Projecting and Forecasting Part 2

Question 1

___________________ (as the name implies) absorbs fixed overhead cost into the units produced. Those units placed in inventory can absorb some of the
manager’s cost and raise profits. This method encourages larger inventories.

Answer 1

Absorption costing

Question 2

________________ places only variable costs into products and all fixed overhead is charged to cost of goods sold. This does not give an incentive to
overproduce.

Answer 2

Variable costing

Question 3

____________________ is an inventory costing method that places only variable direct material in inventoriable cost. All other costs are treated as costs of the period. This also does not give an incentive to overproduce.

Answer 3

Throughput costing

Question 4

MCQ-04255

Assumptions underlying cost-volume-profit analysis include all of the following, EXCEPT:

A. All costs can be divided into fixed and variable elements.
B. Total costs are directly proportional to volume over the relevant range.
C. Selling prices are to be unchanged.
D. Volume is the only relevant factor affecting cost.

Answer 4

Choice “B” is correct.
Only total variable costs are directly proportional to volume over the relevant range.

Choices “A”, “C”, and “D” are incorrect, because all are underlying assumptions of cost-volume-profit.

Question 5

MCQ-04395
Producto Industries had a beginning inventory of 1,000 units on January 1, 20X1, purchased 30,000 units during the year, and sold 28,000 during the year ended December 31, 20X1. In comparing the net income results related to the use of absorption versus variable (direct) costing for the year ended December 31, 20X1:

A. There will be no difference in net income amounts using either absorption or
variable costing.
B. Absorption costing will produce a greater net income than variable costing.
C. Variable costing will produce a greater net income than absorption costing.
D. Variable costing will only produce greater net income if variable costs per unit are
unchanged in relation to periodic fixed overhead applications.

Answer 5

Choice “B” is correct. The only difference between variable and absorption costing is
the treatment of fixed costs. Under variable costing approaches, all fixed costs are
treated as periodic expenses. Using absorption costing, certain fixed costs are treated
as unexpired (inventory) and only recognized as cost of goods sold when relieved from
inventory. When inventory increases, cost of goods sold decreases and net income
increases. An increase in inventory by 2,000 units as displayed in the fact pattern
(30,000 − 28,000) indicates that some fixed costs, treated as period expenses under
variable costing, have been included in inventory under absorption costing thereby
decreasing cost of goods sold and increasing net income.

Question 6

MCQ-03717
Jago Co. has 2 products that use the same manufacturing facilities and cannot be
subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:

A. Lower total manufacturing costs for the manufacturing capacity.
B. Lower total variable manufacturing costs for the manufacturing capacity.
C. Greater gross profit per hour of manufacturing capacity.
D. Greater contribution margin per hour of manufacturing capacity.

Answer 6

Choice “D” is correct. To maximize profit at full capacity, contribution margin per hour should be maximized.

Choice “C” is incorrect. Contribution margin is a better measure of profit maximization
than gross profit because it includes all variable costs. Gross margin includes consideration of cost of goods sold, but may exclude other variable costs, such as selling, general, and administrative costs.