Question

1. Which of the following is not a method to mitigate the incentive to overproduce in an absorption costing system?
   A. Charge managers inventory holding costs
   B. Evaluate managers on residual income
   C. Require senior management approval for all inventory purchases
   D. Institute a Just-in-time (JIT) production system
   
2. Which of the following statements about variable costing systems is true?
   A. Variable overhead costs are treated as period costs
   B. Fixed overhead costs are treated as product costs
   C. Only direct materials and direct labor are included in total cost
   D. Fixed overhead costs are treated as period costs
   
3. Which of the following is not a category of cost driver in an Activity-Based Costing system?
   A. Unit level
   B. Departmental level
   C. Batch level
   D. Product level
   
4. Which of the following is not an advantage of an Activity-Based Costing system?
   A. Improved understanding of how products consume activities
   B. Easy to implement and explain
   C. Focuses cost control on the activity level
   D. Improved understanding of the direct and indirect costs of activity centers

Answer 1

1. Option C, Require senior management approval for all inventory purchases, The Management uses the methods mentioned in option A, B, D to mitigate overproduction in absorption costing. Getting approval from senior management does not serve the purpose to mitigate overproduction

2. Option D, Variable Costs are known as product costs as they change with the level of production, Fixed costs are known as period costs because we incur them over the time irrespective of production.

3. Option B,  The Activity Based costing is used to allocate several indirect costs to products based on the activities involved in the production of the specific product, hence Department level is not a category in ABC costing system

4. Option C, ABC can be more complex to explain to the stakeholders of the costing exercise.