Absorption Costing MCQs with Answers Explanation
What Is Absorption Costing?
Absorption costing, also known as the all-encompassing, all-inclusive, or comprehensive costing method, is a sophisticated and perplexing managerial accounting framework that attempts to incorporate all expenses that are linked to the production of a particular product. This method is highly intricate and involves a copious amount of calculations and analyses to arrive at the total cost of production.
Every minuscule expense, whether direct or indirect, such as raw materials, labor, rent, utilities, depreciation, maintenance, insurance, and every other associated cost, is taken into account to determine the total cost of the product. The complexity of this method is staggering, and it requires extensive knowledge of accounting principles, an understanding of manufacturing processes, and advanced analytical skills to execute.
However, despite its complexity, absorption costing is still widely used in the industry due to its comprehensive approach to providing an accurate picture of the cost of production. Moreover, under the generally accepted accounting principles (GAAP) in the United States, absorption costing is an approved method for external reporting. In contrast, variable costing is prohibited, adding to the confusion and perplexity surrounding this topic.
Which of the following costs would NOT be included in the cost of goods sold calculation under absorption costing?
a) Direct materials
b) Direct labor
c) Variable manufacturing overhead
d) Fixed manufacturing overhead
Answer: c) Variable manufacturing overhead
Explanation: Under absorption costing, both fixed and variable manufacturing overhead costs are included in the cost of goods sold calculation. Direct materials and direct labor costs are also included.
When production exceeds sales, absorption costing will result in:
a) Higher net income than variable costing
b) Lower net income than variable costing
c) The same net income as variable costing
d) None of the above
Answer: a) Higher net income than variable costing
Explanation: When production exceeds sales, there will be more fixed manufacturing overhead costs that are absorbed into the cost of goods sold calculation under absorption costing. This results in a higher net income compared to variable costing, which only includes variable manufacturing costs in the cost of goods sold calculation.
Which of the following statements is true about absorption costing?
a) It is used for external reporting purposes
b) It is used for internal decision-making purposes
c) It is the same as variable costing
d) None of the above
Answer: a) It is used for external reporting purposes
Explanation: Absorption costing is required for external financial reporting purposes, such as on the income statement and in financial statements. Variable costing, on the other hand, is often used for internal decision-making purposes.
In a period of increasing production and sales, absorption costing will result in:
a) Higher net income than variable costing
b) Lower net income than variable costing
c) The same net income as variable costing
d) None of the above
Answer: c) The same net income as variable costing
Explanation: When production and sales increase, absorption costing and variable costing will result in the same net income. This is because there will be fewer fixed manufacturing overhead costs per unit under absorption costing, but there will also be more units sold.
Which of the following costs would be classified as a variable manufacturing cost under absorption costing?
a) Depreciation on factory equipment
b) Property taxes on the factory building
c) Direct materials
d) Advertising for the product
Answer: c) Direct materials
Explanation: Direct materials are considered a variable manufacturing cost because they vary with the level of production. Depreciation on factory equipment and property taxes on the factory building is fixed manufacturing overhead costs, and advertising for the product is a period cost that is not included in the cost of goods sold calculation.
Which of the following statements is true about absorption costing and inventory valuation?
a) Under absorption costing, inventory is valued at its variable manufacturing cost
b) Under absorption costing, inventory is valued at its full manufacturing cost
c) Under absorption costing, inventory is not valued at all
d) None of the above
Answer: b) Under absorption costing, inventory is valued at its full manufacturing cost
Explanation: Under absorption costing, inventory is valued at its full manufacturing cost, including both fixed and variable manufacturing overhead costs. This is because absorption costing includes all manufacturing costs in the cost of goods sold calculation.
Which of the following methods can be used to calculate the predetermined overhead rate under absorption costing?
a) Total fixed manufacturing overhead costs divided by total units produced
b) Total variable manufacturing overhead costs divided by total units produced
c) Total manufacturing overhead costs divided by total units sold
d) None of the above
Answer: a) Total fixed manufacturing overhead costs divided by total units produced
Explanation: To calculate the predetermined overhead rate under absorption costing, the total fixed manufacturing overhead costs are divided by the total units produced. This rate is then used to allocate fixed manufacturing overhead costs to the cost of goods sold calculation.
Which of the following statements is true about absorption costing and contribution margin?
a) Absorption costing uses contribution margin to calculate net income
b) Absorption costing and contribution margin are unrelated concepts
c) Absorption costing and contribution margin both use the same approach to cost calculation
d) None of the above
Answer: b) Absorption costing and contribution margin are unrelated concepts
Explanation: Absorption costing and contribution margin are unrelated concepts. Absorption costing calculates net income by allocating all manufacturing costs to the cost of goods sold calculation, while contribution margin is a tool used to analyze the profitability of a product or service by comparing the revenue generated with the variable costs incurred.
Which of the following statements is true about absorption costing and fixed costs?
a) Absorption costing treats fixed costs as a variable cost
b) Absorption costing treats fixed costs as a period cost
c) Absorption costing treats fixed costs as a product cost
d) None of the above
Answer: c) Absorption costing treats fixed costs as a product cost
Explanation: Absorption costing treats fixed costs as product costs by allocating them to the cost of goods sold calculation based on the level of production. This results in a higher cost per unit compared to variable costing, which only includes variable costs in the cost of goods sold calculation.
In a period of decreasing production and sales, absorption costing will result in:
a) Higher net income than variable costing
b) Lower net income than variable costing
c) The same net income as variable costing
d) None of the above
Answer: b) Lower net income than variable costing
Explanation: In a period of decreasing production and sales, absorption costing will result in a lower net income compared to variable costing. This is because there will be more fixed manufacturing overhead costs per unit under absorption costing, but there will also be fewer units sold.