Stiller Corporation incurred fixed manufacturing costs of $12,000 during 2011. Other information for 2011 includes:

Stiller Corporation incurred fixed manufacturing costs of $12,000 during 2011. Other information for 2011 includes:

The budgeted denominator level is 2,000 units. Units produced total 1,500 units.

Units sold total 1,200 units. Beginning inventory was zero.

The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold.

1) Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total:

A) $7,200 B) $9,600 C) $12,000

D) 0 Answer: A

Explanation: A) $12,000 / 2,000 units = $6 × 1,200 = $7,200 Diff: 3

Terms: absorption costing Objective: 2

AACSB:  Analytical skills

2) Fixed manufacturing costs included in ending inventory total: A) $2,400

B) $3,000 C) $1,800

D) 0 Answer: C

Explanation: C) $12,000 / 2,000 units = $6 × 300 = $1,800 Diff: 3

Terms: absorption costing Objective: 2

AACSB:  Analytical skills

3) Operating income using absorption costing  will be                than operating income if using variable costing.

A)   $4,800 higher

B)   $4,800 lower

C)   $1,800 higher

D)   $7,200 lower Answer: C

Explanation: C) Different operating incomes are reported because the unit level of inventory increased during the accounting period by 300 units × $6 denominator rate = $1,800. Therefore, operating income is $1,800 higher under absorption costing because $1,800 of fixed manufacturing costs remains in inventory.

Diff: 3

Terms: absorption costing Objective: 2

AACSB:  Analytical skills

4)        In general, if inventory increases during an accounting period,

A)   variable costing will report less operating income than absorption costing.

B)   absorption costing will report less operating income than variable costing.

C)   variable costing and absorption costing will report the same operating income.

D)   None of the above are correct. Answer: A

Diff: 3

Terms: absorption costing Objective: 2

AACSB:  Analytical skills

5) At the end of the accounting period Bumsted Corporation reports operating income of $30,000. If Bumstead's inventory levels decrease during the accounting period

A)   variable costing will report less operating income than absorption costing.

B)   absorption costing will report less operating income than variable costing.

C)   variable costing and absorption costing will report the same operating income.

D)   None of the above are correct. Answer: B

Diff: 3

Terms: variable costing Objective: 2

AACSB:  Analytical skills

6) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by:

A)   changes in the quantity of units actually sold

B)   changes in the quantity of units produced

C)   changes in ending inventory

D)   changes in sales price per unit Answer: A

Diff: 3

Terms: variable costing Objective: 2

AACSB:  Reflective thinking

7)        Many companies have switched from absorption costing to variable costing for internal reporting:

A)   to comply with external reporting requirements

B)   to increase bonuses for managers

C)   to reduce the undesirable incentive to build up inventories

D)   so the denominator level is more accurate Answer: C

Diff: 2

Terms: variable costing, absorption costing Objective: 3

AACSB:  Analytical skills

8)        Ways to "produce for inventory" that result in increasing operating income include:

A)   switching production to products that absorb the least amounts of fixed manufacturing costs

B)   delaying items that absorb the greatest amount of fixed manufacturing costs

C)   deferring maintenance to accelerate production

D)   All of these answers are correct. Answer: C

Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

9) Switching production to products that absorb the highest amount of fixed manufacturing costs is also called:

A)   cost reduction

B)   cherry picking

C)   producing for sales

D)   throughput costing Answer: B

Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

10)   To discourage producing for inventory, management can:

A)   evaluate nonfinancial measures such as units in ending inventory compared to units in sales

B)   evaluate performance over a three- to five-year period rather than a single year

C)   incorporate a carrying charge for inventory in the internal accounting system

D)   All of these answers are correct. Answer: D

Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

11)   Which method is NOT a way to discourage producing for inventory?

A)   incorporate a carrying charge for inventory

B)   focus on careful budgeting and inventory planning

C)   include nonfinancial measures when evaluating performance

D)   evaluate performance on a quarterly basis only Answer: D

Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

12)      Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:

A)   increasing the manager's bonus

B)   decreasing the manager's bonus

C)   not affecting the manager's bonus

D)   being unable to determine the manager's bonus using only the above information Answer: A

Diff: 3

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

13)      Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in:

A)   increasing the manager's bonus

B)   decreasing the manager's bonus

C)   not affecting the manager's bonus

D)   being unable to determine the manager's bonus using only the above information Answer: C

Diff: 2

Terms: variable costing Objective: 3

AACSB:  Reflective thinking

14)   Critics of absorption costing suggest to evaluate management on their ability to:

A)   exceed production quotas

B)   increase operating income

C)   decrease inventory costs

D)   All of these answers are correct. Answer: C

Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

15)   Differences between absorption costing and variable costing are much smaller when a:

A)   large part of the manufacturing process is subcontracted out

B)   just-in-time inventory strategy is implemented

C)   significant portion of manufacturing costs are fixed

D)   Both A and B are correct. Answer: D

Diff: 2

Terms: variable costing, absorption costing Objective: 3

AACSB:  Reflective thinking

16)   All of the following are examples of drawbacks of using absorption costing EXCEPT:

A)   management has the ability to manipulate operating income via production schedules

B)   manipulation of operating income may ultimately increase the company's costs incurred over the long run

C)   operating income solely reflects income from the sale of units and excludes the effects of manipulating production schedules

D)   decreasing maintenance activities and increasing production result in increased operating income Answer: C

Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Reflective thinking

17)   Which of the following inventory costing methods shown below is most likely to cause undesirable incentives for managers to build up finished goods inventory?

A)   absorption costing

B)   variable costing

C)   throughput costing

D)   direct costing Answer:   A Diff: 2

Terms: absorption costing Objective: 3

AACSB:  Analytical skills