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Chapter 7 Variable Costing: A Tool for Management 13.

13. When using absorption costing, a company ma y be able to show a profit even
if it is operating below the breakeven point.
True/False Questions
14. Variable costing is more compatible with cost-volume-profit analysis than is
1. The inventory value shown on the balance sheet is generally higher under absorption costing.
absorption costing than under variable costing.
15. Just-In-Time (JIT) methods generally increase the difference between
2. Under variable costing, inventoriable product costs consist of direct materials, absorption and variable costing net operating income.
direct labor, variable manufacturing overhead and variable selling and
administration expenses. Multiple Choice Questions
16. Under variable costing, fixed manufacturing overhead is:
3. Under variable costing, an increase in the fixed factory overhead will have no A) carried in a liability account.
effect on the unit product cost. B) carried in an asset account.
C) ignored.
4. Under the absorption costing method, a portion of fixed manufacturing D) immediately expensed as a period cost.
overhead cost is allocated to each unit of product.
17. Which of the following is true of a company that uses absorption costing?
5. Under variable costing, it is possible to defer a portion of the fixed
A) Net operating income fluctuates directly with changes in sales volume.
manufacturing overhead costs of the current period to future periods through the
B) Fixed production and fixed selling cost s are considered to be product
inventory account.
costs.
6. Under absorption costing, a portion of fixed manufacturing overhead cost is C) Unit product costs can change as a re sult of changes in the number of
released from inventory when sales volume exceeds production volume. units manufactured.
D) Variable selling expenses are included in product costs.
7. Contribution margin and gross margin mean the same thing.
18. Under absorption costing, fixed manufacturing overhead costs:
8. When reconciling variable costing and ab sorption costing net operating A) are deferred in inventory when production exceeds sales.
income, fixed manufacturing overhead costs deferred in inventory under absorption B) are always treated as period costs.
costing should be deducted from variable costing net opera ting income to arrive at C) are released from inventory when production exceeds sales.
the absorption costing net operating income. D) none of these.

9. If production equals sales for the period, absorption costing and variable costing 19. Which of the following costs at a manufacturing company would be treated as
will produce the same net operating income under LIFO. a product cost under both absorption costing and variable costing?
Variable overhead Variable Selling and Administrative
10. When the number of units in inventories decrease between the beginning and
A) Yes Yes
end of the period, absorption costing net operating income will typically be greater
B) Yes No
than variable costing net operating income.
C) No Yes
11. When viewed over the long term, accumulated net operating income will be D) No No
the same for variable and absorption costing if there are no ending inventories at
the end of the term. 20. Under absorption costing, product costs include:
Fixed FOH Variable FOH
12. Under absorption costing, the profit for a period is not affected by changes in A) No No
inventory. B) No Yes
C) Yes Yes
D) Yes No
21. Which of the following are included in product costs under variable costing? C) equal to net operating income reported under variable costing.
I. Variable manufacturing overhead. D) higher or lower because no generalization can be made.
II. Fixed manufacturing overhead.
III. Selling and administrative expenses. 27. When sales exceed production, the net operating income reported under
A) I, II, and III. B) I and III. variable costing generally will be:
C) I and II. D) I. A) less than net operating income reported under absorption costing.
B) greater than net operating inco me reported under absorption costing.
22. Under variable costing: C) equal to net operating income reported under absorption costing.
A) net operating income will tend to move up and down in response to D) higher or lower because no generalization can be made.
changes in levels of production.
B) inventory costs will be lowe r than under absorption costing. 28. A single-product company prepares income statements using both absorption
C) net operating income will tend to vary inversely with production and variable costing methods. Manufacturing overhead cost applied per unit
changes. produced under absorption costing in year 2 was the same as in year 1. The year 2
D) net operating income will always be higher than under absorption variable costing statement reported a profit whereas the year 2 absorption costing
costing. statement reported a loss. The difference in report ed income could be explained
by units produced in year 2 being:
23. In an income statement prepared using the variable costing method, fixed A) Less than units sold in year 2.
selling and administrative expenses would: B) Less than the activity level used for allocating overhead to the product.
A) be used in the computation of the contribution margin. C) In excess of the activity level used for allocating overhead to the product.
B) be used in the computation of net operating income but not in the D) In excess of units sold in year 2.
computation of the contribution margin.
C) be treated the same as variable manufacturing expenses. 29. The type of costing that provides the best information for breakeven analysis
D) not be used. is:
A) job-order costing. B) variable costing.
24. In an income statement prepared using the variable costing method, fixed C) process costing. D) absorption costing.
manufacturing overhead would:
A) not be used. 30. Advocates of variable costing argue that:
B) be used in the computation of the contribution margin. A) fixed production costs should be added to inventory because such
C) be used in the computation of net operating income but not in the costs have future service potential and therefore are inventoriable as an
computation of the contribution margin. asset.
D) be treated the same as variable manufacturing overhead. B) fixed production costs should be capitalized as an asset and am ortized
over future periods when benefits from such cost s are expected to be
25. In an income statement prepared as an in ternal report using variable costing, received.
variable selling and administrativ e expenses would: C) fixed production costs should be charged to the period in which they
A) not be used. are incurred unless sales do not equal production in which case any
B) be used in the computati on of the contribution margin. difference should be capitalized as an asset and am ortized over future
C) be used in the computation of net ope rating income but not in the periods.
computation of the contribution margin. D) fixed production costs should be charged to the period in which they
D) be treated the same as fixed selling and administrative expenses. are incurred.

26. When production exceeds sales, the net operating income reported under
absorption costing generally will be:
A) less than net operating income reported under variable costing.
B) greater than net operating inco me reported under variable costing.