FFMA - Week 8

Question 1

(FFMA-098) What is the primary difference between absorption and variable costing?

Answer 1

Absorption costing includes all manufacturing costs, both variable and fixed, in product costs, while variable costing only includes variable manufacturing costs in product costs, treating fixed manufacturing costs as period costs.

Question 2

(FFMA-099) What are period costs in variable costing?

Answer 2

Period costs in variable costing are all fixed costs, including fixed manufacturing overhead, and all selling and administrative expenses.

Question 3

(FFMA-100) How does absorption costing define product costs?

Answer 3

In absorption costing, product costs include direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.

Question 4

(FFMA-101) What are period costs in absorption costing?

Answer 4

Period costs in absorption costing include only selling and administrative expenses, not directly tied to production.

Question 5

(FFMA-102) How does variable costing treat fixed manufacturing overhead?

Answer 5

Variable costing treats fixed manufacturing overhead as a period cost, not as part of the product cost.

Question 6

(FFMA-103) What does the contribution margin represent in variable costing?

Answer 6

The contribution margin in variable costing represents the amount remaining from sales revenue after variable expenses have been deducted, contributing to covering fixed costs and profit.

Question 7

(FFMA-104) How is the predetermined overhead rate calculated in variable costing?

Answer 7

By dividing the estimated total manufacturing overhead cost by the estimated total units in the allocation base for the coming period.

Question 8

(FFMA-105) Why might there be under or over-applied overheads in job costing?

Answer 8

Under or over-applied overheads occur when the applied overhead (based on the predetermined rate) does not match the actual overhead incurred during the period.

Question 9

(FFMA-106) What are the implications of under-applied overheads?

Answer 9

Under-applied overheads mean that the applied overhead was less than the actual overhead, indicating not all costs have been accounted for, which may require an increase in the cost of goods sold or an allocation to work in progress and finished goods.

Question 10

(FFMA-107) What are the implications of over-applied overheads?

Answer 10

Over-applied overheads mean that the applied overhead was more than the actual overhead, indicating that too much cost has been assigned to products, which may require a decrease in the cost of goods sold or a reduction in the reported amounts for work in progress and finished goods.

Question 11

(FFMA-108) What is the main distinction between absorption costing and variable/marginal costing?

Answer 11

Absorption costing includes both variable and fixed manufacturing costs in product costs, whereas variable/marginal costing includes only variable manufacturing costs, treating fixed manufacturing costs as period costs.

Question 12

(FFMA-109) In absorption costing, how are fixed manufacturing overheads treated?

Answer 12

Fixed manufacturing overheads are allocated to each unit produced, becoming part of the unit product cost.

Question 13

(FFMA-110) What are the fixed costs per year for Harvey Co. as given in the example?

Answer 13

Harvey Co. has fixed manufacturing overheads of £150,000 and selling and admin expenses of £100,000 per year.

Question 14

(FFMA-111) How is the unit product cost under absorption costing calculated for Harvey Co.?

Answer 14

The unit product cost under absorption costing is calculated by adding the variable cost per unit (£10) to a portion of the fixed manufacturing overheads (£150,000/25,000 units = £6), totaling £16 per unit.

Question 15

(FFMA-112) What is the selling price per unit for Harvey Co.’s product?

Answer 15

Harvey Co.’s product has a selling price of £30 per unit.

Question 16

(FFMA-113) How does variable/marginal costing treat selling and administrative expenses?

Answer 16

In variable/marginal costing, selling and administrative expenses are treated as period costs and are not included in the product cost.

Question 17

(FFMA-114) What is the net income difference between absorption and variable costing for Harvey Co. in year one?

Answer 17

The net income under absorption costing is £120,000, while under variable costing it is £90,000, showing a difference of £30,000.

Question 18

(FFMA-115) How can the difference in net income between absorption and variable costing be reconciled for Harvey Co.?

Answer 18

The difference can be reconciled by considering the fixed manufacturing overhead costs that are deferred in inventory under absorption costing but are expensed in the period they are incurred under variable costing.

Question 19

(FFMA-116) What is the contribution margin in a variable/marginal costing income statement?

Answer 19

The contribution margin is the amount remaining from sales revenue after deducting all variable expenses, which contributes to covering fixed costs and profit.

Question 20

(FFMA-117) What should you attempt next to understand the product cost for Harvey Co.?

Answer 20

Attempt the product cost quiz to better understand how product costs are calculated under both absorption and variable/marginal costing systems.

Question 21

(FFMA-118) In the second year of operations for Harvey Co., how many units were produced and sold?

Answer 21

Harvey Co. produced 25,000 units and sold 30,000 units.

Question 22

(FFMA-119) What were the fixed costs for Harvey Co. in the second year?

Answer 22

The fixed costs were the same as in the first year: manufacturing overhead of £150,000 and selling and admin expenses of £100,000.

Question 23

(FFMA-120) What is the variable cost per unit for Harvey Co.’s product?

Answer 23

The variable cost per unit is £10, which includes direct materials, direct labour, and variable manufacturing overhead.

Question 24

(FFMA-121) Under absorption costing, what is Harvey Co.’s unit product cost?

Answer 24

The unit product cost under absorption costing is £16, which includes variable costs and a portion of fixed manufacturing overhead.

Question 25

(FFMA-122) What is the difference in net income between absorption and variable costing for Harvey Co. in the second year?

Answer 25

The net income under absorption costing is £230,000, while under variable costing it is £260,000, showing a difference of £30,000.

Question 26

(FFMA-123) How is the ending inventory for Harvey Co. valued under absorption costing in the second year?

Answer 26

The ending inventory is valued at £0 under absorption costing since all units produced and previously held in inventory were sold.

Question 27

(FFMA-124) Why does absorption costing show a lower net income compared to variable costing in Harvey Co.’s second year?

Answer 27

Absorption costing shows a lower net income because it includes £30,000 of fixed overhead from the previous year’s inventory, which is released into the cost of goods sold when the inventory is sold.

Question 28

(FFMA-125) What happens to net income when production is less than sales under absorption costing?

Answer 28

When production is less than sales, inventory decreases, releasing the fixed overhead costs into the cost of goods sold, which reduces net income under absorption costing compared to variable costing.

Question 29

(FFMA-126) How does the net income compare between absorption and variable costing when production equals sales over a period?

Answer 29

When production equals sales over a period, there’s no change in inventory, leading to the same net income under both absorption and variable costing.

Question 30

(FFMA-127) What should you attempt next to further understand the comparison between absorption and variable costing for Harvey Co.?

Answer 30

Attempt the reconciliation quiz to practice justifying the differences between absorption and variable costing income statements.

Question 31

(FFMA-209) What is the total variable cost per unit for Denton Company’s product?

Answer 31

The total variable cost per unit is £25, which includes direct materials, direct labour, variable manufacturing overhead, and variable selling and administrative costs.

Question 32

(FFMA-210) What are the fixed costs per month for Denton Company?

Answer 32

The fixed costs per month for Denton Company are £315,000 for manufacturing overhead and £245,000 for selling and administrative expenses, totalling £560,000.

Question 33

(FFMA-211) What is the selling price per unit for Denton Company’s product?

Answer 33

The product sells for £60 per unit.

Question 34

(FFMA-212) How many units were produced and sold by Denton Company in July and August?

Answer 34

Denton Company produced 17,500 units in both July and August, selling 15,000 units in July and 20,000 units in August.

Question 35

(FFMA-213) How is the unit product cost calculated under absorption costing for Denton Company?

Answer 35

Under absorption costing, the unit product cost includes the variable cost of production (£22) plus a share of the fixed manufacturing overhead. With fixed overhead of £315,000 and production of 17,500 units, the fixed overhead per unit is £18, making the total unit product cost £40.

Question 36

(FFMA-214) How does variable costing differ from absorption costing in calculating unit product cost?

Answer 36

Variable costing only includes the variable costs of production, which total £22 per unit, excluding the fixed manufacturing overhead that is included in absorption costing.

Question 37

(FFMA-215) What is the net income for Denton Company in July and August using absorption costing?

Answer 37

The net income using absorption costing is £10,000 for July and £95,000 for August.

Question 38

(FFMA-216) What would be the net income using variable costing for Denton Company?

Answer 38

Using variable costing, the net income would be £35,000 for July and £140,000 for August.

Question 39

(FFMA-217) How does the ending inventory valuation differ between absorption and variable costing for Denton Company?

Answer 39

Under absorption costing, ending inventory includes both variable and fixed manufacturing overhead costs. Under variable costing, it only includes variable costs.

Question 40

(FFMA-218) Why is there a difference in net income between absorption and variable costing for Denton Company?

Answer 40

The difference in net income is due to the treatment of fixed manufacturing overhead costs. Under absorption costing, a portion of these costs is deferred in inventory, affecting net income when inventory levels change. Under variable costing, all fixed costs are expensed in the period they occur, leading to different net income figures when inventory levels fluctuate.

Question 41

(FFMA-219) What should be the next step after understanding the cost data for Denton Company?

Answer 41

The next step is to prepare income statements under both absorption and variable costing, reconcile any differences, and attempt the related quizzes and lecture engagement questions for further practice.

Question 42

(FFMA-220) What does the red Lego in the instructional video represent?

Answer 42

The red Lego represents fixed costs.

Question 43

(FFMA-221) What does the yellow Lego in the instructional video represent?

Answer 43

The yellow Lego represents variable costs, including direct labor, materials, and variable overheads.

Question 44

(FFMA-222) In the Lego example, what is the difference between absorption costing and variable costing?

Answer 44

In absorption costing, both fixed and variable costs are included in the product cost, whereas in variable costing, only variable costs are included.

Question 45

(FFMA-223) What happens to the fixed costs in absorption costing when production is less than sales?

Answer 45

In absorption costing, when production is less than sales, a portion of fixed costs is carried forward with the inventory.

Question 46

(FFMA-224) What happens to the fixed costs in absorption costing when production is more than sales?

Answer 46

In absorption costing, when production is more than sales, the fixed costs are spread across more units, resulting in a lower cost per unit.

Question 47

(FFMA-225) How does absorption costing affect net income when production equals sales?

Answer 47

When production equals sales, absorption costing will result in the same net income as variable costing, as all costs are matched to the units sold.

Question 48

(FFMA-226) How is under or over absorption of overheads adjusted in the accounts?

Answer 48

Under or over absorption of overheads is adjusted in the accounts by either charging or crediting the amount to the cost of goods sold or other relevant accounts.

Question 49

(FFMA-227) What visual aid is used in the video to explain the concept of absorption and variable costing?

Answer 49

Lego bricks are used as a visual aid to explain the concepts of absorption and variable costing.

Question 50

(FFMA-228) What does the conveyer belt with a computer represent in the video?

Answer 50

The conveyor belt with a computer represents the process of recording manufacturing costs as products are made.

Question 51

(FFMA-229) How is the recorded cost in the computer compared to actual costs?

Answer 51

The recorded cost in the computer, based on budgeted information, is compared to actual costs to determine under or over absorption of overheads.