Ch 9 multiple choice

Question 1

Which of the following denominator levels would reduce the Fixed Manufacturing Overhead (FMOH) assigned to inventory?
A) Theoretical Capacity
B) Practical Capacity
C) Normal Capacity
D) Master Budget Capacity

Answer 1

A) Theoretical Capacity

Question 2

How does using a lower capacity denominator (e.g., Master Budget Capacity) affect the fixed overhead (FOH) rate?
A) The FOH rate decreases
B) The FOH rate increases
C) The FOH rate stays constant
D) The FOH rate becomes irrelevant

Answer 2

B) The FOH rate increases

Question 3

What is a key difference between Variable Costing and Absorption Costing?
A) Under variable costing, both variable and fixed manufacturing costs are capitalized
B) Under absorption costing, fixed manufacturing costs are expensed in the period incurred
C) Under absorption costing, fixed manufacturing costs are capitalized as inventory
D) Under variable costing, all non-manufacturing costs are treated as product costs

Answer 3

C) Under absorption costing, fixed manufacturing costs are capitalized as inventory

Question 4

What is the primary effect of producing more units than are sold under absorption costing?
A) Operating income will decrease
B) Operating income will remain the same
C) Operating income will increase
D) Absorption costing is unaffected by production levels

Answer 4

C) Operating income will increase

Question 5

Under absorption costing, when production is greater than sales, what happens to operating income (OI)?
A) OI increases
B) OI decreases
C) OI stays the same
D) OI is not affected by production and sales levels

Answer 5

A) OI increases

Question 6

What does throughput costing treat as product costs?
A) Only direct materials
B) Only variable manufacturing costs
C) Direct materials and direct labor
D) All manufacturing costs

Answer 6

A) Only direct materials

Question 7

In absorption costing, what happens to fixed manufacturing costs in ending inventory?
A) They are expensed in the period incurred
B) They are capitalized as part of inventory
C) They are transferred to COGS immediately
D) They are recorded as period costs

Answer 7

B) They are capitalized as part of inventory

Question 8

Which of the following would be most likely to happen when a manager uses absorption costing to increase operating income?
A) Reduce inventory levels
B) Increase production of products that absorb higher fixed costs
C) Focus on reducing variable costs
D) Decrease production to lower fixed costs

Answer 8

B) Increase production of products that absorb higher fixed costs

Question 9

Under which costing method are only variable direct materials considered product costs?
A) Absorption Costing
B) Variable Costing
C) Throughput Costing
D) Standard Costing

Answer 9

C) Throughput Costing

Question 10

Which of the following is a disadvantage of using absorption costing for performance evaluation?
A) Managers are less likely to manipulate income
B) Managers may manipulate production to capitalize more fixed costs in inventory
C) It allows for accurate real-time performance measurement
D) It simplifies inventory costing processes

Answer 10

B) Managers may manipulate production to capitalize more fixed costs in inventory

Question 11

In variable costing, what happens to fixed manufacturing overhead costs?
A) They are capitalized as inventory
B) They are included in product cost and inventory
C) They are expensed in the period they are incurred
D) They are treated as period costs only if the product is sold

Answer 11

C) They are expensed in the period they are incurred

Question 12

Which of the following costing methods is most likely to reduce motivation to increase inventories?
A) Absorption Costing
B) Variable Costing
C) Throughput Costing
D) Standard Costing

Answer 12

C) Throughput Costing

Question 13

Which of the following statements is true about breakeven analysis under absorption costing?
A) Breakeven is based on fixed costs, contribution margin per unit, and unit sales levels
B) Breakeven only depends on fixed costs and variable costs
C) Breakeven is not affected by changes in production levels
D) Absorption costing breakeven analysis ignores fixed manufacturing costs

Answer 13

A) Breakeven is based on fixed costs, contribution margin per unit, and unit sales levels

Question 14

When using the master budget capacity as a denominator, what might occur if actual sales drop?
A) Fixed overhead rate will decrease
B) Fixed overhead rate will increase, leading to higher product costs and potentially higher prices
C) Product costs will decrease, and prices will go down
D) No effect on product costs

Answer 14

B) Fixed overhead rate will increase, leading to higher product costs and potentially higher prices

Question 15

What can managers do to avoid manipulating income under absorption costing?
A) Base manager bonuses on profits calculated using variable costing
B) Increase production to absorb more fixed costs
C) Use throughput costing for performance evaluation
D) Allow more flexibility in inventory accumulation

Answer 15

A) Base manager bonuses on profits calculated using variable costing

Question 16

When using the theoretical capacity denominator for fixed overhead allocation, which of the following is a likely consequence?
A) The fixed overhead rate will be based on actual production levels, leading to more accurate cost allocation
B) The fixed overhead rate will be set higher than actual production requires, potentially leading to over-absorption of fixed overhead
C) The company will avoid any under-absorption of fixed overhead costs
D) The fixed overhead rate will fluctuate based on changes in sales levels

Answer 16

B) The fixed overhead rate will be set higher than actual production requires, potentially leading to over-absorption of fixed overhead

Question 17

Which of the following is a potential drawback of using practical capacity as the denominator for allocating fixed overhead costs?
A) It can lead to an under-absorption of fixed overhead costs
B) It can lead to over-absorption of fixed overhead costs, thus increasing the cost of inventory
C) It ignores potential inefficiencies that may arise during the production process
D) It does not provide useful information for long-term performance evaluations

Answer 17

B) It can lead to over-absorption of fixed overhead costs, thus increasing the cost of inventory

Question 18

In a scenario where production exceeds sales under absorption costing, which of the following will occur?
A) Operating income will decrease because more costs are capitalized into inventory
B) Fixed manufacturing costs that are capitalized into inventory will be expensed immediately, decreasing operating income
C) Operating income will increase because fixed manufacturing overhead costs are spread across more units of inventory
D) There will be no effect on operating income, as absorption costing does not consider production levels

Answer 18

C) Operating income will increase because fixed manufacturing overhead costs are spread across more units of inventory

Question 19

How does variable costing affect the income statement when production exceeds sales compared to absorption costing?
A) Under variable costing, operating income will increase as production exceeds sales, unlike absorption costing
B) Under variable costing, fixed manufacturing overhead costs are treated as period costs, so they do not affect operating income when production exceeds sales
C) Under absorption costing, operating income remains unchanged regardless of production levels, while under variable costing it fluctuates
D) Both variable and absorption costing will show the same operating income if production exceeds sales, because both allocate fixed costs equally

Answer 19

B) Under variable costing, fixed manufacturing overhead costs are treated as period costs, so they do not affect operating income when production exceeds sales

Question 20

Which of the following statements about throughput costing is true?
A) It capitalizes both direct materials and fixed overhead as product costs, expensing all other costs as period expenses
B) It treats direct materials as the only product cost, expensing all other manufacturing costs immediately
C) It is designed to increase the capital tied up in inventory by capitalizing all manufacturing costs
D) It requires the allocation of fixed overhead to the cost of goods sold, similar to absorption costing

Answer 20

B) It treats direct materials as the only product cost, expensing all other manufacturing costs immediately

Question 21

In an environment where sales are less than production, which of the following will be true under absorption costing compared to variable costing?
A) Operating income will be higher under absorption costing because fixed manufacturing costs are capitalized into inventory
B) Operating income will be lower under absorption costing because fixed costs are expensed immediately
C) Absorption costing and variable costing will yield the same operating income regardless of the sales-to-production ratio
D) Operating income will be higher under variable costing because all costs are treated as period expenses

Answer 21

A) Operating income will be higher under absorption costing because fixed manufacturing costs are capitalized into inventory

Question 22

Under absorption costing, what will happen if production exceeds sales and inventory builds up over time?
A) The fixed manufacturing costs allocated to inventory will decrease, leading to lower income
B) The fixed manufacturing costs allocated to inventory will increase, leading to a higher operating income
C) The cost of goods sold will decrease, leading to an increase in operating income
D) The increase in inventory will lead to a decrease in the fixed overhead allocation rate for the following period

Answer 22

B) The fixed manufacturing costs allocated to inventory will increase, leading to a higher operating income

Question 23

Which of the following is a key advantage of using variable costing for performance evaluation?
A) It provides a more accurate reflection of profitability by capitalizing all manufacturing costs into inventory
B) It reduces the potential for managerial manipulation of income through overproduction
C) It results in lower taxes due to the capitalizing of fixed manufacturing overhead
D) It simplifies inventory costing by treating all production costs as period expenses

Answer 23

B) It reduces the potential for managerial manipulation of income through overproduction

Question 24

How does throughput costing impact managerial behavior compared to traditional absorption costing?
A) Throughput costing incentivizes managers to overproduce to absorb fixed overhead costs, just like absorption costing
B) Throughput costing discourages overproduction since only direct materials are capitalized, reducing the desire to increase inventory
C) Throughput costing encourages the same production volume as absorption costing but uses different inventory methods
D) Throughput costing leads to higher income as it capitalizes all production costs, similar to absorption costing

Answer 24

B) Throughput costing discourages overproduction since only direct materials are capitalized, reducing the desire to increase inventory

Question 25

When analyzing breakeven points, what is a major difference between variable costing and absorption costing?
A) The breakeven point in variable costing depends only on fixed costs and contribution margin per unit, while absorption costing also considers fixed manufacturing costs in inventory
B) Absorption costing does not factor in fixed costs, while variable costing does
C) Variable costing shows a higher breakeven point because all fixed costs are expensed immediately
D) Both costing methods show identical breakeven points regardless of fixed costs

Answer 25

A) The breakeven point in variable costing depends only on fixed costs and contribution margin per unit, while absorption costing also considers fixed manufacturing costs in inventory

Question 26

If fixed manufacturing costs in ending inventory are higher than in the beginning inventory, what would be the effect on operating income under absorption costing versus variable costing?
A) Operating income under absorption costing would be higher, while operating income under variable costing would be lower
B) Operating income under both costing methods would be the same, as the impact of fixed costs is handled similarly
C) Operating income under variable costing would be higher, as it expensed all fixed manufacturing overhead
D) Operating income under absorption costing would be lower, while operating income under variable costing would be unaffected

Answer 26

A) Operating income under absorption costing would be higher, while operating income under variable costing would be lower

Question 27

In performance evaluations, which of the following would be most effective in preventing income manipulation under absorption costing?
A) Set budgets based on normal or theoretical capacity to avoid absorption manipulation
B) Use throughput costing, which eliminates the incentive to manipulate inventory levels
C) Calculate performance based solely on variable costing to avoid the impact of fixed costs in inventory
D) Set strict production limits and enforce lower fixed cost allocations to sales

Answer 27

C) Calculate performance based solely on variable costing to avoid the impact of fixed costs in inventory