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1. Under variable costing, product costs consist of direct materials, direct labor, and variable
manufacturing overhead.
2. Under absorption costing, fixed manufacturing overhead is treated as a product cost.
3. Under variable costing, variable production costs are not treated as product costs.
4. Under variable costing, fixed manufacturing overhead cost is not treated as a product
cost.
5. The costs assigned to units in inventory are typically lower under variable costing than
under absorption costing.
6. Direct materials is considered to be a product cost under variable costing but not
absorption costing.
7. Under absorption costing, fixed manufacturing overhead cost is not included in product
cost.
8. Under variable costing, product cost does not contain any fixed manufacturing overhead
cost.
9. Under conventional absorption costing, the fixed costs associated with idle production
capacity are not included as part of the product cost.
10. Under absorption costing, the profit for a period is affected by a change in the number of
units of finished goods in inventory.
11. When variable costing is used, and if selling prices exceed variable expenses and if the
unit contribution margins, the sales mix, and fixed costs remain the same, profits move in the
same direction as sales.
12. Because absorption costing emphasizes costs by behavior, it works well with cost-volume-
profit analysis.
13. Net operating income is affected by the number of units produced when absorption
costing is used.
14. Under absorption costing, it is possible to defer a portion of the fixed manufacturing
overhead costs of the current period to future periods through the inventory account.
15. When the number of units in work in process and finished goods inventories decrease,
absorption costing net operating income will typically be greater than variable costing net
operating income.
16. Assuming the LIFO inventory flow assumption, if production is less than sales for the
period, absorption costing net operating income will generally be greater than variable costing
net operating income.
17. Assuming the LIFO inventory flow assumption, if production equals sales for the period,
absorption costing and variable costing will produce the same net operating income.
18. When viewed over the long term, cumulative net operating income will be the same for
variable and absorption costing if ending inventories exceed beginning inventories.
19. A common fixed cost is a fixed cost that supports more than one business segment and is
traceable in whole or in part to at least one of the business segments.
20. Common fixed costs should not be charged to the individual segments when preparing a
segmented income statement.
21. If a cost must be arbitrarily allocated in order to be assigned to a particular segment, then
that cost should not be considered a common cost.
22. A common fixed cost is a fixed cost that is incurred because of the existence of a
particular business segment and that would be eliminated if the segment were eliminated.
23. Segment margin is a better measure of the long-run profitability of a segment than
contribution margin.
24. When using segmented income statements, the dollar sales for a company to break even
equals the sum of the traceable fixed expenses and the common fixed expenses divided by the
overall CM ratio.
25. Common fixed expenses should be allocated to business segments when performing
break-even calculations and making decisions.
26. When using segmented income statements, the dollar sales for a segment to break even
equals the common fixed expenses of the segment divided by the segment CM ratio.
27. If a company operates at the break even point for each of its segments, it will lose money
overall if common fixed expenses exist.
28. Routsong Corporation had the following sales and production for the past four years:
Year 1 Year 2 Year 3 Year 4
Production in units 6,000 9,000 4,000 5,000
Sales in units 6,000 6,000 5,000 7,000
Selling price per unit, variable cost per unit, and total fixed cost are the same each year. There
were no beginning inventories in Year 1. Which of the following statements is NOT correct?
29. Under absorption costing, product costs include:
Variable manufacturing overhead Fixed manufacturing overhead
Yes Yes
No No
Yes No
No Yes
30. Which of the following costs at a manufacturing company would be treated as a product
cost under both absorption costing and variable costing?
Variable manufacturing overhead Variable selling and administrative expense
Yes Yes
Yes No
No Yes
No No
31. The principal difference between variable costing and absorption costing centers on:
32. Under absorption costing, fixed manufacturing overhead costs:
33. Under variable costing, fixed manufacturing overhead is:
34. Under variable costing, which of the following is not expensed in its entirety in the period
in which it is incurred?
35. The term gross margin is used in reports prepared using:
36. When sales are constant, but the number of units produced fluctuates, net operating
income determined by the absorption costing method will:
37. George Corporation has no beginning inventory and manufactures a single product. If the
number of units produced exceeds the number of units sold, then net operating income under the
absorption method for the year will:
38. When production exceeds sales and the company uses the LIFO inventory flow
assumption, the net operating income reported under absorption costing generally will be:
39. Routit Corporation had the following sales and production for the past four years:
Year 1 Year 2 Year 3 Year 4
Production in units 5,000 6,000 5,000 5,000
Sales in units 4,000 5,000 5,000 7,000
Selling price per unit, variable cost per unit, and total fixed cost are the same each year. There
were no beginning inventories in Year 1. Which of the following statements is correct?
40. If a cost is a common cost of the segments on a segmented income statement, the cost
should:
