Variable/Absorption Costing Flashcards
Product costs of this includes direct materials, direct labor, variable and fixed manufacturing overhead.
Absorption costing
Period costs includes variable and fixed selling and administrative expenses.
Absorption costing
Product costs of this includes direct material, direct labor, and variable manufacturing overhead.
Variable Costing
Period costs of this includes fixed manufacturing overhead aside from variable and fixed selling and administrative expenses.
Variable costing
Which method will produce the highest values for work in process and finished goods inventories?
Absorption costing
What is the effect on inventory when production is greater than sales?
Inventory increases
When production is greater than sales and inventory increases, absorption costing is _____________ than variable costing.
greater than
What happens when production is less than sales?
Inventory decreases and absorption is less than variable costing
When production is equal to sales, what is the effect on inventory?
No change. Absorption and variable costing is also equal.
True or false. Net operating income is not affected by changes in production using variable costing.
True.
True or false. Net operating income is affected by changes in production using absorption costing even though the number of units sold is the same each year.
True.
True or false. Opponents of absorption costing argue that shifting fixed manufacturing overhead costs between periods can lead to misinterpretations and faulty decisions.
True.
True or false. Those who favor variable costing argue that the income statements are easier to understand because net operating income is only affected by changes in unit sales. The resulting income amounts are more consistent with managers’ expectations.
True.
True or false. Absorption costing does not support CVP analysis .
True, because it essentially treats fixed manufacturing overhead as a variable cost by assigning a per unit amount of the fixed overhead to each unit of production.
True or false. Treating fixed manufacturing overhead as a product cost can lead to faulty pricing decisions and keep/drop decisions.
True.
True or false. Treating fixed manufacturing overhead as a product cost can produce positive net operating income even when the number of units sold is less than the breakeven point.
True.
True or false. Under the Tax Reform Act of 1986, absorption costing must be used when filing income tax returns.
True.
True or false. Management finds variable costing and the contribution approach more useful.
True.
True or false. Variable costing and the contribution approach is consistent with CVP analysis.
True.
True or false. Net operating income is closer to net cash flow with variable costing and the contribution approach.
True.
True or false. Variable costing and the contribution approach is consistent with standard costs and flexible budgeting.
True.
True or false. With variable costing and the contribution approach, it is easier to estimate profitability of products and segments.
True.
True or false. Profit is not affected by change in inventories.
True.
True or false. with variable costing and the contribution approach, impact of fixed costs on profits emphasized.
True.
True or false. In absorption costing, fixed manufacturing costs must be assigned to products to properly match revenues and costs.
True.
True or false. In variable costing, fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.
True.
Companies involved in TOC use a form of variable costing, but treating direct labor as a fixed cost for three reasons:
- Many companies have a commitment to guarantee workers a minimum number of paid hours.
- TOC emphasizes the role of direct labor in continuous improvement. Fluctuating levels of direct labor can devastate morale and defeat the role of employees in continuous improvement efforts.
- Direct labor is usually not the constraint.
True or false. In a JIT inventory system, production tends to equal sales. So, the difference between variable and absorption income tends to disappear.
True.
