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Unformatted text preview: MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 12 VARIABLE COSTING I. Questions 1. The variable costing technique does not consider fixed costs as unimportant or irrelevant, but it maintains that the distinction between behaviors of different costs is crucial for certain decisions. 2. The central issue in variable costing is what is the proper timing for release of fixed manufacturing overhead as expense: at the time of incurrence, or at the time the finished units to which the fixed overhead relates are sold. 3. Direct costing would be more accurately called variable or marginal costing because in substance it is the inventory costing method which applies only variable production costs to product; fixed factory overhead is not assigned to product. 4. Marketing and administrative costs are treated as period costs under both variable costing and absorption costing methods of product costing. 5. Under absorption costing, as a company manufactures units of product, the fixed manufacturing overhead costs of the period are added to the units, along with direct materials, direct labor, and variable manufacturing overhead. If some of these units are not sold by the end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period as part of their inventory cost. When the units carried over as inventory are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that periods cost of goods sold. 6. Many accountants and managers believe absorption costing does a better job of matching costs with revenues than variable costing. They argue that all manufacturing costs must be assigned to products to properly match the costs of producing units of product with the revenues from the units when they are sold. They believe that the fixed costs of depreciation, taxes, insurance, supervisory salaries, and so on, are just as essential to manufacturing products as are the variable costs. 12-1 Chapter 12 Variable Costing 7. If fixed manufacturing overhead cost is released from inventory, then inventory levels must have decreased and therefore production must have been less than sales. 8. Under absorption costing it is possible to increase net operating income without increasing sales by increasing the level of production. If production exceeds sales, units of product are added to inventory. These units carry a portion of the current periods fixed manufacturing overhead costs into the inventory account, thereby reducing the current periods reported expenses and causing net operating income to rise....
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- Spring '11