cost12etif_09 inventory costing

8/12/2019 Cost12etif_09 Inventory Costing

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CHAPTER 9

INVENTORY COSTING AND CAPACITY ANALYSIS

TRUE/FALSE

1. Absorption costing absorbs only variable manufacturing costs.

Answer: False Difficulty: 1 Objective: 1Terms to Learn: absorption costingAbsorption costing absorbs all manufacturing costs, both fixed and variable.

2. ariable costing includes all variable costs ! both manufacturing andnonmanufacturing ! in inventory.

Answer: False Difficulty: 1 Objective: 1

Terms to Learn: variable costingariable costing includes only manufacturing variable costs in inventory.

". #nder both variable and absorption costing, all variable manufacturing costs areinventoriable costs.

Answer: $rue Difficulty: 1 Objective: 1Terms to Learn: variable costing, absorption costing

%. #nder variable costing, fixed manufacturing costs are treated as an expense of theperiod.

Answer: $rue Difficulty: 1 Objective: 1Terms to Learn: variable costing

&. $he contribution'margin format of the income statement is used (ith absorptioncosting.

Answer: False Difficulty: 1 Objective: 2Terms to Learn: absorption costing$he contribution'margin format of the income statement is used (ith variablecosting.

). $he contribution'margin format of the income statement distinguishesmanufacturing costs from nonmanufacturing costs.

Answer: False Difficulty: 1 Objective: 2Terms to Learn: variable costing$he contribution'margin format of the income statement distinguishes variablecosts from fixed costs.

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+. $he gross'margin format of the income statement highlights the lump sum of fixedmanufacturing costs.

Answer: False Difficulty: 2 Objective: 2Terms to Learn: absorption costing

$he gross'margin format of the income statement distinguishes manufacturing costsfrom nonmanufacturing costs, but it does not highlight the lump sum of fixedmanufacturing costs.

. -n absorption costing, all nonmanufacturing costs are subtracted from gross margin.

Answer: $rue Difficulty: 1 Objective: 2Terms to Learn: absorption costing

*. irect costing is a perfect (ay to describe the variable'costing inventory method.

Answer: False Difficulty: 2 Objective: 2Terms to Learn: direct costingirect costing is a less than perfect (ay to describe this method because not allvariable costs are inventoriable costs.

1/. 0hen variable costing is used, an income statement (ill sho( gross margin.

Answer: False Difficulty: 2 Objective: 2Terms to Learn: variable costing0hen variable costing is used, an income statement (ill sho( contribution margin.

11. $he income under variable costing (ill al(ays be the same as the income underabsorption costing.

Answer: False Difficulty: 2 Objective: 2Terms to Learn: variable costing, absorption costing$he income under variable costing (ill sometimes be the same as the income underabsorption costing.

12. Absorption costing is reuired by AA3 4enerally Accepted Accounting3rinciples5 for external reporting.

Answer: $rue Difficulty: 2 Objective: 2Terms to Learn: absorption costing

1". 0hen production deviates from the denominator level, a production'volumevariance al(ays exists under absorption costing.

Answer: $rue Difficulty: 1 Objective: "Terms to Learn: absorption costing

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1%. Fixed manufacturing costs included in cost of goods available for sale 6 theproduction'volume variance (ill al(ays 7 total fixed manufacturing costs underabsorption costing.

Answer: $rue Difficulty: 1 Objective: "

Terms to Learn: absorption costing

1&. $he production'volume variance only exists under absorption costing and not undervariable costing.

Answer: $rue Difficulty: 1 Objective: "Terms to Learn: absorption costing, variable costing

1). 0hen the unit level of inventory increases during an accounting period, operatingincome is greater under variable costing than absorption costing.

Answer: False Difficulty: " Objective: "Terms to Learn: variable costing, absorption costingreater operating income is reported under variable costing than absorption costing(hen the unit level of inventory decreasesduring an accounting period.

1+. $he difference in operating income under absorption costing and variable costing isdue solely to the timing difference of expensing fixed manufacturing costs.

Answer: $rue Difficulty: 2 Objective: "Terms to Learn: variable costing, absorption costing

1. -f managers report inventories of 8ero at the start and end of each accountingperiod, operating incomes under absorption costing and variable costing (ill be thesame.

Answer: $rue Difficulty: 2 Objective: "Terms to Learn: variable costing, absorption costing

1*. 9any companies use variable costing for internal reporting to reduce theundesirable incentive to build up inventories.

Answer: $rue Difficulty: 2 Objective: %Terms to Learn: variable costing, absorption costing

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2/. #nder variable costing, managers can increase operating income by simplyproducing more inventory at the end of the accounting period even if that inventorynever gets sold.

Answer: False Difficulty: " Objective: %

Terms to Learn: variable costing#nder absorptioncosting, managers can increase operating income by producingmore inventory at the end of the accounting period.

21. onfinancial measures such as comparing units in ending inventory this period tounits in ending inventory last period can help reduce buildup of excess inventory.

Answer: $rue Difficulty: 1 Objective: %Terms to Learn: absorption costing

22. ;ne of the most common problems reported by companies using variable costing is

the difficulty of classifying costs into fixed or variable categories.

Answer: $rue Difficulty: 2 Objective: %Terms to Learn: variable costing

2". 9anagers can increase operating income (hen absorption costing is used byproducing more inventory.


2%. A manager can increase operating income by deferring maintenance beyond thecurrent accounting period (hen absorption costing is used.


2&. $hroughput costing considers only direct materials and direct manufacturing laborto be truly variable costs.

Answer: False Difficulty: 1 Objective: &Terms to Learn: throughput costing$hroughput costing considers only direct materialsto be truly variable costs.

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2). 0hen production uantity exceeds sales, throughput costing results in reportinggreater operating income than variable costing.

Answer: False Difficulty: " Objective: &Terms to Learn: throughput costing, variable costing

0hen production uantity exceeds sales, throughput costing results in reportingloweroperating income than variable costing.

2+. $hroughput costing provides more incentive to produce for inventory than doesabsorption costing.

Answer: False Difficulty: 1 Objective: &Terms to Learn: throughput costing, absorption costing$hroughput costing provides less incentive to produce for inventory than doesabsorption costing.

2. A company may use absorption costing for external reports and still choose to usethroughput costing for internal reports.

Answer: $rue Difficulty: 2 Objective: &Terms to Learn: throughput costing, absorption costing

2*. $hroughput contribution euals revenues minus all product costs.

Answer: False Difficulty: 1 Objective: &Terms to Learn: throughput costing$hroughput contribution euals revenues minus direct materials costs.

"/. $hroughput costing results in a higher amount of manufacturing costs being placedin inventory than either variable or absorption costing.

Answer: False Difficulty: 2 Objective: &Terms to Learn: throughput costing$hroughput costing results in a lo(er amount of manufacturing costs being placedin inventory than either variable or absorption costing.

"1. etermining the right level of capacity is one of the most strategic and difficultdecisions managers face.

Answer: $rue Difficulty: 2 Objective: )Terms to Learn: practical capacity

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"2.


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". $heoretical capacity is the capacity level that represents (hat the firm is able toobtain under reasonable circumstances.

Answer: False Difficulty: 2 Objective: )Terms to Learn: theoretical capacity

3ractical capacity is the capacity level that represents (hat the firm is able to obtainunder reasonable circumstances.

"*. -f a company chooses practical capacity for planning purposes, it must also usepractical capacity for performance evaluation.

Answer: False Difficulty: 2 Objective: +Terms to Learn: practical capacity$here is no reuirement that one capacity'level concept has to be used for allpurposes.

%/. $heoretical capacity is most often used to cost a product.

Answer: False Difficulty: 2 Objective: +Terms to Learn: theoretical capacity$heoretical capacity is unattainable and therefore should not be used to cost aproduct. 3ractical capacity is generally used to cost a product.

%1. 3ractical capacity highlights capacity acuired but currently not used.

Answer: $rue Difficulty: 2 Objective: +Terms to Learn: practical capacity

%2. For benchmar>ing purposes it is best to use master'budget capacity because allcompetitors use about the same about of capacity for production.

Answer: False Difficulty: 2 Objective: +Terms to Learn: master'budget capacity utili8ationFor benchmar>ing purposes it is best to usepracticalcapacity because it bestrepresents the long'run cost of capacity.

%". #sing normal capacity for pricing decisions can lead to setting noncompetitiveselling prices.

Answer: $rue Difficulty: " Objective: Terms to Learn: normal capacity utili8ation

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%%. #sing master'budget capacity for pricing purposes can lead to a do(n(ard demandspiral.

Answer: $rue Difficulty: 2 Objective: Terms to Learn: master'budget capacity utili8ation, do(n(ard demand spiral

%&. #sing practical capacity is best for evaluating the mar>eting manager@sperformance for a particular year.

Answer: False Difficulty: " Objective: Terms to Learn: practical capacity#sing master-budget capacityis best for evaluating the mar>eting manager@sperformance.

%). $he production'volume variance is affected by the choice of capacity concept usedto determine the denominator level.

Answer: $rue Difficulty: 2 Objective: *Terms to Learn: practical capacity

%+. $he higher the denominator level the higher the budgeted fixed manufacturing costrate per unit.

Answer: False Difficulty: 2 Objective: *Terms to Learn: practical capacity$he higher the denominator level the lowerthe budgeted fixed manufacturing costrate per unit.

%. 9aster'budget capacity utili8ation can be more reliably estimated than normalcapacity utili8ation.

Answer: $rue Difficulty: 2 Objective: *Terms to Learn: master'budget capacity utili8ation

%*. #nused capacity is considered (asted resources and the result of poor planning.

Answer: False Difficulty: 1 Objective: *Terms to Learn: practical capacity#nused capacity is not considered (asted resources because capacity has to bepurchased in large chun>s to accommodate future needs, not ?ust the needs of thecurrent period.

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&/. hallenges only result from estimating the denominator level, but not the costs inthe numerator of the fixed manufacturing cost rate.

Answer: False Difficulty: 1 Objective: *Terms to Learn: practical capacity

hallenges result from estimating both the denominator level and the costs in thenumerator of the fixed manufacturing cost rate.

&1. =stimating capacity costs is uniue to manufacturing and it is not applicable tononmanufacturing entities.

Answer: False Difficulty: 1 Objective: *Terms to Learn: practical capacity=stimating capacity costs is needed in both manufacturing and nonmanufacturingentities.

&2. -f the capacity level chosen to calculate the budgeted fixed overhead cost rate ismore than the actual production, an unfavorable production'volume variance (illresult.

Answer $rue Difficulty: 2 Objective: *Terms to Learn: practical capacity

&". $he brea>even points are the same under both variable costing and absorptioncosting.

Answer: False Difficulty: 2 Objective: ATerms to Learn: variable costing, absorption costing$he brea>even points are generally different under both variable costing andabsorption costing.

MULTIPLE CHOICE

&%. 0hich of the follo(ing cost4s5 are inventoried (hen using variable costingBa. direct manufacturing costsb. variable mar>eting costsc. fixed manufacturing costsd.


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&&. 0hich of the follo(ing cost4s5 are inventoried (hen using absorption costingBa. direct manufacturing costsb. variable mar>eting costsc. fixed manufacturing costsd. eting costs as cost of goods soldb. treats direct manufacturing costs as a period costc. includes fixed manufacturing overhead as an inventoriable costd. is reuired for internal reports to managers

Answer: c Difficulty: " Objective: 1Terms to Learn: absorption costing

&. ariable costing:a. expenses administrative costs as cost of goods soldb. treats direct manufacturing costs as a product costc. includes fixed manufacturing overhead as an inventoriable costd. is reuired for external reporting to shareholders

Answer: b Difficulty: " Objective: 1Terms to Learn: variable costing

&*. DDDDDDDDDD method4s5 expense4s5 variable mar>eting costs in the period incurred.a. ariable costingb. Absorption costingc. $hroughput costingd. All of these ans(ers are correct.

Answer: d Difficulty: 1 Objective: 1Terms to Learn: variable costing, absorption costing, throughput costing

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)/. DDDDDDDDDD method4s5 include4s5 fixed manufacturing overhead costs asinventoriable costs.a. ariable costingb. Absorption costingc. $hroughput costing

d. All of these ans(ers are correct.

Answer: b Difficulty: 1 Objective: 1Terms to Learn: absorption costing

)1. DDDDDDDDDD method4s5 expense4s5 direct material costs as cost of goods sold.a. ariable costingb. Absorption costingc. $hroughput costingd. All of these ans(ers are correct.

Answer: d Difficulty: 1 Objective: 1Terms to Learn: variable costing, absorption costing, throughput costing

)2. DDDDDDDDDD method4s5 is reuired for tax reporting purposes.a. ariable costingb. Absorption costingc. $hroughput costingd. All of these ans(ers are correct.

Answer: b Difficulty: 1 Objective: 1Terms to Learn: absorption costing

)". ariable costing regards fixed manufacturing overhead as a4n5:a. administrative costb. inventoriable costc. period costd. product cost

Answer: c Difficulty: 1 Objective: 1Terms to Learn: variable costing

)%. $he only difference bet(een variable and absorption costing is the expensing of:a. direct manufacturing costsb. variable mar>eting costsc. fixed manufacturing costsd.


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$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H )& A )):9arie@s ecorating produces and sells a mantel cloc> for J1// per unit. -n 2/C&,1//,/// cloc>s (ere produced and /,/// (ere sold. ;ther information for the yearincludes:

irect materials J"/.// per unitirect manufacturing labor J 2.// per unitariable manufacturing costs J ".// per unitHales commissions J &.// per partFixed manufacturing costs J2&.// per unitAdministrative expenses, all fixed J1&.// per unit

)&. 0hat is the inventoriable cost per unit using variable costingBa. J"2b. J"&c. J%/d. J)/

Answer: b Difficulty: 2 Objective: 1Terms to Learn: variable costingJ"/.// 6 J2.// 6 J".// 7 J"&.//

)). 0hat is the inventoriable cost per unit using absorption costingBa. J"2b. J"&c. J)/d. J/

Answer: c Difficulty: 2 Objective: 1Terms to Learn: absorption costingJ"/ 6 J2 6 J" 6 J2& 7 J)/

$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H )+ A ):abe@s Auto produces and sells an auto part for J"/.// per unit. -n 2/C&, 1//,/// parts(ere produced and +&,/// units (ere sold. ;ther information for the year includes:

irect materials J12.// per unitirect manufacturing labor J 2.2& per unitariable manufacturing costs J /.+& per unit

Hales commissions J ".// per partFixed manufacturing costs J"+&,/// per yearAdministrative expenses, all fixed J1"&,/// per year

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)+. 0hat is the inventoriable cost per unit using variable costingBa. J1%.2&b. J1&.//c. J1.//d. J21.+&

Answer: b Difficulty: 2 Objective: 1Terms to Learn: variable costingJ12.// 6 J2.2& 6 J/.+& 7 J1&.//

). 0hat is the inventoriable cost per unit using absorption costingBa. J1&.//b. J1.//c. J1.+&d. J21.+&

Answer: c Difficulty: 2 Objective: 1Terms to Learn: absorption costingJ12.// 6 J2.2& 6 J/.+& 6 4J"+&,/// K 1//,///5 7 J1.+&

)*. 0hich of the follo(ing inventory costing methods sho(n belo( is reuired byAA3 4enerally Accepted Accounting 3rinciples5 for external financialreportingB

a. absorption costingb. variable costingc. throughput costingd. direct costing

Answer: a Difficulty: 2 Objective: 1Terms to Learn: absorption costing

+/. $he contribution'margin format of the income statement:a. is used (ith absorption costingb. highlights the lump sum of fixed manufacturing costsc. distinguishes manufacturing costs from nonmanufacturing costsd. calculates gross margin

Answer: b Difficulty: " Objective: 2

Terms to Learn: variable costing

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+1. $he gross'margin format of the income statement:a. distinguishes bet(een manufacturing and nonmanufacturing costsb. distinguishes variable costs from fixed costsc. is used (ith variable costingd. calculates contribution margin

Answer: a Difficulty: " Objective: 2Terms to Learn: absorption costing

+2. DDDDDDDDDD are subtracted from sales to calculate contribution margin.a. ariable manufacturing costsb. ariable mar>eting costsc. Fixed manufacturing costsd.


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+%. 0hat is cost of goods sold per unit using variable costingBa. J2/b. J2"c. J"/d. J%&

Answer: a Difficulty: 1 Objective: 2Terms to Learn: variable costingJ2/, only variable manufacturing costs are included (hen using variable costing.

+&. 0hat is cost of goods sold using variable costingBa. J"&,///b. J%/,///c. J%+,2&/d. J&%,///

Answer: a Difficulty: 2 Objective: 2

Terms to Learn: variable costingJ2/ x 1,+&/ units 7 J"&,///

+). 0hat is contribution margin using variable costingBa. J*),2&/b. J*1,///c. J1/%,///d. J11/,///

Answer: b Difficulty: " Objective: 2Terms to Learn: variable costing

4J+& x 1,+&/5M4J2/ 6 J"5 x 1,+&/ unitsN 7 J*1,///

++. 0hat is operating income using variable costingBa. J&2,&//b. J+,+&/c. J)&,+&/d. J%+,///

Answer: d Difficulty: " Objective: 2Terms to Learn: variable costingontribution margin of J*1,///M4J+ 6 J1&5 x 2,/// unitsN 7 J%+,///

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$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H + $EG;#E /:Andrea@s Eobbies produces and sells a luxury animal pillo( for J%/.// per unit. -n thefirst month of operation, ",/// units (ere produced and 2,2&/ units (ere sold. Actualfixed costs are the same as the amount budgeted for the month. ;ther information for themonth includes:

ariable manufacturing costs J1* per unitariable mar>eting costs J 1 per unitFixed manufacturing costs J"/,/// per monthAdministrative expenses, all fixed J),/// per month=nding inventories:irect materials '/'0-3 '/'Finished goods +&/ units

+. 0hat is cost of goods sold per unit (hen using absorption costingBa. J1*b. J2/c. J2*d. J"2

Answer: c Difficulty: 2 Objective: 2Terms to Learn: absorption costingJ1* 6 4J"/,/// K ",/// units5 7 J2*

+*. 0hat is gross margin (hen using absorption costingBa. J%&,///b. J&%,+&/c. J++,2&/d. J2%,+&/

Answer: d Difficulty: 2 Objective: 2Terms to Learn: absorption costingMJ%/J1*4J"/,///K",///5N x 2,2&/ units 7 J2%,+&/

/. 0hat is operating income (hen using absorption costingBa. J%,///b. J1),&//c. 4J11,+&/5

d. J1,+&/

Answer: b Difficulty: " Objective: 2Terms to Learn: absorption costingMJ%/J1*4J"/,///K",///5N x 2,2&/ units 7 gross margin L 4J1 x 2,2&/5 L J),///7 J1),&//

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1. An unfavorable production'volume variance occurs (hen:a. production exceeds the denominator levelb. the denominator level exceeds productionc. production exceeds unit salesd. unit sales exceed production

Answer: b Difficulty: 2 Objective: "Terms to Learn: practical capacity

2. -f the unit level of inventory increases during an accounting period, then:a. less operating income (ill be reported under absorption costing than variable

costingb. more operating income (ill be reported under absorption costing than variable

costingc. operating income (ill be the same under absorption costing and variable

costing

d. the exact effect on operating income cannot be determined

Answer: b Difficulty: 2 Objective: "Terms to Learn: absorption costing

". $he difference bet(een operating incomes under variable costing and absorptioncosting centers on ho( to account for:a. direct materials costsb. fixed manufacturing costsc. variable manufacturing costsd.


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&. 0hen comparing the operating incomes bet(een absorption costing and variablecosting, and beginning finished inventory exceeds ending finished inventory, it maybe assumed that:a. sales increased during the periodb. variable cost per unit is less than fixed cost per unit

c. there is an unfavorable production'volume varianced. variable costing operating income exceeds absorption costing operatingincome

Answer: d Difficulty: " Objective: "Terms to Learn: variable costing, absorption costing

). 0hich of the follo(ing statements is FAH=Ba. Absorption costing allocates fixed manufacturing overhead to actual units

produced during the period.b. onmanufacturing costs are expensed in the future under variable costing.

c. Fixed manufacturing costs in ending inventory are expensed in the futureunder absorption costing.d. ;perating income under absorption costing is higher than operating income

under variable costing (hen production units exceed sales units.

Answer: b Difficulty: " Objective: "Terms to Learn: variable costing

+. Eelton ompany has the follo(ing information for the current year:


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. $he follo(ing information pertains to


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*/. Fixed manufacturing costs included in ending inventory total:a. J1,2//b. J1,&//c. J*//d. /

Answer: c Difficulty: " Objective: "Terms to Learn: absorption costingJ),/// K 1,/// units 7 J) x 1&/ 7 J*//

*1. $he production'volume variance is:a. J2,///b. J1,&//c. J2,%//d. /

Answer: b Difficulty: " Objective: "

Terms to Learn: absorption costingJ),/// K 1,/// units 7 J) x 2&/ 7 J1,&//

*2. ;perating income using absorption costing (ill be DDDDDDDDDD than operatingincome if using variable costing.a. J2,%// higher b. J2,%// lo(erc. J*// higher d. J",)// lo(er

Answer: c Difficulty: " Objective: "Terms to Learn: absorption costingifferent operating incomes are reported because the unit level of inventory increasedduring the accounting period by 1&/ units x J) denominator rate 7 J*//. $herefore,operating income is J*// higher under absorption costing because J*// of fixedmanufacturing costs remains in inventory.

$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H *" $EG;#E *):each orporation incurred fixed manufacturing costs of J),/// during 2/C&. ;therinformation for 2/C& includes:

$he budgeted denominator level is 1,/// units.#nits produced total +&/ units.#nits sold total )// units.


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*". Fixed manufacturing costs expensed on the income statement 4excludingad?ustments for variances5 total:a. J",)//b. J%,//c. J),///

d. /Answer: c Difficulty: " Objective: "Terms to Learn: variable costingJ),/// of fixed manufacturing costs is expensed as a lump sum.

*%. Fixed manufacturing costs included in ending inventory total:a. J1,2//b. J1,&//c. J*//d. /

Answer: d Difficulty: " Objective: "Terms to Learn: variable costing#nder variable costing no fixed manufacturing costs are included in inventory, andall are expensed on the income statement as a lump sum.

*&. $he production'volume variance totals:a. J2,///b. J1,&//c. J2,%//d. /

Answer: d Difficulty: " Objective: "

Terms to Learn: variable costingariable costing has no production'volume variance.

*). ;perating income using variable costing (ill be DDDDDDDDDD than operating incomeif using absorption costing.a. J2,%// higher b. J2,%// lo(erc. J",)// higher d. J*// lo(er

Answer: d Difficulty: " Objective: "Terms to Learn: variable costing, absorption costingifferent operating incomes are reported because the unit level of inventory increasedduring the accounting period by 1&/ units x J) denominator rate 7 J*//. $herefore,operating income is J*// lo(er under variable costing because J*// of fixedmanufacturing costs remains in inventory under absorption.

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$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H *+ $EG;#E 1//:9orse orporation incurred fixed manufacturing costs of J+,2// during 2/C&. ;therinformation for 2/C& includes:

$he budgeted denominator level is // units.#nits produced total 1,/// units.

#nits sold total *&/ units.


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1//. ;perating income using absorption costing (ill be DDDDDDDDDD operating income ifusing variable costing.a. J%&/ higher thanb. J*// higher thanc. J1,"&/ lo(er than

d. the same asAnswer: a Difficulty: " Objective: "Terms to Learn: absorption costingifferent operating incomes are reported because the unit level of inventory increasedduring the accounting period by &/ units x J* denominator rate 7 J%&/. $herefore,operating income is J%&/ higher under absorption costing because J%&/ of fixedmanufacturing costs remains in inventory under absorption costing.

1/1. At the end of the accounting period Husan orporation reports operating income ofJ"/,/// and the fixed overhead cost rate is J2/ per unit. #nder absorption costing,if this company no( produces an additional 1// units of inventory, then operating

income:a. (ill increase by J2,///b. (ill increase by J2,/// only if the additional 1// units of inventory are soldc. (ill not be affectedd. is indeterminable

Answer: a Difficulty: " Objective: "Terms to Learn: absorption costing

1/2. At the end of the accounting period


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1/%. 9any companies have s(itched from absorption costing to variable costing forinternal reporting:a. to comply (ith external reporting reuirementsb. to increase bonuses for managersc. to reduce the undesirable incentive to build up inventories

d. so the denominator level is more accurate

Answer: c Difficulty: 2 Objective: %Terms to Learn: variable costing, absorption costing

1/&. 0ays to produce for inventory that result in increasing operating income include:a. s(itching production to products that absorb the least amounts of fixed

manufacturing costsb. delaying items that absorb the greatest amount of fixed manufacturing costsc. deferring maintenance to accelerate productiond. All of these ans(ers are correct.

Answer: c Difficulty: 2 Objective: %Terms to Learn: absorption costing

1/). $o discourage producing for inventory, management cana. evaluate nonfinancial measures such as units in ending inventory compared to

units in salesb. evaluate performance over a three' to five'year period rather than a single yearc. incorporate a carrying charge for inventory in the internal accounting systemd. All of these ans(ers are correct.

Answer: d Difficulty: 2 Objective: %Terms to Learn: absorption costing

1/+. #nder absorption costing, if a manager@s bonus is tied to operating income, thenincreasing inventory levels compared to last year (ould result in:a. increasing the manager@s bonusb. decreasing the manager@s bonusc. not affecting the manager@s bonusd. being unable to determine the manager@s bonus using only the above

information

Answer: a Difficulty: " Objective: %Terms to Learn: absorption costing

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1/. #nder variable costing, if a manager@s bonus is tied to operating income, thenincreasing inventory levels compared to last year (ould result in:a. increasing the manager@s bonusb. decreasing the manager@s bonusc. not affecting the manager@s bonus

d. being unable to determine the manager@s bonus using only the aboveinformation

Answer: c Difficulty: 2 Objective: %Terms to Learn: variable costing

1/*. ritics of absorption costing suggest to evaluate management on their ability to:a. exceed production uotasb. increase operating incomec. decrease inventory costsd. All of these ans(ers are correct.


11/. ifferences bet(een absorption costing and variable costing are much smaller (hena:a. large part of the manufacturing process is subcontracted outb. ?ust'in'time inventory strategy is implementedc. significant portion of manufacturing costs are fixedd. s of using absorption costing=C=3$:a. management has the ability to manipulate operating income via production

schedulesb. manipulation of operating income may ultimately increase the companyOs

costs incurred over the long runc. operating income solely reflects income from the sale of units and excludes

the effects of manipulating production schedulesd. decreasing maintenance activities and increasing production result in

increased operating income


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112. 0hich of the follo(ing inventory costing methods sho(n belo( is 9;H$ li>ely tocause undesirable incentives for managers to build up finished goods inventoryBa. absorption costingb. variable costingc. throughput costing

d. direct costing

Answer: a Difficulty: 2 Objective: %Terms to Learn: absorption costing

11". Advocates of throughput costing argue that:a. only direct materials are truly variableb. direct manufacturing labor is relatively fixedc. variable manufacturing costs are a cost of the periodd. All of these ans(ers are correct.

Answer: d Difficulty: 2 Objective: &

Terms to Learn: throughput costing

11%. -f )// units are produced and only %// units are sold, DDDDDDDDDD results in thegreatest amount of expense reported on the income statement.a. throughput costingb. variable costingc. absorption costingd. period costing

Answer: a Difficulty: 2 Objective: &Terms to Learn: throughput costing

11&. -f %// units are produced and )// units are sold, DDDDDDDDDD results in the greatestamount of operating income.a. throughput costingb. variable costingc. absorption costingd. period costing

Answer: a Difficulty: 2 Objective: &Terms to Learn: throughput costing

*'2)


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11). Advocates of throughput costing maintain that:a. both variable and fixed are necessary to produce goodsP therefore, both types

of costs should be inventoriedb. all manufacturing costs plus some design costs should be inventoriedc. fixed manufacturing costs are related to the capacity to produce rather than to

the actual production of specific unitsd.


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$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H 11* A 12/:Htober ompany produces a specialty item. 9anagement has provided the follo(inginformation:

Actual sales )/,/// units


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122. 0hich of the follo(ing inventory costing methods sho(n belo( is =AH$ li>ely tocause undesirable incentives for managers to build up finished goods inventoryBa. absorption costingb. variable costingc. throughput costing

d. direct costing

Answer: c Difficulty: 2 Objective: &Terms to Learn: throughput costing

12". 3ractical capacity is the denominator'level concept that:a. reduces theoretical capacity for unavoidable operating interruptionsb. is the maximum level of operations at maximum efficiencyc. is based on the level of capacity utili8ation that satisfies average customer

demand over periods generally longer than one yeard. is based on anticipated levels of capacity utili8ation for the coming budget

period

Answer: a Difficulty: 1 Objective: )Terms to Learn: practical capacity

12%. DDDDDDDDDD reduces theoretical capacity for unavoidable operating interruptions.a. 3ractical capacityb. $heoretical capacityc. 9aster'budget capacity utili8ationd. ormal capacity utili8ation

Answer: a Difficulty: 1 Objective: )Terms to Learn: practical capacity

12&. DDDDDDDDDD is based on the level of capacity utili8ation that satisfies averagecustomer demand over periods generally longer than one year.a. 3ractical capacityb. $heoretical capacityc. 9aster'budget capacity utili8ationd. ormal capacity utili8ation

Answer: d Difficulty: 1 Objective: )Terms to Learn: normal capacity utili8ation

12). DDDDDDDDDD is 4are5 based on the demand for the output of the plant.a. 3ractical capacityb. 9aster'budget capacity utili8ationc. ormal capacity utili8ationd.


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12+. $heoretical capacity allo(s for:a. preventive machine maintenanceb. interruptions due to uncontrollable po(er failuresc. re(or> of the expected number of defective units

d. one of these ans(ers is correct.Answer: d Difficulty: 2 Objective: )Terms to Learn: theoretical capacity

12. $heoretical capacitya. is unattainable in the real (orldb. represents an ideal goal of capacity usagec. is based on engineering studies that provide information about the technical

capabilities of machines used in productiond. All of these ans(ers are correct.

Answer: d Difficulty: 2 Objective: )Terms to Learn: theoretical capacity

12*. $he budgeted fixed manufacturing cost rate is the lo(est for:a. practical capacityb. theoretical capacityc. master'budget capacity utili8ationd. normal capacity utili8ation

Answer: b Difficulty: 2 Objective: )Terms to Learn: theoretical capacity

1"/. DDDDDDDDDD provides the lo(est estimate of denominator'level capacity.a. 3ractical capacityb. $heoretical capacityc. 9aster'budget capacity utili8ationd. ormal capacity utili8ation

Answer: c Difficulty: 2 Objective: )Terms to Learn: master'budget capacity utili8ation

$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H 1"1 A 1"2:

A manufacturing firm is able to produce 1,/// pairs of shoes per hour, at maximumefficiency. $here are three eight'hour shifts each day. ue to unavoidable operatinginterruptions, production averages // units per hour. $he plant actually operates only2+ days per month.

*'"/


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1"1. 0hat is the theoretical capacity for the month of AprilBa. 1,///,/// unitsb. +2/,/// unitsc. &1,%// unitsd. 2%/,/// units

Answer: b Difficulty: 2 Objective: )Terms to Learn: theoretical capacity1,/// units x 2% hours x "/ days 7 +2/,/// units

1"2. 0hat is the practical capacity for the month of AprilBa. 1,///,/// unitsb. +2/,/// unitsc. &1,%// unitsd. 2%/,/// units

Answer: c Difficulty: 2 Objective: )Terms to Learn: practical capacity// units x 2% hours x 2+ days 7 &1,%// units

1"". $heoretical capacity:a. represents real capacity available to the companyb. provides the best perspective of actual long'run costsc. (hen used for product costing results in the lo(est cost estimate of the four

capacity optionsd. replicates the cost of capacity in a competitor@s cost structure

Answer: c Difficulty: " Objective: +

Terms to Learn: theoretical capacity

1"%. eting manager@s performance in the current

year

Answer: a Difficulty: " Objective: +Terms to Learn: practical capacity

*'"1


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1"&. ormal capacity utili8ation:a. represents real capacity available to the companyb. can result in setting selling prices that are not competitivec. (hen used for product costing results in the lo(est cost estimate of the four

capacity options

d. represents the maximum units of production intended for current capacityAnswer: b Difficulty: " Objective: +Terms to Learn: normal capacity utili8ation

1"). 9aster'budget capacity utili8ation:a. hides the amount of unused capacityb. represents the maximum units of production intended for current capacityc. provides the best cost estimate for benchmar>ing purposesd. (hen used for product costing results in the lo(est cost estimate of the four

capacity options

Answer: a Difficulty: " Objective: +Terms to Learn: master'budget capacity utili8ation

1"+. From the perspective of long'run product costing it is best to use:a. master'budget capacity utili8ation to highlight unused capacityb. normal capacity utili8ation for benchmar>ing purposesc. practical capacity for pricing decisionsd. theoretical capacity for performance evaluation

Answer: c Difficulty: " Objective: +Terms to Learn: practical capacity

1". ustomers expect to pay a price that includes:a. the cost of unused capacityb. the cost of actual capacity usedc. no capacity costsd.


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1%/. #sing master'budget capacity to set selling prices:a. avoids the recalculation of unit costs (hen expected demand levels changeb. spreads fixed costs over available capacityc. can result in a do(n(ard demand spirald. uses the perspective of long'run product pricing

Answer: c Difficulty: 2 Objective: Terms to Learn: master'budget capacity utili8ation

1%1. 0hen large differences exist bet(een practical capacity and master'budget capacityutili8ation, companies may:a. classify the difference as planned unused capacityb. use master'budget capacity utili8ation for setting selling pricesc. use practical capacity for meaningful feedbac> to the mar>eting managerd. All of these ans(ers are correct.

Answer: a Difficulty: 2 Objective: Terms to Learn: practical capacity, master'budget capacity utili8ation

1%2. $he effect of spreading fixed manufacturing costs over a shrin>ing master'budgetcapacity utili8ation amount results in:a. greater utili8ation of capacityb. increased unit costsc. more competitive selling pricesd. greater demand for the product

Answer: b Difficulty: 2 Objective: Terms to Learn: do(n(ard demand spiral

1%". $he higher the denominator level, the:a. higher the budgeted fixed manufacturing cost rateb. lo(er the amount of fixed manufacturing costs allocated to each unit producedc. higher the favorable production'volume varianced. more li>ely actual output (ill exceed the denominator level

Answer: b Difficulty: 2 Objective: *Terms to Learn: absorption costing

*'""


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1%%. ;perating income reported on the end'of'period financial statements is changed(hen DDDDDDDDDD is 4are5 used to handle the production'volume variance at the endof the accounting period.a. the ad?usted allocation'rate approachb. the proration approach

c. the (rite'off variances to cost of goods sold approachd. All of these ans(ers are correct.

Answer: c Difficulty: " Objective: *Terms to Learn: absorption costing

1%&. 3ractical capacity may:a. increase over time due to improvements in plant layoutb. decrease over time due to efficiencies offered by ne( technologiesc. cannot be altered unless there is a ma?or plant expansiond.


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1%. 9anagers face uncertainty (hen estimating:a. demand of the productb. the denominator level for practical capacityc. total fixed manufacturing costs for the next accounting periodd. All of these ans(ers are correct.

Answer: d Difficulty: 2 Objective: *Terms to Learn: practical capacity

1%*. #nused capacity:a. is a definite sign of (asted resourcesb. is intended for future usec. provides capacity for potential demand surgesd. in processd. fixed manufacturing overhead is not allocated to (or> in process

Answer: d Difficulty: 2 Objective: *Terms to Learn: variable costing

*'"&


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$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H 1&" $EG;#E 1&&:9s. Andrea had(ic>, the company president, has heard that there are multiplebrea>even points for every product. Hhe does not believe this and has as>ed you toprovide the evidence of such a possibility. Home information about the company for2/C& is as follo(s:

$otal fixed manufacturing overhead J1/,///$otal other fixed expenses J2//,///$otal variable manufacturing expenses J12/,///$otal other variable expenses J12/,///#nits produced "/,/// unitseven sales in units using variable costingB

a. &,)2& unitsb. &,+)* unitsc. 11,+& unitsd. 12,1/ units

Answer: c Difficulty: 2 Objective: *Terms to Learn: variable costingeven units 7 4J1/,/// 6 J2//,///5 K 4J%/ L J% L J%5 7 11,+& units

1&%. 0hat are brea>even sales in units using absorption costingBa. &,)2& unitsb. ),))+ unitsc. +,)*2 unitsd. ,/// units

Answer: c Difficulty: 2 Objective: *Terms to Learn: absorption costingeven units 7 MJ"/,/// 6 4J1/,///K"/,/// x 4 L "/,///5N

4J%/ L J% L J%5

7 4J"/,/// 6 J) ' J1/,///5KJ"2J"2 7 J2//,/// 6 J)J2) 7 J2//,/// 7 +,)*" units

*'")


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1&&. 0hat are brea>even sales in units using absorption costing if the production unitsare actually 2&,///Ba. &,)2& unitsb. ),))+ unitsc. +,))+ units

d. ,%+ units

Answer: d Difficulty: 2 Objective: *Terms to Learn: absorption costingeven units 7 MJ"/,/// 6 4J1/,///K"/,/// x 4 L 2&,///5N 4J%/ L J% L J%5

7 4J"/,/// 6 J) ' J1&/,///5KJ"2J"2 7 J2"/,/// 6 J)J2) 7 J2"/,/// 7 ,%+ units

$E= F;;0- -F;G9A$-; A33-=H $; I#=H$-;H 1&) A 1&+:$he follo(ing information pertains to the even point in unitsBa. "" unitsb. &,&&) unitsc. &," unitsd. ),/// units

Answer: d Difficulty: 2 Objective: *Terms to Learn: variable costingeven units 7 MJ%,/// 6 41/,/// x J)/5N K 4J12" L J" L J125 7 ),/// units

*'"+


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1)/. 0hat is the brea>even point in units using absorption costing if the units producedare actually 2,2&/Ba. 1,""/ unitsb. 1,/// unitsc. + units

d. &% unitsAnswer: d Difficulty: 2 Objective: *Terms to Learn: absorption costing

even units 7 M4J%&,/// 6 J"&,///5 6 4J2/ x 4 L 2,2&/55N 4J1// L J2/5

7 4J/,/// 6 J2/ L J%&,///5KJ/J/ 7 J"&,/// 6 J2/ 7 &% units

EXERCISES AND PROBLEMS

1)1. For 2/C&, ichols, -nc., had sales of +&,/// units and production of 1//,/// units.;ther information for the year included:

irect manufacturing labor J1+,&//ariable manufacturing overhead 1//,///irect materials 1&/,///ariable selling expenses 1//,///Fixed administrative expenses 1//,///Fixed manufacturing overhead 2//,///

$here (as no beginning inventory.

Required:

a. ompute the ending finished goods inventory under both absorption andvariable costing.

b. ompute the cost of goods sold under both absorption and variable costing.

Answer:

a. As!r"#i!n $%ri%&eirect materials J1&/,/// J1&/,///irect manufacturing labor 1+,&// 1+,&//ariable manufacturing overhead 1//,/// 1//,///Fixed manufacturing overhead 2//,/// /

$otal J)"+,&// J%"+,&//

#nit costs:J)"+,&//K1//,/// units J)."+&J%"+,&//K1//,/// units J%."+&

*'"*


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=nding inventory:2&,/// units x J)."+& J1&*,"+&2&,/// units x J%."+& J1/*,"+&

b. ost of goods sold:+&,/// x J)."+& J%+,12&+&,/// x J%."+& J"2,12&

Difficulty: 2 Objective: 1Terms to Learn: variable costing, absorption costing

1)2. eting expenses J).// per unit, plus J)/,/// peryear

Required:

a. 3repare an income statement using absorption costing.b. 3repare an income statement using variable costing.

Answer:

a. Absorption-costing income statement:

Hales 42/,/// x J))5 J1,"2/,///ost of goods sold 42/,/// x J%).2/Q5 *2%,///

ross margin "*),///9ar>eting:

ariable 42/,/// x J)5 J12/,///Fixed )/,/// 1/,///

;perating income J21),///

Q J12.// 6 J1.// 6 J*.// 6 4J1/,///K2&,///5 7 J%).2/

*'%/


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b. !ariable-costing income statement:

Hales 42/,/// x J))5 J1,"2/,///ariable costs:ost of goods sold 42/,/// x J"*Q5 J+/,///9ar>eting 42/,/// x J)5 12/,/// *//,///

ontribution margin %2/,///Fixed costs:

9anufacturing J1/,///9ar>eting )/,/// 2%/,///

;perating income J1/,///

Q J12.// 6 J1.// 6 J*.// 7 J"*


1)". -reland orporation planned to be in operation for three years.

uring the first year, 2/C1, it had no sales but incurred J12/,/// in variable

manufacturing expenses and J%/,/// in fixed manufacturing expenses.

-n 2/C2, it sold half of the finished goods inventory from 2/C1 for J1//,///

but it had no manufacturing costs.

-n 2/C", it sold the remainder of the inventory for J12/,///, had no

manufacturing expenses and (ent out of business.

9ar>eting and administrative expenses (ere fixed and totaled J2/,/// each

year.

Required:

a. 3repare an income statement for each year using absorption costing.b. 3repare an income statement for each year using variable costing.

Answer:

a. Absorption-costing income statements:'(X) '(X' '(X*

Hales J/ J1//,/// J12/,///ost of goods sold / /,/// /,///

ross margin / 2/,/// %/,///9ar>eting and administrative 2/,/// 2/,/// 2/,///

;perating income J42/,/// 5 J / J2/,///

*'%1


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b. !ariable-costing income statements:'( X) '(X' '(X*

Hales J / J1//,/// J12/,///ariable expenses / )/,/// )/,///

ontribution margin / %/,/// )/,///

Fixed expenses:9anufacturing J%/,/// J / J /9ar>eting and administrative 2/,/// 2/,/// 2/,///

$otal fixed )/,/// 2/,/// 2/,///

;perating income J4)/,/// 5 J2/,/// J%/,///

Difficulty: " Objective: 2

Terms to Learn: variable costing, absorption costing

1)%. Rarvis olf ompany sells a special putter for J2/ each. -n 9arch, it sold 2,///putters (hile manufacturing "/,///. $here (as no beginning inventory on 9arch1. 3roduction information for 9arch (as:

irect manufacturing labor per unit 1& minutesFixed selling and administrative costs J %/,///Fixed manufacturing overhead 1"2,///irect materials cost per unit 2irect manufacturing labor per hour 2%ariable manufacturing overhead per unit %ariable selling expenses per unit 2

Required:

a. ompute the cost per unit under both absorption and variable costing.b. ompute the ending inventories under both absorption and variable costing.c. ompute operating income under both absorption and variable costing.

Answer:

a.As!r"#i!n $%ri%&e

irect manufacturing labor 4J2%K%5 J ).// J ).//irect materials 2.// 2.//ariable manufacturing overhead %.// %.//Fixed manufacturing overhead 4J1"2,///K"/,///5 %.%/ DDD/

$otal cost per unit J1).%/ J12.//

*'%2


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b. As!r"#i!n $%ri%&e


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1)&. Rohnson Gealty bought a 2,///'acre island for J1/,///,/// and divided it into 2//eual si8e lots.

As the lots are sold, they are cleared at an average cost of J&,///.Htorm drains and drive(ays are installed at an average cost of J,/// per site.Hales commissions are 1/S of selling price.

Administrative costs are J&/,/// per year.$he average selling price (as J1)/,/// per lot during 2/C& (hen &/ lots (eresold.

uring 2/C), the company bought another 2,///'acre island and developed itexactly the same (ay. ot sales in 2/C) totaled "// (ith an average selling priceof J1)/,///. All costs (ere the same as in 2/C&.

Required:

3repare income statements for both years using both absorption and variable costingmethods.

Answer:

ost per site: As!r"#i!n $%ri%&eand cost J1/,///,///K2// sites J&/,/// J/learing costs &,/// &,///-mprovements ,/// ,///

$otal J)",/// J1",///

Absorption-costing income statements: '(X+ '(X,Hales J,///,/// J%,///,///

ost of goods sold:&/ x 4J&/,/// 6 J,/// 6 J&,///5 ",1&/,///"// x 4J&/,/// 6 J,/// 6 J&,///5 DDDDDDDD 1,*//,///

ross margin J%,&/,/// J2*,1//,///ariable mar>eting //,/// %,//,///Fixed administrative &/,/// &/,///;perating income J",2//,/// J2",%&/,///

!ariable-costing income statements: '(X+ '(X,

Hales J,///,/// J%,///,///ariable expenses:ost of operations:

&/ x J1",/// )&/,///"// x J1",/// ",*//,///

Helling expenses //,/// %,//,///

*'%%


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1)+. $he follo(ing data are available for Guggles ompany for the year endedHeptember "/, 2/C&.

Hales: 2%,/// units at J&/ each

=xpected and actual production: "/,/// units9anufacturing costs incurred:ariable: J&2&,///Fixed: J"+2,///

onmanufacturing costs incurred:ariable: J1%%,//Fixed: J++,%//


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1).


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c.


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"anuary $ncome %tatement

Hales 4%&,/// x J1/5 J%&/,///ost of goods sold 4%&,/// x J+.)/5 "%2,///ross margin J1/,///;ther costs:ariable selling and administrative J1,///Fixed selling and administrative )/,/// +,///

;perating income J"/,///

#ebruary $ncome %tatement

Hales 4%&,/// x J1/5 J%&/,///ost of goods sold 4%&,/// x J+.&/5 ""+,&//

ross margin J112,&//

;ther costs:ariable selling and administrative J1,///Fixed selling and administrative )/,/// +,///;perating income J"%,&//

Difficulty: 2 Objectives: 2, +Terms to Learn: absorption costing

1+/. alvin =nterprises produces a specialty statue item. $he follo(ing information hasbeen provided by management:

Actual sales 1&/,/// units


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Answer:

a. J* 6 J& 6 J% 7 J1

b. =ual to direct materials 7 J*

c. 1&/,/// x 4J"% L J*5 7 J",+&/,///

Difficulty: 2 Objective: &Terms to Learn: absorption costing, super'variable costing, throughput costing

1+1. 0allace@s 0rench ompany manufactures soc>et (renches.

For next month, the vice president of production plans on producing %,%//

(renches per day.

$he company can produce as many as &,/// (renches per day, but is more li>ely

to produce %,&// per day.

$he demand for (renches for the next three years is expected to average %,2&/

(renches per day.

Fixed manufacturing costs per month total J""),)//.

$he company (or>s 2/ days a month.

Fixed manufacturing overhead is charged on a per'(rench basis.

Required:

a. 0hat is the theoretical fixed manufacturing overhead rate per (renchBb. 0hat is the practical fixed manufacturing overhead rate per (renchBc. 0hat is the normal fixed manufacturing overhead rate per (renchBd. 0hat is the master'budget fixed manufacturing overhead rate per (renchB

Answer:a. $heoretical overhead rate 7 J""),)// K 4&,/// x 2/5 7 J"."))

b. 3ractical overhead rate 7 J""),)// K 4%,&// x 2/5 7 J".+%

c. ormal overhead rate 7 J""),)// K 4%,2&/ x 2/5 7 J".*)

d. 9aster'budget overhead rate 7 J""),)// K 4%,%// x 2/5 7 J".2&

Difficulty: 2 Objective: )Terms to Learn: absorption costing, super'variable costing, throughput costing

*'&/


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1+2. Hutton Eot og Htand sells hot dogs for J1."&. ariable costs are J1./& per unit(ith fixed production costs of J*/,/// per month at a level of %//,/// units. Fixedadministrative costs total J"/,///. Hales average %//,/// units per month, (ithplanned production of %//,/// hot dogs.

Required:a. 0hat are brea>even unit sales under variable costingBb. 0hat are brea>even unit sales under absorption costing if she sells everything

she preparesBc. 0hat are brea>even unit sales under absorption costing if average sales are

%*,/// and planned production is changed to &//,///B

Answer:

a. even units 7 4J*/,/// 6 J"/,///5 K 4J1."& L J1./&5 7 %//,///

b. even units 45 7 M4J*/,/// 6 J"/,///5 6 4J/.22& 4 L %//,///55N

J1."& L J1./&

7 4J12/,/// 6 J/.22& ' J*/,///5 K J/."/J/."/ 7 J"/,/// 6 J/.22&J/./+& 7 J"/,/// 7 %//,/// units

c. even units 45 7 M4J*/,/// 6 J"/,///5 6 4J/.1 4 L &//,///55NJ1."& L J1./&

7 4J12/,/// 6 J/.1 ' J*/,///5 K J/."/J/." 7 J"/,/// 6 J/.1J/.12 7 J"/,/// 7 2&/,/// units

Difficulty: 2 Objective: *Terms to Learn: absorption costing, super'variable costing, throughput costing

*'&1


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CRITICAL THIN-IN.

1+". a. =xplain the difference bet(een the variable and absorption costing methods.b. 0hich method4s5 are reuired for external reportingB For internal reportingB

Answer:a. Absorption costing includes both fixed and variable manufacturing costs asinventoriable costs, (hereas variable costing only includes variablemanufacturing costs as inventoriable costs.

b. Absorption costing is reuired for external reporting to shareholders and forincome tax reporting. A company may use (hichever method it chooses forinternal reporting purposes.


1+%. =xplain the difference bet(een the gross margin format and the contribution marginformat for the income statement. 0hat information is highlighted (ith eachB

Answer:

$he gross margin format divides costs into product and period costs (hile thecontribution format divides costs into variable and fixed costs. $he gross marginformat highlights cost function (hile the contribution format highlights costbehavior.


1+&. $he manager of the manufacturing division of -o(a 0indo(s does not understand(hy income (ent do(n (hen sales (ent up. Home of the information he hasselected for evaluation include:

%nu%r0 Feru%r0

#nits produced %/,/// "/,///#nits sold "/,/// %/,///

Hales J)//,/// J//,///


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Required:

=xplain the profit differences. Eo( (ould variable costing income statements helpthe manager understand the divisionOs operating incomeB

Answer:

$he 1/,/// units in inventory being assigned fixed manufacturing costs cause theoperating income difference. $he fixed manufacturing cost assigned to theinventory is carried into the next month. $he fixed costs per unit (ere J1/ per unit4J%//,///K%/,///5, therefore, J1//,/// 41/,/// x J1/5 (ere carried into February.

ariable costing helps avoid confusion by relating variations in expenses to salesrather than to inventory fluctuations. #nder variable costing, the total fixed amount4J%//,///5 (ould be expensed in Ranuary and none carried for(ard into February.$herefore, RanuaryOs income (ould be J1//,/// less than reported and FebruaryOsJ1//,/// more than reported.

Difficulty: 2 Objectives: 1, 2, "

Terms to Learn: variable costing, absorption costing

1+). alliart ompany has t(o identical divisions, =ast and 0est. $heir sales,production volume, and fixed manufacturing costs have been the same for the lastfive years. $he amounts for each division (ere as follo(s:

'(X) '(X' '(X* '(X1 '(X+

#nits produced &/,/// &&,/// &&,/// %%,/// %%,///#nits sold %&,/// %&,/// &/,/// &/,/// &/,///Fixed manufacturing costs J&&,/// J&&,/// J&&,/// J&&,///J&&,///

=ast ivision uses absorption costing and 0est ivision uses variable costing.


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1++. Uaiser ompany ?ust hired its fourth production manager in three years. All threeprevious managers had uit because they could not get the company above thebrea>'even point, even though sales had increased some(hat each year. $hecompany (as operating at about )/ S of plant capacity. $he flat(are industry (asgro(ing, so increased sales (ere not out of the uestion.

-. G. $hin>ing too> the ?ob as manager of the production division (ith a veryattractive salary pac>age. After intervie(ing for the position, he proposed a salaryand bonus pac>age that (ould give him a very small salary but a large bonus if hetoo> the operating income 4using absorption costing5 above the brea>even pointduring his very first year.

Required:

0hat do you thin> 9r. $hin>ing had in mind for increasing the companyOsoperating incomeB

Answer:

9r. $hin>ing reali8ed that he could probably increase both production and salesduring the coming year. -f he substantially overproduced he >ne( that the extracosts (ould be hidden in unsold inventory. -f the ne( production level could besold by the sales force in the gro(ing mar>et, the profits (ould increase any(ayand everybody (ould be happy.

Also, he could combine increased production (ith reduced fixed manufacturingcosts such as maintenance. -n the short run, several combinations could beunderta>en by 9r. $hin>ing to ensure that the profit picture (ould improve.

Difficulty: " Objective: %

Terms to Learn: absorption costing

1+.


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"5 =xtend the period of the plant manager@s evaluation to a " to & year period. $his(ill reduce the manager@s incentive to produce into the inventory to increaseuarterly or short run profits.

%5 -nclude non'financial as (ell as financial measures in the manager@s performance

evaluation. $hese might include ratios of units produced to units sold to ma>eproducing to inventory more visible to top management.

Difficulty: " Objective: %Terms to Learn: absorption costing

1+*. 0hat is throughput costingB 0hat advantages is it purported to have over variableand absorption costingB

Answer:

$hroughput costing treats all costs except direct materials as costs of the period in(hich they are incurred. $hroughput costing results in a lo(er amount ofmanufacturing cost put into inventory than either variable or absorption costing.Hupporters of throughput costing claim that it provides less incentive to produce forinventory than absorption costing or even variable costing.

Difficulty: 2 Objective: &Terms to Learn: throughput costing, variable costing, absorption costing

1/. a. ist the four different measures of capacity.b. 0hich measure of capacity is best for setting pricesB 0hyBc. 0hich measure of capacity is best for evaluating the performance of the

mar>eting manager for the current yearB 0hyB

Answer:

a. $heoretical capacity, practical capacity, normal capacity utili8ation, andmaster'budget capacity utili8ation are the four measures of capacity.

b. 3ractical capacity is best to use (hen setting prices because only the actualcost of capacity used for production is included in the cost of a unit.

c. 9aster'budget capacity utili8ation is best for evaluating performance ofmanagers over the current year because the manager should only be heldaccountable for budgeted sales of the current year and not productioncapacity, especially (hen there is unused capacity.

Difficulty: 2 Objectives: ), +Terms to Learn: theoretical capacity, practical capacity, normal capacityutili8ation, master'budget capacity utili8ation

*'&&


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11. =xplain ho( using master'budget capacity utili8ation for setting prices can lead to ado(n(ard demand spiral.

Answer:

-f master'budget capacity utili8ation is used as the denominator level fordetermining fixed manufacturing costs per unit, the cost includes a charge forunused capacity. -f prices are based on this cost, the product may be priced higherthan competitor@s products. 0ith a higher selling price, volume of sales (illprobably decrease reducing the expected number of future sales. o(er expectedsales leads to a lo(er denominator level, (hich in turn results in an even higherselling price and even lo(er sales volume. =tc., etc., etc.

Difficulty: 2 Objective: Terms to Learn: do(n(ard demand spiral

12. Hhould a company (ith high fixed costs and unused capacity raise selling prices totry to fully recoup its costsB

Answer:

o, companies in this situation might experience greater reductions in the demandof their products if they continue to raise selling prices. $his (ould result in thefixed capacity costs being spread over fe(er and fe(er units, increasing reportedcosts, resulting in more pressure to raise prices.

Difficulty: " Objective: Terms to Learn: normal capacity utili8ation

1". Eo( does the capacity level chosen to compute the budgeted fixed overhead cost

rate affect the production'volume varianceB

Answer:

$he chosen capacity level is directly related to the si8e and direction of theproduction'volume variance. 0hen the chosen capacity level exceeds the actualproduction level, there (ill be an unfavorable production'volume varianceP (henthe chosen capacity level is less than the actual production level, there (ill be afavorable production'volume variance.

Difficulty: " Objective: *Terms to Learn: absorption costing

cost12etif_09 inventory costing

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