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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: 1 Terms to Learn: absorption costing Absorption costing absorbs all manufacturing costs, both fixed and variable. 2. ariable costing includes all variable costs ! both manufacturing and nonmanufacturing ! in inventory. Answer: False Difficulty: 1 Objective: Terms to Learn: variable costing ariable costing includes only manufacturing variable costs in inventory. ". 1

#nder both variable and absorption costing, all variable manufacturing costs are inventoriable costs. Answer: Terms to Learn: $rue Difficulty: 1 variable costing, absorption costing Objective: 1

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#nder variable costing, fixed manufacturing costs are treated as an expense of the period. Answer: Terms to Learn: $rue Difficulty: variable costing 1 Objective: 1

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

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

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$he gross'margin format of the income statement highlights the lump sum of fixed manufacturing costs. Answer: False Difficulty: 2 Objective: 2 Terms to Learn: absorption costing $he gross'margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs, but it does not highlight the lump sum of fixed manufacturing costs.

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-n absorption costing, all nonmanufacturing costs are subtracted from gross margin. Answer: Terms to Learn: $rue Difficulty: absorption costing 1 Objective: 2

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.irect costing is a perfect (ay to describe the variable'costing inventory method. Answer: False Difficulty: 2 Objective: 2 Terms to Learn: direct costing .irect costing is a less than perfect (ay to describe this method because not all variable costs are inventoriable costs.

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0hen variable costing is used, an income statement (ill sho( gross margin. Answer: False Difficulty: 2 Objective: 2 Terms to Learn: variable costing 0hen 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 under absorption costing. Answer: False Difficulty: 2 Objective: 2 Terms to Learn: variable costing, absorption costing $he income under variable costing (ill sometimes be the same as the income under absorption costing.

12.

Absorption costing is re1uired by 2AA3 42enerally Accepted Accounting 3rinciples5 for external reporting. Answer: Terms to Learn: $rue Difficulty: absorption costing 2 Objective: 2

1".

0hen production deviates from the denominator level, a production'volume variance al(ays exists under absorption costing. Answer: Terms to Learn: $rue Difficulty: absorption costing 1 Objective: "

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1%.

Fixed manufacturing costs included in cost of goods available for sale 6 the production'volume variance (ill al(ays 7 total fixed manufacturing costs under absorption costing. Answer: Terms to Learn: $rue Difficulty: absorption costing 1 Objective: "

1&.

$he production'volume variance only exists under absorption costing and not under variable costing. Answer: Terms to Learn: $rue Difficulty: 1 absorption costing, variable costing Objective: "

1).

0hen the unit level of inventory increases during an accounting period, operating income is greater under variable costing than absorption costing. Answer: False Difficulty: " Objective: " Terms to Learn: variable costing, absorption costing 2reater operating income is reported under variable costing than absorption costing (hen the unit level of inventory decreases during an accounting period.

1+.

$he difference in operating income under absorption costing and variable costing is due solely to the timing difference of expensing fixed manufacturing costs. Answer: Terms to Learn: $rue Difficulty: 2 variable costing, absorption costing Objective: "

1,.

-f managers report inventories of 8ero at the start and end of each accounting period, operating incomes under absorption costing and variable costing (ill be the same. Answer: Terms to Learn: $rue Difficulty: 2 variable costing, absorption costing Objective: "

1*.

9any companies use variable costing for internal reporting to reduce the undesirable incentive to build up inventories. Answer: Terms to Learn: $rue Difficulty: 2 variable costing, absorption costing Objective: %

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2/.

#nder variable costing, managers can increase operating income by simply producing more inventory at the end of the accounting period even if that inventory never gets sold. Answer: False Difficulty: " Objective: % Terms to Learn: variable costing #nder absorption costing, managers can increase operating income by producing more inventory at the end of the accounting period.

21.

:onfinancial measures such as comparing units in ending inventory this period to units in ending inventory last period can help reduce buildup of excess inventory. Answer: Terms to Learn: $rue Difficulty: absorption costing 1 Objective: %

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

2".

9anagers can increase operating income (hen absorption costing is used by producing more inventory. Answer: Terms to Learn: $rue Difficulty: absorption costing 2 Objective: %

2%.

A manager can increase operating income by deferring maintenance beyond the current accounting period (hen absorption costing is used. Answer: Terms to Learn: $rue Difficulty: absorption costing 2 Objective: %

2&.

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

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2).

0hen production 1uantity exceeds sales, throughput costing results in reporting greater operating income than variable costing. Answer: False Difficulty: " Objective: & Terms to Learn: throughput costing, variable costing 0hen production 1uantity exceeds sales, throughput costing results in reporting lower operating income than variable costing.

2+.

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

2,.

A company may use absorption costing for external reports and still choose to use throughput costing for internal reports. Answer: Terms to Learn: $rue Difficulty: 2 throughput costing, absorption costing Objective: &

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$hroughput contribution e1uals revenues minus all product costs. Answer: False Difficulty: 1 Objective: Terms to Learn: throughput costing $hroughput contribution e1uals revenues minus direct materials costs. &

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

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.etermining the right level of capacity is one of the most strategic and difficult decisions managers face. Answer: Terms to Learn: $rue Difficulty: practical capacity 2 Objective: )

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"2.

<oth theoretical and practical capacity measure capacity in terms of demand for the output. Answer: False Difficulty: 2 Objective: ) Terms to Learn: theoretical capacity, practical capacity <oth theoretical and practical capacity measure capacity in terms of (hat a plant can supply ! available capacity.

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:ormal capacity utili8ation is the expected level of capacity utili8ation for the current budget period, (hich is typically one year. Answer: False Difficulty: 1 Objective: ) Terms to Learn: normal capacity utili8ation Master-budget capacity utilization is the expected level of capacity utili8ation for the current budget period, (hich is typically one year.

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$heoretical capacity is generally much larger than master'budget capacity utili8ation. Answer: Terms to Learn: $rue Difficulty: theoretical capacity 1 Objective: )

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$heoretical capacity allo(s time for regular machine maintenance. Answer: False Difficulty: 2 Objective: ) Terms to Learn: theoretical capacity Theoretical capacity is the denominator'level concept that is based on producing at full efficiency all the time.

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=stimates of human factors such as the increased ris> of in?ury (hen machines (or> at faster speeds are important (hen estimating practical capacity. Answer: Terms to Learn: $rue Difficulty: practical capacity 2 Objective: )

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$heoretical capacity is unattainable in the real (orld. Answer: Terms to Learn: $rue Difficulty: theoretical capacity 1 Objective: )

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

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-f a company chooses practical capacity for planning purposes, it must also use practical capacity for performance evaluation. Answer: False Difficulty: 2 Objective: + Terms to Learn: practical capacity $here is no re1uirement that one capacity'level concept has to be used for all purposes.

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$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 a product. 3ractical capacity is generally used to cost a product.

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3ractical capacity highlights capacity ac1uired but currently not used. Answer: Terms to Learn: $rue Difficulty: practical capacity 2 Objective: +

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For benchmar>ing purposes it is best to use master'budget capacity because all competitors use about the same about of capacity for production. Answer: False Difficulty: 2 Objective: + Terms to Learn: master'budget capacity utili8ation For benchmar>ing purposes it is best to use practical capacity because it best represents the long'run cost of capacity.

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#sing normal capacity for pricing decisions can lead to setting noncompetitive selling prices. Answer: Terms to Learn: $rue Difficulty: " normal capacity utili8ation Objective: ,

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#sing master'budget capacity for pricing purposes can lead to a do(n(ard demand spiral. Answer: Terms to Learn: $rue Difficulty: 2 Objective: , master'budget capacity utili8ation, do(n(ard demand spiral

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#sing practical capacity is best for evaluating the mar>eting manager@s performance for a particular year. Answer: False Difficulty: " Objective: , Terms to Learn: practical capacity #sing master-budget capacity is best for evaluating the mar>eting manager@s performance.

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$he production'volume variance is affected by the choice of capacity concept used to determine the denominator level. Answer: Terms to Learn: $rue Difficulty: practical capacity 2 Objective: *

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

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9aster'budget capacity utili8ation can be more reliably estimated than normal capacity utili8ation. Answer: Terms to Learn: $rue Difficulty: 2 master'budget capacity utili8ation Objective: *

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#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 be purchased in large chun>s to accommodate future needs, not ?ust the needs of the current period.

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Ahallenges only result from estimating the denominator level, but not the costs in the numerator of the fixed manufacturing cost rate. Answer: False Difficulty: 1 Objective: * Terms to Learn: practical capacity Ahallenges result from estimating both the denominator level and the costs in the numerator of the fixed manufacturing cost rate.

&1.

=stimating capacity costs is uni1ue to manufacturing and it is not applicable to nonmanufacturing entities. Answer: False Difficulty: 1 Objective: * Terms to Learn: practical capacity =stimating capacity costs is needed in both manufacturing and nonmanufacturing entities.

&2.

-f the capacity level chosen to calculate the budgeted fixed overhead cost rate is more than the actual production, an unfavorable production'volume variance (ill result. Answer Terms to Learn: $rue Difficulty: practical capacity 2 Objective: *

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$he brea>even points are the same under both variable costing and absorption costing. Answer: False Difficulty: 2 Objective: A Terms to Learn: variable costing, absorption costing $he brea>even points are generally different under both variable costing and absorption costing.

MULTIPLE CHOICE &%. 0hich of the follo(ing cost4s5 are inventoried (hen using variable costingB a. direct manufacturing costs b. variable mar>eting costs c. fixed manufacturing costs d. <oth a and b are correct. Answer: Terms to Learn: a Difficulty: variable costing 1 Objective: 1

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0hich of the follo(ing cost4s5 are inventoried (hen using absorption costingB a. direct manufacturing costs b. variable mar>eting costs c. fixed manufacturing costs d. <oth a and c are correct. Answer: Terms to Learn: d Difficulty: absorption costing 1 Objective: 1

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Absorption costing is re1uired for all of the follo(ing =CA=3$: a. generally accepted accounting principles b. determining a competitive selling price c. external reporting to shareholders d. income tax reporting Answer: Terms to Learn: b Difficulty: absorption costing 2 Objective: 1

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Absorption costing: a. expenses mar>eting costs as cost of goods sold b. treats direct manufacturing costs as a period cost c. includes fixed manufacturing overhead as an inventoriable cost d. is re1uired for internal reports to managers Answer: Terms to Learn: c Difficulty: absorption costing " Objective: 1

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ariable costing: a. expenses administrative costs as cost of goods sold b. treats direct manufacturing costs as a product cost c. includes fixed manufacturing overhead as an inventoriable cost d. is re1uired for external reporting to shareholders Answer: Terms to Learn: b Difficulty: variable costing " Objective: 1

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DDDDDDDDDD method4s5 expense4s5 variable mar>eting costs in the period incurred. a. ariable costing b. Absorption costing c. $hroughput costing d. All of these ans(ers are correct. Answer: Terms to Learn: d Difficulty: 1 Objective: variable costing, absorption costing, throughput costing 1

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DDDDDDDDDD method4s5 include4s5 fixed manufacturing overhead costs as inventoriable costs. a. ariable costing b. Absorption costing c. $hroughput costing d. All of these ans(ers are correct. Answer: Terms to Learn: b Difficulty: absorption costing 1 Objective: 1

)1.

DDDDDDDDDD method4s5 expense4s5 direct material costs as cost of goods sold. a. ariable costing b. Absorption costing c. $hroughput costing d. All of these ans(ers are correct. Answer: Terms to Learn: d Difficulty: 1 Objective: variable costing, absorption costing, throughput costing 1

)2.

DDDDDDDDDD method4s5 is re1uired for tax reporting purposes. a. ariable costing b. Absorption costing c. $hroughput costing d. All of these ans(ers are correct. Answer: Terms to Learn: b Difficulty: absorption costing 1 Objective: 1

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ariable costing regards fixed manufacturing overhead as a4n5: a. administrative cost b. inventoriable cost c. period cost d. product cost Answer: Terms to Learn: c Difficulty: variable costing 1 Objective: 1

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$he only difference bet(een variable and absorption costing is the expensing of: a. direct manufacturing costs b. variable mar>eting costs c. fixed manufacturing costs d. <oth a and c are correct. Answer: Terms to Learn: c Difficulty: 2 variable costing, absorption costing Objective: 1

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$E= F;FF;0-:2 -:F;G9A$-;: A33F-=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 year includes: .irect materials .irect manufacturing labor ariable manufacturing costs Hales commissions Fixed manufacturing costs Administrative expenses, all fixed )&. J"/.// per unit J 2.// per unit J ".// per unit J &.// per part J2&.// per unit J1&.// per unit

0hat is the inventoriable cost per unit using variable costingB a. J"2 b. J"& c. J%/ d. J)/ Answer: b Difficulty: Terms to Learn: variable costing J"/.// 6 J2.// 6 J".// 7 J"&.// 2 Objective: 1

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0hat is the inventoriable cost per unit using absorption costingB a. J"2 b. J"& c. J)/ d. J,/ Answer: c Difficulty: Terms to Learn: absorption costing J"/ 6 J2 6 J" 6 J2& 7 J)/ 2 Objective: 1

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H )+ A:. ),: 2abe@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 .irect manufacturing labor ariable manufacturing costs Hales commissions Fixed manufacturing costs Administrative expenses, all fixed J12.// per unit J 2.2& per unit J /.+& per unit J ".// per part J"+&,/// per year J1"&,/// per year

*'12

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0hat is the inventoriable cost per unit using variable costingB a. J1%.2& b. J1&.// c. J1,.// d. J21.+& Answer: b Difficulty: Terms to Learn: variable costing J12.// 6 J2.2& 6 J/.+& 7 J1&.// 2 Objective: 1

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0hat is the inventoriable cost per unit using absorption costingB a. J1&.// b. J1,.// c. J1,.+& d. J21.+& Answer: c Difficulty: 2 Terms to Learn: absorption costing J12.// 6 J2.2& 6 J/.+& 6 4J"+&,/// K 1//,///5 7 J1,.+& Objective: 1

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0hich of the follo(ing inventory costing methods sho(n belo( is re1uired by 2AA3 42enerally Accepted Accounting 3rinciples5 for external financial reportingB a. b. c. d. absorption costing variable costing throughput costing direct costing a Difficulty: absorption costing 2 Objective: 1

Answer: Terms to Learn: +/.

$he contribution'margin format of the income statement: a. is used (ith absorption costing b. highlights the lump sum of fixed manufacturing costs c. distinguishes manufacturing costs from nonmanufacturing costs d. calculates gross margin Answer: Terms to Learn: b Difficulty: variable costing " Objective: 2

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+1.

$he gross'margin format of the income statement: a. distinguishes bet(een manufacturing and nonmanufacturing costs b. distinguishes variable costs from fixed costs c. is used (ith variable costing d. calculates contribution margin Answer: Terms to Learn: a Difficulty: absorption costing " Objective: 2

+2.

DDDDDDDDDD are subtracted from sales to calculate contribution margin. a. ariable manufacturing costs b. ariable mar>eting costs c. Fixed manufacturing costs d. <oth a and b are correct. Answer: Terms to Learn: d Difficulty: variable costing 2 Objective: 2

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DDDDDDDDDD are subtracted from sales to calculate gross margin. a. ariable manufacturing costs b. ariable mar>eting costs c. Fixed manufacturing costs d. <oth a and c are correct. Answer: Terms to Learn: d Difficulty: absorption costing 2 Objective: 2

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H +% $EG;#2E ++: 3eggy@s 3illo(s produces and sells a decorative pillo( for J+&.// per unit. -n the first month of operation, 2,/// units (ere produced and 1,+&/ units (ere sold. Actual fixed costs are the same as the amount budgeted for the month. ;ther information for the month includes: ariable manufacturing costs ariable mar>eting costs Fixed manufacturing costs Administrative expenses, all fixed =nding inventories: .irect materials 0-3 L/L Finished goods J2/.// per unit J ".// per unit J +.// per unit J1&.// per unit L/L 2&/ units

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0hat is cost of goods sold per unit using variable costingB a. J2/ b. J2" c. J"/ d. J%& Answer: a Difficulty: 1 Objective: 2 Terms to Learn: variable costing J2/, only variable manufacturing costs are included (hen using variable costing.

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0hat is cost of goods sold using variable costingB a. J"&,/// b. J%/,/// c. J%+,2&/ d. J&%,/// Answer: a Difficulty: Terms to Learn: variable costing J2/ x 1,+&/ units 7 J"&,/// 2 Objective: 2

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0hat is contribution margin using variable costingB a. J*),2&/ b. J*1,/// c. J1/%,/// d. J11/,/// Answer: b Difficulty: " Terms to Learn: variable costing 4J+& x 1,+&/5 M4J2/ 6 J"5 x 1,+&/ unitsN 7 J*1,/// Objective: 2

++.

0hat is operating income using variable costingB a. J&2,&// b. J+,,+&/ c. J)&,+&/ d. J%+,/// Answer: d Difficulty: " Objective: Terms to Learn: variable costing Aontribution margin of J*1,/// M4J+ 6 J1&5 x 2,/// unitsN 7 J%+,/// 2

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$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H +, $EG;#2E ,/: Andrea@s Eobbies produces and sells a luxury animal pillo( for J%/.// per unit. -n the first month of operation, ",/// units (ere produced and 2,2&/ units (ere sold. Actual fixed costs are the same as the amount budgeted for the month. ;ther information for the month includes: ariable manufacturing costs ariable mar>eting costs Fixed manufacturing costs Administrative expenses, all fixed =nding inventories: .irect materials 0-3 '/' Finished goods +,. J1* per unit J 1 per unit J"/,/// per month J),/// per month '/' +&/ units

0hat is cost of goods sold per unit (hen using absorption costingB a. J1* b. J2/ c. J2* d. J"2 Answer: c Difficulty: Terms to Learn: absorption costing J1* 6 4J"/,/// K ",/// units5 7 J2* 2 Objective: 2

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0hat is gross margin (hen using absorption costingB a. J%&,/// b. J&%,+&/ c. J++,2&/ d. J2%,+&/ Answer: d Difficulty: 2 Terms to Learn: absorption costing MJ%/ J1* 4J"/,///K",///5N x 2,2&/ units 7 J2%,+&/ Objective: 2

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0hat is operating income (hen using absorption costingB a. J%,/// b. J1),&// c. 4J11,+&/5 d. J1,,+&/ Answer: b Difficulty: " Objective: 2 Terms to Learn: absorption costing MJ%/ 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 level b. the denominator level exceeds production c. production exceeds unit sales d. unit sales exceed production Answer: Terms to Learn: b Difficulty: practical capacity 2 Objective: "

,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 costing b. more operating income (ill be reported under absorption costing than variable costing c. operating income (ill be the same under absorption costing and variable costing d. the exact effect on operating income cannot be determined Answer: Terms to Learn: b Difficulty: absorption costing 2 Objective: "

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$he difference bet(een operating incomes under variable costing and absorption costing centers on ho( to account for: a. direct materials costs b. fixed manufacturing costs c. variable manufacturing costs d. <oth b and c are correct. Answer: Terms to Learn: b Difficulty: 2 variable costing, absorption costing Objective: "

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;ne possible means of determining the difference bet(een operating incomes for absorption costing and variable costing is by: 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 Answer: Terms to Learn: b Difficulty: " variable costing, absorption costing Objective: "

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0hen comparing the operating incomes bet(een absorption costing and variable costing, and beginning finished inventory exceeds ending finished inventory, it may be assumed that: a. sales increased during the period b. variable cost per unit is less than fixed cost per unit c. there is an unfavorable production'volume variance d. variable costing operating income exceeds absorption costing operating income Answer: Terms to Learn: d Difficulty: " variable costing, absorption costing Objective: "

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0hich of the follo(ing statements is FAFH=B a. 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 future under absorption costing. d. ;perating income under absorption costing is higher than operating income under variable costing (hen production units exceed sales units. Answer: Terms to Learn: b Difficulty: variable costing " Objective: "

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Eelton Aompany has the follo(ing information for the current year: <eginning fixed manufacturing overhead in inventory Fixed manufacturing overhead in production =nding fixed manufacturing overhead in inventory <eginning variable manufacturing overhead in inventory ariable manufacturing overhead in production =nding variable manufacturing overhead in inventory J*&,/// "+&,/// 2&,/// J1/,/// &/,/// 1&,///

0hat is the difference bet(een operating incomes under absorption costing and variable costingB a. J+/,/// b. J&/,/// c. J%/,/// d. J&,/// Answer: a Difficulty: " Terms to Learn: variable costing, absorption costing J*&,/// J2&,/// 7 J+/,/// Objective: "

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$he follo(ing information pertains to <rian Htone Aorporation: <eginning fixed manufacturing overhead in inventory =nding fixed manufacturing overhead in inventory <eginning variable manufacturing overhead in inventory =nding variable manufacturing overhead in inventory Fixed selling and administrative costs #nits produced #nits sold &,/// units %,,// units J)/,/// %&,/// J"/,/// 1%,2&/ J+2%,///

0hat is the difference bet(een operating incomes under absorption costing and variable costingB a. J+&/ b. J+,&// c. J1&,/// d. J"/,+&/ Answer: c Difficulty: " Terms to Learn: variable costing, absorption costing J)/,/// J%&,/// 7 J1&,/// Objective: "

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H ,* $EG;#2E *2: Eeinrich Aorporation incurred fixed manufacturing costs of J),/// during 2/C&. ;ther information for 2/C& includes: $he budgeted denominator level is 1,/// units. #nits produced total +&/ units. #nits sold total )// units. <eginning inventory (as 8ero. $he company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. 9anufacturing variances are closed to cost of goods sold. ,*. Fixed manufacturing costs expensed on the income statement 4excluding ad?ustments for variances5 total: a. J",)// b. J%,,// c. J),/// d. / Answer: a Difficulty: Terms to Learn: absorption costing J),/// K 1,/// units 7 J) x )// 7 J",)// " Objective: "

*'1*

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Fixed manufacturing costs included in ending inventory total: a. J1,2// b. J1,&// c. J*// d. / Answer: c Difficulty: Terms to Learn: absorption costing J),/// K 1,/// units 7 J) x 1&/ 7 J*// " Objective: "

*1.

$he production'volume variance is: a. J2,/// b. J1,&// c. J2,%// d. / Answer: b Difficulty: Terms to Learn: absorption costing J),/// K 1,/// units 7 J) x 2&/ 7 J1,&// " Objective: "

*2.

;perating income using absorption costing (ill be DDDDDDDDDD than operating income if using variable costing. a. J2,%// higher b. J2,%// lo(er c. J*// higher d. J",)// lo(er Answer: Terms to Learn: c Difficulty: absorption costing " Objective: "

.ifferent operating incomes are reported because the unit level of inventory increased during the accounting period by 1&/ units x J) denominator rate 7 J*//. $herefore, operating income is J*// higher under absorption costing because J*// of fixed manufacturing costs remains in inventory.

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H *" $EG;#2E *): each Aorporation incurred fixed manufacturing costs of J),/// during 2/C&. ;ther information for 2/C& includes: $he budgeted denominator level is 1,/// units. #nits produced total +&/ units. #nits sold total )// units. <eginning inventory (as 8ero. $he company uses AG-A<F= A;H$-:2 and the fixed manufacturing cost rate is based on the budgeted denominator level. 9anufacturing variances are closed to cost of goods sold.

*'2/

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Fixed manufacturing costs expensed on the income statement 4excluding ad?ustments for variances5 total: a. J",)// b. J%,,// c. J),/// d. / Answer: c Difficulty: " Objective: Terms to Learn: variable costing J),/// of fixed manufacturing costs is expensed as a lump sum. "

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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, and all are expensed on the income statement as a lump sum.

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$he production'volume variance totals: a. J2,/// b. J1,&// c. J2,%// d. / Answer: d Difficulty: " Terms to Learn: variable costing ariable costing has no production'volume variance. Objective: "

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;perating income using variable costing (ill be DDDDDDDDDD than operating income if using absorption costing. a. J2,%// higher b. J2,%// lo(er c. J",)// higher d. J*// lo(er Answer: Terms to Learn: d Difficulty: " variable costing, absorption costing Objective: "

.ifferent operating incomes are reported because the unit level of inventory increased during 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 fixed manufacturing costs remains in inventory under absorption.

*'21

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H *+ $EG;#2E 1//: 9orse Aorporation incurred fixed manufacturing costs of J+,2// during 2/C&. ;ther information for 2/C& includes: $he budgeted denominator level is ,// units. #nits produced total 1,/// units. #nits sold total *&/ units. <eginning inventory (as 8ero. $he fixed manufacturing cost rate is based on the budgeted denominator level. 9anufacturing variances are closed to cost of goods sold. *+. #nder absorption costing, fixed manufacturing costs expensed on the income statement 4excluding ad?ustments for variances5 total: a. J,,&&/ b. J*,/// c. J+,2// d. / Answer: a Difficulty: Terms to Learn: absorption costing J+,2// K ,// units 7 J* x *&/ 7 J,,&&/ *,. " Objective: "

#nder absorption costing, the production'volume variance is: a. J%&/ b. J1,"&/ c. J1,,// d. / Answer: c Difficulty: Terms to Learn: absorption costing J+,2// K ,// units 7 J* x 2// 7 J1,,// " Objective: "

**.

#nder variable costing, the fixed manufacturing costs expensed on the income statement 4excluding ad?ustments for variances5 total: a. J,,&&/ b. J+,2// c. J*,/// d. / Answer: b Difficulty: 2 Objective: Terms to Learn: variable costing J+,2// of fixed manufacturing costs is expensed as a lump sum. "

*'22

1//. ;perating income using absorption costing (ill be DDDDDDDDDD operating income if using variable costing. a. J%&/ higher than b. J*// higher than c. J1,"&/ lo(er than d. the same as Answer: Terms to Learn: a Difficulty: absorption costing " Objective: "

.ifferent operating incomes are reported because the unit level of inventory increased during the accounting period by &/ units x J* denominator rate 7 J%&/. $herefore, operating income is J%&/ higher under absorption costing because J%&/ of fixed manufacturing costs remains in inventory under absorption costing.

1/1. At the end of the accounting period Husan Aorporation reports operating income of J"/,/// 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 sold c. (ill not be affected d. is indeterminable Answer: Terms to Learn: a Difficulty: absorption costing " Objective: "

1/2. At the end of the accounting period <umsted Aorporation reports operating income of J"/,/// and the fixed overhead cost rate is J2/ per unit. #nder variable costing, if this company produces 1// more units of inventory, then operating income: a. (ill increase by J2,/// b. (ill increase by J2,/// only if the 1// additional units of inventory are sold c. (ill not be affected d. is indeterminable Answer: Terms to Learn: c Difficulty: variable costing " Objective: "

1/". Aompanies have recently been able to reduce inventory levels because: a. there is better sharing of information bet(een suppliers and manufacturers b. ?ust'in'time production strategies are being implemented c. production 1uotas are being implemented d. <oth a and b are correct. Answer: Terms to Learn: d Difficulty: absorption costing 2 Objective: %

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1/%. 9any companies have s(itched from absorption costing to variable costing for internal reporting: a. to comply (ith external reporting re1uirements b. to increase bonuses for managers c. to reduce the undesirable incentive to build up inventories d. so the denominator level is more accurate Answer: Terms to Learn: c Difficulty: 2 variable costing, absorption costing Objective: %

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 costs b. delaying items that absorb the greatest amount of fixed manufacturing costs c. deferring maintenance to accelerate production d. All of these ans(ers are correct. Answer: Terms to Learn: c Difficulty: absorption costing 2 Objective: %

1/). $o discourage producing for inventory, management can a. evaluate nonfinancial measures such as units in ending inventory compared to units in sales b. evaluate performance over a three' to five'year period rather than a single year c. incorporate a carrying charge for inventory in the internal accounting system d. All of these ans(ers are correct. Answer: Terms to Learn: d Difficulty: absorption costing 2 Objective: %

1/+. #nder absorption costing, if a manager@s bonus is tied to operating income, then increasing inventory levels compared to last year (ould result in: a. increasing the manager@s bonus b. decreasing the manager@s bonus c. not affecting the manager@s bonus d. being unable to determine the manager@s bonus using only the above information Answer: Terms to Learn: a Difficulty: absorption costing " Objective: %

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1/,. #nder variable costing, if a manager@s bonus is tied to operating income, then increasing inventory levels compared to last year (ould result in: a. increasing the manager@s bonus b. decreasing the manager@s bonus c. not affecting the manager@s bonus d. being unable to determine the manager@s bonus using only the above information Answer: Terms to Learn: c Difficulty: variable costing 2 Objective: %

1/*. Aritics of absorption costing suggest to evaluate management on their ability to: a. exceed production 1uotas b. increase operating income c. decrease inventory costs d. All of these ans(ers are correct. Answer: Terms to Learn: c Difficulty: absorption costing 2 Objective: %

11/. .ifferences bet(een absorption costing and variable costing are much smaller (hen a: a. large part of the manufacturing process is subcontracted out b. ?ust'in'time inventory strategy is implemented c. significant portion of manufacturing costs are fixed d. <oth a and b are correct. Answer: Terms to Learn: d Difficulty: 2 variable costing, absorption costing Objective: %

111. All of the follo(ing are examples of dra(bac>s of using absorption costing =CA=3$: a. management has the ability to manipulate operating income via production schedules b. manipulation of operating income may ultimately increase the companyOs costs incurred over the long run c. operating income solely reflects income from the sale of units and excludes the effects of manipulating production schedules d. decreasing maintenance activities and increasing production result in increased operating income Answer: Terms to Learn: c Difficulty: absorption costing 2 Objective: %

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112. 0hich of the follo(ing inventory costing methods sho(n belo( is 9;H$ li>ely to cause undesirable incentives for managers to build up finished goods inventoryB a. absorption costing b. variable costing c. throughput costing d. direct costing Answer: Terms to Learn: a Difficulty: absorption costing 2 Objective: %

11". Advocates of throughput costing argue that: a. only direct materials are truly variable b. direct manufacturing labor is relatively fixed c. variable manufacturing costs are a cost of the period d. All of these ans(ers are correct. Answer: Terms to Learn: d Difficulty: throughput costing 2 Objective: &

11%. -f )// units are produced and only %// units are sold, DDDDDDDDDD results in the greatest amount of expense reported on the income statement. a. throughput costing b. variable costing c. absorption costing d. period costing Answer: Terms to Learn: a Difficulty: throughput costing 2 Objective: &

11&. -f %// units are produced and )// units are sold, DDDDDDDDDD results in the greatest amount of operating income. a. throughput costing b. variable costing c. absorption costing d. period costing Answer: Terms to Learn: a Difficulty: throughput costing 2 Objective: &

*'2)

11). Advocates of throughput costing maintain that: a. both variable and fixed are necessary to produce goodsP therefore, both types of costs should be inventoried b. all manufacturing costs plus some design costs should be inventoried c. fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units d. <oth a and c are correct. Answer: Terms to Learn: c Difficulty: throughput costing " Objective: &

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H 11+ A:. 11,: Geusser Aompany produces (ood statues. 9anagement has provided the follo(ing information: Actual sales <udgeted production Helling price .irect material costs ariable manufacturing costs ariable administrative costs Fixed manufacturing overhead ,/,/// statues 1//,/// statues J2/.// per statue J&.// per statue J1.&/ per statue J2.&/ per statue J2.// per statue

11+. 0hat is the cost per statue if throughput costing is usedB a. J11.// b. J*.&/ c. J+.&/ d. J&.// Answer: d Difficulty: Terms to Learn: throughput costing =1ual to direct materials 7 J&.// 11,. 0hat is the total throughput contributionB a. J1,&//,/// b. J2,///,/// c. J+2/,/// d. J1,2//,/// Answer: d Difficulty: Terms to Learn: throughput costing ,/,/// x 4J2/.// L J&.//5 7 J1,2//,/// " Objective: & 2 Objective: &

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$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H 11* A:. 12/: Htober Aompany produces a specialty item. 9anagement has provided the follo(ing information: Actual sales )/,/// units <udgeted production &/,/// units Helling price J%/.// per unit .irect material costs ariable manufacturing overhead ariable administrative costs Fixed manufacturing overhead J1/.// per unit J".// per unit J&.// per unit J%.// per unit

11*. 0hat is the cost per statue if throughput costing is usedB a. J22.// b. J1*.// c. J1&.// d. J1/.// Answer: d Difficulty: Terms to Learn: throughput costing .irect material cost of J1/ 12/. 0hat is the total throughput contributionB a. J1,&//,/// b. J1,)2/,/// c. J1,",/,/// d. J1,,//,/// Answer: d Difficulty: Terms to Learn: throughput costing )/,/// x 4J%/.// L J1/.//5 7 J1,,//,/// " Objective: & 1 Objective: &

121. 0hich of the follo(ing inventory costing methods results in the least amount of costs being inventoriedB a. absorption costing b. variable costing c. throughput costing d. direct costing Answer: Terms to Learn: c Difficulty: throughput costing 2 Objective: &

*'2,

122. 0hich of the follo(ing inventory costing methods sho(n belo( is F=AH$ li>ely to cause undesirable incentives for managers to build up finished goods inventoryB a. absorption costing b. variable costing c. throughput costing d. direct costing Answer: Terms to Learn: c Difficulty: throughput costing 2 Objective: &

12". 3ractical capacity is the denominator'level concept that: a. reduces theoretical capacity for unavoidable operating interruptions b. is the maximum level of operations at maximum efficiency c. is based on the level of capacity utili8ation that satisfies average customer demand over periods generally longer than one year d. is based on anticipated levels of capacity utili8ation for the coming budget period Answer: Terms to Learn: a Difficulty: practical capacity 1 Objective: )

12%. DDDDDDDDDD reduces theoretical capacity for unavoidable operating interruptions. a. 3ractical capacity b. $heoretical capacity c. 9aster'budget capacity utili8ation d. :ormal capacity utili8ation Answer: Terms to Learn: a Difficulty: practical capacity 1 Objective: )

12&. DDDDDDDDDD is based on the level of capacity utili8ation that satisfies average customer demand over periods generally longer than one year. a. 3ractical capacity b. $heoretical capacity c. 9aster'budget capacity utili8ation d. :ormal capacity utili8ation Answer: Terms to Learn: d Difficulty: 1 normal capacity utili8ation Objective: )

12). DDDDDDDDDD is 4are5 based on the demand for the output of the plant. a. 3ractical capacity b. 9aster'budget capacity utili8ation c. :ormal capacity utili8ation d. <oth b and c are correct. Answer: Terms to Learn: d Difficulty: 2 Objective: ) normal capacity utili8ation, master'budget capacity utili8ation

*'2*

12+. $heoretical capacity allo(s for: a. preventive machine maintenance b. interruptions due to uncontrollable po(er failures c. re(or> of the expected number of defective units d. :one of these ans(ers is correct. Answer: Terms to Learn: d Difficulty: theoretical capacity 2 Objective: )

12,. $heoretical capacity a. is unattainable in the real (orld b. represents an ideal goal of capacity usage c. is based on engineering studies that provide information about the technical capabilities of machines used in production d. All of these ans(ers are correct. Answer: Terms to Learn: d Difficulty: theoretical capacity 2 Objective: )

12*. $he budgeted fixed manufacturing cost rate is the lo(est for: a. practical capacity b. theoretical capacity c. master'budget capacity utili8ation d. normal capacity utili8ation Answer: Terms to Learn: b Difficulty: theoretical capacity 2 Objective: )

1"/. DDDDDDDDDD provides the lo(est estimate of denominator'level capacity. a. 3ractical capacity b. $heoretical capacity c. 9aster'budget capacity utili8ation d. :ormal capacity utili8ation Answer: Terms to Learn: c Difficulty: 2 master'budget capacity utili8ation Objective: )

$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H 1"1 A:. 1"2: A manufacturing firm is able to produce 1,/// pairs of shoes per hour, at maximum efficiency. $here are three eight'hour shifts each day. .ue to unavoidable operating interruptions, production averages ,// units per hour. $he plant actually operates only 2+ days per month.

*'"/

1"1. 0hat is the theoretical capacity for the month of AprilB a. 1,///,/// units b. +2/,/// units c. &1,,%// units d. 2%/,/// units Answer: b Difficulty: 2 Terms to Learn: theoretical capacity 1,/// units x 2% hours x "/ days 7 +2/,/// units 1"2. 0hat is the practical capacity for the month of AprilB a. 1,///,/// units b. +2/,/// units c. &1,,%// units d. 2%/,/// units Answer: c Difficulty: 2 Terms to Learn: practical capacity ,// units x 2% hours x 2+ days 7 &1,,%// units Objective: ) Objective: )

1"". $heoretical capacity: a. represents real capacity available to the company b. provides the best perspective of actual long'run costs c. (hen used for product costing results in the lo(est cost estimate of the four capacity options d. replicates the cost of capacity in a competitor@s cost structure Answer: Terms to Learn: c Difficulty: theoretical capacity " Objective: +

1"%. <udgeted fixed manufacturing costs of a product using practical capacity: a. represents the cost per unit of supplying capacity b. can result in setting selling prices that are not competitive c. includes the cost of unused capacity d. should be used to evaluate a mar>eting manager@s performance in the current year Answer: Terms to Learn: a Difficulty: practical capacity " Objective: +

*'"1

1"&. :ormal capacity utili8ation: a. represents real capacity available to the company b. can result in setting selling prices that are not competitive c. (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 capacity Answer: Terms to Learn: b Difficulty: " normal capacity utili8ation Objective: +

1"). 9aster'budget capacity utili8ation: a. hides the amount of unused capacity b. represents the maximum units of production intended for current capacity c. provides the best cost estimate for benchmar>ing purposes d. (hen used for product costing results in the lo(est cost estimate of the four capacity options Answer: Terms to Learn: a Difficulty: " master'budget capacity utili8ation Objective: +

1"+. From the perspective of long'run product costing it is best to use: a. master'budget capacity utili8ation to highlight unused capacity b. normal capacity utili8ation for benchmar>ing purposes c. practical capacity for pricing decisions d. theoretical capacity for performance evaluation Answer: Terms to Learn: c Difficulty: practical capacity " Objective: +

1",. Austomers expect to pay a price that includes: a. the cost of unused capacity b. the cost of actual capacity used c. no capacity costs d. <oth a and b are correct. Answer: Terms to Learn: b Difficulty: practical capacity 2 Objective: +

1"*. $he mar>eting manager@s performance evaluation is most fair (hen based on a denominator level using: a. practical capacity b. theoretical capacity c. master'budget capacity utili8ation d. normal capacity utili8ation Answer: Terms to Learn: c Difficulty: 2 master'budget capacity utili8ation Objective: +

*'"2

1%/. #sing master'budget capacity to set selling prices: a. avoids the recalculation of unit costs (hen expected demand levels change b. spreads fixed costs over available capacity c. can result in a do(n(ard demand spiral d. uses the perspective of long'run product pricing Answer: Terms to Learn: c Difficulty: 2 master'budget capacity utili8ation Objective: ,

1%1. 0hen large differences exist bet(een practical capacity and master'budget capacity utili8ation, companies may: a. classify the difference as planned unused capacity b. use master'budget capacity utili8ation for setting selling prices c. use practical capacity for meaningful feedbac> to the mar>eting manager d. All of these ans(ers are correct. Answer: Terms to Learn: a Difficulty: 2 Objective: practical capacity, master'budget capacity utili8ation ,

1%2. $he effect of spreading fixed manufacturing costs over a shrin>ing master'budget capacity utili8ation amount results in: a. greater utili8ation of capacity b. increased unit costs c. more competitive selling prices d. greater demand for the product Answer: Terms to Learn: b Difficulty: 2 do(n(ard demand spiral Objective: ,

1%". $he higher the denominator level, the: a. higher the budgeted fixed manufacturing cost rate b. lo(er the amount of fixed manufacturing costs allocated to each unit produced c. higher the favorable production'volume variance d. more li>ely actual output (ill exceed the denominator level Answer: Terms to Learn: b Difficulty: absorption costing 2 Objective: *

*'""

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 end of the accounting period. a. the ad?usted allocation'rate approach b. the proration approach c. the (rite'off variances to cost of goods sold approach d. All of these ans(ers are correct. Answer: Terms to Learn: c Difficulty: absorption costing " Objective: *

1%&. 3ractical capacity may: a. increase over time due to improvements in plant layout b. decrease over time due to efficiencies offered by ne( technologies c. cannot be altered unless there is a ma?or plant expansion d. <oth a and b are correct. Answer: Terms to Learn: a Difficulty: practical capacity 2 Objective: *

1%). $he -nternal Gevenue Hervice re1uires the use of DDDDDDDDDD for calculating fixed manufacturing costs per unit. a. practical capacity b. theoretical capacity c. master'budget capacity utili8ation d. normal capacity utili8ation Answer: Terms to Learn: a Difficulty: practical capacity 2 Objective: *

1%+. -t is most difficult to estimate DDDDDDDDDD because of the need to predict demand for the next fe( years. a. practical capacity b. theoretical capacity c. master'budget capacity utili8ation d. normal capacity utili8ation Answer: Terms to Learn: d Difficulty: 2 normal capacity utili8ation Objective: *

*'"%

1%,. 9anagers face uncertainty (hen estimating: a. demand of the product b. the denominator level for practical capacity c. total fixed manufacturing costs for the next accounting period d. All of these ans(ers are correct. Answer: Terms to Learn: d Difficulty: practical capacity 2 Objective: *

1%*. #nused capacity: a. is a definite sign of (asted resources b. is intended for future use c. provides capacity for potential demand surges d. <oth b and c are correct. Answer: Terms to Learn: d Difficulty: 2 Objective: practical capacity, normal capacity utili8ation *

1&/. Aapacity costs: a. are difficult to estimate b. don@t provide a useful planning tool for nonmanufacturing firms c. cannot be used (ith activity'based costing d. All of these ans(ers are correct. Answer: Terms to Learn: a Difficulty: 2 Objective: practical capacity, normal capacity utili8ation *

1&1. $he brea>even point using absorption costing depends on all of the follo(ing factors, =CA=3$: a. the number of units sold during the current period b. the budgeted level of production c. the denominator level chosen for the fixed manufacturing overhead rate d. fulfillment of current production 1uotas Answer: Terms to Learn: b Difficulty: absorption costing 2 Objective: *

1&2. $here is not an output'level variance for variable costing, because: a. the inventory level decreased during the period b. the inventory level increased during the period c. fixed manufacturing overhead is allocated to (or> in process d. fixed manufacturing overhead is not allocated to (or> in process Answer: Terms to Learn: d Difficulty: variable costing 2 Objective: *

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$E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H 1&" $EG;#2E 1&&: 9s. Andrea Ahad(ic>, the company president, has heard that there are multiple brea>even points for every product. Hhe does not believe this and has as>ed you to provide the evidence of such a possibility. Home information about the company for 2/C& is as follo(s: $otal fixed manufacturing overhead $otal other fixed expenses $otal variable manufacturing expenses $otal other variable expenses #nits produced <udgeted production #nits sold Helling price J1,/,/// J2//,/// J12/,/// J12/,/// "/,/// units "/,/// units 2&,/// units J%/

1&". 0hat are brea>even sales in units using variable costingB a. &,)2& units b. &,+)* units c. 11,,+& units d. 12,1,/ units Answer: c Difficulty: 2 Objective: Terms to Learn: variable costing <rea>even 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 costingB a. &,)2& units b. ),))+ units c. +,)*2 units d. ,,/// units Answer: c Difficulty: 2 Objective: Terms to Learn: absorption costing <rea>even units : 7 MJ",/,/// 6 4J1,/,///K"/,/// x 4: L "/,///5N 4J%/ L J% L J%5 : 7 4J",/,/// 6 J): ' J1,/,///5KJ"2 J"2: 7 J2//,/// 6 J): J2): 7 J2//,/// : 7 +,)*" units * *

*'")

1&&. 0hat are brea>even sales in units using absorption costing if the production units are actually 2&,///B a. &,)2& units b. ),))+ units c. +,))+ units d. ,,,%+ units Answer: d Difficulty: 2 Objective: Terms to Learn: absorption costing <rea>even units : 7 MJ",/,/// 6 4J1,/,///K"/,/// x 4: L 2&,///5N 4J%/ L J% L J%5 : 7 4J",/,/// 6 J): ' J1&/,///5KJ"2 J"2: 7 J2"/,/// 6 J): J2): 7 J2"/,/// : 7 ,,,%+ units $E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H 1&) A:. 1&+: $he follo(ing information pertains to the <ean Aompany: Helling price per unit Htandard fixed manufacturing costs per unit ariable selling and administrative costs per unit Htandard variable manufacturing costs per unit Fixed selling and administrative costs #nits produced #nits sold 1&). 0hat is the variable costing brea>even point in unitsB a. ,"" units b. &,&&) units c. &,,", units d. ),/// units Answer: d Difficulty: 2 Objective: * Terms to Learn: variable costing <rea>even units 7 MJ%,,/// 6 41/,/// x J)/5N K 4J12" L J" L J125 7 ),/// units J12" J)/ J12 J" J%,,/// 1/,/// units *,)// units *

*'"+

1&+. 0hat is the absorption costing brea>even point in unitsB a. *1+ units b. 1,/// units c. &,,", units d. ),/// units Answer: b Difficulty: 2 Objective: * Terms to Learn: absorption costing <rea>even units : 7 M4J)%,,/// 6 4J)/ x 4: L 1/,///55N K 4J12" L J" L J125 7 1,/// units $E= F;FF;0-:2 -:F;G9A$-;: A33F-=H $; I#=H$-;:H 1&, $EG;#2E 1)/: 2reene 9anufacturing incurred the follo(ing expenses during 2/C&: Fixed manufacturing costs Fixed nonmanufacturing costs #nit selling price $otal unit cost ariable manufacturing cost rate #nits produced J%&,/// J"&,/// J1// J%/ J2/ 1,"%/ units

1&,. 0hat (ill be the brea>even point if variable costing is usedB a. 1,""% units b. 1,12& units c. 1,/// units d. &)" units Answer: c Difficulty: 2 Objective: Terms to Learn: variable costing <rea>even units 7 4J%&,/// 6 J"&,///5 K 4J1// L J2/5 7 1,/// units 1&*. 0hat (ill be the brea>even point in units if absorption costing is usedB a. 1,""/ units b. 1,/// units c. ,,+ units d. &)" units Answer: Terms to Learn: c Difficulty: absorption costing 2 Objective: * *

<rea>even units : 7 M4J%&,/// 6 J"&,///5 6 4J2/ x 4: L 1,"%/55N 4J1// L J2/5 : 7 4J,/,/// 6 J2/: L J2),,//5KJ,/ J,/: 7 J&",2// 6 J2/: : 7 ,,+ units

*'",

1)/. 0hat is the brea>even point in units using absorption costing if the units produced are actually 2,2&/B a. 1,""/ units b. 1,/// units c. ,,+ units d. &,% units Answer: Terms to Learn: d Difficulty: absorption costing 2 Objective: *

<rea>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 ariable manufacturing overhead .irect materials ariable selling expenses Fixed administrative expenses Fixed manufacturing overhead $here (as no beginning inventory. Required: a. Aompute the ending finished goods inventory under both absorption and variable costing. b. Aompute the cost of goods sold under both absorption and variable costing. Answer: a. .irect materials .irect manufacturing labor ariable manufacturing overhead Fixed manufacturing overhead $otal #nit costs: J)"+,&//K1//,/// units J%"+,&//K1//,/// units J)."+& J%."+& A s!r"#i!n J1&/,/// 1,+,&// 1//,/// 2//,/// J)"+,&// $%ri% &e J1&/,/// 1,+,&// 1//,/// / J%"+,&// J1,+,&// 1//,/// 1&/,/// 1//,/// 1//,/// 2//,///

*'"*

=nding inventory: 2&,/// units x J)."+& 2&,/// units x J%."+& b. Aost of goods sold: +&,/// x J)."+& +&,/// x J%."+&

J1&*,"+& J1/*,"+& J%+,,12& J"2,,12&

Difficulty: Terms to Learn:

2 Objective: 1 variable costing, absorption costing

1)2. <ruster Aompany sells its products for J)) each. $he current production level is 2&,/// units, although only 2/,/// units are anticipated to be sold. #nit manufacturing costs are: .irect materials .irect manufacturing labor ariable manufacturing costs $otal fixed manufacturing costs 9ar>eting expenses year J12.// J1,.// J*.// J1,/,/// J).// per unit, plus J)/,/// per

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 Aost of goods sold 42/,/// x J%).2/Q5 2ross margin 9ar>eting: ariable 42/,/// x J)5 Fixed ;perating income Q J12.// 6 J1,.// 6 J*.// 6 4J1,/,///K2&,///5 7 J%).2/ J1,"2/,/// *2%,/// "*),/// J12/,/// )/,/// 1,/,/// J21),///

*'%/

b.

!ariable-costing income statement: Hales 42/,/// x J))5 ariable costs: Aost of goods sold 42/,/// x J"*Q5 9ar>eting 42/,/// x J)5 Aontribution margin Fixed costs: 9anufacturing 9ar>eting ;perating income Q J12.// 6 J1,.// 6 J*.// 7 J"* Difficulty: Terms to Learn: 2 Objective: 2 variable costing, absorption costing J1,"2/,/// J+,/,/// 12/,/// *//,/// %2/,/// J1,/,/// )/,/// 2%/,/// J1,/,///

1)". -reland Aorporation 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: Hales Aost of goods sold 2ross margin 9ar>eting and administrative ;perating income '(X) J/ / / 2/,/// J42/,///5 J '(X' J1//,/// ,/,/// 2/,/// 2/,/// / '(X* J12/,/// ,/,/// %/,/// 2/,/// J2/,///

*'%1

b.

!ariable-costing income statements: Hales ariable expenses Aontribution margin Fixed expenses: 9anufacturing 9ar>eting and administrative $otal fixed ;perating income J '(X) / / / J%/,/// 2/,/// )/,/// J4)/,///5 J '(X' J1//,/// )/,/// %/,/// / 2/,/// 2/,/// J2/,/// J '(X* J12/,/// )/,/// )/,/// / 2/,/// 2/,/// J%/,///

Difficulty: Terms to Learn:

" Objective: 2 variable costing, absorption costing

1)%. Rarvis 2olf Aompany sells a special putter for J2/ each. -n 9arch, it sold 2,,/// putters (hile manufacturing "/,///. $here (as no beginning inventory on 9arch 1. 3roduction information for 9arch (as: .irect manufacturing labor per unit Fixed selling and administrative costs Fixed manufacturing overhead .irect materials cost per unit .irect manufacturing labor per hour ariable manufacturing overhead per unit ariable selling expenses per unit 1& minutes J %/,/// 1"2,/// 2 2% % 2

Required: a. Aompute the cost per unit under both absorption and variable costing. b. Aompute the ending inventories under both absorption and variable costing. c. Aompute operating income under both absorption and variable costing. Answer: a. .irect manufacturing labor 4J2%K%5 .irect materials ariable manufacturing overhead Fixed manufacturing overhead 4J1"2,///K"/,///5 $otal cost per unit A s!r"#i!n J ).// 2.// %.// %.%/ J1).%/ $%ri% &e J ).// 2.// %.// DDD/ J12.//

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b. <eginning inventory Aost of goods manufactured: "/,/// x J1).%/ "/,/// x J12.// Aost of goods available for sale Aost of goods sold: 2,,/// x J1).%/ 2,,/// x J12.// =nding inventory c. Absorption-costing income statement: Hales 42,,/// x J2/5 Aost of goods sold 42,,/// x J1).%/5 2ross margin Fess: ariable selling and administrative Fixed selling and administrative ;perating income !ariable-costing income statement: Hales 42,,/// x J2/5 ariable A;2H 42,,/// x J125 ariable selling expenses 42,,/// x J25 Aontribution margin Fixed costs: 9anufacturing Helling and administrative ;perating income Difficulty: Terms to Learn: 2 Objective: 2 variable costing, absorption costing

A s!r"#i!n J/ J%*2,/// DDDDDDD J%*2,/// J%&*,2// DDDDDDD J "2,,//

$%ri% &e J/

J")/,/// J")/,///

J""),/// J 2%,///

J&)/,/// %&*,2// 1//,,// J&),/// %/,/// *),/// J %,,//

J&)/,/// J""),/// &),/// "*2,/// 1),,/// J1"2,/// %/,/// 1+2,/// J 4%,///5

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1)&. Rohnson Gealty bought a 2,///'acre island for J1/,///,/// and divided it into 2// e1ual 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 (ere sold. .uring 2/C), the company bought another 2,///'acre island and developed it exactly the same (ay. Fot sales in 2/C) totaled "// (ith an average selling price of J1)/,///. All costs (ere the same as in 2/C&. Required: 3repare income statements for both years using both absorption and variable costing methods. Answer: Aost per site: Fand cost J1/,///,///K2// sites Alearing costs -mprovements $otal Absorption-costing income statements: Hales Aost of goods sold: &/ x 4J&/,/// 6 J,,/// 6 J&,///5 "// x 4J&/,/// 6 J,,/// 6 J&,///5 2ross margin ariable mar>eting Fixed administrative ;perating income !ariable-costing income statements: Hales ariable expenses: Aost of operations: &/ x J1",/// "// x J1",/// Helling expenses

A s!r"#i!n J&/,/// &,/// ,,/// J)",/// '(X+ J,,///,/// ",1&/,/// DDDDDDDD J%,,&/,/// ,//,/// ,&/,/// J",2//,/// '(X+ J,,///,/// )&/,/// ,//,///

$%ri% &e J/ &,/// ,,/// J1",/// '(X, J%,,///,/// 1,,*//,/// J2*,1//,/// %,,//,/// ,&/,/// J2",%&/,/// '(X, J%,,///,///

",*//,/// %,,//,///

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Aontribution margin Fixed expenses: Fand Administrative ;perating income Difficulty: Terms to Learn:

J),&&/,/// 1/,///,/// ,&/,/// J4%,"//,///5 2

J"*,"//,/// 1/,///,/// ,&/,/// J2,,%&/,///

" Objective: variable costing, absorption costing

1)). 9egredy Aompany prepared the follo(ing absorption'costing income statement for the year ended 9ay "1, 2/C&. Hales 41),/// units5 Aost of goods sold 2ross margin Helling and administrative expenses ;perating income J"2/,/// 21),/// J1/%,/// %),/// J &,,///

Additional information follo(s: Helling and administrative expenses include J1.&/ of variable cost per unit sold. $here (as no beginning inventory, and 1+,&// units (ere produced. ariable manufacturing costs (ere J11 per unit. Actual fixed costs (ere e1ual to budgeted fixed costs. Required: 3repare a variable'costing income statement for the same period. Answer: Hales ariable expenses: 9anufacturing cost of goods sold1 Helling and administrative2 Aontribution margin Fixed expenses: Fixed factory overhead" Fixed selling and administrative% ;perating income 1. 2. ". %. J"2/,/// J1+),/// 2%,/// J%",+&/ 22,/// 2//,/// J 12/,/// )&,+&/ J &%,2&/

1),/// units x J11 7 J1+),/// 1),/// units x J1.&/ 7 J2%,/// M4J21),///K1),/// units5 L J11N x 1+,&// units 7 J%",+&/ J%),/// L J2%,/// 7 J22,/// " Objective: variable costing 2

Difficulty: Terms to Learn:

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1)+. $he follo(ing data are available for Guggles Aompany for the year ended Heptember "/, 2/C&. Hales: =xpected and actual production: 9anufacturing costs incurred: ariable: Fixed: :onmanufacturing costs incurred: ariable: Fixed: <eginning inventories: 2%,/// units at J&/ each "/,/// units J&2&,/// J"+2,/// J1%%,,// J++,%// none

Required: a. .etermine operating income using the variable'costing approach. b. .etermine operating income using the absorption'costing approach. c. =xplain (hy operating income is not the same under the t(o approaches. Answer: a. 2%,/// x J&/ 7 J1,2//,/// sales 4J&2&,///K"/,///5 x 2%,/// 7 J%2/,/// variable manufacturing cost J1,2//,/// L J%2/,/// L J1%%,,// 7 J)"&,2// contribution margin J)"&,2// L J"+2,/// L J++,%// 7 J1,&,,// operating income b. 4J"+2,///K"/,///5 x 2%,/// 7 J2*+,)// manufacturing fixed cost J1,2//,/// L J%2/,/// L J2*+,)// 7 J%,2,%// gross margin J%,2,%// L J1%%,,// L J++,%// 7 J2)/,2// operating income J2)/,2// L J1,&,,// 7 J+%,%// or ),/// units in ending inventory x J12.%/ per unit of fixed manufacturing cost. " Objectives: 2, " variable costing, absorption costing

c.

Difficulty: Terms to Learn:

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1),. <obby Hmith and Hons Aompany (as concerned that increased sales did not result in increased profits for 2/C). <oth variable unit and total fixed manufacturing costs for 2/C& and 2/C) remained constant at J2/ and J2,///,///, respectively. -n 2/C&, the company produced 1//,/// units and sold ,/,/// units at a price of J&/ per unit. $here (as no beginning inventory in 2/C&. -n 2/C), the company made +/,/// units and sold */,/// units at a price of J&/. Helling and administrative expenses (ere all fixed at J1//,/// each year. Required: a. 3repare income statements for each year using absorption costing. b. 3repare income statements for each year using variable costing. c. =xplain (hy the income (as different each year using the t(o methods. Hho( computations. Answer: a. Absorption-costing income statements: Hales Aost of goods sold: <eginning inventory ariable Fixed Hubtotal =nding inventory $otal A;2H 2ross margin Helling and administrative ;perating income b. !ariable-costing income statements: Hales ariable expenses Aontribution margin Fixed expenses: 9anufacturing Helling and administrative ;perating income '(X+ J%,///,/// 1,)//,/// 2,%//,/// 2,///,/// 1//,/// J "//,/// '(X, J%,&//,/// 1,,//,/// 2,+//,/// 2,///,/// 1//,/// J )//,/// '(X+ J%,///,/// / 2,///,/// 2,///,/// %,///,/// ,//,/// ",2//,/// ,//,/// 1//,/// J +//,/// '(X, J%,&//,/// ,//,/// 1,%//,/// 2,///,/// %,2//,/// / %,2//,/// "//,/// 1//,/// J 2//,///

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c.

<udgeted fixed manufacturing overhead rate for 2/C& 7 J2,///,/// K 1//,/// 7 J2/ 2/C& difference of J%//,/// 7 41//,/// L ,/,///5 x J2/ 7 J%//,/// 4favors absorption method5 2/C) difference of J%//,/// 7 4+/,/// L */,///5 x J2/ 7 J%//,/// 4favors variable method5

Difficulty: Terms to Learn:

2 Objectives: 2, " variable costing, absorption costing

1)*. =rnsting <ottling 0or>s manufactures glass bottles. Ranuary and February operations (ere identical in every (ay except for the planned production. Ranuary had a production denominator of "&,/// units. February had a production denominator of "),/// units. Fixed manufacturing costs totaled J12),///. Hales for both months totaled %&,/// units (ith variable manufacturing costs of J% per unit. Helling and administrative costs (ere J/.%/ per unit variable and J)/,/// fixed. $he selling price (as J1/ per unit. Required: Aompute the operating income for both months using absorption costing. Answer: "anuary manufacturing cost per unit ariable costs: Fixed costs 4J12),///K"&,///5 $otal per unit #ebruary manufacturing cost per unit ariable costs Fixed costs J12),///K"),/// $otal per unit

J%.// ".)/ J+.)/ J%.// ".&/ J+.&/

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"anuary $ncome %tatement Hales 4%&,/// x J1/5 Aost of goods sold 4%&,/// x J+.)/5 2ross margin ;ther costs: ariable selling and administrative Fixed selling and administrative ;perating income #ebruary $ncome %tatement Hales 4%&,/// x J1/5 Aost of goods sold 4%&,/// x J+.&/5 2ross margin ;ther costs: ariable selling and administrative Fixed selling and administrative ;perating income Difficulty: Terms to Learn: 2 Objectives: 2, + absorption costing J%&/,/// ""+,&// J112,&// J1,,/// )/,/// +,,/// J"%,&// J%&/,/// "%2,/// J1/,,/// J1,,/// )/,/// +,,/// J"/,///

1+/. Aalvin =nterprises produces a specialty statue item. $he follo(ing information has been provided by management: Actual sales <udgeted production Helling price .irect manufacturing costs Fixed manufacturing costs ariable manufacturing costs ariable administrative costs 1&/,/// units 1)/,/// units J"% per unit J* per unit J& per unit J% per unit J2 per unit

Required: a. 0hat is the cost per statue if absorption costing is usedB b. 0hat is the cost per statue if Tsuper'variable costingT is usedB c. 0hat is the total throughput contributionB

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Answer: a. J* 6 J& 6 J% 7 J1, b. c. =1ual to direct materials 7 J* 1&/,/// x 4J"% L J*5 7 J",+&/,/// 2 Objective: & absorption costing, super'variable costing, throughput costing

Difficulty: Terms to Learn:

1+1. 0allace@s 0rench Aompany 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 (renchB b. 0hat is the practical fixed manufacturing overhead rate per (renchB c. 0hat is the normal fixed manufacturing overhead rate per (renchB d. 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. c. d. 3ractical overhead rate 7 J""),)// K 4%,&// x 2/5 7 J".+% :ormal overhead rate 7 J""),)// K 4%,2&/ x 2/5 7 J".*) 9aster'budget overhead rate 7 J""),)// K 4%,%// x 2/5 7 J".,2& 2 Objective: ) absorption costing, super'variable costing, throughput costing

Difficulty: Terms to Learn:

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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. Fixed administrative costs total J"/,///. Hales average %//,/// units per month, (ith planned production of %//,/// hot dogs. Required: a. 0hat are brea>even unit sales under variable costingB b. 0hat are brea>even unit sales under absorption costing if she sells everything she preparesB c. 0hat are brea>even unit sales under absorption costing if average sales are %*,,/// and planned production is changed to &//,///B Answer: a. <rea>even units 7 4J*/,/// 6 J"/,///5 K 4J1."& L J1./&5 7 %//,/// b. <rea>even units 4:5 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. <rea>even units 4:5 7 M4J*/,/// 6 J"/,///5 6 4J/.1, 4: L &//,///55N J1."& L J1./& : 7 4J12/,/// 6 J/.1,: ' J*/,///5 K J/."/ J/.": 7 J"/,/// 6 J/.1,: J/.12: 7 J"/,/// : 7 2&/,/// units Difficulty: Terms to Learn: 2 Objective: * absorption costing, super'variable costing, throughput costing

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CRITICAL THIN-IN. 1+". a. b. =xplain the difference bet(een the variable and absorption costing methods. 0hich method4s5 are re1uired for external reportingB For internal reportingB

Answer: a. Absorption costing includes both fixed and variable manufacturing costs as inventoriable costs, (hereas variable costing only includes variable manufacturing costs as inventoriable costs. b. Absorption costing is re1uired for external reporting to shareholders and for income tax reporting. A company may use (hichever method it chooses for internal reporting purposes. Difficulty: Terms to Learn: 2 Objective: 1 variable costing, absorption costing

1+%. =xplain the difference bet(een the gross margin format and the contribution margin format for the income statement. 0hat information is highlighted (ith eachB Answer: $he gross margin format divides costs into product and period costs (hile the contribution format divides costs into variable and fixed costs. $he gross margin format highlights cost function (hile the contribution format highlights cost behavior. Difficulty: Terms to Learn: 2 Objective: 2 variable costing, absorption costing

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 has selected for evaluation include: /%nu%r0 Fe ru%r0 #nits produced %/,/// "/,/// #nits sold "/,/// %/,/// Hales <eginning inventory Aost of production =nding inventory ;perating income J)//,/// / )//,/// 1&/,/// +/,/// J,//,/// 1&/,/// &&/,/// / "&,///

$he division operated at normal capacity during Ranuary. ariable manufacturing cost per unit (as J&, and the fixed costs (ere J%//,///. Helling and administrative expenses (ere all fixed.

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Required: =xplain the profit differences. Eo( (ould variable costing income statements help the manager understand the divisionOs operating incomeB Answer: $he 1/,/// units in inventory being assigned fixed manufacturing costs cause the operating income difference. $he fixed manufacturing cost assigned to the inventory is carried into the next month. $he fixed costs per unit (ere J1/ per unit 4J%//,///K%/,///5, therefore, J1//,/// 41/,/// x J1/5 (ere carried into February. ariable costing helps avoid confusion by relating variations in expenses to sales rather than to inventory fluctuations. #nder variable costing, the total fixed amount 4J%//,///5 (ould be expensed in Ranuary and none carried for(ard into February. $herefore, RanuaryOs income (ould be J1//,/// less than reported and FebruaryOs J1//,/// more than reported. Difficulty: Terms to Learn: 2 Objectives: 1, 2, " variable costing, absorption costing

1+). 2alliart Aompany has t(o identical divisions, =ast and 0est. $heir sales, production volume, and fixed manufacturing costs have been the same for the last five 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. <oth use F-F; inventory methods. ariable manufacturing costs are J& per unit. Helling and administrative expenses (ere identical for each division. $here (ere no inventories at the beginning of 2/C1. 0hich division reports the highest income each yearB =xplain. Answer: =ast .ivision had the higher income during the first three years because production exceeded salesP this stored some of the fixed manufacturing costs each year in the ending inventory balances. 0est had the higher income during the last t(o years because sales exceeded production. .uring these years, =ast incurred all of the yearOs fixed manufacturing costs plus those costs that (ere in inventory from the prior years. Difficulty: Terms to Learn: 2 Objective: " variable costing, absorption costing

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1++. Uaiser Aompany ?ust hired its fourth production manager in three years. All three previous managers had 1uit because they could not get the company above the brea>'even point, even though sales had increased some(hat each year. $he company (as operating at about )/ S of plant capacity. $he flat(are industry (as gro(ing, so increased sales (ere not out of the 1uestion. -. G. $hin>ing too> the ?ob as manager of the production division (ith a very attractive salary pac>age. After intervie(ing for the position, he proposed a salary and bonus pac>age that (ould give him a very small salary but a large bonus if he too> the operating income 4using absorption costing5 above the brea>even point during his very first year. Required: 0hat do you thin> 9r. $hin>ing had in mind for increasing the companyOs operating incomeB Answer: 9r. $hin>ing reali8ed that he could probably increase both production and sales during the coming year. -f he substantially overproduced he >ne( that the extra costs (ould be hidden in unsold inventory. -f the ne( production level could be sold by the sales force in the gro(ing mar>et, the profits (ould increase any(ay and everybody (ould be happy. Also, he could combine increased production (ith reduced fixed manufacturing costs such as maintenance. -n the short run, several combinations could be underta>en by 9r. $hin>ing to ensure that the profit picture (ould improve. Difficulty: Terms to Learn: " Objective: absorption costing %

1+,. <riefly discuss t(o methods of reducing the undesirable incentives associated (ith the use of absorption costing to evaluate the performance of a plant manager. Answer: $here are several (ays to reduce the undesirable incentives associated (ith the use of absorption costing to evaluate the performance of a plant manager. Any t(o of the follo(ing (ould be sufficient to ans(er this 1uestion: 15 #se budgeted balance sheets to limit the ability of a manager to exceed those amounts (ithout providing an explanation. 25 -ncorporate a carrying charge for inventory in the internal accounting system. $his (ill serve to reduce the amount of profit a manager reports in proportion to the amount of any inventory buildup.

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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 increase 1uarterly 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>e producing to inventory more visible to top management. Difficulty: Terms to Learn: " Objective: absorption costing %

1+*. 0hat is throughput costingB 0hat advantages is it purported to have over variable and 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 of manufacturing cost put into inventory than either variable or absorption costing. Hupporters of throughput costing claim that it provides less incentive to produce for inventory than absorption costing or even variable costing. Difficulty: Terms to Learn: 1,/. a. b. c. 2 Objective: & throughput costing, variable costing, absorption costing

Fist the four different measures of capacity. 0hich measure of capacity is best for setting pricesB 0hyB 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, and master'budget capacity utili8ation are the four measures of capacity. b. 3ractical capacity is best to use (hen setting prices because only the actual cost of capacity used for production is included in the cost of a unit. c. 9aster'budget capacity utili8ation is best for evaluating performance of managers over the current year because the manager should only be held accountable for budgeted sales of the current year and not production capacity, especially (hen there is unused capacity. Difficulty: 2 Objectives: ), + Terms to Learn: theoretical capacity, practical capacity, normal capacity utili8ation, master'budget capacity utili8ation

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1,1. =xplain ho( using master'budget capacity utili8ation for setting prices can lead to a do(n(ard demand spiral. Answer: -f master'budget capacity utili8ation is used as the denominator level for determining fixed manufacturing costs per unit, the cost includes a charge for unused capacity. -f prices are based on this cost, the product may be priced higher than competitor@s products. 0ith a higher selling price, volume of sales (ill probably decrease reducing the expected number of future sales. Fo(er expected sales leads to a lo(er denominator level, (hich in turn results in an even higher selling price and even lo(er sales volume. =tc., etc., etc. Difficulty: Terms to Learn: 2 Objective: , do(n(ard demand spiral

1,2. Hhould a company (ith high fixed costs and unused capacity raise selling prices to try to fully recoup its costsB Answer: :o, companies in this situation might experience greater reductions in the demand of their products if they continue to raise selling prices. $his (ould result in the fixed capacity costs being spread over fe(er and fe(er units, increasing reported costs, resulting in more pressure to raise prices. Difficulty: Terms to Learn: " Objective: , 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 the production'volume variance. 0hen the chosen capacity level exceeds the actual production level, there (ill be an unfavorable production'volume varianceP (hen the chosen capacity level is less than the actual production level, there (ill be a favorable production'volume variance. Difficulty: Terms to Learn: " Objective: absorption costing *

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