STUDY UNIT NINETEEN COSTING TECHNIQUES Flashcards Preview

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Flashcards in STUDY UNIT NINETEEN COSTING TECHNIQUES Deck (31):
1

When production exceeds sales, operating income is higher under variable costing.
True.
False.

False.
Your answer is correct.
Operating income is higher under absorption costing when production exceeds sales. When production exceeds sales ending inventory expands. Under absorption costing, some fixed costs are still embedded in ending inventory. Under variable costing, all fixed costs have been expensed. Therefore, operating income is higher under absorption costing.

2

In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is irrelevant because it is a sunk (already expended) cost.
True.
False.

True.
Your answer is correct.
In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is irrelevant because it is a sunk (already expended) cost.

The cost of additional processing (incremental costs) should be weighed against the benefits received (incremental revenues). The sell/process decision should be based on that relationship.

3

Joint costs are not separately identifiable and must be allocated to the individual joint products.
True.
False.

True.
Your answer is correct.
Joint costs include direct materials, direct labor, and manufacturing overhead. Because they are not separately identifiable, they must be allocated to the individual joint products.

4

The net joint value method is based on the relative sales values of the separate products at split-off.
True.
False.

False.
Your answer is correct.
The sales-value at split-off method is based on the relative sales values of the separate products at split-off.

5

In an income statement prepared as an internal report using the variable costing method, fixed selling and administrative expenses are
A Used in the computation of the contribution margin.
B Not used.
C Treated the same as variable selling and administrative expenses.
D Used in the computation of operating income but not in the computation of the contribution margin.

D Used in the computation of operating income but not in the computation of the contribution margin.
This answer is correct.
In a variable costing income statement, all variable costs are deducted from sales revenue to arrive at the contribution margin. Total fixed costs are then deducted from the contribution margin to determine operating income. Thus, fixed selling and administrative expenses would be used in the computation of operating income but not in the computation of the contribution margin.

6

Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?
A When production equals sales, absorption costing income is less than variable costing income.
B When production equals sales, absorption costing income is greater than variable costing income.
C When production is less than sales, absorption costing income is greater than variable costing income.
D When production is greater than sales, absorption costing income is greater than variable costing income.

D When production is greater than sales, absorption costing income is greater than variable costing income.
This answer is correct.
When production exceeds sales, ending inventory increases. Under absorption costing, some fixed costs are included in ending inventory. Under variable costing, all fixed costs are expensed. Accordingly, income is higher under absorption costing.

7

One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are $135. X is sold for $2.50 per pound, and Y can be sold for $3.00 per pound or processed further into 30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z can then be sold for $6.00. What is the effect on profits of further processing product Y into product Z?
A $60 decrease.
B No change.
C $30 increase.
D $60 increase.

B No change.
This answer is correct.
The joint costs of $135 do not vary with the option chosen. Without further processing of product Y, revenue equals $270 [(60 lbs × $2.50) + (40 lbs × $3.00)], and net revenue equals $135 ($270 – $135). If product Y is processed further into product Z, revenue equals $330 [(60 lbs × $2.50) + (30 lbs × $6.00)]. This additional processing is at an incremental cost of $60, resulting in net revenue of $135 ($330 – $135 – $60). Hence, further processing results in no increase or decrease in net revenue.

8

Mighty, Inc., processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2, and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?
A $120,000
B $400,000
C $200,000
D $480,000

D $480,000
This answer is correct.
Given no additional processing costs, white breast meat has a sales value of $200,000 (100,000 pounds × $2), and legs have a sales value of $50,000 (50,000 pounds × $1). Thus, the joint costs allocated to white breast meat based on relative sales value is $480,000 [$600,000 × ($200,000 ÷ $250,000)]

9

In a job-order cost system, the application of factory overhead is usually reflected in the general ledger as an increase in
A Finished goods control.
B Factory overhead control.
C Cost of goods sold.
D Work-in-process control.

D Work-in-process control.
This answer is correct.
The entry to record the application of factory overhead to specific jobs is to charge WIP control and credit factory overhead applied using a predetermined overhead rate. The effect is to increase the WIP control account.

10

In an income statement prepared using the variable-costing method, fixed factory overhead would
A Be used in the computation of operating income but not in the computation of the contribution margin.
B Be used in the computation of the contribution margin.
C Be treated the same as variable factory overhead.
D Not be used.

A Be used in the computation of operating income but not in the computation of the contribution margin.
This answer is correct.
Under the variable-costing method, the contribution margin equals sales minus variable expenses. Fixed selling and administrative costs and fixed factory overhead are deducted from the contribution margin to arrive at operating income. Thus, fixed costs are included only in the computation of operating income.
View Subunit 19.1 Outline

11


Lowe Co. manufactures products A and B from a joint process. Sales value at split-off was $700,000 for 10,000 units of A and $300,000 for 15,000 units of B. Using the sales value at split-off approach, joint costs properly allocated to A were $140,000. Total joint costs were
A $98,000
B $233,333
C $200,000
D $350,000

C $200,000
This answer is correct.
The relative sales value is a cost allocation method that allocates joint costs in proportion to the relative sales value of the individual products. Total sales value is $1,000,000 ($700,000 for A + $300,000 for B). The $140,000 of joint costs allocated to product A was 70% ($700,000 ÷ $1,000,000) of total joint costs. The calculation for total joint costs (Y) is
.7Y

=

$140,000
Y

=

$140,000 ÷ .7
Y

=

$200,000

12


Which of the following must be known about a production process to institute a variable costing system?
A Contribution margin and breakeven point for all goods in production.
B Standard production rates and times for all elements of production.
C The controllable and noncontrollable components of all costs related to production.
D The variable and fixed components of all costs related to production.

D The variable and fixed components of all costs related to production.
This answer is correct.
Variable costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are treated as period costs. Thus, one need only be able to determine the variable and fixed manufacturing costs to institute a variable costing system.
View Subunit 19.1 Outline

13

Nil Co. uses a predetermined factory overhead application rate based on direct labor cost. For the year ended December 31, Nil’s budgeted factory overhead was $600,000, based on a budgeted volume of 50,000 direct labor hours, at a standard direct labor rate of $6 per hour. Actual factory overhead amounted to $620,000, with actual direct labor cost of $325,000. For the year, overapplied factory overhead was

A. $50,000
B. $30,000
C. $25,000
D. $20,000

B. $30,000
Answer (B) is correct.
Nil Co. applies factory overhead using a predetermined overhead rate, based on direct labor cost. Overhead was budgeted for $600,000 based on a budgeted labor cost of $300,000 ($6 × 50,000 hrs.). Thus, $2 of overhead was applied for each $1 of labor. Given actual labor cost of $325,000, $650,000 ($2 × $325,000) of overhead was applied during the period. Actual overhead was $620,000, so $30,000 ($650,000 – $620,000) was overapplied.

View Subunit 19.5 Outline

14

A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income increase is that, compared to budget, actual

A. Sales prices and variable costs had increased proportionately.
B. Selling and administrative fixed expenses had decreased.
C. Manufacturing fixed costs had increased.
D. Sales prices had declined proportionately less than variable costs.

B. Selling and administrative fixed expenses had decreased.
Answer (B) is correct.
Both variable and absorption costing income statements exclude fixed selling and administrative expenses from the calculation of gross profit (gross margin) and contribution margin. Because actual sales revenue, total gross profit, and total contribution margin approximated their budgeted amounts, the only item that could have caused an increase in net income without affecting either gross profit or contribution margin would be a decrease in fixed selling and administrative expenses.
(19.1.9)

15

At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year. The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of $40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What amount would the company recognize as income for April using variable costing?

A. $35,000
B. $44,000
C. $45,000
D. $36,000

D. $36,000
Answer (D) is correct.
The difference between variable costing and absorption costing is the treatment of fixed costs. Under absorption costing, the fixed portion of manufacturing overhead is included in the cost of each product. Under variable costing, product cost includes only variable manufacturing costs and fixed costs are treated as period costs. The rate for assigning fixed overhead costs is $2 per unit ($600,000 budgeted fixed overhead costs ÷ 300,000 budgeted production units). Since the ending inventory in April is 2,000 units greater than the beginning inventory, the company produced more units than it sold. In April, under absorption costing, $4,000 ($2 fixed overhead rate per unit × 2,000 units produced and not sold) of fixed manufacturing overhead costs were still embedded in ending inventory and were not expensed. Under variable costing, these fixed manufacturing overhead costs of $4,000 were expensed. Therefore, the operating income under the absorption costing is $4,000 greater than under the variable costing. Therefore, operating income under variable costing is $36,000 ($40,000 – $4,000).
(19.1.29)

16

Osawa, Inc., planned and actually manufactured 200,000 units of its single product during its first year of operations. Variable manufacturing costs were $30 per unit of product. Planned and actual fixed manufacturing costs were $600,000, and selling and administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of $40 per unit.
Osawa’s operating income for the year using variable costing is

A. $600,000
B. $440,000
C. $800,000
D. $200,000

D. $200,000
Answer (D) is correct.
The contribution margin from manufacturing (sales – variable costs) is $10 ($40 – $30) per unit sold, or $1,200,000 (120,000 units × $10). The fixed costs of manufacturing ($600,000) and selling and administrative costs ($400,000) are deducted from the contribution margin to arrive at an operating income of $200,000. The difference between the absorption income of $440,000 and the $200,000 of variable costing income is attributable to capitalization of the fixed manufacturing costs under the absorption method. Because 40% of the goods produced are still in inventory (80,000 ÷ 200,000), 40% of the $600,000 in fixed costs, or $240,000, was capitalized under the absorption method. That amount was expensed under the variable costing method.
19.2.48)

17

Which one of the following statements is true regarding absorption costing and variable costing?

A. Variable manufacturing costs are lower under variable costing.
B. Overhead costs are treated in the same manner under both costing methods.
C. If finished goods inventory increases, absorption costing results in higher income.
D. Gross margins are the same under both costing methods.

C. If finished goods inventory increases, absorption costing results in higher income.
Answer (C) is correct.
Under variable costing, inventories are charged only with the variable costs of production. Fixed manufacturing costs are expensed as period costs. Absorption costing charges to inventory all costs of production. If finished goods inventory increases, absorption costing results in higher income because it capitalizes some fixed costs that would have been expensed under variable costing. When inventory declines, variable costing results in higher income because some fixed costs capitalized under the absorption method in prior periods are expensed in the current period.
(19.1.25)

18

What costs are treated as product costs under variable costing?

A. Only variable production costs.
B. All variable costs.
C. All variable and fixed manufacturing costs.
D. Only direct costs.

A. Only variable production costs.
Answer (A) is correct.
Product costs under variable costing include direct materials, direct labor, and variable factory overhead. Each is a variable production cost.
(19.1.16)

19

In an income statement prepared as an internal report using the variable costing method, variable selling and administrative expenses are

A. Used in the computation of operating income but not in the computation of the contribution margin.
B. Used in the computation of the contribution margin.
C. Treated the same as fixed selling and administrative expenses.
D. Not used.

B. Used in the computation of the contribution margin.
Answer (B) is correct.
In a variable costing income statement, the contribution margin equals sales minus all variable costs, which include the variable selling and administrative expenses as well as variable manufacturing costs (direct materials, direct labor, and variable factory overhead). Operating income equals the contribution margin minus all fixed costs.
(19.1.8)

20

At the end of a company’s first year of operations, 2,000 units of inventory are on hand. Variable costs are $100 per unit, and fixed manufacturing costs are $30 per unit. The use of absorption costing, rather than variable costing, would result in a higher net income of what amount?

A. $200,000
B. $140,000
C. $60,000
D. $260,000

C. $60,000
Answer (C) is correct.
Absorption costing is required under GAAP. It includes all manufacturing costs in product cost: direct materials, direct labor, and fixed as well as variable manufacturing overhead. Variable costing differs only in that it expenses fixed manufacturing costs. Hence, given no beginning inventory, pretax net income for absorption costing purposes exceeds pretax net income for variable costing purposes by $60,000 (2,000 units in EI × $30 fixed manufacturing cost per unit). This amount is expensed using variable costing and treated as a product cost using absorption costing.
(19.2.31)

21

Fact Pattern: Osawa, Inc., planned and actually manufactured 200,000 units of its single product during its first year of operations. Variable manufacturing costs were $30 per unit of product. Planned and actual fixed manufacturing costs were $600,000, and selling and administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of $40 per unit.
Osawa’s operating income for the year using variable costing is

A. $200,000
B. $440,000
C. $600,000
D. $800,000

Osawa’s operating income for the year using variable costing is

A. $200,000
Answer (A) is correct.
The contribution margin from manufacturing (sales – variable costs) is $10 ($40 – $30) per unit sold, or $1,200,000 (120,000 units × $10). The fixed costs of manufacturing ($600,000) and selling and administrative costs ($400,000) are deducted from the contribution margin to arrive at an operating income of $200,000. The difference between the absorption income of $440,000 and the $200,000 of variable costing income is attributable to capitalization of the fixed manufacturing costs under the absorption method. Because 40% of the goods produced are still in inventory (80,000 ÷ 200,000), 40% of the $600,000 in fixed costs, or $240,000, was capitalized under the absorption method. That amount was expensed under the variable costing method.
(19.2.48)

22

The change in period-to-period operating income when using variable costing can be explained by the change in the

A. Finished goods inventory level multiplied by a constant unit contribution margin.
B. Finished goods inventory level multiplied by the unit sales price.
C. Unit sales level multiplied by a constant unit contribution margin.
D. Unit sales level multiplied by the unit sales price.

C. Unit sales level multiplied by a constant unit contribution margin.
Answer (C) is correct.
In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales, especially when the UCM (selling price per unit – variable costs per unit) is constant. Unit sales times the UCM equals the total CM, and operating income (a pretax amount) equals the CM minus fixed costs of operations. If the UCM is constant and fixed costs are stable, the change in operating income will approximate the change in the CM (unit sales × UCM).
(19.1.19)

23

In an income statement prepared using the variable-costing method, fixed factory overhead would

A. Be used in the computation of the contribution margin.
B. Not be used.
C. Be used in the computation of operating income but not in the computation of the contribution margin.
D. Be treated the same as variable factory overhead.

C. Be used in the computation of operating income but not in the computation of the contribution margin.
Answer (C) is correct.
Under the variable-costing method, the contribution margin equals sales minus variable expenses. Fixed selling and administrative costs and fixed factory overhead are deducted from the contribution margin to arrive at operating income. Thus, fixed costs are included only in the computation of operating income.
(19.1.5)

24

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the
A Net sales value at split-off.
B Joint costs.
C Total costs.
D Sales price less a normal profit margin at point of sale.

A Net sales value at split-off.

This answer is correct.
The relative sales value method is the most frequently used method to allocate joint costs to joint products. It allocates joint costs based upon the products’ proportion of total sales revenue. For joint products salable at the split-off point, the relative sales value is the selling price at split-off. However, if further processing is needed, the relative sales value is approximated by subtracting the additional anticipated processing costs from the final sales value to arrive at the estimated net sales value at split-off.

25


In a job-order cost system, the use of direct materials previously purchased usually is recorded as an increase in
A Stores control.
B Factory overhead applied.
C Factory overhead control.
D Work-in-process control.

D Work-in-process control.
This answer is correct.
The purchase of direct materials requires a debit to (an increase in) direct materials inventory (stores control). This account is credited and work-in-process control is debited when direct materials are issued to a production department
View Subunit 19.5 Outline

26


Lowe Co. manufactures products A and B from a joint process. Sales value at split-off was $700,000 for 10,000 units of A and $300,000 for 15,000 units of B. Using the sales value at split-off approach, joint costs properly allocated to A were $140,000. Total joint costs were
A $98,000
B $233,333
C $200,000
D $350,000

C $200,000
This answer is correct.
The relative sales value is a cost allocation method that allocates joint costs in proportion to the relative sales value of the individual products. Total sales value is $1,000,000 ($700,000 for A + $300,000 for B). The $140,000 of joint costs allocated to product A was 70% ($700,000 ÷ $1,000,000) of total joint costs. The calculation for total joint costs (Y) is
.7Y

=

$140,000
Y

=

$140,000 ÷ .7
Y

=

$200,000
View Subunit 19.4 Outline

27


Fleet, Inc., manufactured 700 units of Product A, a new product, during the year. Product A’s variable and fixed manufacturing costs per unit were $6.00 and $2.00, respectively. The inventory of Product A on December 31 consisted of 100 units. There was no inventory of Product A on January 1. What would be the change in the dollar amount of inventory on December 31 if variable costing were used instead of absorption costing?
A $0
B $200 decrease.
C $800 decrease.
D $200 increase.

B $200 decrease.
This answer is correct.
Given an inventory increase of 100 units during the year and the fixed manufacturing cost per unit of $2.00, $200 (100 units × $2.00) of overhead would be deferred using absorption costing but expensed immediately using variable costing. Thus, variable-costing inventory would be $200 less than absorption costing.
View Subunit 19.2 Outline

28

Which of the following must be known about a production process to institute a variable costing system?
A Contribution margin and breakeven point for all goods in production.
B Standard production rates and times for all elements of production.
C The controllable and noncontrollable components of all costs related to production.
D The variable and fixed components of all costs related to production.

D The variable and fixed components of all costs related to production.
This answer is correct.
Variable costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are treated as period costs. Thus, one need only be able to determine the variable and fixed manufacturing costs to institute a variable costing system.
View Subunit 19.1 Outline

29


At the end of a company’s first year of operations, 2,000 units of inventory are on hand. Variable costs are $100 per unit, and fixed manufacturing costs are $30 per unit. The use of absorption costing, rather than variable costing, would result in a higher net income of what amount?
A $200,000
B $260,000
C $140,000
D $60,000

D $60,000

This answer is correct.
Absorption costing is required under GAAP. It includes all manufacturing costs in product cost: direct materials, direct labor, and fixed as well as variable manufacturing overhead. Variable costing differs only in that it expenses fixed manufacturing costs. Hence, given no beginning inventory, pretax net income for absorption costing purposes exceeds pretax net income for variable costing purposes by $60,000 (2,000 units in EI × $30 fixed manufacturing cost per unit). This amount is expensed using variable costing and treated as a product cost using absorption costing.

30


In a job-order cost system, direct labor costs usually are recorded initially as an increase in
A Work-in-process control.
B Factory overhead control.
C Factory overhead applied.
D Finished goods control.

A Work-in-process control.
This answer is correct.
Direct labor costs are inventoriable costs. They are initially debited to the work-in-process control account

31

Under a job-order system of cost accounting, the dollar amount of the general ledger entry involved in the transfer of inventory from work-in-process to finished goods is the sum of the costs charged to all jobs
A Completed during the period.
B In process during the period.
C Completed and sold during the period.
D Started in process during the period.

A Completed during the period.
This answer is correct.
The entry to transfer inventory from WIP to FG is to debit finished goods and credit work-in-process. The amount of the entry is the sum of the costs (irrespective of the period in which they were incurred) charged to all jobs completed during the period.
View Subunit 19.5 Outline