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Questions and Answers

What approach is employed when a company creates overhead rates based on the activities it performs?

Departmental overhead rate approach

Traditional costing approach

Plantwide overhead rate approach

Activity-based costing approach (correct)

What does using predetermined departmental overhead rates aim to provide?

Reduced direct material wastage

Increased machine-hour efficiency

More accurate accounting of job costs (correct)

Higher direct labor utilization

In job-order costing systems, what do all of a company's job cost sheets collectively form?

Subsidiary ledger (correct)

Balance sheet

Trial balance

Income statement

What is the selling price of Job 407 assuming a 75% markup?

Selling price = Cost + 75% of Cost Signup and view all the answers

What is the appeal of using predetermined departmental overhead rates?

Enhanced management planning and decision making Signup and view all the answers

What do managers use activity-based costing systems to more accurately measure?

Demands that jobs, products, and customers make on overhead resources Signup and view all the answers

In activity-based costing, what is an activity measure?

A measure of the amount of time needed for an activity Signup and view all the answers

Why has relying exclusively on direct labor hours and/or machine hours to assign overhead costs to products come under increased scrutiny?

Direct labor and overhead costs have been moving in opposite directions on an economy-wide basis Signup and view all the answers

What is a characteristic of a successful ABC implementation?

Strong top management support Signup and view all the answers

What is the purpose of defining activities, activity cost pools, and activity measures in ABC?

To accumulate costs related to a single activity measure Signup and view all the answers

What does the company assign all costs of resources consumed by customer requested design changes to, in ABC?

Design Changes Signup and view all the answers

What is the basis for allocating all organization-sustaining costs and unused capacity costs in ABC?

Other Signup and view all the answers

What is the impact of underapplied or overapplied overhead on financial statements?

It impacts cost of goods sold and net operating income Signup and view all the answers

What is the difference between variable costing and absorption costing?

Variable costing uses only variable costs, while absorption costing includes both fixed and variable components Signup and view all the answers

What is the allocation base used for applying overhead to jobs?

Predetermined overhead rate multiplied by the allocation base (actual) Signup and view all the answers

When does underapplied overhead occur?

When less overhead is applied to production than actually incurred Signup and view all the answers

What is the purpose of the predetermined overhead rate in job-order costing?

To account for the lack of synchronization between accruing manufacturing overhead and job production Signup and view all the answers

In which industries is job-order costing commonly used?

Law firms, accounting firms, and medical treatment Signup and view all the answers

In absorption costing, what does it distort, making it difficult to perform break-even and cost-volume-profit analysis?

Fixed manufacturing overhead Signup and view all the answers

What does variable costing accurately identify and emphasize the impact of on profits?

Additional variable costs per unit Signup and view all the answers

What does decentralized accounting involve segmenting the overall activity into?

Smaller segments Signup and view all the answers

What is the key gauge of the long-run profitability of a segment?

Segment margin Signup and view all the answers

What method is designed to provide managers with cost information for strategic decisions affecting capacity and variable costs?

Activity-Based Costing (ABC) Signup and view all the answers

How does ABC differ from traditional cost accounting?

Using numerous overhead cost pools and a more complex allocation scheme Signup and view all the answers

Which costing method includes only variable costs in product costs?

Variable costing Signup and view all the answers

What is included in unit product cost under absorption costing but not under variable costing?

Fixed manufacturing overhead Signup and view all the answers

How are income statements prepared in variable and absorption costing used?

To compute net operating income Signup and view all the answers

What does reconciling variable and absorption costing net operating incomes involve?

Adding fixed manufacturing overhead deferred in inventory to variable costing net operating income Signup and view all the answers

Which costing method expensed all fixed manufacturing overhead?

Variable costing Signup and view all the answers

How does the relationship between production and sales affect net operating income in absorption costing?

It can lead to positive operating income even if the number of units sold is less than the breakeven point Signup and view all the answers

Study Notes

Variable and Absorption Costing in Managerial Accounting

Variable costing only includes variable costs in product costs, while absorption costing includes both variable and fixed costs in product costs.
In variable costing, direct and indirect variable costs are product costs, while in absorption costing, fixed manufacturing overhead is also considered a product cost.
The difference between variable and absorption costing lies in the treatment of fixed manufacturing overhead, impacting the cost of goods sold and inventory valuation.
Unit product cost under absorption costing includes fixed manufacturing overhead, while under variable costing, it only includes variable costs.
Income statements using variable and absorption costing are prepared to compute net operating income, considering sales and production units.
Reconciling variable and absorption costing net operating incomes involves adding fixed manufacturing overhead deferred in inventory to variable costing net operating income.
The comparison of income data for Harvey Company's second year shows unchanged unit cost computations due to constant variable costs, fixed costs, and production units.
Under variable costing, all fixed manufacturing overhead is expensed, while under absorption costing, fixed manufacturing overhead released from inventory impacts net operating income.
The relationship between production and sales affects net operating income differently in variable and absorption costing.
Variable costing simplifies cost-volume-profit (CVP) analysis by categorizing costs as variable and fixed and highlighting the contribution margin.
Absorption costing can lead to positive operating income when the number of units sold is less than the breakeven point due to fixed manufacturing overhead residing in inventory.
Changes in net operating income are directly influenced by changes in unit sales in variable costing, while absorption costing is also affected by changes in production units, increasing net operating income even if unsold units are produced.

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Description

Test your knowledge of variable and absorption costing in managerial accounting with this quiz. Explore the differences in product cost calculations, income statements, and the impact on net operating income. Gain insights into cost-volume-profit analysis and the effects of production and sales on operating income under each costing method.