Which of the following statements is true for a firm that uses variable costing?
Answer (B) is correct. In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales.
When a firm prepares financial reports by using absorption costing,
Answer (C) is correct. In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing due to fixed overhead carried over from the prior inventory. If sales increase over production, more than one period’s overhead is recognized as expense. Accordingly, if the increase in overhead expensed is greater than the contribution margin of the increased units sold, profit may be lower with an increased level of sales.
Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs?
Answer (C) is correct. Absorption (full) costing considers all manufacturing costs to be inventoriable as product costs. These costs include variable and fixed manufacturing costs, whether direct or indirect. The alternative to absorption is known as variable (direct) costing.
The contribution margin is the excess of revenues over
Answer (D) is correct.
Contribution margin is the excess of revenues over all variable costs
(including both manufacturing and non manufacturing variable costs) that
vary with an output-related cost driver. The contribution margin equals
the revenues that contribute toward covering the fixed costs and
providing a net income.
Which one of the following statements is true regarding absorption costing and variable
Answer (B) is correct.
Under variable costing, inventories are charged only with the variable
costs of production. Fixed manufacturing costs are expensed as period
costs. Absorption costing charges to inventory all costs of production. If
finished goods inventory increases, absorption costing results in higher
income because it capitalizes some fixed costs that would have been
expensed under variable costing. When inventory declines, variable
costing results in higher income because some fixed costs capitalized
under the absorption method in prior periods are expensed in the current
Jansen, Inc., pays bonuses to its managers based on operating income. The company uses
absorption costing, and overhead is applied on the basis of direct labor hours. To increase
bonuses, Jansen’s managers may do all of the following except
Answer (D) is correct.
Under an absorption costing system, income can be manipulated by
producing more products than are sold because more fixed
manufacturing overhead will be allocated to the ending inventory. When
inventory increases, some fixed costs are capitalized rather than
expensed. Decreasing production, however, will result in lower income
because more of the fixed manufacturing overhead will be expensed.
The costing method that is properly classified for both external and internal reporting
External Reporting ... Internal Reporting
Answer (C) is correct.
Activity-based costing, job-order costing, process costing, and standard
costing can all be used for both internal and external purposes. Variable
costing is not acceptable under GAAP for external reporting purposes.
Absorption costing and variable costing are two different methods of assigning costs to units
produced. Of the four cost items listed below, identify the one that is not correctly
accounted for as a product cost.
Part of Product Cost Under
Absorption Costing Variable
Answer (D) is correct.
Under absorption costing, all manufacturing costs, both fixed and
variable, are treated as product costs. Under variable costing, only variable costs of manufacturing are inventoried as product costs. Fixed manufacturing costs are expensed as period costs. Packaging and shipping costs are not product costs under either method because they are incurred after the goods have been manufactured. Instead, they are included in selling and administrative expenses for the period.
Which one of the following is an advantage of using variable costing?
Answer (C) is correct. Under variable costing, only the variable costs of manufacturing attach to the units of output; fixed costs are expensed in the period in which they are incurred. Thus, the variations in cost directly attributable to changes in production level are immediately apparent under variable costing.
Huntington Corporation pays bonuses to its managers based on operating income, as calculated under variable costing. It is now 2 months before year end, and earnings have been depressed for some time. Which one of the following actions should Wanda Richards, production manager, definitely implement if she desires to maximize her bonus for this year?
Answer (C) is correct. Because the production manager wishes to maximize her bonus for the coming year, the action she must take will necessarily have most of its effect in the short run. The action she should take to achieve this goal is to defer costs under her control until the following period.