The Setup Cost Incurred in Preparing a Machine to Produce

question 26

Multiple Choice

The setup cost incurred in preparing a machine to produce a batch of product is an example of a

• A) fixed charge.
• B) random charge.
• C) sunk cost.
• D) variable cost.

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Definitions:

Variable Costing

A costing method in which variable manufacturing costs are included in product costs, while fixed manufacturing costs are treated as period costs.

Absorption Costing

An accounting method that assigns all manufacturing costs, both variable and fixed, to products, thereby impacting the inventory valuation on the balance sheet.

Net Operating Income

The profit a company makes from its operations, calculated as total revenue minus operating expenses, excluding taxes and interest.

Variable Costing

An accounting method that only includes variable production costs—direct materials, direct labor, and variable manufacturing overhead—in product costs.