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True/False Questions

1. Under variable costing, only variable production costs are treated as product costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

2. Under variable costing, variable selling and administrative costs are included in product
costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

3. Absorption costing treats all manufacturing costs as product costs.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

4. In the preparation of financial statements using variable costing, fixed manufacturing


overhead is treated as a period cost.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

5. Absorption costing treats fixed manufacturing overhead as a period cost.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 1 Level: Easy

6. When the number of units in work in process and finished goods inventories increase,
absorption costing net operating income will typically be greater than variable costing net
operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2,3 Level: Easy

7. Net operating income computed using absorption costing will always be greater than net
operating income computed using variable costing.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 2 Level: Easy
8. When reconciling variable costing and absorption costing net operating income, fixed
manufacturing overhead costs released from inventory under absorption costing should
be added to variable costing net operating income to arrive at the absorption costing net
operating income.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Medium

9. When production exceeds sales for the period, absorption costing net operating income
will exceed variable costing net operating income.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Medium

10. Under variable costing it may be possible to report a profit even if the company sells less
than the break-even volume of sales.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Medium

11. Absorption costing net operating income is closer to the net cash flow of a period than is
variable costing net operating income.

Ans: False AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Medium

12. Variable costing is not permitted for income tax purposes, but it is widely accepted for
external financial reports.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Medium

13. A basic concept of the contribution approach and variable costing is that fixed costs are
not important in an organization.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Medium

14. Variable costing is better suited to cost-volume-profit calculations than absorption


costing.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Easy
15. When lean production is introduced, the difference in net operating income computed
under the absorption and variable costing methods is reduced.

Ans: True AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 5 Level: Easy

Multiple Choice Questions

16. How would the following costs be classified (product or period) under variable costing at
a retail clothing store?

Cost of purchasing clothing Sales commissions


A) Product Product
B) Product Period
C) Period Product
D) Period Period

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting
LO: 1 Level: Medium

17. The principal difference between variable costing and absorption costing centers on:
A) whether variable manufacturing costs should be included as product costs.
B) whether fixed manufacturing costs should