Question 1

Galliart Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows:
  
East Division uses absorption costing and West Division uses variable costing.
Both use FIFO inventory methods.
Variable manufacturing costs are $5 per unit.
Selling and administrative expenses were identical for each division.
There were no inventories at the beginning of 2014.
Which division reports the highest income each year? Explain.

Accepted Answer

East Division had the higher income during the first three years because production exceeded sales; this stored some of the fixed manufacturing costs each year in the ending inventory balances. West had the higher income during the last two years because sales exceeded production. During these years, East incurred all of the year's fixed manufacturing costs plus those costs that were in inventory from the prior years.

Question 2

One possible means of determining the difference between operating incomes for absorption costing and variable costing is by ________.

Accepted Answer

A)   subtracting sales of the previous period from sales of this period
B)   subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory
C)   multiplying the number of units produced by the budgeted fixed manufacturing cost rate
D)   adding fixed manufacturing costs to the production-volume variance B

Question 3

Which of the following is a reason for companies adopting variable costing for internal reporting purposes?

Accepted Answer

A)   It is cost-effective to use variable costing for both internal and external reporting.
B)   It reduces the incentives for undesirable buildup of inventories.
C)   It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory.
D)   It assists in accurate pricing decisions in case of long-run pricing. B

Question 4

The amount of fixed manufacturing costs inventoried depends on two factors: the number of units in ending inventory and the rate at which fixed manufacturing overhead costs are allocated to each unit.

Accepted Answer

A) True 
 B)False

Question 5

To achieve consistency in reporting, a company must use the same capacity-level concept for internal reporting and control as it uses for external reporting and tax reporting.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following best describes practical capacity?

Accepted Answer

A)   It is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays.
B)   It is the level of capacity based on producing at full efficiency all the time.
C)   It is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors.
D)   It is the level of capacity utilization that managers expect for the current budget period, which is typically one year.

Question 7

The only real challenge in planning and controlling capacity costs is with the denominator as the numerator of a budgeted fixed manufacturing cost allocation rate is rarely the issue.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following inventory costing methods results in the least amount of costs being inventoried?

Accepted Answer

A)   absorption costing
B)   variable costing
C)   throughput costing
D)   direct costing

Question 9

Banta Corporation is in the business of selling computers. The following expenses were incurred in March 2017:

What will be the breakeven point if variable costing is used? (Round your final answer up to the next whole unit.)

Accepted Answer

A)   97 units
B)   208 units
C)   182 units
D)   129 units

Question 10

In general, if inventory increases during an accounting period, ________.

Accepted Answer

A)   variable costing will report less operating income than absorption costing
B)   absorption costing will report less operating income than variable costing
C)   variable costing and absorption costing will report the same operating income
D)   both variable costing and absorption costing will show losses

Question 11

Which of the following statements is true of gross-margin format of the income statement?

Accepted Answer

A)   It distinguishes between manufacturing and nonmanufacturing costs.
B)   It distinguishes variable costs from fixed costs.
C)   It is used for variable costing.
D)   It calculates the contribution margin from sales.

Question 12

Which of the following costs will be treated as period costs under absorption costing?

Accepted Answer

A)   raw materials used in the production
B)   sales commission paid on sale of product
C)   depreciation on factory equipment
D)   rent for factory building

Question 13

Briefly explain why many companies use absorption costing for external reporting as well as internal accounting.

Accepted Answer

The answer of Briefly explain why many companies use absorption...

Question 14

Match between columns
                        Premises: Level of capacity utilization that satisfies average customer demand over a period
Reduces theoretical capacity by considering unavoidable operating interruptions
Level of capacity utilization that managers expect for the current budget period
Producing at full efficiency all the time
Does not allow for plant maintenance
Measures capacity levels in terms of what a plant can supply
Measures capacity levels in terms of demand
Ideal goal of capacity utilization
Engineering and human resource factors are important when estimating capacity
Takes into account seasonal, cyclical, and trend factors

Accepted Answer

The Answer of Practical capacity and Master-budget capacity utilization and is...

Question 15

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

Accepted Answer

A)   Downward demand spiral
B)   Competitor pricing pressure
C)   Continuous step down demand
D)   Super-demand cutback

Question 16

Throughput costing considers only direct materials and direct manufacturing labor to be truly variable costs.

Accepted Answer

A) True 
 B)False

Question 17

The gross-margin format is used for ________.

Accepted Answer

A)   variable costing income statement
B)   mixed costing income statement
C)   absorption costing income statement
D)   standard costing income statement

Question 18

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually manufactured.

Accepted Answer

A) True 
 B)False

Question 19

Swan Textiles Inc. produces and sells a decorative pillow for $98.00 per unit. In the first month of operation, 2,200 units were produced and 1,800 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes:

What is the operating income using variable costing?

Accepted Answer

A)   $129,780
B)   $69,480
C)   $104,580
D)   $56,080

Question 20

In ________, fixed manufacturing costs are included as inventoriable costs.

Accepted Answer

A)   variable costing
B)   absorption costing
C)   throughput costing
D)   activity-based costing

Exam 9: Inventory Costing and Capacity Analysis

One possible means of determining the difference between operating incomes for absorption costing and variable costing is by ________.

Which of the following is a reason for companies adopting variable costing for internal reporting purposes?

The amount of fixed manufacturing costs inventoried depends on two factors: the number of units in ending inventory and the rate at which fixed manufacturing overhead costs are allocated to each unit.

To achieve consistency in reporting, a company must use the same capacity-level concept for internal reporting and control as it uses for external reporting and tax reporting.

Which of the following best describes practical capacity?

The only real challenge in planning and controlling capacity costs is with the denominator as the numerator of a budgeted fixed manufacturing cost allocation rate is rarely the issue.

Which of the following inventory costing methods results in the least amount of costs being inventoried?

Banta Corporation is in the business of selling computers. The following expenses were incurred in March 2017: What will be the breakeven point if variable costing is used? (Round your final answer up to the next whole unit.)

In general, if inventory increases during an accounting period, ________.

Which of the following statements is true of gross-margin format of the income statement?

Which of the following costs will be treated as period costs under absorption costing?

Briefly explain why many companies use absorption costing for external reporting as well as internal accounting.

Match each of the following items with one or more of the denominator-level capacity concepts by putting the appropriate letter(s) by each item:

________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met.

Throughput costing considers only direct materials and direct manufacturing labor to be truly variable costs.

The gross-margin format is used for ________.

Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually manufactured.

In ________, fixed manufacturing costs are included as inventoriable costs.