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Unformatted text preview: Chapter 5 Variable Costing QUESTIONS 1. In full costing, fixed manufacturing overhead is treated as a product cost. In variable costing, fixed manufacturing overhead is treated as a period cost. 2. When production exceeds sales, part of fixed manufacturing overhead will remain in inventory. In variable costing, the entire amount of fixed manufacturing overhead will be expensed since it is treated as a period cost. Thus, income computed under full costing will exceed income computed under variable costing when production exceeds sales. 3. Variable costing facilitates C-V-P analysis since fixed and variable costs are separated and a contribution margin is calculated. Also, under variable costing, managers cannot artificially inflate profit by producing more units than they sell and burying fixed manufacturing overhead in inventory. 4. Companies using JIT generally have low levels of work in process and finished goods inventory. Thus, even when a company uses full costing, very little of fixed manufacturing overhead is in inventory at the end of a period. Rather, most of it is in cost of goods sold— an expense. 5. Under full costing, ending inventory includes direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. Under variable costing, ending inventory includes each of these items except fixed manufacturing overhead. Thus, the inventory balance under variable costing is always less than the balance under full costing (assuming the balance is not zero). 6. The full costing method will result in higher income. In this method, fixed manufacturing overhead applied to units produced but not sold in the year will appear in ending inventory. This amount of fixed manufacturing overhead is expensed under variable costing, causing income under full costing to be greater than under variable costing. 7. The variable costing method will result in higher income. In this method, the beginning inventory charged to cost of goods sold is less than that under full costing since cost of goods sold under full costing contains fixed manufacturing overhead not expensed the previous year. The result is that income is greater under variable costing than full costing. 8. Under variable costs, fixed manufacturing overhead costs are expensed in the year they are incurred. Meanwhile, full costing calculates the amount of fixed manufacturing overhead per unit produced for the year and includes this amount in the product’s unit cost. Then, the product’s unit cost is expensed when the product is sold. 9. The resulting number represents the difference in net income under full costing and variable costing. Jiambalvo Managerial Accounting 10. For a service company, full costing net income may be slightly different from absorption costing net income. The company may not have as much inventory as a manufacturing company, but some inventory may still exist. Therefore, it is likely that the differences in net income between the two methods will be smaller for service companies than manufacturing companies....
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- Spring '10
- Managerial Accounting, Net Income, Jiambalvo Managerial Accounting, Variable Manufacturing