Ch. 9

Question 1

two most common methods of costing inventory in manufacturing companies are

Answer 1

1. variable costing
2. absorption costing

Question 2

given a firms level of spending on fixed manufacturing costs, what capacity level should managers and accountants use to compute the fixed manufacturing cost per unit produced

Answer 2

denominator level capacity

Question 3

is a method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as inventoriable costs

Answer 3

variable costing

Question 4

is a method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs

Answer 4

absorption costing

Question 5

changes in _______ drive differences in income between absorption and variable costing

Answer 5

inventory level

Question 6

why do changes in inventory level drive differences in income between absorption and variable costing:

the amount of difference represents

Answer 6

the amount of fixed manufacturing costs capitalized as inventory under absorption costing and expensed as a period cost under variable costing

Question 7

the required inventory method for external financial reporting in most countries

Answer 7

absorption costing

Question 8

• is cost effective and less confusing
• it measures the cost of all manufacturing resources (variable or fixed) necessary to produce inventory
• it can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders

Answer 8

absorption costing

Question 9

an important attribute of absorption costing is that it enables a manager to

Answer 9

increase margins and operating incoome by producing more ending inventory

Question 11

producing excess inventory is justified when a firms managers anticipates

Answer 11

rapid growth in demand, and want to have additional units to guards against possible production shortages in the next year

Question 12

a plant manager may switch to manufacturing products that absorb the highest amount of fixed manufacturing costs, regardless of the customer demand for these products

Answer 12

cherry picking the production line

Question 13

delaying the production of items that absorb the least or lower fixed manufacturing costs could lead to

Answer 13

failure to meet promised customer delivery dates

Question 14

5 ways to reduce the undesirable effects of absorption costing by upper level management

Answer 14

1. use variable costing for internal reporting
2. focus on careful budgeting and inventory planning
3. incorporate an internal carrying charge for inventory
4. change (lengthen) the period used to evaluate performance
5. include nonfinancial as well as financial variables in the measure to evaluate performance

Question 15

is a method of inventory costing in which only direct materials are included as inventoriable costs. all other costs are expensed

Answer 15

throughput costing

Question 16

both variable and absorption costing should be inventoried in order to match all manufacturing costs to revenues, regardless of their different behavior patters

Question 17

4 different capacity levels can be used to the denominator to compute the budgeted fixed manufacturing cost rate

Answer 17

1. theoretical capacity
2. practical capacity
3. normal capacity utilization
4. master budget capacity

Question 18

(which of the 4 capacity levels is this)
the level of capacity based on producing at full efficiency all the time

Answer 18

theoretical capacity

Question 19

whats theoretical capacity based on

Answer 19

supply/inputs

Question 20

_____ capacity levels, in the real world, are unattainable, but they represent the ideal goal of capacity utilization a company can aspire to

Answer 20

theoretical capacity levels

Question 21

which of the 4 capacity levels is this)
the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions like scheduled maintenance time and shutdowns for holidays

Answer 21

practical capacity

Question 22

whats practical capacity based on

Answer 22

supply/inputs

Question 23

some of the considerations take into account for _____ capacity are more predictable than others. plant shutdowns are typically scheduled a year or more in advance; sickness or other interruptions can only be estimated based on past results

Answer 23

practical capacity

Question 24

(which of the 4 capacity levels is this)
the level of capacity utilization that satisfies average customer demand over a period that is long enough to consider seasonal, cyclical, and trend factors

Answer 24

normal capacity utilization

Question 25

what is normal capacity utilization based on

Answer 25

demand

Question 26

closely related to master budget capacit, but relies almost entirely on past results as representation of typical/normal demand levels

Answer 26

normal capacity utilization

Question 27

(which of the 4 capacity levels is this) is the level of capacity utilization that managers expect for the current budget period which is typically one year

Answer 27

master budget capacity utilization

Question 28

what is master budget capacity utilization based on

Answer 28

demand

Question 29

closely related to normal capacity, but relies more on expectations/predictions in the near term as opposed to an average of previous levels of demand

Answer 29

master budget capacity utilization

Question 30

5 possible purposes of choosing a capacity level

Answer 30

1. product costing and capacity management 2. pricing 3. performance evaluation 4. external reporting 5. tax requirements

Question 31

2 possibly capacity levels to choose from

Answer 31

1. demand based capacity 2. supply based capacity

Question 32

using _______ capacity as the denominator sets the cost of capacity (which is the fixed cost in the numerator) at the cost of supplying the capacity, regardless of production/unit volume (demand based vs supply based capacity)

Answer 32

supply based capacity (benefit: highlights the cost of capacity acquired but not used)

Question 33

using ________ capacity hides the amount unused capacity bc it allocates all the cost of supplying the capacity to the amount of production/unit volume, regardless of how much capacity it really takes

Answer 33

demand based capacity (problem: management doesnt get alerted when there is unused capacity)

Question 34

pricing decisions made on demand based capacity can lead to a

Answer 34

downward spiral

Question 35

(demand based or supply based capacity) ____ capacity, is more stable measure because it calculates the fixed cost rate based on capacity available rather than capacity used to meet demand

Answer 35

supply based capacity

Question 36

using _____ is often the fairest as it most closely holds managers accountable for what they have control over

Answer 36

master budget capacity

Question 37

where differences between practical capacity and master budget capacity utilization are large, that difference is often classified as

Answer 37

planned unused capacity

Question 38

(external reporting) GAAP requires that the allocation of fixed manufacuting costs to productin be based on the _____ of the facilities

Answer 38

normal capacity

Question 39

(external reporting) the production volume variance will be written off and represents _______ to support the production of output during the period

Answer 39

the cost of capacity not used

Question 40

(tax requirements) the IRS permits the use of ______ to calculate budgeted fixed manufacturing cost per unit

Answer 40

practical capacity

Question 41

the production volume variance generated this way can be deducted for tax purposed when

Answer 41

in the year in which the cost is incurred