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Management Accounting

Willie Seal, University of Essex, UK
Ray Garrison, Brigham Young University, Provo, Utah, USA
Eric Noreen, INSEAD, France

Income reporting under Variable Costing and Absorption Costing

Self-test Questions


1	Consider the following data: Direct Material = £4 per unit Direct Labour = £2 per unit Variable Overhead = £1 per unit Total Fixed overheads = £10,000 Number of units produced = 2,500 units Under variable costing the variable cost per unit is: (Learning Objective 1 Ch 6)
		A)	£11
		B)	£6
		C)	£7
		D)	£9


2	Consider the following data: Direct Material = £4 per unit Direct Labour = £2 per unit Variable Overhead = £1 per unit Total Fixed overheads = £10,000 Number of units produced = 2,500 units Under variable costing the absorption cost per unit is (Learning Objective 1 Ch 6)
		A)	£11
		B)	£6
		C)	£7
		D)	£9


3	Which one of the following items will not affect the reconciliation of profit calculated under the Absorption or Variable Costing methods (Learning Objective 3 Ch 6)
		A)	Stock levels
		B)	Sales
		C)	Production
		D)	Sales commission


4	Which of the following is not an advantage of Variable Costing (Learning Objective 5 Ch 6)
		A)	Easy to calculate
		B)	Not affected by stock levels
		C)	Better for decision making
		D)	Can be useful for financial accounts as well


5	One of the following is not an advantage of Absorption Costing (Learning Objective 5 Ch 6)
		A)	Takes account of all production costs in stock valuation
		B)	Can be used for financial accounts a well
		C)	Reveals clearly the cost of selling one more item
		D)	Under/Over absorption is clearly shown


6	JIT has the following affect on the reconciliation of profit calculated under the Absorption or Variable Costing methods (Learning Objective 6 Ch 6)
		A)	The difference between the profits will increase
		B)	The difference between the profits will reduce
		C)	The Absorption Costing accounts become meaningless
		D)	The Variable Costing accounts become meaningless


7	Under Absorption Costing accounting, when stock increases profits will be Learning Objective 2/4 Ch 6
		A)	Greater than under Variable Costing accounts
		B)	Smaller than under Variable Costing accounts
		C)	The same
		D)	We can’t tell


8	Under Variable Costing accounting, when stocks decrease profits will be Learning Objective 2/4 Ch 6
		A)	Greater than under Absorption Costing accounts
		B)	Smaller than under Absorption Costing accounts
		C)	The same
		D)	We can’t tell


9	When opening stock is the same as closing stock Learning Objective 2/4 Ch 6
		A)	Variable Costing profit > Absorption Costing profit
		B)	Absorption Costing profit > Variable Costing profit
		C)	Absorption Costing profit = Variable Costing profit
		D)	We can’t tell

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