Question 1

The costs assigned to units in inventory are typically lower under variable costing than under absorption costing.

Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of inventory, while under variable costing, only variable manufacturing costs are included. Because fixed costs are typically higher than variable costs, the cost assigned to units in inventory will be lower under variable costing, leading to a lower overall cost of goods sold and potentially a higher net income.

Question 2

Under absorption costing, it is possible to defer a portion of the fixed manufacturing overhead costs of the current period to future periods through the inventory account.

Accepted Answer

This is true. In absorption costing, fixed manufacturing overhead costs are included in the cost of producing each unit of inventory. As a result, a portion of these costs may be deferred to future periods if some of the produced units are not sold and remain in inventory. The deferred costs are then carried over as an asset in the inventory account until the inventory is sold in future periods, at which point they are recognized as expenses in the cost of goods sold.

Question 3

When the number of units in work in process and finished goods inventories decrease, absorption costing net operating income will typically be greater than variable costing net operating income.

Accepted Answer

When the number of units in work in process and finished goods inventories decrease, variable costing net operating income will typically be greater than absorption costing net operating income. This is because under variable costing, only variable manufacturing costs are included in product costs and fixed manufacturing costs are treated as period expenses. Therefore, when inventory levels decrease, it results in lower fixed manufacturing costs being expensed in the current period, which increases net operating income. However, under absorption costing, fixed manufacturing costs are included in product costs and are not expensed until the products are sold. Therefore, when inventory levels decrease, it results in lower fixed manufacturing costs being allocated to products in inventory, which decreases net operating income.

Question 4

Direct materials is considered to be a product cost under variable costing but not absorption costing.

Accepted Answer

Direct materials are considered a product cost under both variable costing and absorption costing.

Question 5

Under absorption costing, the profit for a period is affected by a change in the number of units of finished goods in inventory.

Accepted Answer

Absorption costing includes fixed production costs as part of the cost of goods sold, meaning that the number of units in inventory can affect the amount of fixed costs allocated to each unit and thus impact the profit for a period.

Question 6

A common fixed cost is a fixed cost that supports more than one business segment and is traceable in whole or in part to at least one of the business segments.

Accepted Answer

A common fixed cost supports more than one business segment but is not traceable to any specific segment.

Question 7

Common fixed costs should not be charged to the individual segments when preparing a segmented income statement.

Accepted Answer

Common fixed costs are costs that do not vary with changes in the level of activity in a company's segments. Therefore, they should not be allocated to individual segments when preparing a segmented income statement. Instead, these costs should be treated as an operating expense of the company as a whole. Only variable costs that vary with changes in the level of activity should be allocated to individual segments.

Question 8

Assuming the LIFO inventory flow assumption, if production is less than sales for the period, absorption costing net operating income will generally be greater than variable costing net operating income.

Accepted Answer

If production is less than sales for the period, there will be less units in ending inventory under LIFO, resulting in a lower cost of goods sold and higher net operating income under variable costing compared to absorption costing. Therefore, variable costing net operating income will generally be greater than absorption costing net operating income.

Question 9

Assuming the LIFO inventory flow assumption, if production equals sales for the period, absorption costing and variable costing will produce the same net operating income.

Accepted Answer

When production equals sales, there is no change in inventory levels, so the fixed manufacturing overhead costs are fully expensed in both absorption and variable costing, resulting in the same net operating income.

Question 10

Because absorption costing emphasizes costs by behavior, it works well with cost-volume-profit analysis.

Accepted Answer

Absorption costing does not emphasize costs by behavior; it includes both fixed and variable costs in product costs, making it less suitable for cost-volume-profit analysis, which relies on distinguishing between fixed and variable costs.

Question 11

Under absorption costing, fixed manufacturing overhead cost is not included in product cost.

Accepted Answer

Under absorption costing, fixed manufacturing overhead cost is included in product cost.

Question 12

When variable costing is used, and if selling prices exceed variable expenses and if the unit contribution margins, the sales mix, and fixed costs remain the same, profits move in the same direction as sales.

Accepted Answer

This is correct as variable costing only considers variable expenses in determining the cost of goods sold and does not include fixed costs. Therefore, if sales increase, profits will also increase as long as the unit contribution margins and sales mix remain constant.

Question 13

When viewed over the long term, cumulative net operating income will be the same for variable and absorption costing if ending inventories exceed beginning inventories.

Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in inventory costs, which can defer some expenses to future periods if inventories increase. This causes differences in net operating income between the two methods when inventory levels change.

Question 14

Under variable costing, product cost does not contain any fixed manufacturing overhead cost.

Accepted Answer

Variable costing only includes variable manufacturing costs such as direct materials, direct labor, and variable manufacturing overhead in product cost. Fixed manufacturing overhead costs are expensed in the period they are incurred and do not become part of product cost until they are allocated or absorbed through absorption costing.

Question 15

Under variable costing, variable production costs are not treated as product costs.

Accepted Answer

Under variable costing, variable production costs are treated as product costs and are included in inventory valuation.

Question 16

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

Accepted Answer

Variable costing only includes direct materials, direct labor, and variable manufacturing overhead in the product costs. Fixed manufacturing overhead is treated as a period cost and is expensed in the period incurred rather than allocated to the products.

Question 17

Under conventional absorption costing, the fixed costs associated with idle production capacity are not included as part of the product cost.

Accepted Answer

Under conventional absorption costing, all fixed manufacturing costs, including those associated with idle production capacity, are included in the product cost.

Question 18

Under absorption costing, fixed manufacturing overhead is treated as a product cost.

Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to the cost of goods produced and is considered a product cost. This is in contrast to variable costing, where fixed manufacturing overhead is expensed in the period incurred and is not treated as a product cost.

Question 19

Net operating income is affected by the number of units produced when absorption costing is used.

Accepted Answer

In absorption costing, net operating income is calculated by subtracting cost of goods sold (which includes both variable and fixed manufacturing costs) and operating expenses from total revenues. As a result, the number of units produced can affect the allocation of fixed manufacturing cost per unit, which can impact the cost of goods sold and hence net operating income.

Question 20

Under variable costing, fixed manufacturing overhead cost is not treated as a product cost.

Accepted Answer

Under variable costing, only variable manufacturing costs are treated as product costs. Fixed manufacturing overhead costs are considered period costs and are recorded as an expense in the period incurred. This is in contrast to absorption costing, where fixed manufacturing overhead costs are included as a product cost and become part of the cost of goods sold.

Quiz 11: Variable Costing and Segment Reporting: Tools for Management