Absorption Costing
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CPA Auditing and Attestation (AUD) › Absorption Costing
Which of the following costs are included in product or inventoriable costs in an absorption costing system? Direct material, direct labor, and:
all overhead and all period expenses
all overhead
variable overhead
all overhead and selling expenses
Explanation
All overhead costs are included in product or inventoriable costs in an absorption system along with direct material and labor costs.
Many companies have made significant strides in reducing their inventories. Which of the following would be least likely to encourage managers to reduce inventory?
Using absorption costing
Using variable costing
Using throughput costing
Instituting a charge against the budget for managers based on the size of the inventory
Explanation
By using absorption costing managers have the least incentive to reduce the current amount of inventory.
In situations when management must decide on accepting or rejecting one time only special orders, where there is sufficient idle capacity, which one of the following is not relevant to the decision?
Variable costs
Direct costs
Absorption costs
Incremental costs
Explanation
Incremental costs are the only costs not relevant to the make or buy special order decision.
A cost that bears an observable and known relationship to a quantifiable activity base is a:
Indirect cost
Fixed cost
Target cost
Engineered cost
Explanation
An engineered cost bears an observable and known relationship to a quantifiable activity base.
Costs are allocated to cost objectives in many ways and for many reason. Which of the following is a purpose of cost allocation?
Measuring income and assets for external reporting
Evaluating revenue center performance
Aiding in variable costing for internal reporting
Implementing ABC
Explanation
Cost allocation is essential for measuring income and assets for external reporting.
Which of the following is another name for Activity Based Costing?
Transaction based costing
Absorption costing
Cost driver costing
Cost center costing
Explanation
When the cost driver is the number of transactions involved in a particular activity, ABC is referred to as transaction-based costing.