Question 1
Which of the following statements is true regarding absorption costing?
a. It is not the traditional costing approach.
b. It is not permitted to be used for financial reporting.
c. It is not permitted to be used for tax reporting.
d. It assigns all manufacturing costs to products.
e. It requires only variable costs to be treated as product costs.
Question 2
Question 3
Which of the following statements is true regarding variable costing?
a) It is a traditional costing approach.
b) Only manufacturing costs that change in total with changes in production level are included in product costs.
c) It is not permitted to be used for managerial reporting.
d) It treats overhead in the same manner as absorption costing.
Question 4
Consider the following statements regarding absorption costing and variable costing.
1) Profit reported under absorption costing for a year will likely differ from that reported under variable costing because production and sales differed.
2) Total profit when added together over a ten year period will be approximately equal under absorption costing and variable costing because production and sales will be approximately the same.
3) Total profit, when added together over a ten year period, will be significantly different under absorption and variable costing because fixed costs will generally increase significantly over that long a time period.
Which statement(s) are true?
Answer to question 1
The following is true regarding absorption costing:
Example:
Units produced:35000 units; Direct labour:$28 per unit; Direct materials:$21 per unit;variable overhead per unit: $15; Fixed overhead total: $100000
Product cost as per absorption costing:- $ 66.86 per unit calculated as below,
$28+21+15=$64
$64*35000 units=$ 2240000
adding fixed costs $2240000+$100000= $2340000
Per unit product cost=$2340000/35000 units=$66.86.
Product cost as per variable costing:
$28+21+15=$64
Hence as seen in the example above, the product cost as per absorption costing takes into consideration all manufacturing costs in calculating product cost as opposed to variable costing wherein fixed overheads are ignored while calculating product cost.
Answer to question 2
14. B
15. C
A standard cost is essentially a budget for the production of a single unit including the planned quantity of input such as materials and labour as well as the planned cost of that input i.e. dollar amount that should be paid for materials and labour. A standard cost variance can be calculated to highlight differences between those planned amounts and the actual amounts achieved
16. D
Effective budget depends on a sound organizational structure. In such a structure, authority, and responsibility for all phases of operations are clearly defined. Budgets based on the research and analysis should result in realistic goals that will contribute to the growth and profitability of the company and the effectiveness of the budget program is directly related to its acceptance by all levels of management. Once adopted budgeting is an important tool for evaluating performance, management should systematically and periodically review variations between actual and expected results to determine the causes.
Answer to question 3
Option b is true
In variable costing, only the variable manufacturing costs is included in product cost and the non-variable (fixed) cost goes into period costs. The variable manufacturing costs changes along with the change in units of production.
An explanation for incorrect options:
Option a: A traditional costing is an absorption costing approach that assigns the total overhead cost to the products.
Option c: Variable costing is a managerial approach and is permitted for reporting.
Option d: Variable cost treats overheads in a different manner from absorption costing.
Answer to question 4
Let’s look at each statement separately.
1) Profit reported under absorption costing for a year will likely differ from that reported under variable costing because production and sales differed.
- Although this statement is very close to being true there’s a little adjustment required. In reality, variable costing will result in a different profit because unlike absorption costing, variable costing does not include any fixed costs incurred in the period.
2) Total profit when added together over a ten year period will be approximately equal under absorption costing and variable costing because production and sales will be approximately the same.I’ll throw this statement can be true depending on the company oh, it is not always true. Fixed cost do I eventually need to be upgraded and changed, however it is not possible to say whether a 10-year period Is sufficient for this.
3) Total profit, when added together over a ten year period, will be significantly different under absorption and variable costing because fixed costs will generally increase significantly over that long a time period.This is generally true. The reason why I fixed cost and to increase over long periods of time is due to inflation. For instance, the cost of rent in New York City for a factory has significantly increased in the past 10 years. This increase in fixed costs will impact profitability in a long run.