Problem 20 - hakdog PDF

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9-20 Which of the following statements is not true regarding the use of variable and absorption costing for performance measurement? a. The net income reported under the absorption method is less reliable for use in performance evaluations because the cost of the product includes fixed costs, which means the level of inventory affects net income. b. The net income reported under the contribution income statement is more reliable for use in performance evaluations because the product cost does not include fixed costs. c. Variable costing isolates contribution margins to aid in decision making. d. The Internal Revenue Service allows either absorption or variable costing as long as the method is not changed from year to year, while U.S. GAAP only allows absorption costing. SOLUTION The answer is choice "d". This is not a true statement. The I.R.S. only allows absorption costing for financial statements, which is the same method required for U.S. GAAP. Choices “b” and “c” are factually accurate. Variable costing is useful for decision making because it segregates costs based on behavior, identifies the contribution margin, and expenses fixed costs rather than unitizing them into the cost of products. Choice “a” is again a true statement. Under absorption costing, the choice of output and inventory affects the realized level of net income, making it more susceptible to manipulation and a less reliable measure of managerial performance....