Exam 7: Variable Costing: A Tool for Decision Making
Exam 1: Overview of Managerial Accounting58 Questions
Exam 2: Managerial Accounting Concepts and Cost Flows74 Questions
Exam 3: Cost Accounting Systems: Job Order Costing106 Questions
Exam 4: Cost Accounting Systems: Process Costing146 Questions
Exam 5: Activity-Based Costing130 Questions
Exam 6: Cost-Volume-Profit Relationships142 Questions
Exam 7: Variable Costing: A Tool for Decision Making86 Questions
Exam 8: Relevant Costs and Short-Term Decision Making133 Questions
Exam 9: Planning and Budgeting111 Questions
Exam 10: Standard Costing and Variance Analysis147 Questions
Exam 11: Flexible Budgets, Segment Analysis, and Performance Reporting128 Questions
Exam 12: Capital Budgeting166 Questions
Exam 13: Statement of Cash Flows115 Questions
Exam 14: Analysis and Interpretation of Financial Statements76 Questions
Exam 15: Appendix: Accounting and the Time Value of Money16 Questions
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Under variable costing, a change in the level of production will affect the amount of fixed costs reported on the variable income statement for the period.
(True/False)
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The equation to find contribution margin under absorption costing is:
(Multiple Choice)
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Dining Sets, Inc. manufactures dining sets, which are sold in sets of 4 chairs to a table to furniture stores and businesses. They reported the following financial information for last year:
What would Operating Income be under variable costing? (Round per-unit costs to the nearest cent.)

(Essay)
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Under absorption costing, a company applies all overhead costs associated with manufacturing to the inventory produced in the period in which the costs are incurred.
(True/False)
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Lotso Inc. is a toy design company that serves both commercial and independent brands. Lotso recorded the following information for last month's transactions:
Projects in Process at the beginning of the month: 45 projects, 30% complete, with $65,000 of fixed overhead costs applied.
Projects in Process at the end of the month: 70 projects, 25% complete
All projects in process at the beginning of the month are considered completed by the end of the month, and costs are tracked for each project individually. This month, fixed overhead was allocated at a rate of $5,000/project (applied evenly over the production process).
Management is concerned about their costs, and wants to get a short-term bank loan-just enough to cover their variable operating loss from this past month while projects are completed. The bank requires Lotso to submit GAAP-compliant financial statements, and will only grant a loan if they can show absorption operating income at least $10,000 greater than the loan requested.
Will Lotso be able to receive the loan needed?

(Essay)
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How does Net Income respond to changes in production (assuming a constant level of sales) under absorption costing?
(Essay)
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Split Yellow Co. is a banana plantation that grows and sells bananas in Florida. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes. The company's books are adjusted to arrive at Absorption Income for financial reporting purposes. The company reported the following financial information for the past month:
The company tracks harvested bananas that have not yet been shipped out as "in-process." This inventory of food increased from the equivalent of 40 full truckloads at the beginning of the month to 70 full truckloads at the end of the month.
What was Absorption Net Income?

(Essay)
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Which of the following will not affect Net Income under absorption costing?
(Multiple Choice)
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Sunlight Manufacturing produces a single product, fluorescent lightbulbs. They reported the following information from their operations last period:
Under absorption costing, what was the per-unit cost of the units produced?

(Essay)
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CES Inc. is considering obtaining a bank loan to finance a new operation. The company is required by the bank to submit GAAP-compliant accounting records (which they currently do not keep). CES has contracted with your consulting firm to estimate the costs and benefits of this new operation.
Management provides you with the following information regarding their financial position:
Expected performance next month (before considering the potential investment):
The loan contract has the following information:
Bank loan: $500,000
Interest rate: 1% per month, payable at the end of the month. Interest rate increases to 1.5% per month if the company suffers a net Operating Loss before Interest and Taxes that month (by GAAP standards).
After evaluating the company, you report the following estimates:
Monthly cost of keeping a second set of accounting records: $5,000
Potential return on investment: 2% per month (through increased sales, after considering the costs involved).
Would you recommend that CES take out the loan (i.e. would it be profitable for them)?

(Essay)
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One of the advantages of variable costing is that this costing method may be used for management decisions as well as external reporting.
(True/False)
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CookieClub Co. uses variable costing for managerial purposes and absorption costing for external reporting. These past two months, CCC has had an even number of sales at $100,000, at a price of $10 per unit. However, in an effort to reduce inventory levels, management decreased production from the regular 10,000 units to 7,500 units for last month only. CCC has fixed costs of $40,000 per month.
Assuming that sales continue to hold constant and production returns to normal levels, if absorption net income was $30,000 last month, what will it be this month? (Round per-unit costs to the nearest cent.)
(Essay)
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Which of the following is not a way to calculate Absorption Net Income?
(Multiple Choice)
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Organic Food Market (OFM) is a local grocery store that uses an absorption costing approach when pricing their goods, in order to make sure that their fixed costs are covered. All costs except purchasing-related variable costs (such as the supplier price of the goods and the shipping costs) are considered fixed costs and are allocated to inventory. The allocation is made when each item is purchased, and is based on the sales mark-up of each item, at a rate of $0.50/dollar of mark-up. Any under- or over-applied overhead is closed to Cost of Goods Sold.
Financial information for this month and last month are as follows:
Over-applied overhead for this month was $4,000. The owners of OFM want to increase income, and want to know if the best way to do that is to increase sales volume or to barter with suppliers for lower prices. To assist in making the decision, they want to know what Operating Income would be under Variable costing rather than Absorption costing, in order to remove the effect of inventoried fixed costs.
What would Variable Operating Income be this month?

(Essay)
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Working capital tends to be lower under variable net income than under absorption net income.
(True/False)
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One of the disadvantages of variable costing is that it may lead management to underprice products, leading to loss of long-term profits.
(True/False)
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Glitter Inc. is a fashion designer company that serves both individuals and companies (mostly in the entertainment industry). Glitter recorded the following information for last month's transactions:
Projects in Process at the beginning of the month: 20 projects, 15% complete, with $30,000 of fixed overhead costs allocated.
Projects in Process at the end of the month: 40 projects, 50% complete
All projects in process at the beginning of the month are considered completed by the end of the month, and costs are tracked for each project individually. This month, fixed overhead was allocated at a rate of $6,000/project (applied evenly over the production process).
Management is concerned about their costs, and wants to get a short-term bank loan-just enough to cover their variable operating loss from this past month while projects are completed. The bank requires Glitter to submit GAAP-compliant financial statements and will only grant a loan if they can show absorption operating income at least $15,000 greater than the loan requested.
Will Glitter be able to receive the loan needed?

(Essay)
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What is the shortcut to find the difference between absorption net income and variable net income?
(Essay)
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If sales exceed production, then previous period costs will be released to the income statement and will decrease the level of absorption net income relative to variable net income.
(True/False)
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