21.Absorption costing is useful because it reflects the full costs that sales must exceed for the company to be profitable.
22.The traditional income statement format used for financial reporting is called the contribution margin format.
23.If a company has excess capacity, increases in production level will increase variable production costs but not fixed production costs.
24.Fixed costs change in the short run depending upon management's decision to accept or reject special orders.
25.Variable costing separates the variable costs from fixed costs and therefore makes it easier to identify and assign control over costs.
26.A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.
14,000/.7 - 14,000 = 6,000 unit capacity remaining
Per unit variable costs = $2 DM + $4 DL + $1.50 VOH = $7.50
Per unit incremental income = $10.00 - $7.50 = $2.50
27.A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.
28.Absorption costing is usually used for internal management purposes, and variable costing is usually used for external reporting purposes.
29.During a given year if a company produces and sells the same number of units, then beginning inventory units equal ending inventory units.
30.During a given year, if a company produces more units than it sells, then ending inventory units will be less than beginning inventory units.