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Questions CH 5 to 8 - QUESTIONS Chapters 5 8 Chapter 5 1 2...

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QUESTIONS Chapters 5 - 8 Chapter 5 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). Chapter 6 1. Indirect costs are allocated to (1) provide information for decision making, (2) reduce frivolous use of common resources, (3) encourage evaluation of internally provided services, and (4) calculate the “full cost” of products for GAAP reporting. 2. The statement is false. Cost allocation refers to the process of assigning indirect costs. Direct costs are traced to cost objects. Costs are allocated for a variety of reasons. It is not economically feasible to directly trace some costs to cost objects—these costs are classified as indirect costs and are allocated to the cost object via the use of an allocation base. 3. Charging for internal services can reduce frivolous use of resources and encourage departments being charged to critically evaluate the service. In addition,
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GAAP requires that all manufacturing costs be assigned to goods being produced. Thus, cost allocation of indirect manufacturing costs is required.
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