B2 - 1st HW?

Question 1

Which of the following statements is correct regarding the difference b/w the absorption costing and variable costing methods?

• When production equals sales, absorption costing income is less than variable costing income
• when production is less than sales, absorption costing income is greater than variable costing income
• when production is greater than sales, absorption costing income is greater than variable costing income
• when production eqwuals sales, absorption costing income is greater than variable costing income

Answer 1

When production is greater than sales, absorption costing income is greater than variable costing income.

Production in excess of sales result in increases in inventory that include capitalization of fixed product costs that are immediately expensed under variable costing. Since costs that are used in the determination of net income for variable costing are accounted for in inventory for absorption costing, absorption costing will produce higher net income than variable costing when production is greater than sales.

Question 2

Lynn Mfg Co prepares income statements using both standard absorption and standard variable costing methods. For year 2, unit standard costs were unchanged from year 1. in year 2, the only beginning and ending inventories were finished goods of 5000 units. How would Lynn’s ratios using absorption costing compare with those using variable costing (same, greater, smaller) for current ratio and ROE

Answer 2

Current ratio = greater, ROE = smaller.

Under variable (direct) costing, fixed manufacturing overhead is treated as a period cost and expensed, while under absorption costing, this expense is treated as a product cost and is inventoried. The two different methods will therefore result in different year-end inventory amounts with inventory under the absorption method being higher. Since the current ratio includes inventory in current assets, the current ratio under absorption costing will be higher.

Question 3

Jago Co has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:

• Greater profit per hour of manufacturing capacity
• Lower total variable manufacturing costs for the manufacturing capacity
• lower total manufacturing costs for the manufacturing capacity
• greater contribution margin per hour of manufacturing capacity

Answer 3

Greater contribution margin per hour of manufacturing capacity

To maximize profit at full capacity, contribution margin per hour should be maximized

Question 4

Which costing methods provide(s) the added benefit of usefulness for external reporting purposes?

Variable, absorption, or both?

Answer 4

ABSORPTION
absorption costing methods represents generally accepted accounting principles generally used for the presentation of external financial statements and are therefore for the benefit of external users.

Question 5

Which method will yield the lowest inventory value?

Options: Process, hybrid, variable, absorption

Answer 5

VARIABLE

Variable costing typically produces the lowest inventory values since only variable costs are capitalized. Other methodologies of inventory accounting will account for fixed costs in inventory and result in greater values than variable costing.

Question 6

Many firms have made significant strides in reducing their inventories. Which of the following would be least likely to encourage managers to reduce inventory?
Options: using absorption costing, instituting a change against the budget for managers based on the size of inventory, using variable costing, using throughput costing

Answer 6

Using absorption costing

Absorption costing absorbs fixed OH cost into the units produced. those units placed into inventory can absorb some of the manager’s cost and raise profits. This method encourages larger inventories.

Question 7

In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and admin expenses would:
Options: not be used, be treated the same as variable SG&A, be used in teh computation of op income but not in teh computation of contribution margin, be used in teh computation of contribution margin

Answer 7

BE USED IN THE COMPUTATION OF CONTRIBUTION MARGIN

contribution margin is defined as net sales revenue less variable costs. op income equals cm less fixed costs

Question 8

An increase in production levels within a relevant range most likely would result in:
Options: Increasing the total cost, increasing the varaible cost per unit, decreasing the variable cost per unit, decreasing the total fixed cost

Answer 8

INCREASING THE TOTAL COST

An increase in production levels within the relevant range would likely cause variable costs to increase. While fixed costs would remain constant, total costs would increase

Question 9

Which costs are included in product or inventoriable costs in an absorption costing system?

Answer 9

DM, DL, and all OH

Question 10

Which of the following is(are) true tregarding the relationship between absorption costing net income and variale costing net income:
Options:
1. When production exceeds sales, variable costing income exceeds absorption costing net income
2. When sales exceed production, absorption costing income exceeds variable costing net income

Answer 10

NEITHER

Question 11

assumptions underlying cost-volume-profit analysis include all the following EXCEPT:
options: all costs can be divided into fixed and variable elemenets, total costs are directly proportional to volume over the relevant range, volume is the only relevant factor affecting cost, selling prices are to be unchanged

Answer 11

Total costs are directly proportional to volume over the relevant range