Question

In a reporting period where the company has no beginning inventory and manufactures more inventory than it sells, we expect:

a. Net Income to be the same under Variable and Absorption Costing.

b. Net Income to be unpredictable under Variable and Absorption Costing.

c. Net Income to be higher under Absorption Costing than Variable Costing.

d. Net Income to be higher under Variable Costing than Absorption Costing.

When finding the most profitable product mix in a situation where there is a limited (or constrained) resource, the decision should be based on

a. total manufacturing costs.

b. selling price.

c. profit per unit of limited resource.

d. profit per unit.

Answer 1

· Question #1
Correct Answer = Option ‘C’, When units produced are MORE than units sold, ‘Net Income to be higher under Absorption Costing than Variable Costing’.
This is because under Absorption costing, PART of fixed manufacturing overhead gets deferred in ending units, while in Variable costing, total fixed manufacturing overhead becomes the ‘period cost’.

· Question #2
Correct Answer = Option ‘C’
When there is a situation of ‘limited resource’, the decision is to be based on “Profit per unit of limited resource”.
That product is to be produced first that has ‘maximum’ contribution margin per unit of that limited resource.