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:

Preponderantly Conforming

A legal term used to describe goods that substantially meet the specifications or requirements outlined in a contract, despite minor discrepancies.

Uniform Commercial Code

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Restatement of Contracts

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