Which of the following statements is true for a firm that uses "direct" (variable) costing? a....

Question:

Which of the following statements is true for a firm that uses "direct" (variable) costing?

a. Product costs include "direct" (variable) administrative costs.

b. Profits fluctuate with sales.

c. An idle facility variation is calculated by a direct cost system.

d. The cost of a unit changes because of changes in number of units manufactured.

Variable Costing:

Variable costing is a method of assigning costs to products. Under this costing method product costs include direct materials, direct labor, and variable manufacturing overhead. Fixed costs and administrative costs are ignored, and the product cost per unit remains fixed as activity fluctuates.

Answer and Explanation:

Choice True/False Explanation
a. Product costs include "direct" (variable) administrative costs. False Only variable manufacturing costs are considered. Administrative costs are ignored.
b. Profits fluctuate with sales. True As sales increase, so do profits, and vice-versa
c. An idle facility variation is calculated by a direct cost system. False This variance is calculated by multiplying the difference between actual and anticipated facility use.
d. The cost of a unit changes because of changes in number of units manufactured. False Since fixed costs are not part of the product cost, the cost per unit does not change as activity changes.

The correct answer is b. Profits fluctuate with sales.


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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