I-Rev6 - LESSON 6 Review material Review questions Question...

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LESSON 6 Review material Review questions Question 1 — Multiple choice a. Which of the following is true of a firm that uses absorption costing? 1) Net income fluctuates directly with changes in sales volume. 2) Fixed production and fixed selling costs are considered to be product costs. 3) The cost of one unit of inventory can change as a result of changes in the number of units manufactured. 4) Variable selling expenses are included in the inventory value assigned to each product. b. Why would a company using a just-in-time (JIT) inventory method likely show the same net income under both absorption and variable costing? 1) Because ending inventory would be valued in the same manner for both methods under JIT. 2) Because fixed overhead costs are charged to the period incurred rather than to the product produced under JIT. 3) Because production is geared to sales under JIT and thus there would be no ending inventory and no fixed overhead costs deferred in inventory. 4) Because there is no distinction made under JIT between fixed and variable costs. c. Which of the following supports the use of variable costing? 1) Fixed production costs should be added to inventory because such costs have future service potential and therefore are inventoriable as an asset. 2) Fixed production costs should be capitalized as an asset and depreciated over future periods when benefits from such costs are expected to be received. 3) Fixed production costs should be charged to the period incurred unless sales do not equal production, in which case, any difference should be capitalized as an asset and depreciated over future periods. 4) Fixed production costs should be charged to the period incurred in all cases since such costs cannot be avoided in the future. d. In an effort to minimize its carrying costs, Holbrook Manufacturing decided to reduce its safety stock of raw materials by 75%. What is the effect of this decision on Holbrook’s economic order quantity (EOQ)? 1) No effect 2) 75% decrease 3) 75% increase 4) 25% increase Management Accounting Fundamentals Review material 6 1
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e. During 20X7, Change Company reported a net income of €77,000 using absorption costing and a net income of €70,700 using variable costing. The fixed overhead application rate has been €3 per unit for the last three years. If 18,000 units were produced during 20X7, what were the sales in units for 20X7? 1) 11,700 units 2) 15,900 units 3) 20,100 units 4) 24,300 units f. IPM Co. is considering closing down one of its divisions. The division presently has a contribution margin of €500,000. Overhead allocated to the division is €1,250,000, of which €125,000 cannot be eliminated. If this division were discontinued, by what amount would IPM’s pretax income increase? 1) €125,000
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This note was uploaded on 06/07/2011 for the course ACCT 101 taught by Professor None during the Spring '11 term at University of Illinois, Urbana Champaign.

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I-Rev6 - LESSON 6 Review material Review questions Question...

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