Managerial Accounting Creating Value in a Dynamic Business Environment 11E – Hilton – TB

Managerial Accounting Creating Value in a Dynamic Business Environment 11E – Hilton – TB

Chapter 8
Variable Costing and the Costs of Quality and Sustainability
Answer Key

True / False Questions

1. Fixed manufacturing overhead is not inventoried under absorption costing.
FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Feedback True: Fixed manufacturing overhead is inventories under absorption costing.
Feedback False: Correct! Fixed manufacturing overhead is inventories under absorption costing.

2. Absorption costing is required for tax purposes.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Feedback True: Correct! Absorption costing is the method required for tax purposes.
Feedback False: Absorption costing is the method required for tax purposes.

3. Variable manufacturing overhead becomes part of a unit’s cost when variable costing is used.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Learning Objective: 08-02
Learning Objective: 08-03
Feedback True: Correct! It is true that variable manufacturing overhead becomes part of a unit’s cost when variable costing is used.
Feedback False: It is true that variable manufacturing overhead becomes part of a unit’s cost when variable costing is used.
4. On an absorption-costing income statement, fixed overhead costs are period costs.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02
Feedback True: Fixed overhead costs are not period costs on an absorption-costing income statement.
Feedback False: Correct! Fixed overhead costs are not period costs on an absorption-costing income statement.
5. On a variable-costing income state¬ment, fixed overhead is not treated as a period cost.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03
Feedback True: Fixed overhead is treated as a period cost on a variable-costing income statement.
Feedback False: Correct! Fixed overhead is treated as a period cost on a variable-costing income statement.
6. On a variable-costing income state¬ment, the cost of goods sold is measured at variable cost, which includes direct material, direct labor, and variable manufacturing overhead.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03
Feedback True: Correct! The cost of goods sold is measured at variable cost, including direct material, direct labor, and variable manufacturing overhead, on a variable-costing income statement.
Feedback False: The cost of goods sold is measured at variable cost, including direct material, direct labor, and variable manufacturing overhead, on a variable-costing income statement.

7. Income reported under absorption and variable costing can be reconciled by focusing on the effects of the five places where the two statements differ.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04
Feedback True: Income reported under absorption and variable costing can be reconciled by focusing on the effects of the two places where the two statements differ.
Feedback False: Correct! Income reported under absorption and variable costing can be reconciled by focusing on the effects of the two places where the two statements differ.

8. When units sold exceed units produced, absorption-costing income will be lower than variable-costing income.
TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04
Feedback True: Correct! It is true that when units sold exceed units produced, absorption-costing income will be lower than variable-costing income.
Feedback False: It is true that when units sold exceed units produced, absorption-costing income will be lower than variable-costing income.

9. Absorption costing is inconsistent with CVP analysis.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05
Feedback True: Correct! It is true that absorption costing is inconsistent with CVP analysis.
Feedback False: It is true that absorption costing is inconsistent with CVP analysis.
10. Cost-volume-profit analysis and break-even calculations account for fixed manufacturing overhead as a lump sum.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05
Feedback True: Correct! Both cost-volume-profit analysis and break-even calculations account for fixed manufacturing overhead as a lump sum.
Feedback False: Both cost-volume-profit analysis and break-even calculations account for fixed manufacturing overhead as a lump sum.

11. For external-reporting purposes, generally accepted accounting principles require that net income be based on variable costing.
FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-06
Feedback True: GAAP does not require that net income be based on variable costing for external-reporting.
Feedback False: Correct! GAAP does not require that net income be based on variable costing for external-reporting.

12. Many managers prefer to use absorption-costing data in cost-based pricing decisions.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-06
Feedback True: Correct! Many managers prefer to use absorption-costing data in cost-based pricing decisions.
Feedback False: Many managers prefer to use absorption-costing data in cost-based pricing decisions.

13. The quality of conformance refers to how well a product is conceived or designed for its intended use.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-07
Feedback True: This is not the correct definition of the quality of conformance.
Feedback False: Correct! This is not the correct definition of the quality of conformance.

14. When discussing the costs of quality, the costs of determining whether defects exist are known as appraisal costs.

TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-07
Feedback True: Correct! The costs of determining whether defects exist are known as appraisal costs.
Feedback False: The costs of determining whether defects exist are known as appraisal costs.

15. An analytical method that aims at achieving near-perfect results in a production process is known as the zero-defect perspective.

FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-08
Feedback True: This is not the correct definition of the zero-defect perspective.
Feedback False: Correct! This is not the correct definition of the zero-defect perspective.

16. Total quality management or TQM refers to the broad set of management and control processes designed to focus the entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer.
TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-08
Feedback True: Correct! TQM refers to a broad set of management and control processes designed to focus the entire organization and personnel on satisfying the customer in the best possible way.
Feedback False: TQM refers to a broad set of management and control processes designed to focus the entire organization and personnel on satisfying the customer in the best possible way.

17. On a global scale, there are four primary environmental agreements addressing the atmosphere, hazardous substances, the marine environment, nature conservation, and nuclear power issues.
FALSE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-09
Feedback True: On a global scale, there are literally dozens of environmental agreements addressing the atmosphere, hazardous substances, the marine environment, nature conservation, and nuclear power issues.
Feedback False: Correct! On a global scale, there are literally dozens of environmental agreements addressing the atmosphere, hazardous substances, the marine environment, nature conservation, and nuclear power issues.

18. Hid¬den private environmental costs are those that are caused by environmental issues but have not been so identified by the accounting system.
TRUE

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-09
Feedback True: Correct! This is the correct definition of hidden private environmental costs.
Feedback False: This is the correct definition of hidden private environmental costs.

Multiple Choice Questions

19. Under variable costing, fixed manufacturing overhead is:
A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process Inventory.
E. treated in the same manner as variable manufacturing overhead.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Feedback A: Correct! Under variable costing, fixed manufacturing overhead is expensed immediately when incurred.
Feedback B: This statement is incorrect.
Feedback C: This statement is incorrect.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.

20. All of the following are inventoried under variable costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. variable manufacturing overhead and fixed manufacturing overhead.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Feedback A: This is inventoried.
Feedback B: This is inventoried.
Feedback C: This is inventoried.
Feedback D: Correct! Fixed manufacturing overhead is not inventoried under variable costing.
Feedback E: Only part of this answer is correct.

21. All of the following are expensed under variable costing except:
A. variable manufacturing overhead.
B. fixed manufacturing overhead.
C. variable selling and administrative costs.
D. fixed selling and administrative costs.
E. variable selling and administrative costs and fixed selling and administrative costs.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Feedback A: Correct! Variable manufacturing overhead is not expensed under variable costing.
Feedback B: This is expensed.
Feedback C: This is expensed.
Feedback D: This is expensed.
Feedback E: This is expensed.

22. All of the following costs are inventoried under absorption costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01
Feedback A: This would be inventoried under absorption costing.
Feedback B: This would be inventoried under absorption costing.
Feedback C: This would be inventoried under absorption costing.
Feedback D: This would be inventoried under absorption costing.
Feedback E: Correct! Fixed Administrative Salaries would not be inventoried under absorption costing.

23. All of the following are inventoried under absorption costing except:
A. direct labor.
B. raw materials used in production.
C. utilities cost consumed in manufacturing.
D. sales commissions.
E. machine lubricant used in production.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01
Feedback A: This would be inventoried under absorption costing.
Feedback B: This would be inventoried under absorption costing.
Feedback C: This would be inventoried under absorption costing.
Feedback D: Correct! Sales commissions would not be inventoried under absorption costing.
Feedback E: This would be inventoried under absorption costing.

24. The underlying difference between absorption costing and variable costing lies in the treatment of:
A. direct labor.
B. variable manufacturing overhead.
C. fixed manufacturing overhead.
D. variable selling and administrative expenses.
E. fixed selling and administrative expenses.

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01
Feedback A: This statement is incorrect.
Feedback B: This statement is incorrect.
Feedback C: Correct! The underlying difference between absorption costing and variable costing lies in the treatment of fixed manufacturing overhead.
Feedback D: This statement is incorrect.
Feedback E: This statement is incorrect.

25. Which of the following costs would be treated differently under absorption costing and variable costing?
Direct Labor Variable Manufacturing Overhead Fixed Administrative Expenses
A. Yes No Yes
B. Yes Yes Yes
C. No Yes No
D. No No Yes
E. No No No

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01
Feedback A: This answer is incorrect.
Feedback B: This answer is incorrect.
Feedback C: This answer is incorrect.
Feedback D: This answer is incorrect.
Feedback E: Correct! None of these are treated differently under absorption and variable costing.

Use the following information to answer Questions 26 and 27.

Vega Enterprises has computed the following unit costs for the year just ended:

Direct material used $12
Direct labor 18
Variable manufacturing overhead 25
Fixed manufacturing overhead 29
Variable selling and administrative cost 10
Fixed selling and administrative cost 17
26. Under variable costing, each unit of the company’s inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-01
Feedback A: This amount is incorrect.
Feedback B: Correct! Direct materials + Direct labor + Variable Manufacturing Overhead = $12 + $18 + $25 = $55
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This statement is wrong, because there is a correct amount listed.

27. Under absorption costing, each unit of the company’s inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-01
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: Correct! Direct materials + Direct labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead = $12 + $18 + $25 + $29 = $84.
Feedback E: This statement is wrong, because there is a correct amount listed.

Use the following information to answer Questions 28 and 29.
Romano Corporation has computed the following unit costs for the year just ended:
Direct material used $11
Direct labor 17
Variable manufacturing overhead 21
Fixed manufacturing overhead 23
Variable selling and administrative cost 5
Fixed selling and administrative cost 27

28. Under absorption costing, each unit of the company’s inventory would be carried at:
A. $49.
B. $54.
C. $72.
D. $104.
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-01
Feedback A: This amount is incorrect.
Feedback B: This amount is incorrect.
Feedback C: Correct! Direct materials + Direct labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead = $11 + $17 + $21 + $23 = $72.
Feedback D: This amount is incorrect.
Feedback E: This statement is wrong, because there is a correct amount listed.

29. Under variable costing, each unit of the company’s inventory would be carried at:
A. $49.
B. $54.
C. $72.
D. $104.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-01
Feedback A: Correct! Direct materials + Direct labor + Variable Manufacturing Overhead = $11 + $17 + $21 = $49.
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: This statement is wrong, because there is a correct amount listed.

30. Falisari Corporation has computed the following unit costs for the year just ended:

Direct material used $25
Direct labor 19
Variable manufacturing overhead 35
Fixed manufacturing overhead 40
Variable selling and administrative cost 17
Fixed selling and administrative cost 32

Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption costing?

Variable Absorption
Costing Costing
A. $79 $119
B. $79 $151
C. $96 $119
D. $96 $151
E. None of the answers is correct.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-01
Feedback A: Correct! Variable costing = Direct materials + Direct labor + Variable Manufacturing Overhead = $25 + $19 + $35 = $79; Absorption costing = Direct materials + Direct labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead = $25 + $19 + $35 + $40 = $119.
Feedback B: These amounts are incorrect.
Feedback C: These amounts are incorrect.
Feedback D: These amounts are incorrect.
Feedback E: This statement is wrong, because there is a correct set of amounts listed.

31. Montana Industries has computed the following unit costs for the year just ended:
Variable manufacturing overhead $85
Fixed manufacturing overhead 20
Variable selling and administrative cost 18
Fixed selling and administrative cost 11

Which of the following choices correctly depict amounts included in the per-unit cost of inventory under variable costing and absorption costing?
A. Variable, $85; absorption, $105.
B. Variable, $85; absorption, $116.
C. Variable, $103; absorption, $105.
D. Variable, $103; absorption, $116.
E. None of the answers is correct.