Question

True or false

1) companies that utilize an activity—based costing system are encouraged to utilize this costing system when preparing external financial statements so end users of the financial statements can see a more accurate reflection of how the company is performing.

2) in multi division companies with large payroll expense but small material expenses (such as legal firms), the best base to allocate common fixed expenses to the division is

A) not applicable

B) headcount (number of employees)

C) payroll expense

D) revenue

3) based on the following assumptions and financial information, select ALL the true statements.

Year 1. Year 2. Yr 3. Yr4

Production

In units. 4,000. 6,000. 8,000. 4,000

Sales

In units. 4,000. 3,000. 3,000. 11,000

1) selling price per unit, variable cost per unit and total fixed costs do not change during the four years.

2) there is no beginning inventory at year 1

______ A. The combined four year net operating income would be the same under variable and absorption costing.

______B. Because of the changes in production level, under absorption costing the unit product cost will change each year.

______C. Under variable costing, net operating income will be less in year 1 than in year 2.

_______D. Under absorption costing, net operating income will be the same in year 2 and year 3.

________E. Under variable costing, net operating income will be the same in year 2 and year 3.

Answer 1

1) Companies that utilize an activity—based costing system are encouraged to utilize this costing system when preparing external financial statements so end users of the financial statements can see a more accurate reflection of how the company is performing.

False. This is not the case as ABC costing helps Internal managers to make decisions.

2) In multi division companies with large payroll expense but small material expenses (such as legal firms), the best base to allocate common fixed expenses to the division is:

C) payroll expense.

3.

A. The combined four year net operating income would be the same under variable and absorption costing. True

B. Because of the changes in production level, under absorption costing the unit product cost will change each year. True

C. Under variable costing, net operating income will be less in year 1 than in year 2. False

D. Under absorption costing, net operating income will be the same in year 2 and year 3. False

E. Under variable costing, net operating income will be the same in year 2 and year 3. True