product costs in direct or variable costing. Although all variable costs are subtracted from sales in order to determine the contribution margin, only those variable costs related to the manufacturing process are allocated to the products.

Question 10

What factor related to manufacturing costs causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing?
A)Absorption costing considers all costs in the determination of net earnings, whereas variable costing considers only direct costs.
B)Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period costs.
C)Absorption costing "inventories" all fixed manufacturing costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs.
D)Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed costs to be period costs.

Accepted Answer

Absorption costing considers fixed manufacturing costs to be an essential element of cost in producing a product; therefore, fixed manufacturing costs are allocated to the inventories and cost of goods sold. However, when variable costing is used, all fixed costs for a given period are charged only to that period.

Question 11

The use of either absorption or variable costing will make little difference in companies
A)with large inventories.
B)using JIT.
C)with high fixed costs.
D)with high variable costs.

Accepted Answer

If JIT or just-in-time is used then inventories levels are minimized. Absorption and variable cost would have nearly identical results as no costs are deferred in inventories.

Question 12

Johns Company operates in three different industries each of which is appropriately regarded as a reportable segment. Segment No. 1 contributed 60 percent of Johns Company's total sales. Sales for Segment No. 1 were $600,000 and total variable costs were $400,000. Total common costs for all segments were $320,000. Johns allocates common costs based on the ratio of each segment's sales to the total sales. What should be the contribution margin presented for Segment No. 1?
A)$(100,000)
B)$8,000
C)$20,000
D)$200,000

Accepted Answer

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Question 13

Segment profitability analysis may be used to evaluate the profitability of:
A)Divisions.
B)Sales territories.
C)Product lines.
D)All of these are correct.

Accepted Answer

Segment profitability analysis may be used to evaluate the profitability of divisions, sales territories, product lines, or other identifiable organizational unit.

Question 14

Mobile, Inc., manufactured 700 units of Product A, a new product, during the year. Product A's variable and fixed manufacturing costs per unit were $5.00 and $2.00, respectively. The inventory of Product A on December 31 of the year consisted of 100 units. There was no inventory of Product A on January 1 of the year. What would be the change in the dollar amount of inventory on December 31 if the variable costing method was used instead of the absorption costing method?
A)$800 decrease
B)$200 decrease
C)$500 decrease
D)$200 increase

Accepted Answer

Ending inventory under absorption costing (100 units x $7) $700
Ending inventory under variable costing (100 units x $5) 500
$200

Question 15

A manager can increase income under absorption costing by
A)increasing variable costs.
B)increasing production.
C)increasing fixed costs.
D)increasing leased assets.

Accepted Answer

By increasing production, the fixed costs are absorbed by more units. This lowers the cost per unit and thus increasing income.

Question 16

Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and variable costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were 60% of sales. Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000, respectively. Common fixed costs of $200,000 were arbitrarily allocated equally to each segment. What was the contribution margin of the Audio Segment.
A)$50,000
B)$300,000
C)$200,000
D)$150,000

Accepted Answer

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Question 17

When evaluating profitability of a segment, costs that are directly identifiable with a specific segment are called:
A)Direct costs.
B)Common costs.
C)Indirect costs.
D)Fixed costs.

Accepted Answer

Direct costs are costs, variable or fixed, that are directly identifiable with a specific segment, so they would disappear if that segment was eliminated.

Question 18

Net income reported under absorption costing will exceed net income reported under variable costing for a given period if:
A)Production equals sales for that period.
B)Production exceeds sales for that period.
C)Sales exceed production for that period.
D)The variable overhead exceeds the fixed overhead.

Accepted Answer

When production exceeds sales under the absorption cost method, the unsold (ending) inventory contains part of the fixed cost of the period which, along with other inventory costs, are deferred to the next period. Under the variable costing method, all fixed costs are charged to the current period. Therefore, when production exceeds sales and results in unsold inventory, net income reported under absorption costing will exceed the net income reported under variable costing for the period.

Question 19

Which of the following is a more descriptive term of the type of cost accounting often called "direct costing"?
A)Prime costing
B)Out-of-pocket costing
C)Variable costing
D)Relevant costing

Accepted Answer

Variable costing may be considered a more descriptive term than direct costing because only the variable costs are used to determine a product's cost.

Question 20

Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and variable costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were 60% of sales. Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000, respectively. Common fixed costs of $200,000 were arbitrarily allocated equally to each segment. What was the segment margin of the Video Segment.
A)$200,000
B)$80,000
C)$(20,000)
D)$150,000

Accepted Answer

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Quiz 10: Cost Analysis for Management Decision Making

Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and the company sells approximately 500,000 gears each year. Unit cost data for the year follows: The unit cost of gears for variable costing inventory purposes is:

Which of the following does not appear on an income statement prepared using variable costing?

The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs are:

Which of the following is true about absorption costing?

A basic tenet of variable costing is that fixed overhead costs should be currently expensed. What is the basic rationale behind this procedure?

When evaluating profitability of a segment, costs that would disappear if the company eliminated the segment are called:

Absorption cost is required for:

The excess of revenue over variable costs, including manufacturing, selling and administrative, is called:

What costs are treated as product costs under direct costing?

What factor related to manufacturing costs causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing?

The use of either absorption or variable costing will make little difference in companies

Segment profitability analysis may be used to evaluate the profitability of:

A manager can increase income under absorption costing by

When evaluating profitability of a segment, costs that are directly identifiable with a specific segment are called:

Net income reported under absorption costing will exceed net income reported under variable costing for a given period if:

Which of the following is a more descriptive term of the type of cost accounting often called "direct costing"?