Ch 9

Question 1

Factors in Choosing Denominator for Fixed Overhead Allocation

Answer 1

Capacity levels (e.g., theoretical, practical)
Accuracy of costing
Impact on pricing and performance evaluation

Question 2

Effect of Denominator Choice on Business Operations

Answer 2

Capacity Management: Impacts cost allocation and pricing strategies.

Costing: Affects fixed overhead rate and product costing.

Pricing: Determines how much cost is passed to customers.

Performance Evaluation: Influences assessments of operational success.

Question 3

Absorption vs. Variable Costing

Answer 3

Absorption Costing:
Both fixed and variable manufacturing costs are included in product costs (inventoriable).
Non-manufacturing costs are expensed.

Variable Costing:
Only variable manufacturing costs are included in product costs.
Fixed manufacturing costs are treated as period costs (expensed).

Question 4

Throughput Costing vs. Variable & Absorption Costing

Answer 4

Throughput Costing:
Focuses on only direct materials as product costs.
Fixed and variable overheads are treated as period costs.
Income Difference: Operating income will differ between these costing methods due to how costs are handled (variable and fixed).

Question 5

Breakeven under Different Costing Policies (variable vs. AB)

Answer 5

Breakeven Analysis:
Variable Costing: Focuses on covering variable costs.

Absorption Costing: Includes both fixed and variable costs, leading to different breakeven points.

Question 6

Types of Denominator Capacity Levels

Answer 6

Theoretical Capacity: Maximum possible production.
Practical Capacity: Adjusted for normal inefficiencies.
Normal Capacity: Average production over several periods.
Master Budget Capacity: Based on sales projections.

Question 7

Impact of Denominator Capacity on Product Costing

Answer 7

Theoretical/Practical Capacity:
Reduces fixed manufacturing overhead (FMOH) assigned to inventory.
Increases Production Volume Variance (PVV).

Lower Capacity Denominators:
Higher fixed overhead rate.
Higher cost per unit produced.
Lower PVV.

Question 8

Impact of Master Budget Capacity on Performance

Answer 8

Master Budget: If sales decrease, fixed overhead rate increases, leading to higher costs and prices, which may reduce sales further.
Normal Capacity: Provides average capacity over time but lacks meaningful performance feedback in the short term.

Question 9

Inventory Costing Choices

Answer 9

Variable Costing:
Only variable manufacturing costs are inventoried.
Fixed manufacturing costs are expensed.
Absorption Costing:
Both variable and fixed manufacturing costs are inventoried.
Non-manufacturing costs are expensed.

Question 10

Variable Costing (Direct Method)

Answer 10

Product Costs: Only variable manufacturing costs are capitalized (inventoriable).
Period Costs: Fixed manufacturing and non-manufacturing costs are expensed.
COGS: Transferred from inventory when goods are sold.

Question 11

Absorption Costing (Full Method)

Answer 11

Product Costs: Capitalizes both variable and fixed manufacturing costs as inventory.

Period Costs: Non-manufacturing costs (variable and fixed) are expensed.

COGS: Includes both variable and fixed manufacturing costs when goods are sold

Question 12

Differences in Operating Income (OI)

Answer 12

Under Absorption Costing:
Fixed product costs are capitalized as inventory.
PVV (Production Volume Variance) occurs.

Under Variable Costing:
Fixed product costs are expensed as period costs.
No PVV.

Question 13

Income Effects of Changes in Inventory Costs
Production = Sales

Answer 13

Variable Costing: No change.
Absorption Costing: No change.

Question 14

Income Effects of Changes in Inventory Costs
If Production > Sales

Answer 14

Variable Costing: Lower income.
Absorption Costing: Higher income.

Question 15

Income Effects of Changes in Inventory Costs

Answer 15

Variable Costing: Higher income.
Absorption Costing: Lower income.

Question 16

Differences in Operating Income (OI)

Answer 16

This difference arises due to how fixed manufacturing costs are treated under both costing methods.

Question 17

Differences in Operating Income (OI)
Formula:

Answer 17

Absorption costing OI – Variable costing OI

Fixed Manufacturing Costs in Ending Inventory – Fixed Manufacturing Costs in Beginning Inventory

Question 18

Actual vs. Standard Costing for FMOH

Answer 18

Differences in these calculations lead to Production Volume Variance (PVV).

Question 19

Actual vs. Standard Costing for FMOH
Formula: ACTUAL COSTING

Answer 19

FMOH rate/unit =
Actual FMOH costs ÷ Actual units produced

Question 20

Actual vs. Standard Costing for FMOH
Standard Costing formula

Answer 20

FMOH rate/unit = Budgeted FMOH costs ÷ Budgeted units produced

Question 21

Performance Issues with Absorption Costing

Answer 21

Income Manipulation:
Managers might manipulate income by:
Producing more units than needed, increasing inventory and capitalizing more fixed costs.
This results in higher operating income but also higher inventory levels.
Impact: More fixed costs are capitalized as inventory, leaving less to be expensed, which inflates operating income.

Question 22

Avoiding Income Manipulation

Answer 22

Use Variable Costing for Bonuses:
To avoid manipulating income, base manager bonuses on operating income under variable costing.

Issue: It creates a complex system (producing two sets of inventory figures—one for external reporting and one for bonus calculations).

Question 23

Other Manipulation Tactics

Answer 23

“Cherry Picking”:
Managers might focus on manufacturing products that absorb higher fixed costs, regardless of demand.

Excess Production:
Accepting orders that increase production but could be better handled by another plant.

Maintenance Manipulation:
Deferring maintenance costs to a future period to boost current operating income, even if it harms future operations.

Question 24

Revising Performance Evaluation

Answer 24

Change to Variable or Throughput Costing: Switch accounting systems to reduce income manipulation.

Better Inventory Planning: Reduce excessive inventory buildup.

Carrying Charge for Inventory: Account for the costs of holding inventory.

Change the Evaluation Period: Modify the time frame for performance reviews.

Use Both Financial and Non-financial Measures: Assess performance using both types of metrics.

Question 25

Throughput Costing (Super-Variable)

Answer 25

Capitalized Costs: Only variable direct materials are capitalized as product costs.
Other Costs: All other costs are expensed as period costs when incurred.
Effect: Reduces motivation to overproduce and increase inventory. This minimizes funds tied up in inventory.

Question 26

Comparing Breakeven (BE) under Different Costing Systems

Answer 26

Variable Costing Breakeven:
Dependent on fixed costs (FC), contribution margin per unit (CM/U), and unit sales level.
Formula: Q = (TFC + Target Operating Income) ÷ CM/U
Sales Increase → Operating Income Increases.
Absorption Costing Breakeven:
Dependent on FC, CM/U, unit sales level, and unit production level.
Formula: Q = (TFC + Target Operating Income + (FMOH cost rate × (BE sales units – units produced)))
Sales and Production both impact the breakeven point.
Multiple scenarios can lead to the same breakeven result.