Exam 10: Criticisms of Absorption Cost Systems: Incentive to Overproduce

Chamiching makes hacksaw blades.Inventory values are determined using the first in,first out (FIFO)method.Production and sales data for the first three years appear below. Hacksaw blades Sold Produced Yr 1 18,000 22,000 Yr 2 25,000 23,000 Yr 3 37,000 35,000 In the first year,variable costs accounted for half of the full costs.Total fixed production costs increased each subsequent year by 20%,as a result of step-fixed costs and a general inflationary price increase. For Chamiching,if absorption costing is used,which of the following is true?

CC uses absorption (full)costing and its direct competitor,FF uses variable costing for internal decision making purposes.Last year,both companies reported the same production and sales volumes.Which is true?

Finlandia Frankfurters (FF),incorporated in Finland,uses variable costing for external reporting.On 1^st January,it is purchased by Belgian Bagels,which uses absorption costing,and FF is obliged to adopt the parent company's accounting method for the purposes of filing consolidated accounts.At the time of the merger,FF had 4,000 units in inventory and production costs remained stable over the following year.Which is true about FF's income in the first post-merger year?

Chamiching makes hacksaw blades.Inventory values are determined using the first in,first out (FIFO)method.Production and sales data for the first three years appear below. Hacksaw blades Sold Produced Yr 1 18,000 22,000 Yr 2 25,000 23,000 Yr 3 37,000 35,000 Sales price Full Cost Yr1 \ 10.00 \ 6.00 Yr 2 \ 11.00 \ 6.60 Yr3 \ 12.00 \ 7.60 In the first year,variable costs accounted for half of the full costs.Total fixed production costs increased each subsequent year by 20%,as a result of step-fixed costs and a general inflationary price increase. For Chamiching,if variable costing is used,which of the following is true?

Bungalow Industries manufactures and sells hardware for homes such as door knobs and cabinet pulls.Each door knob sells for $15 per unit and during its first year of operations,Bungalow produced 24,000 units and sold 20,000 units.The company has fixed manufacturing overhead costs of $126,000 and fixed selling and administrative expenses of $32,000.Each door knob has $3.00 of direct materials,$1.00 of direct labor and $.50 of variable overhead.If Bungalow Industries uses absorption costing,what is the manufacturing cost per unit?

Chamiching makes hacksaw blades.Inventory values are determined using the first in,first out (FIFO)method.Production and sales data for the first three years appear below. Hacksaw blades Sold Produced Yr 1 18,000 22,000 Yr 2 25,000 23,000 Yr 3 37,000 35,000 Sales price Full Cost Yr1 \ 10.00 \ 6.00 Yr 2 \ 11.00 \ 6.60 Yr3 \ 12.00 \ 7.60 In the first year,variable costs accounted for half of the full costs.Total fixed production costs increased each subsequent year by 20%,as a result of step-fixed costs and a general inflationary price increase. For Chamiching,which of the following is true?

Bungalow Industries manufactures and sells hardware for homes such as door knobs and cabinet pulls.Each door knob sells for $15 per unit and during its first year of operations,Bungalow produced 24,000 units and sold 20,000 units.The company has fixed manufacturing overhead costs of $126,000 and fixed selling and administrative expenses of $32,000.Each door knob has $3.00 of direct materials,$1.00 of direct labor and $0.50 of variable overhead.Which of the following is not true?

One should always be wary of using unit costs for decision-making,because unit costs:

Chamiching makes hacksaw blades.Inventory values are determined using the first in,first out (FIFO)method.Production and sales data for the first three years appear below. Hacksaw blades Sold Produced Yr 1 18,000 22,000 Yr 2 25,000 23,000 Yr 3 37,000 35,000 Sales price Full Cost Yr1 \ 10.00 \ 6.00 Yr 2 \ 11.00 \ 6.60 Yr3 \ 12.00 \ 7.60 In the first year,variable costs accounted for half of the full costs.Total fixed production costs increased each subsequent year by 20%,as a result of step-fixed costs and a general inflationary price increase. For Chamiching,when variable costing income is reconciled to absorption costing income,which of the following is true?

Chamiching makes hacksaw blades.Inventory values are determined using the first in,first out (FIFO)method.Production and sales data for the first three years appear below. Hacksawblades Sold Produced Yr 1 18,000 22,000 Yr 2 25,000 23,000 Yr 3 37,000 35,000 Salas price Full cost Yr1 \ 10.00 \ 6.00 Yr2 \ 11.00 \ 6.60 Yr3 \ 12.00 \ 7.60 In the first year,variable costs accounted for half of the full costs.Total fixed production costs increased each subsequent year by 20%,as a result of step-fixed costs and a general inflationary price increase. For Chamiching,which of the following is true?

Chamiching makes hacksaw blades.Inventory values are determined using the first in,first out (FIFO)method.Production and sales data for the first three years appear below. Hacksaw blades Sold Produced Yr 1 18,000 22,000 Yr 2 25,000 23,000 Yr 3 37,000 35,000 Sales price Full Cost Yr1 \ 10.00 \ 6.00 Yr 2 \ 11.00 \ 6.60 Yr3 \ 12.00 \ 7.60 In the first year,variable costs accounted for half of the full costs.Total fixed production costs increased each subsequent year by 20%,as a result of step-fixed costs and a general inflationary price increase. For Chamiching,which of the following is true?

Absorption costing of inventories,as required by US GAAP,has been criticized for encouraging managers to increase year-end inventories in order to boost reported profits.Which of the following techniques is the most effective at resolving this problem?