Question 1

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.

Accepted Answer

False

Question 2

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

Accepted Answer

Cost information from absorption costing and variable costing can help managers determine the total cost of producing a product, which can then be used to determine a price that will cover those costs and generate a profit. By understanding the costs associated with production under both methods, managers can make informed pricing decisions that take into account all of the costs associated with producing a product.

Question 3

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.

Accepted Answer

This statement is true. When production equals sales, all variable costs and fixed manufacturing overhead costs are expensed in the period in which they are incurred under both variable and absorption costing. Therefore, net income reported under both methods will be identical.

Question 4

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

Accepted Answer

Absorption costing takes into account all the costs associated with producing a product, including direct and indirect costs. By including all costs, it provides a more accurate picture of the true cost of production and helps ensure that a product's selling price covers all necessary costs for the company to make a profit.

Question 5

The absorption costing approach assigns all manufacturing costs to products.

Accepted Answer

Absorption costing assigns not only direct labor, direct materials and manufacturing overhead but it also includes fixed manufacturing overhead like facility rents, utilities, depreciation, and equipment repairs in the cost of manufactured goods.

Question 6

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

Accepted Answer

The biggest problems with producing too much are typically increased inventory costs, wasted resources, and potential obsolescence of products, rather than lost sales and customer dissatisfaction, which are more directly related to producing too little.

Question 7

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.

Accepted Answer

Since fixed costs do not change in the short run, any additional revenue earned from accepting a special order that covers the variable costs will contribute towards covering the fixed costs and ultimately increasing profits. Thus, as long as the special order price exceeds the variable costs, accepting it would be beneficial in the short run.

Question 8

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

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to products, which can result in a higher product cost per unit. For special orders, it's more relevant to consider variable costs and contribution margin because fixed costs are typically unaffected by the order. The decision should be based on whether the special order price exceeds the variable costs per unit, not the absorption costing per unit.

Question 9

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

Accepted Answer

This statement is true. Companies often link manager bonuses to income computed under absorption costing because it reflects the income that is reported to shareholders, and is therefore seen as a measure of company success. Absorption costing takes into account all manufacturing costs, including direct materials, direct labor, and overhead, and allocates them to each unit of production. This method of costing can lead to variations in reported income based on changes in production levels, making it a popular choice for bonus calculations.

Question 10

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

Accepted Answer

This is because absorption costing includes fixed overhead costs in the product cost calculation, which can distort the cost of individual products. This can be particularly problematic if the company produces multiple products with different levels of overhead usage, as some products may be allocated more overhead costs than they actually consume.

Question 11

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

Accepted Answer

Variable costing only includes direct labor, direct materials, and variable overhead in the product costs. Fixed overhead is considered a period cost and is not included in product costs under variable costing.

Question 12

Variable costing treats fixed overhead cost as a period cost.

Accepted Answer

In variable costing, fixed overhead cost is not included in the cost of goods sold and is treated as a period cost, which means it is expensed in the period incurred. This is in contrast to absorption costing, where fixed overhead cost is included in the cost of goods sold and treated as a product cost.

Question 13

When there are zero units in Beginning Finished Goods Inventory and the units produced are more than the units sold, the income will be lower under variable costing than under absorption costing.

Accepted Answer

This is because under variable costing, fixed manufacturing costs are treated as period costs and are expensed in the period incurred rather than being allocated to the units produced. Therefore, with zero Beginning Finished Goods Inventory, all fixed manufacturing costs will be expensed in the current period, resulting in a lower income. However, under absorption costing, fixed manufacturing costs are allocated to the units produced regardless of inventory levels, resulting in a higher income.

Question 14

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

Accepted Answer

Variable costing is not required by GAAP for financial statement purposes. GAAP only requires absorption costing for external reporting. However, companies may use variable costing for internal management purposes.

Question 15

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

Accepted Answer

Absorption costing includes all manufacturing costs, both variable and fixed, in the cost of a product. This can lead to over- or under-valuing inventory and may not reflect the true cost of producing a product in the short term. For short-term pricing decisions, it may be more appropriate to use variable costing or marginal costing, which only includes variable costs in the cost of a product.

Question 16

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.

Accepted Answer

The answer of Under absorption costing, a company had the...

Question 17

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

Accepted Answer

Under variable costing, product costs consist of direct materials, direct labor, and variable overhead. Fixed overhead is treated as a period cost and is not included in the product cost.

Question 18

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

Accepted Answer

Absorption basis income includes all manufacturing costs, regardless of whether the goods are sold or not. This can incentivize managers to overproduce in order to maximize their income, rather than focusing on producing the optimal amount that is most profitable for the company. This can lead to an excess of inventory and additional storage and holding costs. Therefore, using absorption basis income to evaluate and reward managers can lead to overproduction.

Question 19

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

Accepted Answer

Long-term sales prices should cover all costs, including fixed costs, to ensure profitability and sustainability of the business.

Question 20

Absorption costing is required under GAAP.

Accepted Answer

Absorption costing is required under Generally Accepted Accounting Principles (GAAP) for external reporting purposes. This method of costing includes all manufacturing costs, both fixed and variable, as part of the cost of a finished product. This includes direct materials, direct labor, and overhead costs.

Quiz 6: Variable Costing and Analysis

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.