Question 1

Management may use both absorption and variable costing methods for analyzing a particular product.

Accepted Answer

Management can use both absorption costing (which includes all manufacturing costs in product cost) and variable costing (which includes only variable manufacturing costs in product cost) for internal analysis, decision-making, and performance evaluation of a product.

Question 2

For a period during which the quantity of product manufactured is less than the quantity sold, operating income reported under absorption costing will be smaller than operating income reported under variable costing.

Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of goods sold, regardless of whether the goods are sold or not. Under variable costing, fixed manufacturing costs are expensed in the period in which they are incurred. Therefore, when the quantity of product manufactured is less than the quantity sold, the cost of goods sold under absorption costing will be higher than the cost of goods sold under variable costing, resulting in a lower operating income under absorption costing.

Question 3

For a period during which the quantity of inventory at the end is smaller than that at the beginning, operating income reported under variable costing will be smaller than operating income reported under absorption costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are included in product costs, whereas under absorption costing, both fixed and variable manufacturing costs are included. If inventory decreases, the fixed manufacturing costs released from inventory under absorption costing will increase the cost of goods sold and decrease operating income compared to variable costing, where these costs have already been expensed.

Question 4

Changes in the quantity of finished goods inventory, caused by differences in the levels of sales and production, directly affect the amount of operating income reported under absorption costing.

Accepted Answer

Under absorption costing, all manufacturing costs (including fixed manufacturing overhead) are assigned to the products. Therefore, when the quantity of finished goods inventory changes due to differences in sales and production levels, the amount of fixed manufacturing overhead costs allocated to sold and unsold units changes, directly affecting the reported operating income.

Question 5

Property tax expense is an example of a controllable cost for the supervisor of a manufacturing department.

Accepted Answer

Property tax is considered a fixed and uncontrollable cost because it is determined by external entities (like local governments) and cannot be altered by the decisions of a department supervisor.

Question 6

Under absorption costing, increases or decreases in operating income due to changes in inventory levels could be misinterpreted to be the result of operating efficiencies or inefficiencies.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to products. Therefore, when inventory levels increase, some of these costs are deferred in inventory, leading to higher operating income, and vice versa when inventory levels decrease. This can make it appear as if there were changes in operating efficiency when in fact the changes are due to inventory level fluctuations.

Question 7

On the variable costing income statement, variable costs are deducted from contribution margin to yield manufacturing margin.

Accepted Answer

On the variable costing income statement, sales revenue is first reduced by variable costs to calculate the contribution margin, not the other way around.

Question 8

For an accounting period during which the quantity of inventory at the end is smaller than the quantity at the beginning, operating income reported under variable costing will be larger than operating income reported under absorption costing.

Accepted Answer

When ending inventory decreases, fixed manufacturing costs deferred in inventory under absorption costing are released, reducing operating income compared to variable costing, which expenses all fixed costs in the period incurred.

Question 9

For a period during which the quantity of inventory at the end equals the inventory at the beginning, operating income reported under variable costing will be smaller than operating income reported under absorption costing.

Accepted Answer

Under variable costing, fixed manufacturing overhead is expensed in the period incurred, not included in the cost of inventory. Therefore, if beginning and ending inventories are equal, the total fixed manufacturing overhead cost expensed under both methods would be the same, making the difference in operating income due to the treatment of variable versus fixed costs, not inventory levels.

Question 10

For a period during which the quantity of product manufactured is less than the quantity sold, operating income reported under absorption costing will be larger than operating income reported under variable costing.

Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to units produced, so if fewer units are produced than sold, some of the fixed costs remain in inventory, potentially reducing operating income compared to variable costing, where all fixed costs are expensed in the period incurred.

Question 11

Under absorption costing, the amount of income reported from operations can be increased by producing more units than are sold.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to each unit produced. Therefore, when production exceeds sales, some of these fixed costs are deferred in inventory, reducing the cost of goods sold and increasing reported income from operations.

Question 12

For a period during which the quantity of inventory at the end is larger than that at the beginning, operating income reported under variable costing will be larger than operating income reported under absorption costing.

Accepted Answer

Under variable costing, only variable manufacturing costs are included in product costs, whereas under absorption costing, both variable and fixed manufacturing costs are included. If inventory increases, absorption costing allocates some fixed costs to the additional inventory, reducing the expense recognized in the current period and potentially increasing operating income compared to variable costing, where all fixed costs are expensed in the period they are incurred.

Question 13

The contribution margin and the manufacturing margin are usually equal.

Accepted Answer

The contribution margin and the manufacturing margin are not usually equal because the contribution margin is calculated by subtracting variable costs (both manufacturing and non-manufacturing) from sales, while the manufacturing margin subtracts only the variable manufacturing costs from sales.

Question 14

For a period during which the quantity of inventory at the end is larger than that at the beginning, operating income reported under variable costing will be smaller than operating income reported under absorption costing.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to each unit of production and included in inventory costs, which means that when inventory increases, some of these costs are deferred to future periods, leading to higher operating income in the current period compared to variable costing, where fixed manufacturing overhead costs are expensed in the period they are incurred, regardless of changes in inventory levels.

Question 15

On the variable costing income statement, the amounts representing the difference between the contribution margin and operating income are the fixed manufacturing costs and fixed selling and administrative expenses.

Accepted Answer

The difference between the contribution margin and operating income on a variable costing income statement is due to fixed costs, which include fixed manufacturing costs and fixed selling and administrative expenses.

Question 16

For a period during which the quantity of product manufactured equals the quantity sold, operating income reported under absorption costing will equal the operating income reported under variable costing.

Accepted Answer

During a period where the quantity of product manufactured equals the quantity sold, there are no changes in inventory levels, resulting in operating income being the same under both absorption and variable costing methods.

Question 17

For a period during which the quantity of product manufactured exceeds the quantity sold, operating income reported under absorption costing will be larger than operating income reported under variable costing.

Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to each unit produced, so when production exceeds sales, some of these costs are deferred in inventory, leading to higher operating income compared to variable costing, where all fixed manufacturing overhead costs are expensed in the period incurred.

Question 18

For a period during which the quantity of product manufactured exceeds the quantity sold, operating income reported under absorption costing will be smaller than operating income reported under variable costing.

Accepted Answer

During a period when the quantity of product manufactured exceeds the quantity sold, operating income reported under absorption costing will be higher than under variable costing because fixed manufacturing overhead costs are deferred in inventory under absorption costing, rather than being expensed in the period incurred as in variable costing.

Question 19

For a period during which the quantity of product manufactured equals the quantity sold, operating income reported under absorption costing will be smaller than the operating income reported under variable costing.

Accepted Answer

During a period where the quantity of product manufactured equals the quantity sold, there is no difference in inventory levels at the beginning and end of the period, leading to the same operating income under both absorption and variable costing methods.

Question 20

For a period during which the quantity of inventory at the end equals the inventory at the beginning, operating income reported under variable costing will equal operating income reported under absorption costing.

Accepted Answer

When inventory levels remain constant, the fixed manufacturing overhead costs are fully expensed in the period incurred under both costing methods, resulting in equal operating incomes.

Quiz 21: Variable Costing for Management Analysis