When a Company Uses Absorption Costing, There Is the Potential

question 155

Multiple Choice

When a company uses absorption costing, there is the potential for income manipulation based on choice of the denominator volume for setting the fixed overhead allocation rate. In which case is this manipulation-potential manifested?

• A) When sales volume > production volume, and the production-volume variance is prorated to inventories and cost of goods sold at the end of the period.
• B) When sales volume < production volume, and the production-volume variance is prorated to inventories and cost of goods sold at the end of the period.
• C) When the production-volume variance is written off entirely as an adjustment to cost of goods sold at the end of the period.
• D) When budgeted output is used to develop the standard overhead cost-allocation rate.
• E) When production volume for the period equals sales volume.

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Definitions:

Measuring

The process of quantitatively determining the size, length, quantity, or capacity of something using defined units.

Objects

Items, things, or entities that can be seen, touched, or otherwise sensed.

Size Constancy

The tendency to perceive objects as being the same size even though the sizes of their images on the retina may differ as a result of distance.

Infants

Young babies, typically under one year of age, who are in the earliest stage of human life, characterized by rapid physical and cognitive development.