ABSORPTION VERSUS VARIABLE COSTING

Question 1

are costs that are a necessary and integral part of producing the finished product.

Answer 1

Product costs

Question 2

are costs that are matched with the revenue of a specific time period rather than included as part of the cost of a salable product.

Answer 2

Period costs

Question 3

do not become expenses until the company sells the finished goods inventory.

Answer 3

Product costs

Question 4

include selling and administrative expenses and companies deduct them from revenues in the period in which they are incurred.

Answer 4

Period costs

Question 5

• Costing method that includes all manufacturing costs (direct materials, direct labor and both variable and fixed manufacturing overhead) in the cost of a unit of product.
• Treats fixed manufacturing overhead as a product cost.
• Also called Full Costing and Conventional Costing.

Answer 5

Absorption Costing

Question 6

Costing method that includes only variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of a unit of product.
* Treats fixed manufacturing overhead as a period cost.
* Also called Direct Costing.

Answer 6

Variable Costing

Question 7

The costing procedure that treats fixed manufacturing costs as period costs is
a. Full costing
b. Absorption costing
c. Variable costing
d. Conventional costing

Question 8

Another name for variable costing is
a. Full costing
b. Direct costing
c. Job order costing
d. Fixed costing

Question 9

Under variable costing, which of the following are costs that can be inventoried?
a. Variable selling and administrative expense
b. Variable manufacturing overhead
c. Fixed manufacturing overhead
d. Fixed selling and administrative expense

Question 10

If a firm uses variable costing, fixed manufacturing overhead will be included
a. Only on the balance sheet
b. Only on the income statement
c. On both the balance sheet and income statement
d. On neither the balance sheet nor income statement

Question 11

Under variable costing
a. All product costs are variable
b. All period costs are variable
c. All product costs are fixed
d. Product costs are both fixed and variable

Question 12

A basic tenet of variable costing is that period costs should be currently expensed. What is the rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product
b. Period costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by management
d. Because period costs will occur whether or not production occurs, it is improper to allocate these costs to production and defer a current cost of doing business

Question 13

In an income statement prepared as an internal report using the variable costing method, fixed manufacturing overhead would
a. Not be used
b. Be used in the computation of operating income but not in the computation of the contribution margin
c. Be used in the computation of the contribution margin
d. Be treated the same as variable manufacturing overhead

Question 14

The FASB requires which of the following to be used in preparation of external financial statements?
a. Variable costing
b. Standard costing
c. Activity-based costing
d. Absorption costing

Question 15

Another name for absorption costing is
a. Full or conventional costing
b. Direct costing
c. Job order costing
d. Fixed costing

Question 16

If a firm uses absorption costing, fixed manufacturing overhead will be included
a. Only on the balance sheet
b. Only on the income statement
c. On both the balance sheet and income statement
d. On neither the balance sheet nor income statement

Question 17

If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in
a. Higher income and assets s
b. Higher income but lower assets
c. Lower income but higher asset
d. Lower income and assets

Question 18

An ending inventory valuation on an absorption costing balance sheet would
a. Sometimes be less than the ending inventory valuation under variable costing
b. Always be less than the ending inventory valuation under variable costing
c. Always be the same as the ending inventory valuation under variable costing
d. Always be greater than or equal to the ending inventory valuation under variable costing

Question 19

Profit under absorption costing may differ from profit determined under variable costing. How is this difference calculated?
a. Change in the quantity of all units in inventory times the relevant fixed costs per unit
b. Change in the quantity of all units produced times the relevant fixed costs per unit
c. Change in the quantity of all units in inventory times the relevant variable cost per unit
d. Change in the quantity of all units produced times the relevant variable cost per unit

Question 20

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 fixed costs to be period costs
b. Absorption costing allocates fixed overhead costs between cost of goods sold and inventories, and variable costing considers all fixed costs to be period costs
c. Absorption costing “inventories” all direct costs, but variable costing considers direct costs to be period costs
d. Absorption costing “inventories” all fixed costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs

Question 21

The difference between the reported income under absorption and variable costing is attributable to the difference in the
a. Income statement formats
b. Treatment of fixed manufacturing overhead
c. Treatment of variable manufacturing overhead
d. Treatment of variable selling, general, and
administrative expenses

Question 22

Absorption costing differs from variable costing in all of the following except
a. Treatment of fixed manufacturing overhead
b. Treatment of variable production costs
c. Acceptability for external reporting
d. Arrangement of the income statement

Question 23

Under absorption costing, if sales remain constant from period 1 to period 2, the company will report a larger income in period 2 when
a. Period 2 production exceeds period 1 production
b. Period 1 production exceeds period 2 production
c. Variable production costs are larger in period 2 than period 1
d. Fixed production costs are larger in period 2 than period 1

Question 24

When inventories increase from one period to the next and all other factors remain constant, income under direct costing:
a. Will be irrelevant for decision making
b. Will be smaller than under absorption costing
c. Leads to smaller federal income tax payments
d. Will be greater than under absorption costing

Question 25

Under variable costing, only variable production costs are treated as product costs.

Question 26

Under variable costing, variable selling and administrative costs are included in product costs.

Question 27

Absorption costing treats all manufacturing costs as product costs.

Question 28

In the preparation of financial statements using variable costing, fixed manufacturing overhead is treated as a period cost.

Question 29

Absorption costing treats fixed manufacturing overhead as a period cost.

Question 30

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

Question 31

Net operating income computed using absorption costing will always be greater than net operating income computed using variable costing.

Question 32

When reconciling variable costing and absorption costing net operating income, fixed manufacturing overhead costs released from inventory under absorption costing should be added to variable costing net operating income to arrive at the absorption costing net operating income.

Question 33

When production exceeds sales for the period, absorption costing net operating income will exceed variable costing net operating income.

Question 34

Under variable costing it may be possible to report a profit even if the company sells less than the break-even volume of sales.