Question 1

Under absorption costing all production costs are inventoried.

Accepted Answer

Under absorption costing, all production costs, including direct materials, direct labor, and overhead costs, are included in the cost of inventory. This inventory cost is then transferred to cost of goods sold when the products are sold.

Question 2

Variable costing includes only variable costs of production in inventory.

Accepted Answer

Variable costing includes only variable costs of production (such as direct materials, direct labor, and variable overhead) in inventory, while fixed costs (such as rent, salaries, and insurance) are expensed as period costs. This is in contrast to absorption costing, which includes both variable and fixed costs in the inventory valuation.

Question 3

Generally accepted accounting principles do not allow variable costing to be used in external financial statements because absorption costing makes it easier for financial statement users to interpret year-to-year changes in reported income.

Accepted Answer

The answer of Generally accepted accounting principles do not allow...

Question 4

Product costs,i.e.raw material,labor,and certain overhead items,are assigned to inventory and treated as assets until the inventory is sold.

Accepted Answer

This statement is true as per generally accepted accounting principles. Product costs are assigned to inventory and recorded as assets until the inventory is sold. Once the inventory is sold, the cost is recognized as expenses in the income statement in the form of cost of goods sold.

Question 5

GAAP requires that inventory costs should also include the costs of the purchasing department and other general administrative costs associated with the acquisition and distribution of inventory.

Accepted Answer

GAAP requires that inventory costs include all costs that are directly attributable to the acquisition and preparation of inventory for sale, such as purchase price, import duties, and freight. General administrative costs, unless they are directly related to the acquisition or processing of inventory, should not be included in inventory costs.

Question 6

The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions.

Accepted Answer

The weighted average cost flow assumption calculates the average cost of all units in inventory, which falls between the specific costs used in LIFO and FIFO. Therefore, this statement is true.

Question 7

FIFO matches current costs with current revenues.

Accepted Answer

FIFO (First In, First Out) accounting method matches older costs with current revenues, as it assumes that the oldest inventory items are sold first.

Question 8

Companies frequently disclose the effects of absorption costing on reported net income.

Accepted Answer

Companies typically use absorption costing for internal management purposes and external financial reporting, but they do not frequently disclose the specific effects of absorption costing on reported net income in their financial statements.

Question 9

Absorption costing makes it difficult for financial statement users to interpret year-to-year changes in reported income when inventory levels change between one year and the next.

Accepted Answer

Absorption costing includes fixed manufacturing overhead as part of the cost of inventory, so changes in inventory levels can have a significant impact on reported income. This makes it more challenging for financial statement users to compare income from one year to the next when inventory levels fluctuate.

Question 10

Variable costing is an acceptable costing method for GAAP.

Accepted Answer

Variable costing is not acceptable for external reporting purposes under Generally Accepted Accounting Principles (GAAP) because GAAP requires the absorption costing method, which includes both fixed and variable manufacturing costs in the cost of inventory.

Question 11

Variable costs are those that do not change in proportion to the level of production and include raw materials,direct labor,and the salaries of factory supervisors.

Accepted Answer

Variable costs are costs that do change in proportion to the level of production. Examples of variable costs include direct materials and direct labor, which increase as production increases. Salaries of factory supervisors would be considered a fixed cost, as they do not vary with production levels.

Question 12

GAAP does not require the cost flow assumption to conform to the actual physical flow of the goods.

Accepted Answer

GAAP allows for the use of various cost flow assumptions, such as FIFO or LIFO, and does not require them to match the actual physical flow of goods. However, a company must be consistent in its use of the chosen cost flow assumption from period to period.

Question 13

When variable costing is used,fixed production costs are included as part of inventory cost.

Accepted Answer

When variable costing is used, fixed production costs are expensed as period costs and not included in the inventory cost. Only variable costs are included in the inventory cost under variable costing.

Question 14

GAAP requires the cost flow assumption to correspond to the actual physical flow of inventory.

Accepted Answer

GAAP does not require the cost flow assumption to correspond to the actual physical flow of inventory; companies can choose any method (e.g., FIFO, LIFO, average cost) that best matches their financial situation, regardless of the physical movement of goods.

Question 15

"Vendor allowances" should be used by the recipient to lower the carrying cost of inventory and thus ultimately to lower cost of goods sold.

Accepted Answer

Vendor allowances are discounts or incentives offered by suppliers to their customers (i.e. vendors) to encourage them to purchase more products or to promote certain products. These allowances can be used by the recipient to reduce the cost of their inventory, which in turn can lead to lower cost of goods sold, higher profits, or more competitive pricing.

Question 16

A cash purchase discount that is lost because of a late payment should be recorded as interest expense rather than as a cost of acquiring inventory.

Accepted Answer

When a cash purchase discount is lost because of a late payment, it indicates that the company has effectively borrowed money from the supplier. As such, the lost discount should be recorded as interest expense rather than as a cost of acquiring inventory. This is because interest expense represents the cost of borrowing money, whereas the cost of inventory includes only the direct expenses incurred in acquiring the goods.

Question 17

Analysts must be aware that with the use of absorption costing,as inventory absorbs more fixed costs,reported income tends to decrease.

Accepted Answer

With absorption costing, as inventory absorbs more fixed costs, reported income tends to increase because some of the fixed costs are allocated to inventory and thus are not expensed in the current period but rather when the inventory is sold.

Question 18

The FIFO method of inventory valuation assumes that the first unit purchased is the first unit sold.

Accepted Answer

The FIFO (first-in, first-out) method assumes that the first unit purchased is the first unit sold, making it one of the most straightforward methods of inventory valuation.

Question 19

When inventory increases under absorption costing it absorbs more fixed cost and increases net income.

Accepted Answer

When inventory increases under absorption costing, more fixed cost is allocated to the inventory cost and therefore absorbed into the cost of goods sold. This results in a decrease in the fixed cost per unit and an increase in net income.

Question 20

When physical inventory levels are decreasing,absorption cost income tends to rise since fixed overhead that was previously in inventory gets charged against income as part of the cost of goods sold.

Accepted Answer

When physical inventory levels are decreasing, absorption cost income tends to decrease because less fixed overhead is being allocated to inventory and more is being charged as part of the cost of goods sold. As a result, there is a higher cost of goods sold and a lower gross profit, leading to a decrease in net income.

Quiz 9: Inventories