The principal difference between variable costing and absorption costing centers on

Chapter 05

True / False Questions

1.

Under variable costing, product costs consist of direct materials, direct labor, and variable manufacturing overhead. True False

2.

Under absorption costing, fixed manufacturing overhead is treated as a product cost. True False

3.

Under variable costing, variable production costs are not treated as product costs. True False

4.

Under variable costing, fixed manufacturing overhead cost is not treated as a product cost. True False

5.

The costs assigned to units in inventory are typically lower under variable costing than under absorption costing. True False

6.

Direct materials is considered to be a product cost under variable costing but not absorption costing. True False

7.

Under absorption costing, fixed manufacturing overhead cost is not included in product cost. True False

8.

Under variable costing, product cost does not contain any fixed manufacturing overhead cost. True False

9.

Under conventional absorption costing, the fixed costs associated with idle production capacity are not included as part of the product cost. True False

Multiple/Choice

10.

Under absorption costing, the profit for a period is affected by a change in the number of units of finished goods in inventory. True False

11.

The principal difference between variable costing and absorption costing centers on:

A.

whether variable manufacturing costs should be included in product costs.

B.

whether fixed manufacturing costs should be included in product costs.

C.

whether fixed manufacturing costs and fixed selling and administrative costs should be included in product costs.

D.

whether selling and administrative costs should be included in product costs.

12.

Under absorption costing, fixed manufacturing overhead costs:

A.

are deferred in inventory when production exceeds sales.

B.

are always treated as period costs.

C.

are released from inventory when production exceeds sales.

D.

are ignored.

13.

Under variable costing, fixed manufacturing overhead is:

A.

carried in a liability account.

B.

carried in an asset account.

C.

ignored.

D.

expensed as a period cost.

14.

Under variable costing, which of the following is not expensed in its entirety in the period in which it is incurred?

A.

fixed manufacturing overhead cost

B.

fixed selling and administrative expense

C.

variable selling and administrative expense

D.

variable manufacturing overhead cost

15.

The term gross margin is used in reports prepared using:

A.

both absorption costing and variable costing.

B.

absorption costing but not variable costing.

C.

variable costing but not absorption costing.

D.

neither variable costing nor absorption costing.

16.

When sales are constant, but the number of units produced fluctuates, net operating income determined by the absorption costing method will:

A.

tend to fluctuate in the same direction as fluctuations in the number of units produced.

B.

tend to remain constant.

C.

tend to fluctuate in the opposite direction as fluctuations in the number of units produced.

D.

fluctuate without any relation to the number of units produced.

17.

George Corporation has no beginning inventory and manufactures a single product. If the number of units produced exceeds the number of units sold, then net operating income under the absorption method for the year will:

A.

be equal to the net operating income under variable costing.

B.

be greater than the net operating income under variable costing.

C.

be equal to the net operating income under variable costing plus total fixed manufacturing costs.

D.

be equal to the net operating income under variable costing less total fixed manufacturing costs.

18.

When production exceeds sales and the company uses the LIFO inventory flow assumption, the net operating income reported under absorption costing generally will be:

A.

less than net operating income reported under variable costing.

B.

greater than net operating income reported under variable costing.

C.

equal to net operating income reported under variable costing.

D.

higher or lower because no generalization can be made.

19.

Routit Corporation had the following sales and production for the past four years:

Year 1

Year 2

Year 3

Year 4

Production in units

5,000

6,000

5,000

5,000

Sales in units

4,000

5,000

5,000

7,000

Selling price per unit, variable cost per unit, and total fixed cost are the same each year. There were no beginning inventories in Year 1. Which of the following statements is correct?

A.

Under variable costing, net operating income for Year 3 and Year 4 would be the same.

B.

Under variable costing, net operating income for Year 2 and Year 3 would be the same.

C.

Variable costing net income would exceed absorption costing net income in Year 1.

D.

Absorption costing net income would exceed variable costing net income in Year 4.

20.

If a cost is a common cost of the segments on a segmented income statement, the cost should:

A.

be allocated to the segments on the basis of segment sales.

B.

not be allocated to the segments.

C.

excluded from the income statement.

D.

treated as a product cost rather than as a period cost.

21.

A national retail company has segmented its income statement by sales territories. If each sales territory statement is further segmented by individual stores, which of the following will most likely occur?

A.

some common fixed expenses in the sales territory segmented statement will become traceable fixed expenses in the individual store segmented statement.

B.

some traceable fixed expenses in the sales territory segmented statement will become common fixed expenses in the individual store segmented statement.

C.

the sum total of the individual stores' segment margins in each sales territory will be equal to the segment margin for the sales territory.

D.

the sum total of the sales territory segment margins will equal the total net operating income for the entire company.

22.

Managers will often allocate common fixed expenses to business segments because:

A.

this is required by law.

B.

not allocating these costs will lead to bad decisions.

C.

they believe this practice will ensure that the company's common fixed expenses are covered.

D.

they do not want the sum of the business segment margins to equal the net operating income for the company.

23.

When using data from a segmented income statement, the dollar sales for a segment to break even is equal to:

A.

Common fixed expenses ÷ Unit CM

B.

Common fixed expenses ÷ Segment CM ratio

C.

Traceable fixed expenses ÷ Unit CM

D.

Traceable fixed expenses ÷ Segment CM ratio

24.

When using data from a segmented income statement, the dollar sales for the company to break even overall is equal to:

A.

(Allocated fixed expenses + Traceable fixed expenses) ÷ Overall CM ratio

B.

(Traceable fixed expenses + Common fixed expenses) ÷ Overall CM ratio

C.

(Non-traceable fixed expenses + Common fixed expenses) ÷ Overall CM ratio

D.

(Traceable fixed expenses) ÷ Overall CM ratio

25.

Sharron Inc., which produces a single product, has provided the following data for its most recent month of operations:

Number of units produced

3,000

Variable costs per unit:

Direct materials

$91

Direct labor

$13

Variable manufacturing overhead

$7

Variable selling and administrative expense

$6

Fixed costs:

Fixed manufacturing overhead

$237,000

Fixed selling and administrative expense

$165,000

There were no beginning or ending inventories. The variable costing unit product cost was:

A.

$111 per unit

B.

$190 per unit

C.

$117 per unit

D.

$110 per unit