Spot the false line in each set

Exercise and reference answers

Questions

1. False statement

   When more units are made than sold, variable costing reports the higher operating income.

   Statements

   1. When units made equal units sold, both methods report the same operating income.
   2. When fewer units are made than sold, absorption costing reports the lower operating income.
   3. When more units are made than sold, variable costing reports the higher operating income.

2. False statement

   Under variable costing, fixed factory overhead sits in inventory until the goods are sold.

   Statements

   1. Under variable costing, fixed factory overhead sits in inventory until the goods are sold.
   2. Under absorption costing, fixed factory overhead is expensed only when the product is sold.
   3. Under variable costing, fixed factory overhead is expensed in the period it is incurred.

3. False statement

   Fixed production costs appear above the contribution margin line.

   Statements

   1. Manufacturing margin takes the place of gross profit under variable costing.
   2. Fixed production costs appear above the contribution margin line.
   3. Variable selling costs are deducted before contribution margin is struck.

4. False statement

   The number of units made drives operating income under variable costing.

   Statements

   1. Changes in inventory leave operating income untouched under variable costing.
   2. Operating income changes with the inventory balance under absorption costing.
   3. The number of units made drives operating income under variable costing.

Instructions

Three statements, one of them is wrong. Tap the wrong one.

Explanation