Cost Accounting Fundamentals Flashcards

Question 1

What is the difference between a direct cost and an indirect cost?

Accepted Answer

A direct cost can be traced to a specific cost object, such as a product or job, in an economically practical way. An indirect cost is shared by several cost objects and cannot be easily traced, such as factory rent or utilities, so it must be allocated using a reasonable method.

Question 2

What is a cost object in cost accounting?

Accepted Answer

A cost object is any item for which management wants a separate measurement of cost, such as a product, service, customer, project, department, or activity. Cost accounting assigns costs to cost objects so managers can compare what each one consumes. Choosing the right cost object depends on the decision being made.

Question 3

How do product costs differ from period costs?

Accepted Answer

Product costs are all costs incurred to make goods for sale, such as materials and factory labor. They stay in inventory until the goods are sold, then move to cost of goods sold. Period costs, such as marketing expenses and administrative salaries, are expensed immediately because they are not tied to making the product.

Question 4

What is manufacturing overhead and which costs does it include?

Accepted Answer

Manufacturing overhead includes all factory costs that are not direct materials or direct labor, such as factory rent, equipment depreciation, utilities for the plant, and supervisor salaries. These costs support production but cannot be easily traced to a single unit. They are applied to products using a predetermined overhead rate.

Question 5

What are the three elements of manufacturing cost?

Accepted Answer

The three elements of manufacturing cost are direct materials, direct labor, and manufacturing overhead. Direct materials are the raw inputs that become part of the finished product, such as wood in furniture. Direct labor is the wages of workers who physically transform those materials. Overhead covers every other factory cost that supports production.

Question 6

What does the term opportunity cost mean in cost accounting?

Accepted Answer

Opportunity cost is the benefit given up when one alternative is chosen over the next best alternative. It is not recorded in the accounting books because no cash changes hands, but it is essential for decisions. For example, unused warehouse space that could be leased has a rent opportunity cost.

Question 7

What is a relevant cost in a managerial decision?

Accepted Answer

A relevant cost is a future cost that differs between the alternatives being compared. Costs that are the same under every option, and costs already incurred in the past, do not affect the choice and can be ignored. Focusing on differences keeps decisions sound.

Question 8

Why do managers need cost information beyond standard financial statements?

Accepted Answer

Financial statements prepared for outside investors and lenders follow general reporting rules and summarize results for the whole company. Managers need more detailed cost information to set prices, choose product mixes, control spending, and judge the performance of departments or products. Cost accounting supplies this internal information, often organized by product, process, or activity.

Question 9

What is the difference between fixed costs and variable costs?

Accepted Answer

Fixed costs remain the same in total over a relevant range of activity, such as monthly rent or insurance premiums. Variable costs change in total in direct proportion to activity, such as materials used per unit produced. Fixed cost per unit falls as volume rises, while variable cost per unit stays constant.

Question 10

What is a mixed cost and how is it usually separated?

Accepted Answer

A mixed cost contains both a fixed component and a variable component, such as a utility bill with a base charge plus a charge per unit used. Analysts often separate it using the high-low method, which uses the highest and lowest activity levels. The fixed portion is the total cost minus the variable portion.

Question 11

How is contribution margin per unit calculated and what does it show?

Accepted Answer

Contribution margin per unit equals the selling price per unit minus the variable cost per unit. It shows how much each unit sold contributes toward covering fixed costs and then producing profit. For example, a product selling for 20 with variable cost of 12 has a contribution margin of 8 per unit.

Question 12

How is the break-even point in units calculated?

Accepted Answer

The break-even point in units equals fixed costs divided by the contribution margin per unit. At this volume, total revenue exactly equals total cost, so the operation earns neither a profit nor a loss. For fixed costs of 4,000 and a margin of 8, the break-even point is 500 units.

Question 13

What is the margin of safety and why does it matter?

Accepted Answer

The margin of safety is the amount by which actual or budgeted sales exceed the break-even sales level. It is often expressed as a dollar amount or a percentage of sales. A larger margin of safety means the business can absorb a drop in sales before it begins to lose money.

Question 14

What is the break-even point in sales dollars when the contribution margin ratio is known?

Accepted Answer

The break-even point in sales dollars equals fixed costs divided by the contribution margin ratio. The contribution margin ratio is contribution margin per unit divided by selling price per unit. With fixed costs of 4,000 and a ratio of 40 percent, the business must reach 10,000 in sales to break even.

Question 15

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

Accepted Answer

A higher selling price raises the contribution margin per unit, which lowers the number of units needed to break even, assuming variable costs and fixed costs stay the same. A lower price shrinks the contribution margin and raises the break-even volume. Managers should test price changes this way.

Question 16

What is the relevant range in cost behavior?

Accepted Answer

The relevant range is the span of activity over which a cost behaves in a predictable pattern and cost assumptions hold. Fixed costs may jump if activity moves beyond this range, for example when a new supervisor or facility is needed. Cost estimates should be used within the relevant range where they were developed.

Question 17

What is job order costing and when is it used?

Accepted Answer

Job order costing assigns costs to distinct batches or jobs that are each unique or customized, such as custom furniture or construction projects. Each job has its own cost sheet that accumulates direct materials, direct labor, and applied overhead. It suits businesses where products differ and costs must be tracked for each order.

Question 18

What is process costing and how does it differ from job order costing?

Accepted Answer

Process costing accumulates costs by department or production process over a period and assigns them to large numbers of identical or similar units. Costs are averaged across all units produced, rather than tracked job by job. It suits continuous production such as chemicals, flour, or paint, where units are indistinguishable from one another.

Question 19

What are equivalent units of production and why are they needed?

Accepted Answer

Equivalent units of production express partially completed work as a number of fully completed units. For example, 100 units that are 40 percent complete equal 40 equivalent units. They are needed so that costs incurred in a period can be fairly divided between finished units and units still in process at period end.

Question 20

What is the purpose of a production cost report in process costing?

Accepted Answer

A production cost report summarizes units to account for, equivalent units produced, costs to account for, and costs assigned to completed and in-process units. It provides a check that total costs incurred equal the costs transferred out plus the costs remaining in ending work in process. Reconciliation confirms no costs are lost or double counted.

Question 21

How is a predetermined overhead rate calculated and used?

Accepted Answer

A predetermined overhead rate equals estimated total overhead costs for the coming period divided by the estimated total amount of the allocation base, such as direct labor hours or machine hours. The rate is set before production begins. Applied overhead equals the rate multiplied by the actual allocation base used.

Question 22

How does applied overhead appear in the journal entries for job costing?

Accepted Answer

When overhead is applied, work in process inventory is debited and manufacturing overhead control is credited for the applied amount. This moves overhead from a clearing account into product cost. Actual overhead incurred is recorded separately as a debit to manufacturing overhead control, and the difference is later adjusted.

Question 23

What is a spoilage or waste in process costing and how is normal spoilage treated?

Accepted Answer

Normal spoilage is the unavoidable loss of units that occurs under efficient operating conditions, and its cost is absorbed by good units as part of product cost. Abnormal spoilage is loss beyond what is expected and is recorded as a separate loss rather than added to inventory. Separating the two keeps product costs accurate.

Question 24

Why does a company compute a cost per equivalent unit for each cost category?

Accepted Answer

Direct materials and conversion costs often enter production at different points, so their completion percentages differ. Computing a cost per equivalent unit separately for each category ensures that each cost is spread over the correct number of equivalent units. Adding the per-unit amounts gives the total cost per completed unit.

Question 25

What is a cost pool and what is an allocation base?

Accepted Answer

A cost pool is a group of overhead costs that share a common driver. An allocation base is the measure, such as machine hours or number of inspections, used to assign the pool's costs to cost objects. Choosing a base that reflects how costs are actually consumed improves accuracy.

Question 26

How does activity-based costing differ from traditional overhead allocation?

Accepted Answer

Activity-based costing traces overhead to activities, then assigns those activity costs to products using cost drivers that reflect how each product consumes the activities. Traditional allocation often spreads all overhead using one volume-based base such as direct labor hours. When products differ in complexity or batch size, activity-based costing usually gives more accurate product costs.

Question 27

What is a cost driver and why does choosing it matter?

Accepted Answer

A cost driver is a factor that causes a cost to rise or fall, such as the number of setups, orders processed, or machine hours. Good drivers have a strong cause-and-effect relationship with the costs they explain. Selecting a driver that does not truly cause the cost leads to distorted product costs.

Question 28

What is a cost hierarchy in activity-based costing?

Accepted Answer

A cost hierarchy classifies activity costs by the level at which the activity occurs. Common levels include unit-level activities, which vary with each unit produced, batch-level activities, which occur for each batch, product-level activities, which support each product line, and facility-level activities, which sustain the whole plant. Drivers should match each level.

Question 29

How is a departmental overhead rate different from a plantwide overhead rate?

Accepted Answer

A plantwide overhead rate applies all factory overhead using one rate for the entire facility, while a departmental rate uses a separate rate for each department. Departmental rates can better reflect differences in how departments consume overhead. Plantwide rates are simpler but can distort costs when departments differ widely.

Question 30

How are service department costs allocated to production departments?

Accepted Answer

Service department costs, such as those of maintenance, human resources, or information technology, are allocated to production departments. Common methods include the direct method, which assigns service costs straight to production departments, and the step-down method, which allocates service costs in a sequence. Allocation bases might include square footage or number of employees.

Question 31

Why might a company prefer the reciprocal method over the direct method for service costs?

Accepted Answer

The reciprocal method recognizes that service departments also provide services to one another, so their costs are fully allocated using simultaneous equations or iterative calculations. This gives more accurate results than the direct method, which ignores service-to-service support. The trade-off is greater computational complexity, which is easier to handle with spreadsheet software.

Question 32

What is the purpose of allocating overhead to products or departments?

Accepted Answer

Allocating overhead assigns shared indirect costs to products, services, or departments so that full costs can be compared with prices, revenues, and benchmarks. Without allocation, managers would see only the direct costs of each item and could underprice products that consume large shares of shared resources. Allocation supports pricing and inventory valuation.

Question 33

What is a standard cost and how does it differ from an actual cost?

Accepted Answer

A standard cost is a predetermined estimate of what a product or activity should cost under efficient operating conditions. It is based on expected quantities of materials and labor hours multiplied by expected prices and rates. Actual cost is what was spent, and comparing actual costs with standards reveals variances.

Question 34

How is the direct materials price variance calculated?

Accepted Answer

The direct materials price variance equals the actual quantity purchased multiplied by the difference between actual price and standard price per unit. An unfavorable variance means the company paid more than the standard price. It is often calculated at the time materials are purchased so managers can react quickly.

Question 35

How is the direct labor efficiency variance calculated?

Accepted Answer

The direct labor efficiency variance equals the difference between actual hours worked and standard hours allowed for actual output, multiplied by the standard labor rate. An unfavorable variance means workers took more hours than the standard allowed. Causes may include poor training, faulty equipment, or low-quality materials, so managers should investigate before assigning blame.

Question 36

What is a static budget and how does it differ from a flexible budget?

Accepted Answer

A static budget is set for one planned activity level and is not adjusted. A flexible budget shows expected costs at whatever activity level actually occurred, using fixed costs in total and variable costs per unit. Comparing actual results with a flexible budget gives a fairer performance evaluation because it removes volume effects.

Question 37

What is a sales volume variance and why is it separated from other variances?

Accepted Answer

A sales volume variance measures the effect on profit of selling more or fewer units than budgeted, valued at budgeted contribution margin per unit. It is separated from other variances so managers can tell whether a profit difference came from volume or from other causes. This helps assign responsibility.

Question 38

When should a company accept a special order at a price below its normal price?

Accepted Answer

A company may accept a special order when the price exceeds the variable costs of the order and the company has idle capacity, assuming no extra fixed costs arise. The order's incremental contribution margin should be positive. Managers must consider whether the order will affect regular sales or set a low price that customers expect.

Question 39

How should a company decide whether to make a component or buy it from a supplier?

Accepted Answer

The company compares the relevant costs of each option, which are the costs that differ between making and buying. Avoidable manufacturing costs, such as materials and direct labor, are compared with the purchase price, while unavoidable fixed overhead is excluded. If capacity freed by buying can earn additional contribution, that opportunity cost should be included.

Question 40

Why might a company keep a product line that shows a negative net income after allocations?

Accepted Answer

A product line can show a negative net income after allocated fixed overhead yet still contribute positively toward covering common fixed costs. If the line's revenues exceed its avoidable variable and direct fixed costs, dropping it would reduce profit because shared overhead would remain. Managers should judge continuation using relevant costs, not allocated ones.

Cost Accounting Fundamentals Flashcards

1Cost Terms and Classifications

2Cost Behavior and Break-Even Analysis

3Job, Process, and Equivalent Unit Costing

4Overhead Allocation and Activity-Based Costing

5Budgeting, Variances, and Decisions

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