Chapter 8 alternative

Question 1

Process and Job order costing use what type of costing?

Answer 1

absorption costing

Question 2

Why does Job order and process costing use absorption costing?

Answer 2

because all manufacturing costs are charged to or absorbed by the product

Question 3

what else is absorption costing called?

Answer 3

full

Question 4

what is absorption costing used for?

Answer 4

used for external reporting under GAAP

Question 5

What are the 3 alternative approaches to absorption costing?

Answer 5

1. variable costing
2. normal costing
3. throughput costing

Question 6

what is considered product costs in variable costing?

Answer 6

• only DM, DL, and VARIABLE MOH are considered product costs
• fixed costs are expensed as incurred (period costs)
• selling and admin are still considered period costs

Question 7

What is full or absorption costing used in

Answer 7

process costing and job order

Question 8

Define variable costing

Answer 8

• only direct materials, dir lab and Variable moh costs are considered product costs
• fixed MOH are recognized as period costs

Question 9

What are some decision making concerns with

Answer 9

1. GAAP requires them to use absorption costing to cost their inventories
   - often used internally to evaluate performance, justify cost reductions, or evaluate new products
2. some companies have recognized that net income calculated using GAAP does not highlight the differences between variable and fixed costs
   - may lead to poor decisions
   - some use variable costing internally for this reason

Question 10

What are problems with absorption costing

Answer 10

• when production exceeds sales
  1. absorption costing reports a higher net income than Variable costing
  2. the reason is that some fixed manufacturing costs are not expensed in the current period, but deferred to future periods as part of the inventory
  3. therefore, management may be tempted to over produce in a period in order to increase net income
  
  • net income will increase but this may not always be in the company’s best interest

Question 11

What are the potential advantages of variable costing compared to absorption

Answer 11

1. the use of variable costing is consistent with the CVP and incremental analysis
2. net income calculated under variable costing is not affected by changes in production levels
   
   • therefore it is much easier to understand the impact of fixed and variable costs in the calculation of net income
3. net income is greatly affected by changes in sales levels under VC (not product levels)therefore provides a more realistic assessment of the company’s success or failure during a period
4. Because the fixed and variable cost components are shown in the VC income statement, it is easier to identify these costs and understand their effect on the business
   
   • under absorption costing, the allocation of fixed costs to inventory makes it difficult to evaluate the impact of fixed costs on the company’s results

Question 12

What is normal costing?

Answer 12

• using a predetermined OH rate to assign MOH
• chapter 3
• the use of predetermined OH rate is more practical for assigning fixed MOH costs to production
• *** add more **

Question 13

What is throughput costing also called

Answer 13

upper-variable costing

Question 14

How does throughput costing deal with costs

Answer 14

treats all costs as period expense except for direct materials

Question 15

Describe throughput costing

Answer 15

• modified form of variable costing system treats DL and V MOH as period expenses

Question 16

What is throughput costing based on?

Answer 16

based on lean manufacturing principles

Question 17

What are the lean manufacturing principals?

Answer 17

1. costs can be reduced and profitability increase by improvements in the manufacturing workflow
2. increasingly used by many firms to change their operations more efficiently and wit more control
3. eliminates waste and focuses more on customer’s needs

Question 18

What does throughput costing provide?

Answer 18

provides some useful tools for understanding and improving flow in a process

Question 19

what is a good requirement for a company before they use throughput costing

Answer 19

• company should meet 2 criteria before using throughput costing