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

Question 1

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. 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?

A)The company should always choose absorption costing as it shows increasing profits every year
B)The company should always choose absorption costing because it facilitates income smoothing
C)Over the three years,Chamiching accumulates the same total income regardless of the choice of inventory costing method
D)b)and c)only
E)a,b and c

Answer 1

D

Question 2

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

A)disguise the true nature of how costs vary with production
B)can be multiplied by a different number of units,suggesting that the cost data is scalable
C)generate misleading results when the company faces an increasing cost curve
D)ignore step-fixed costs
E)All of the choices are correct

Answer 2

E

Question 3

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?

A)Senior management control of inventory levels
B)Adoption of just-in-time (JIT)production system
C)Reward managers based upon the residual income approach
D)Use variable costing to determine income for bonus purposes
E)None of the choices are correct

Answer 3

B

Question 4

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. 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?

A)In Yr 1,$12,000 is added to variable costing income to find absorption costing income
B)In Yr 3,$6,887 is added to variable costing income to find absorption costing income
C)In Yr 2,$5,113 is deducted from variable costing income to find absorption costing income
D)In Yr 2,$5,113 is added to variable costing income to find absorption costing income
E)None of the choices are correct

Question 5

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. 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?

A)The variable cost of Yr 2 ending inventory is $6,887
B)The full cost of Yr 2 ending inventory is double the variable cost ending inventory
C)There are 3,000 hacksaw blades in ending inventory
D)The fixed cost per unit in Yr 3 is $2.72
E)None of the choices are correct

Question 6

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?

A)$4.50
B)$11.08
C)$10.80
D)$5.83
E)$9.75

Question 7

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. 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?

A)Yr 3's gross profit is $171,687
B)Yr 1's gross profit is $48,000
C)Yr 2's gross profit is $123,200
D)Yr 2's gross profit is $129,513
E)None of the choices are correct

Question 8

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. 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?

A)Yr 1's ending inventory is $12,000
B)Yr 2's gross profit is $112,400
C)Yr 3's cost of goods sold is $123,200
D)Yr 3's goods available for sale is $266,000
E)None of the choices are correct

Question 9

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?

A)If sales are 10,000 units and production 12,000 units,CC's net income exceeds FF's
B)If sales are 10,000 units and production 10,000 units,FF's net income exceeds CC's
C)If sales are 10,000 units and production 8,000 units,FF's net income exceeds CC's
D)If sales are 12,000 units and production 10,000 units,FF's net income equals CC's
E)Unable to determine

Question 10

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. 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?

A)Variable costing income (VCI)exceeds full costing income (FCI)every year
B)VCI exceeds FCI in Yrs 1 and 2 only
C)VCI exceeds FCI in Yrs 2 and 3 only
D)VCI never exceeds FCI
E)None of the choices are correct

Question 11

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?

A)If sales are 10,000 units and production 12,000 units,variable costing income (VCI)exceeds full costing income (FCI)
B)If sales are 10,000 units and production 10,000 units,FCI exceeds VCI
C)If sales are 10,000 units and production 8,000 units,VCI exceeds FCI
D)If sales are 12,000 units and production 10,000 units,FCI exceeds VCI
E)Unable to determine

Question 12

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?

A)If Bungalow uses absorption costing,there is $21,000 of fixed costs in ending inventory.
B)If Bungalow uses variable costing,profit for the door knob division is $52,000.
C)If Bungalow uses absorption costing,profit for the door knob division is $73,000.
D)The average cost per door knob under absorption costing is higher than the average cost per door knob under direct costing.
E)Next year,Bungalow produces 22,000 units and sells 26,000 units.As a result,profit for the year for the door knob division is equal for absorption and direct costing.