When a Long-Term Contract Is Indexed for Inflation, Then

question 73

Multiple Choice

When a long-term contract is indexed for inflation, then:

• A) prices or wages in the contract are automatically adjusted periodically based on the inflation rate.
• B) inflation has no impact on the nominal prices in the contract.
• C) the quantity of sales is adjusted automatically by the percentage change in prices.
• D) taxes are reduced to offset profit reductions due to inflation.

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Definitions:

Direct Labor Cost

The total amount of money a company spends on wages for employees who are directly involved in the manufacturing of products or providing services.

Absorption Costing

An accounting method that includes both variable and fixed manufacturing costs in the cost of a product.

Net Operating Income

The profit realized from a business's operations after subtracting operating expenses but before deducting taxes and interest.

Variable Costing

A cost accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs and treats fixed manufacturing overhead as a period expense.