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MULTIPLE CHOICEBasic Concepts Under the direct costing, which is classified as product costs? A. Only variable production costs. B. Only direct costs. C. All variable costs. D. All variable and fixed production costs. (rpcpa) A ? The product costs under the direct costing.  Under the direct costing...

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MULTIPLE CHOICE Basic Concepts 1. Under the direct costing, which is classified as product costs? A. Only variable production costs. B. Only direct costs. C. All variable costs. D. All variable and fixed production costs.

(rpcpa)

1. A ? The product costs under the direct costing.  Under the direct costing model, only variable production costs such as direct materials, direct labor, and variable factory overhead are included in the determination of the product costs. Fixed factory overhead is classified as a period costs, that is, automatically deducted from sales as an expense regardless of sales volume level. Hence, choice-letter “a” is correct. Choice-letter “b” is incorrect because there are direct costs that are fixed costs. Choice-letter “c” is incorrect because it refers to all variable costs and expenses. Variable expenses are always period costs either under absorption costing or variable costing model. Choice-letter “d” is incorrect because under direct costing fixed manufacturing costs are period costs. 2. In absorption costing, as contrasted with direct costing, the following are absorbed into inventory. A. All the elements of fixed and variable manufacturing overhead. B. Only the fixed manufacturing overhead. C. Only the variable manufacturing overhead. D. Neither fixed nor variable manufacturing overhead. (rpcpa) 2. A ? The elements absorbed into inventory using the absorption costing model.  Choice-letter “a” is correct because all manufacturing costs, whether variable or fixed, are included in the determination of product costing using the absorption costing method. Because of such principle, choice-letters “b”, “c”. and “d” are all incorrect. 3. The absorption costing method includes in inventory Fixed factory Variable factory overhead overhead . A. No No B. No Yes C. Yes Yes D. Yes No

(aicpa)

3. C ? Items included in inventory under absorption costing.  The following items are included in the inventory cost using the absorption costing method: direct material, direct labor, variable overhead, and fixed overhead. Choiceletter “c” is the correct answer.

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4. In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would A. Not be used. B. Be used in the computation of the contribution margin. 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 selling and administrative expense (aicpa) 4. C ? The use of fixed selling and administrative expenses in preparing an internal report using the direct (variable) costing.  Under direct (variable) costing, fixed selling and administrative expenses are treated as period cost (or expenses) and are charged against revenues in computing operating income. Contribution margin is sales less variable costs and expenses and does not include fixed costs and expenses in the computation thereof. Therefore, choice-letter “c’ is correct and choice-letters “a” and “b” are incorrect. Fixed expenses and variable expenses are always treated as period costs both under the absorption costing and direct (variable) costing methods; hence, choiceletter “d” is not the right answer. 5. In an income statement prepared as internal report using the variable costing method, variable selling and administrative expense would A. Not be used. B. Be used in the computation of the contribution margin. C. Be used in the computation of operating income but not in the computation of the contribution margin. D. Be treated the same as fixed selling and administrative expenses. (aicpa) 5. B ? The use of variable selling and administrative expense in the variable costing income statement.  Under variable costing method, variable selling and administrative expenses are treated as period cost and are included in the computation of contribution margin, choice-letter “b” is correct. 6. A type of managerial accounting which refers to the determination of he operating cost regardless of cost behavior, whether variable or non-variable, is A. Differential accounting. C. Responsibility accounting. B. Full cost accounting. D. Profitability accounting. (rpcpa) 6. B ? The type of accounting the refers to the determination of the operating cost regardless of cost behavior, whether variable or non-variable..  Choice-letter “b” is correct because full cost accounting, or absorption costing, classifies costs according to their source of incurrence and not based on their behavior. Choice-letter “a” is incorrect because differential accounting relates to the technique of using only those costs that differ from one course of action to another.

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Choice-letter “c” is incorrect because responsibility accounting focuses on identifying costs to each responsible officer managing a defined organizational segment. Choice-letter “d” incorrect because profitability accounting focuses on measuring and predicting profit by analyzing those factors that have an impact on profit. 7. When all manufacturing costs used in production are attached to the products, whether direct, or indirect, variable of fixed, this is called: A. Process costing C. Variable costing B. Absorption costing D. Job Order costing (rpcpa) 7. B ? A costing method that includes all manufacturing costs as product costs.  Absorption costing (or full costing, traditional costing) includes all manufacturing costs, whether direct or indirect, fixed or variable, controllable or not, etc., as part of product costs (choice-letter “b” is correct). Process costing (choice-letter “a”) is incorrect because it refers to the technique used in accumulating, processing and reporting production costs of homogenous (or similar) products produced in the same production process and in the same production run. Choice-letter “c” is incorrect because variable costing does not include fixed overhead in its product costing. Choice-letter “d”, job order costing is a costing method used to accumulate, process and generate production cost reports regarding products that are produced according to the customer’s specifications. 8. For a multiple- product company, in determining the break-even point, which of the following assumptions are commonly used when variable costing is adopted? I. Sales equal production. II. Unit variable cost is constant. III. Sales mix is constant. A. B. C. D.

I and III I and II I, II and Iii II and III

(rpcpa)

8. D ? Assumptions commonly used in variable costing.  Item I, sales volume equals production, cannot be accepted as an assumption in the variable costing method because if sales equal production there would no difference in the operating income of absorption an variable costing method. This assumption, however, is used in the cost-volume-profit analysis. Items II and III are assumptions used in variable costing (i.e., unit variable cost is constant, the sales mix is constant) 9.

Care Company’s 2006 fixed manufacturing overhead cost totaled P100,000 and variable selling costs totaled P80,000. Under direct costing, how should these costs be classified? Period Cost Product Cost A. P 0 P180,000 B. P 80,000 P100,000 C. P100,000 P 80,000 D. P180,000 P 0 (aicpa)

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9. D ? Classification of costs under direct costing.  Using direct costing method, fixed manufacturing overhead is a period cost, and variable selling costs are also period costs. Period costs are those charged against sales in the period incurred. Therefore, the total period cost is P180,000 (i.e., P100,000 + P80,000). 10. If production is greater than sales (units), then absorption costing net income will generally be A. Greater than direct costing net income. B. Less than direct costing net income. C. Equal to direct costing net income. D. Additional data is needed to be able to answer. (rpcpa) 10. A ? The effect to absorption costing net income if production is greater than sales.  First, let us remember that the unit product cost of absorption costing (AC) which includes the fixed factory overhead is greater than that of the variable costing (VC). Therefore, if production is greater than sales, the cost of ending inventory under the absorption costing method shall be much higher Because of this, the net income under absorption costing shall also be much higher. Choice-letter “a” is correct. The general line of analysis goes this way If Then, net income under or, if Sales > Production VC > AC Production > Sales Sales < Production VC < AC Production < Sales Sales = Production VC = AC Production = Sales

Choice-letters “b” and “c” are incorrect because they do not conform to the general lien of analysis as presented above. Choice-letter “d” is incorrect because there is no need for additional data to answer the question of the problem. 11. Which of the following statements is correct? A. When production is higher than sales, absorption costing net income is lower than variable costing net income. B. If all the products manufactured during the period are sold in that period, variable costing net income is equal to absorption costing net income. C. When production is lower than sales, variable costing net income is lower than absorption costing net income. D. When production and sales level are equal, variable costing net income is lower than absorption costing net income. (rpcpa) 11. B ? A correct statement with regard to variable and absorption costing methods.  Choice-letter “b” is the best answer because if production and sales are equal, the net income under the absorption costing and variable costing methods are also

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equal, under the assumption that the unit cost of production remains constant. Choice-letter “b” would have been more correct if the problem indicates that there is no beginning inventory during the period. Choice-letter “a” is incorrect because if production is higher than sales, absorption costing net income should also be higher compared to that of variable costing. Choice-letter “c” is incorrect because if production is lower that sales, absorption costing net income should also be lower. Choice-letter “d” is incorrect because when production and sales are equal, the net income under absorption costing and variable costing would be the same. Now notice, that absorption costing positively follows the trend in production, while variable costing positively follows the trend in sales. If production is higher than sales, absorption costing net income is higher, etc. If sales are greater than production, variable costing net income is greater than absorption costing, etc. 12. Operating income using direct costing as compared to absorption costing would be higher A. When the quantity of beginning inventory equals the quantity of ending inventory. B. When the quantity of beginning inventory is more than the quantity of ending inventory. C. When the quantity of beginning inventory is less than the quantity of ending inventory. D. Under no circumstances. (aicpa) 12. C ? The situation wherein the operating income under absorption costing is higher than variable costing.  Choice-letter “c” is correct because when beginning is lower than the ending inventory, it means that sales are greater than production and income under variable costing would be higher than absorption costing. Operating income under absorption costing is higher than variable costing when production is greater than sales. This is because fixed overhead charged under absorption costing is lower than that of variable costing. Under absorption costing, fixed overhead is a product cost and is deducted from sales when units are sold. A lower number of units sold means a lower amount of fixed overhead (i.e., units sold times unit fixed overhead) charged against revenue, and therefore, a greater amount of operating profit. Under variable costing, fixed overhead is an expense without regard to number of units produced and sold. Variable costing follows the trend of sales; if sales are greater than production, variable costing income is also higher than absorption costing, and sales are lower than production, variable costing income is also lower than absorption costing. This is one way of saying, that absorption costing, follows the trend in production: if production is greater than sales, absorption income is greater than variable, and viceversa. 13. If sales equal production, one would expect net income under the variable costing method to be A. The same as net income under the absorption costing method. B. Greater than net income under the absorption costing method.

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C. Differing in as much as the difference between sales and production. D. Less than net income under the absorption costing method.

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13. A ? The behavior of income under variable costing and absorption costing if sales equal production.  If sales equal production, the income under absorption and variable costing methods is the same. Choice-letter “a” is correct. This is because the fixed overhead charged under each method is also the same. Choice-letter “b” is incorrect because variable costing income is greater under absorption costing if sales is greater than production. Choice-letter “c” is incorrect because there is no difference between sales and production. Choice-letter “d” is incorrect because variable costing income is less than absorption costing income when sales are less than, not equal to, production. 14. Determine the following statements as true or false. Statement 1. Direct costing and variable costing are different terms that mean the same thing. Statement 2. In a variable costing income statement, sales revenue is typically lower than in absorption costing income statement. A. B. C. D.

Statement 1 False False True True

Statement 2 True False True False

(rpcpa)

14. D ? Identify the statements as true or false.  Technically, direct costing and variable costing mean differently. Direct costing deals with the process of underlining the importance of segment margin (or direct margin) while variable costing emphasizes the contribution margin in its analysis. In practice, however, some accountants interchange direct costing and variable costing as having the same meaning. Hence, statement 1 is true. Statement 2 is false because the sales revenue under absorption costing method are the same under the variable costing method. 15. If sales exceed production, one would expect net income under the variable costing method to be A. The same as net income under the absorption costing method. B. Greater than net income under the absorption costing method. C. Differing in as much as the difference between sales and production. D. Less than net income under the absorption costing method. (rpcpa) 15. B ? The net income under variable costing as compared to absorption costing if sales exceed production.

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 If sales exceed production, the operating income under variable costing (VC) would be greater than the absorption costing (AC). Variable costing income follows sales; if sales increase, variable income increases, and vice-versa. If sales are greater than production, the income under VC is greater than AC and if sales is lower than production, the income under VC is also lower than AC (choice-letter “b” is correct). The reason is, if sales are greater than production, the amount of fixed overhead charged under absorption costing (i.e., units sold x unit fixed overhead) is greater than the fixed overhead charged under variable costing (i.e., normal capacity x unit fixed overhead). This lowers the income under absorption and makes the income under variable costing higher than absorption costing. If sales are lower than production, the fixed overhead charged in the absorption costing is lower; hence, it has higher income than variable costing. Choice-letter “a” is incorrect since production and sales are different, then there will be a change in the income between VC and AC. Choice-letter “c” is also incorrect because the difference in the net income between VC and AC is not the same as the difference in production and sales. Choice-letter “d” is incorrect because it opposes the correct answer. 16. Other things being equal, income computed by the direct costing method will exceed that computed by an absorption costing method if A. Fixed manufacturing cost increases. B. Units sold exceed units produced. C. Variable manufacturing costs increase. D. Units produced exceed units sold. (rpcpa) 16. B ? A situation where the operating income under the direct costing exceeds that of the absorption costing.  The operating income under the variable costing (direct costing) and absorption costing differs if there is a difference in the production and sales. The variable costing follows the sales pattern. If sales exceed production, variable costing income is higher than absorption income. If sales are lower than production, variable income is lower than absorption income. Choice-letter “b” is correct because if direct costing income is greater than absorption costing income, sales must exceed production. This reason also makes choice-letter “d” incorrect. Choice-letter “a” and “c” are incorrect because the difference in income between the absorption and direct costing methods does not relate to the increase or decrease in the fixed and variable costs. 17.

President X of WXY Corporation requested you to explain the different in net income between the variable costing income statement presentation and the absorption method. You would say that the difference: A. Is none if there is no change in the fixed costs in the beginning and ending inventories. B. Is equal to the fixed cost per unit times the number of units sold. C. Is attributable to the variable costs in the inventory. D. Is attributable to the fixed cost in ending inventory. (rpcpa)

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17. A ? A correct statement to explain the difference in net income between variable income and absorption income.  The difference in the operating income between variable costing and absorption costing lies in their treatment of fixed overhead. Under the variable costing (VC), the fixed overhead is treated as period costs (i.e., immediately charged against sales without regard to whether the units produced are already sold or not); while under the absorption costing (AC), the fixed overhead is treated as a product or inventoriable costs (i.e., charged against sales only when the product is sold). The inventoriable unit cost under absorption costing is always greater than the variable costing because of the inclusion of the unit fixed costs. Therefore, if there is no change in the units of inventory and assuming units costs do not change from one period to another, then there will be no difference in operating income between the absorption and variable costing methods. Because of this, the change in operating income between the absorption and variable costing methods may also be accounted for as follows: Change in inventory (production less sales) x x Unit fixed costs Px Difference in operating income Px Choice-letter “b” is incorrect since difference in operating income between AC and VC is also accounted for as follows: Choice-letter “c” and “d” are incorrect because the difference in operating income between AC and VC is attributable to the fixed overhead (not variable overhead) carried in the beginning and ending inventories (not ending inventory only). 18. Identify the following statements as true or false. Statement 1. In a variable costing system, fixed overhead costs are included as cost of inventory. Statement 2. Under the direct costing method, the contribution margin discloses t...