Question

1 For external reporting purposes, your company uses Absorption Costing with Actual Costing. For internal reporting purposes, your company uses Variable Costing with Standard Costing. Which of the following statements is FALSE?

A Direct Materials would be the same for external and internal reporting purposes.

B Direct Labor would be the same for external and internal reporting purposes.

C Manufacturing Overhead would be the same for external and internal reporting purposes.

D All of the above

2 When attempting to compute a single product cost amount, companies should NOT try to combine

A Variable Costing and Standard Costing

B Variable Costing and Activity-Based Costing

C Variable Costing and Normal Costing

D Variable Costing and Absorption Costing

3 Surfer Company builds custom surfboards. The actual amount of overhead incurred cannot be accurately measured until year end. Every surfboard consumes overhead activities in different proportions. Which of the following product costing methods do you recommend that Surfer Company use?

A actual costing

B normal costing

C all of the above

D none of the above

Answer 1

Solution:

Part 1 --- the correct option is C Manufacturing Overhead would be the same for external and internal reporting purposes

Under Absorption Costing, the overheads are charged based on the allocation base on predetermined basis.

Overhead under Actual Costing always differ from Absorption and Variable and Standard Costing since actual Absorption and Standard Costing uses predetermined overhead rate to allocate overhead.

Part 2 -- When attempting to compute a single product cost amount, companies should NOT try to combine --- the correct option is B Variable Costing and Activity-Based Costing.

Activity based costing is used to allocate the overheads to more than one product by taking the actual usage by each product. Since single product have all the activities involved only that single product there is no use to use variable and activity based costing to compute single product cost.

Part 3 --- The correct option is B. Normal Costing

The actual amount of overhead incurred cannot be accurately measured until year end.

So the overheads are charged on predetermined basis and taking a allocation base. Allocation base may be direct labor hour, machine hour, direct labor cost etc.

Normal Costing uses to allocate the overheads by using predetermined overhead rate and allocation base.

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