L7- Absorption and Variable Costing

Question 1

Why do we determine the cost of products?

Answer 1

–Pricing
–Cost Control
–Product/Market strategies based on profitability analysis of individual products/customers
–Valuing inventory for financial reporting purposes
–Let’s start with the last one, valuing inventories for financial reporting

Question 2

Define Absorption Costing

Answer 2

Charges products with all manufacturing costs, regardless of whether the costs are fixed or variable

Question 3

Characteristics of Absorption Costing

Answer 3

–The cost of a unit of product consists of all four types of manufacturing costs — direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
–Used for external financial reporting purposes

Question 4

Variable Costing Characteristics

Answer 4

–The cost of a unit of product consists of the three variable manufacturing costs — direct material, direct labor, and variable manufacturing overhead.
–Preferred for internal decision making
–Use of contribution format profit and loss account

Question 5

Which method of costing will produce the highest values for work in process and finished goods inventories?

Answer 5

Absorption costing

Question 6

True or False. The variable-costing income statement is based on the contribution margin format

Answer 6

True

Question 7

True or False. The absorption-costing income statement is based on the gross-margin format

Answer 7

True

Question 8

True or False. Under VC only variable production costs are treated as product costs

Answer 8

True

Question 9

True or False.
Under AC fixed manufacturing overheads are also treated as product costs

Answer 9

True

Question 10

True or False Under AC fixed manufacturing overheads attached to unsold units are carried into the stock and deferred to the next period (causing different reported profits).

Answer 10

True

Question 11

True or False. VC cannot be used for external reporting or tax purposes, it may be used for internal purposes.

Answer 11

True

Question 12

True or False. VC fits well with CVP analysis and is important in profit planning and decision making.

Answer 12

True

Question 13

True or False. Variable (VC) and absorption costing (AC) are alternative methods of determining unit product costs.

Answer 13

True

Question 14

Define Just in Time Inventory System

Answer 14

Production tends to equal sales. (So, the difference between variable and
absorption profit tends to disappear)

Question 15

Con of Absorption Costing Method

Answer 15

A basic problem with absorption costing is that fixed manufacturing overhead costs appear to be variable with respect to the number of units sold.

Question 16

Cons of using Variable Costing on its external financial reports

Answer 16

runs the risk that its auditors may not accept the financial statements as conforming to internationally accepted accounting principles.

Question 17

Advantages of Variable Costing and Contribution Approach

Answer 17

–Management finds it
easy to understand
–Consistent with
CVP analysis.
–Operating profit is closerto net cash flow
–Consistent with standardcosts and flexible budgeting.
–Easier to estimate profitabilityof products and segments
–Profit is not affected bychanges in inventory
–Impact of fixed costs on profits
emphasized

Question 18

Reconciliation, Unit Cost Computations and Examples on lecture slides

Answer 18

True