Cost Accounting Applications Flashcards

Question 1

What is a variable cost, and how does its total change as activity volume rises?

Accepted Answer

A variable cost is a cost whose total amount rises and falls in direct proportion to activity volume, while the cost per unit stays constant within the relevant range. Direct materials and sales commissions are common examples. Total variable cost equals the cost per unit multiplied by the number of units produced or sold.

Question 2

What is a fixed cost, and why does its cost per unit change as output changes?

Accepted Answer

A fixed cost is a cost that remains the same in total over a relevant range of activity, regardless of output levels. Examples include rent, insurance, and straight-line depreciation. Because the total stays constant, the fixed cost per unit falls as more units are produced, so spreading overhead over more units lowers unit cost.

Question 3

What is a mixed cost, and why do managers separate it into fixed and variable parts?

Accepted Answer

A mixed cost contains both a fixed element and a variable element, such as a utility bill with a base monthly charge plus a usage charge. Managers separate it into these parts so they can predict total cost at different activity levels, prepare budgets, and make pricing or staffing decisions.

Question 4

What is the relevant range, and why must cost behavior assumptions be limited to it?

Accepted Answer

The relevant range is the band of activity levels over which cost behavior assumptions, such as a constant fixed cost or a constant variable rate, hold true. Outside that band, costs may change because of new facilities, added shifts, or price breaks. Estimates should always state their relevant range.

Question 5

What is a cost object, and what examples are commonly used in cost accounting?

Accepted Answer

A cost object is any item for which management wants a separate cost measurement, such as a product, a service, a customer, a department, or a project. Choosing the cost object comes first because every cost must be classified relative to it, whether as direct or indirect, and costing methods start there.

Question 6

What is the difference between direct costs and indirect costs in a product?

Accepted Answer

Direct costs can be traced conveniently and economically to a specific cost object, such as direct materials and direct labor on a product. Indirect costs are shared by several cost objects and cannot be traced cheaply, such as factory rent, utilities, and supervisor salaries. Indirect costs are therefore assigned through allocation.

Question 7

What is the difference between product costs and period costs?

Accepted Answer

Product costs are costs that attach to inventory as goods are manufactured, including direct materials, direct labor, and factory overhead, and they appear on the balance sheet until the goods are sold. Period costs, such as selling and administrative expenses, are expensed in the period incurred because they are not tied to producing goods.

Question 8

How does the high-low method estimate a mixed cost's fixed and variable components?

Accepted Answer

The high-low method estimates the variable rate by dividing the difference in total cost between the highest and lowest activity levels by the difference in those activity levels. Subtracting the variable cost from total cost gives the fixed portion. It uses only two data points, so results can be less accurate.

Question 9

What is job order costing, and what type of business typically uses it?

Accepted Answer

Job order costing accumulates costs separately for each distinct job, batch, or customer order, and it suits businesses that produce unique or customized products. Construction and custom furniture firms are typical examples. Each job has its own cost sheet, and unit cost is found by dividing total job cost by units in that job.

Question 10

What is a job cost sheet, and which costs does it record?

Accepted Answer

A job cost sheet is a record kept for each job that accumulates its direct materials, direct labor, and applied overhead. Materials and labor are traced from requisitions and time tickets, while overhead is applied using a predetermined rate. When the job is finished, the totals on the sheet give its full manufacturing cost.

Question 11

What is process costing, and when is it the more appropriate system?

Accepted Answer

Process costing accumulates costs by department or production process over a period, and it fits businesses that make large quantities of identical or homogeneous products. Examples include cement, paint, and bottled beverages. Costs are averaged across all units produced in the period, so unit cost equals total process cost divided by equivalent units.

Question 12

What are equivalent units, and why are they needed in process costing?

Accepted Answer

Equivalent units express partially finished work as a number of fully completed units to allow fair cost division. For example, 100 units that are 40 percent complete equal 40 equivalent units for conversion costs. Equivalent units are needed because ending work in process has already consumed some costs but is not yet finished.

Question 13

How does a predetermined overhead rate work in job costing?

Accepted Answer

A predetermined overhead rate is set before the period begins by dividing estimated total overhead by estimated total allocation base, such as direct labor hours. It is then multiplied by actual base usage on each job to apply overhead. This lets managers price jobs before actual overhead is known.

Question 14

What is over-applied overhead, and how is it usually closed at period end?

Accepted Answer

Over-applied overhead occurs when the overhead applied to production exceeds the actual overhead incurred during the period. It is commonly closed to Cost of Goods Sold when the amount is immaterial, or prorated among work in process, finished goods, and Cost of Goods Sold when it is material.

Question 15

How does the weighted average method differ from FIFO in process costing?

Accepted Answer

The weighted average method combines beginning inventory costs with current period costs and divides the total by equivalent units, so one blended unit cost applies to all units. FIFO keeps beginning work in process separate and counts only current period work. FIFO is more precise but more complex.

Question 16

What is normal spoilage in process costing, and how is it treated?

Accepted Answer

Normal spoilage is unavoidable loss of units that occurs under efficient operating conditions, and its cost is typically absorbed by good units as part of product cost. Abnormal spoilage is an unexpected loss beyond normal levels and is usually expensed as a period loss. Both must be identified because they are accounted for differently.

Question 17

What is activity-based costing, and how does it differ from traditional volume-based costing?

Accepted Answer

Activity-based costing assigns overhead to cost pools and then to products using activity drivers that reflect how each product consumes those activities. Traditional costing usually spreads overhead using a single volume measure, such as direct labor hours or machine hours, which can distort product costs when products differ in complexity or batch size.

Question 18

What is an activity cost pool, and how is it linked to a cost driver?

Accepted Answer

An activity cost pool is a group of overhead costs that relate to the same activity, such as setting up machines, inspecting parts, or moving materials. Each pool is linked to one cost driver, so all costs in the pool are assigned to products in proportion to their use of that driver.

Question 19

What is a unit-level activity, and how does it differ from a batch-level activity?

Accepted Answer

A unit-level activity is performed each time a single unit is produced, such as machine processing. A batch-level activity is performed once for each batch regardless of how many units the batch contains, such as machine setup. Batch-level costs therefore do not rise with units within a batch.

Question 20

How is a cost driver rate calculated in activity-based costing?

Accepted Answer

A cost driver rate is calculated by dividing the total cost in an activity pool by the total quantity of its cost driver, such as setup cost per setup. Each product is then charged the rate multiplied by its own driver quantity. This links overhead to products based on actual consumption.

Question 21

How can activity-based cost information change a company's pricing decisions for a product line?

Accepted Answer

Activity-based cost information can reveal that a complex, low-volume product consumes far more setup, inspection, and handling activity than its share of overhead suggests. Managers can then raise its price, redesign it to reduce activities, or reconsider whether to keep offering it. Accurate product costs help protect margins.

Question 22

What is the first-stage and second-stage allocation in activity-based costing?

Accepted Answer

The first stage assigns resource costs, such as salaries, utilities, and equipment depreciation, to activity cost pools. The second stage assigns the costs in each pool to products using cost driver rates. Together these two steps link resources to activities and activities to products.

Question 23

What is a value-added versus non-value-added activity, and why does ABC help identify them?

Accepted Answer

A value-added activity is one that increases the product's worth to the customer, such as cutting or assembling a part, while a non-value-added activity, such as moving materials or waiting, adds cost without adding customer value. ABC makes these costs visible by tracing them to activities, which helps managers reduce waste and streamline processes.

Question 24

What are the main advantages and limitations of activity-based costing?

Accepted Answer

Activity-based costing gives more accurate product costs, better insight into overhead drivers, and support for process improvement and pricing decisions. Its limitations include higher implementation and maintenance cost, the need for detailed activity data, and the difficulty of choosing and updating drivers. Many firms apply it selectively where distortion is largest.

Question 25

What is contribution margin, and how is it calculated from sales and variable costs?

Accepted Answer

Contribution margin is the sales revenue left after subtracting all variable costs, and it is available to cover fixed costs and profit. It is calculated as sales revenue minus total variable costs, or as price per unit minus variable cost per unit. Dividing by sales gives the contribution margin ratio.

Question 26

What is the break-even point in units, and what formula is used?

Accepted Answer

The break-even point in units is the sales volume at which total revenue equals total costs, so profit is zero. It is calculated by dividing total fixed costs by the contribution margin per unit. For example, fixed costs of 60,000 dollars with a 20 dollar contribution margin per unit gives 3,000 units.

Question 27

How is the break-even point in sales dollars calculated using the contribution margin ratio?

Accepted Answer

The break-even point in sales dollars equals total fixed costs divided by the contribution margin ratio, which is contribution margin divided by sales revenue. If the ratio is 40 percent and fixed costs are 60,000 dollars, break-even sales are 150,000 dollars. Multiplying break-even units by price gives the same result.

Question 28

What is the margin of safety, and how is it measured?

Accepted Answer

The margin of safety is the amount by which actual or budgeted sales exceed the break-even sales level, showing how far sales can fall before a loss occurs. It can be expressed in dollars or as a percentage of total sales. A larger margin of safety indicates lower operating risk.

Question 29

How does a target profit change the units needed for CVP analysis?

Accepted Answer

A target profit is added to fixed costs before dividing by contribution margin per unit. The formula is units equal fixed costs plus target profit, divided by contribution margin per unit. For example, 60,000 dollars of fixed costs plus 30,000 dollars of target profit, at 20 dollars per unit, requires 4,500 units.

Question 30

What does a CVP graph show, and what do the lines represent?

Accepted Answer

A cost-volume-profit graph plots total revenue and total cost against units sold. The revenue line starts at zero and rises with sales, while the total cost line starts at the fixed cost level and rises with variable costs. The point where the two lines cross is the break-even point.

Question 31

How does a change in selling price affect the break-even point?

Accepted Answer

A higher selling price increases the contribution margin per unit, so fewer units are needed to break even, while a lower price reduces contribution margin and raises the break-even volume. Fixed costs and variable cost per unit stay the same in this analysis. Managers use this to test pricing decisions before changing prices.

Question 32

What are the main assumptions behind basic CVP analysis?

Accepted Answer

Basic CVP analysis assumes that selling price, variable cost per unit, and total fixed costs remain constant within the relevant range. It also assumes that sales mix is stable when multiple products are sold, and that units produced equal units sold. Real results can differ when these assumptions do not hold.

Question 33

What is a relevant cost, and what two characteristics must it have?

Accepted Answer

A relevant cost is a future cost that differs among the alternatives being considered in a decision. To be relevant, a cost must occur in the future and must differ between the options. Past costs and costs that are the same under every option are not relevant.

Question 34

Why are sunk costs irrelevant to a decision?

Accepted Answer

Sunk costs are costs already incurred and cannot be recovered whatever choice is made now, so they do not differ among alternatives. Including them can lead to poor choices, such as continuing a failing project only because money was already spent. Decisions should focus on future cash flows that change with the choice.

Question 35

What is opportunity cost, and why must it be considered in a make-or-buy decision?

Accepted Answer

Opportunity cost is the benefit lost by choosing one alternative over the next best one, such as the contribution that factory space could earn in another use. In a make-or-buy decision, it is added to the cost of making the part, because the space could otherwise support other profitable work.

Question 36

How should a company decide whether to accept a special order at a lower price?

Accepted Answer

A special order should be accepted if its price exceeds the variable costs of producing those units and there is spare capacity with no lost sales elsewhere. The analysis compares incremental revenue with incremental costs, ignoring unchanged fixed costs. If capacity is limited, the lost contribution from displaced regular sales must also be subtracted.

Question 37

What is the key question in a keep-or-drop decision for a product line?

Accepted Answer

The key question is whether the line's contribution margin is positive, since fixed costs that would remain after dropping the line are not avoidable. Avoidable fixed costs, such as dedicated advertising, also matter. A line with positive contribution may still be worth keeping, even if it shows an accounting loss after allocations.

Question 38

What are joint costs, and why are they irrelevant to sell-or-process-further decisions?

Accepted Answer

Joint costs are costs incurred before the split-off point to produce two or more products at the same time. They are sunk at the split-off point, so they do not differ between the options and are irrelevant to that choice. Only costs incurred after split-off are compared with the added revenue.

Question 39

How should managers evaluate a make-or-buy decision when fixed costs are avoidable?

Accepted Answer

Managers should compare the purchase price with the avoidable costs of making the part, including variable costs and any fixed costs that would be eliminated by buying. Unavoidable fixed costs, such as factory rent that continues either way, are excluded. The option with the lower total relevant cost is usually preferred, all else equal.

Question 40

What is the role of qualitative factors in relevant costing decisions?

Accepted Answer

Qualitative factors are non-financial considerations, such as customer reaction, quality control, supplier reliability, and employee morale, that cannot be fully captured in cost figures. They should be weighed alongside the quantitative analysis rather than ignored. A decision that looks favorable on costs may still be rejected if a qualitative factor creates serious risk.

Cost Accounting Applications Flashcards

1Cost Behavior and Classification

2Job Order and Process Costing

3Activity-Based Costing Applications

4Cost-Volume-Profit Analysis

5Relevant Costing for Decisions

Learning Resources