Chapter 6: Variable and Absorption Costing

Question 1

Net Income moves in the same direction as sales in:

Answer 1

Variable Costing

Question 2

In product costs it includes:
DM, DL, VOH, VSC, VAC (Sales - VC)
Operating Expenses
POH, FSC, FAC

Answer 2

Variable Costing

Question 3

In variable costing, the company will have the highest net operating income in the year with the:

Answer 3

Highest sales units

Question 4

In variable costing:

Answer 4

All FOH is expensed in the year incurred as a period cost

Question 5

Why is NOI not affected by changes in production using variable costing?

Answer 5

Becuase all FOH is period costs fully expensed in each period

Question 6

Does production have an impact on NOI when using variable costing?

Answer 6

No

Question 7

What are some period costs under variable costing?

Answer 7

Depreciation on the chief financial officer’s company chair and the salary of the factory manager

Question 8

In absorption costing, which year has the highest FOH unit cost?

Answer 8

the year with the smallest number of units produced will give you the highest unit cost FOH

Question 9

Which year will absorption costing NOI be greater than variable costing NOI?

Answer 9

When production units are greater than sales units

Question 10

Why is NOI affected by changes in production using absorption costing?

Answer 10

Becuase FOH costs shifts between period as a result of changes in F.G inventory

Question 11

Variable and Absorption costing produce different NOI whenever the number of units produced is different from the number of units sold, when is this not true?

Answer 11

When JIT is used, these differences go away

Question 12

What will still differ using JIT?

Answer 12

Unit product cost will still differ but the differences in NOI will largely disappear

Question 13

Production = Sales

Answer 13

Absorption NOI = Variable Costing NOI
Absorption FOH is expensed in COGS
Variable FOH is expensed as a period cost

Question 14

Production > Sales

Answer 14

Absorption NOI > Variable Costing NOI

Variable FOH is expensed with Expenses > using VC

Question 15

Production < Sales

Answer 15

Absorption NOI < Variable Costing NOI
Because you have “older” units of product sold. We say we have FOH released to COGS under Absorption.
Variable FOH is expensed the previous year

Question 16

Product Costs Under absorption

Answer 16

Fire insurance cost on the factory building

DM, DL, VOH, POH

Question 17

All other things the same, if a division’s traceable fixed expenses decrease, then the division’s segment margin will increase

Answer 17

True

Question 18

Absorption Costing Ending F.G Inventory Formula

Answer 18

End F.G inv units x current year FOH u/c

Question 19

Absorption Costing Begining F.G Inventory Formula

Answer 19

Beginning F.G Inv units x prior year FOH u/c

Question 20

There will always be a difference in NOI whenever

Answer 20

the number of units produced does not equal the number sold

Question 21

Net Operating income fluctuates directly with changes in sales volume

Answer 21

Variable Costing

Question 22

Variable manufacturing overhead costs are treated as product costs under both absorption and variable costing

Answer 22

True

Question 23

Under the absorption costing method, a company can increase profits by increasing the number of units produced

Answer 23

True

Question 24

All other things the same, if a division’s traceable fixed expenses decrease then the division’s segment margin will decrease

Answer 24

False

Question 25

Generally speaking, NOI under VC and Absorption Costing will

Answer 25

Be equal only when production and sales are equal

Question 26

A company has been using JIT for the last three years, which is most likely true?

Answer 26

Absorption Costing NO and VC NOI will be very close to being equal and either could be higher

Question 27

All other things the same, a reduction in the variable expense per unit will decrease the breakeven point

Answer 27

True

Question 28

Over an extended period of time in which the final ending inventories are zero, the accumulated NOI figures under the Absorption Costing will be:

Answer 28

The same as those reported under variable costing

Question 29

Under the absorption costing method, a company can increase profits simply by increasing the number of units sold

Answer 29

True

Question 30

Under Absorption Costing, which year will have the highest product cost?

Answer 30

The year with the smallest number of units produced

Question 31

Under Variable Costing, which year will have the highest NOI?

Answer 31

The year(s) with the highest sales

Question 32

Under Absorption Costing, which year will have the highest NOI?

Answer 32

Between the years with the highest sales, the year with the highest production will have the highest NOI

Question 33

Which of the following strategies could be used to REDUCE the break-even point?

Answer 33

Decrease in Fix Costs and Increase in CM