Variable vs Fixed Costs
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CPA Auditing and Attestation (AUD) › Variable vs Fixed Costs
A cost that is fixed per unit is an example of a:
Variable cost
Fixed cost
Mixed cost
Direct cost
Explanation
A variable cost is one that varies in total but is fixed per unit.
There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate method is considered to be:
The regression analysis method
The account analysis method
The high-low method
The engineering method
Explanation
The most accurate method and method mentioned within the AICPA text is the regression analysis method.
An example of an internal failure cost is:
Inspection
Product recalls
Maintenance
Rework
Explanation
Rework is an internal failure cost.
Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?
When production equals sales, absorption costing income is greater than variable costing income.
When production is greater than sales, absorption costing income is greater than variable costing income.
When production equals sales, absorption costing income is less than variable costing income.
When production is less than sales, absorption costing income is greater than variable costing income.
Explanation
When production is greater than sales, absorption costing income is greater than variable costing income.
Using the variable costing method, which of the following costs are assigned to inventory?
A: Variable selling and admin costs B: Variable factory overhead costs
Both
A
B
Neither
Explanation
Under variable costing, only the variable manufacturing costs are assigned to inventory.
Which of the following would be classified as a fixed cost?
Annual warehouse insurance
Direct materials
Both
Neither
Explanation
No matter how much production occurs at the warehouse each year, insurance will remain fixed whereas the more production, the more direct materials cost.