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ttps://newconnect.mheducation.com/flow/connect.html Saved sive Final 6 Indicate whether each of the following statements is true or false In a period when finished goods decreases, use of absorption costing results in higher net income than variable costing Direct materials and direct labor usually behave as variable costs. Generally accepted accounting principles allow a company to use either variable or absorption costing for external financial reporting Under absorption costing, fixed manufacturing costs are expensed in the period incurred. Increasing the number of units produced during a period increases net income under absorption costing because the cost of goods sold decreases

Solution

True and False

1

In a Period when finished goods decreases, use of Absorption costing results in higher net Income than Variable Costing.

FALSE

2

Direct Material and Direct Labor usually behave as a Variable cost

TRUE

3

GAAPs allow a company to use either Variable or Absorption costing for External Financial Reporting.

FALSE

4

Under Absorption Costing Fixed manufacturing cost are expressed in the period incurred.

FALSE

5

Increasing the number of units produced during a period increases net income under absorption costing because Cost of Goods sold Decreases.

TRUE

Explanation

1

Use of Absorption costing always gives higher profit in comparison to Variable Costing because whatever the Closing inventory is, some portion of Fixed manufacturing overhead is absorbed by finished inventory in Absorption costing. The increase or decrease of finished goods will not matter. Although results will be same if there is zero opening and closing stock.

2

Direct material and direct labor are variable costs. Material is consumed according to units produced and similarly direct labor is paid for units produced. Although Indirect labor behaves like a fixed cost.

3

GAAPs allow accrual Accounting system which is Absorption costing. It does not allow Variable costing system because of marching principle.

4

Under absorption costing fixed manufacturing cost is distributed into all units produced including unsold units. Fixed Manufacturing cost is shown in the period incurred in variable costing only.

5

This is because with more production, more fixed cost will be absorbed in Closing Finished inventory and Cost of Goods sold will decrease.

1	In a Period when finished goods decreases, use of Absorption costing results in higher net Income than Variable Costing.	FALSE
2	Direct Material and Direct Labor usually behave as a Variable cost	TRUE
3	GAAPs allow a company to use either Variable or Absorption costing for External Financial Reporting.	FALSE
4	Under Absorption Costing Fixed manufacturing cost are expressed in the period incurred.	FALSE
5	Increasing the number of units produced during a period increases net income under absorption costing because Cost of Goods sold Decreases.	TRUE