Cost Accounting Management Flashcards

Question 1

What is a cost object in cost accounting?

Accepted Answer

A cost object is anything for which management wants a separate measure of cost, such as a product, department, customer, or project. Managers assign costs to cost objects to price products, evaluate performance, and make decisions. Selecting the cost object comes first, because it determines how costs are traced or allocated.

Question 2

What is the difference between direct costs and indirect costs?

Accepted Answer

Direct costs can be traced easily and economically to a specific cost object, such as direct materials and direct labor used in a particular product. Indirect costs cannot be traced conveniently to one cost object, so they are spread across several objects using an allocation base. Factory rent and supervisor salaries are indirect costs.

Question 3

What are product costs and how do they differ from period costs?

Accepted Answer

Product costs are all costs incurred to acquire or make inventory, including direct materials, direct labor, and manufacturing overhead. They are held in inventory until the goods are sold, then become cost of goods sold. Period costs, such as selling and administrative expenses, are expensed in the period incurred.

Question 4

What is opportunity cost and why does it matter in decisions?

Accepted Answer

Opportunity cost is the benefit given up by choosing one alternative over the next best alternative. It is not recorded in the accounting ledger because no cash changes hands, but it is essential in decisions. For example, using a machine to make one product means losing the contribution it could earn from another product.

Question 5

What is a sunk cost, and should it affect future decisions?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered regardless of the choice made now. Sunk costs should not affect future decisions, because only relevant future cash flows that differ between alternatives matter. Managers who consider sunk costs risk throwing good money after bad.

Question 6

What is a relevant cost in managerial decision making?

Accepted Answer

A relevant cost is a future cost that differs among the alternatives being considered. Costs that are the same under every option, and costs already incurred, are irrelevant and can be ignored. Relevance is judged by the decision at hand, not by whether a cost is large or familiar.

Question 7

What is the cost of goods manufactured, and how is it calculated?

Accepted Answer

Cost of goods manufactured is the total production cost of goods completed during a period. It equals beginning work in process plus total manufacturing costs incurred during the period, minus ending work in process. This figure flows into finished goods, and later into cost of goods sold.

Question 8

What is a cost driver and why does it matter?

Accepted Answer

A cost driver is a factor that causes a cost to change in total, such as machine hours, setups, or number of orders. Choosing a driver that closely tracks how resources are consumed produces more accurate product costs. Cost drivers are central to activity-based costing.

Question 9

What is a variable cost, and how does it behave in total and per unit?

Accepted Answer

A variable cost changes in total in direct proportion to changes in activity volume. Its total rises and falls with output, while the cost per unit stays constant within the relevant range. Direct materials and sales commissions are common examples of variable costs.

Question 10

What is a fixed cost, and how does it behave per unit?

Accepted Answer

A fixed cost remains the same in total over a relevant range of activity, regardless of output level. Because the total does not change, the fixed cost per unit falls as volume increases. Examples include rent, straight-line depreciation, and annual insurance premiums.

Question 11

How can managers separate a mixed cost into fixed and variable parts?

Accepted Answer

The high-low method is a simple way to split a mixed cost. Use the highest and lowest activity levels to compute the variable rate per unit, dividing the cost change by the activity change. Then subtract total variable cost from total cost to find the fixed portion. Outliers can distort it.

Question 12

What is contribution margin and how is it used?

Accepted Answer

Contribution margin is sales revenue minus all variable costs, leaving the amount that contributes to covering fixed costs and profit. It can be expressed in total, per unit, or as a percentage of sales. Managers use it to judge which products add the most to profit when capacity is limited.

Question 13

How does a step cost differ from a fixed cost?

Accepted Answer

A step cost stays fixed over a narrow range of activity but jumps to a new level when activity crosses a threshold. A fixed cost remains constant across the entire relevant range. Supervisor salaries are a common example, since one supervisor may oversee a set number of workers before another is needed.

Question 14

What is the relevant range, and why is it important?

Accepted Answer

The relevant range is the band of activity over which cost assumptions, such as fixed and variable behavior, hold true. Cost estimates should not be used outside that band, because fixed costs may step up and variable rates may change. Stating the relevant range keeps cost models credible and prevents misleading predictions.

Question 15

Why do managers classify costs by behavior rather than by function?

Accepted Answer

Classifying costs by behavior shows how total costs will respond when activity rises or falls, which is essential for planning. Functional classification, such as manufacturing or selling, describes where costs occur but not how they move. Behavior-based categories support budgeting, break-even analysis, and short-term pricing decisions.

Question 16

What is a committed fixed cost versus a discretionary fixed cost?

Accepted Answer

Committed fixed costs, such as depreciation on buildings and salaries of top management, arise from owning capacity and are hard to reduce quickly. Discretionary fixed costs, such as advertising and research, are set by management each period and can be adjusted. Both stay constant in total, but discretionary costs are easier to cut.

Question 17

What is a job order costing system and what kinds of firms use it?

Accepted Answer

A job order costing system accumulates costs for each distinct job, batch, or customer order. It suits businesses that produce unique or custom products, such as furniture built to order, printing jobs, or construction projects. Each job has its own cost sheet that records materials, labor, and applied overhead.

Question 18

What is a process costing system and when is it used?

Accepted Answer

A process costing system accumulates costs by department or production process over a period, then averages them across all units produced. It is used for homogeneous products made in continuous flow, such as chemicals, paint, or food. Equivalent units of production are needed when work in process remains at period end.

Question 19

How are equivalent units of production calculated for partially completed work?

Accepted Answer

Equivalent units convert partially completed units into the number of whole units that would have been completed with the same effort. Multiply the number of partially finished units by their percentage of completion for each cost category. Materials and conversion costs often have different completion percentages, so each is computed separately.

Question 20

What is the difference between actual costing and normal costing?

Accepted Answer

Actual costing assigns direct materials, direct labor, and overhead to jobs or products using actual costs incurred. Normal costing uses actual direct costs but applies overhead using a predetermined rate, so product costs are available promptly. Normal costing avoids waiting for actual overhead totals, which can fluctuate with monthly activity.

Question 21

What is a predetermined overhead rate and how is it calculated?

Accepted Answer

A predetermined overhead rate is an estimated rate set before the period begins, used to apply overhead to jobs or products. It equals estimated total overhead costs divided by the estimated total of the allocation base, such as direct labor hours. Applied overhead equals the rate times the actual base used by each job.

Question 22

What is the meaning of overapplied and underapplied overhead?

Accepted Answer

Overapplied overhead occurs when applied overhead exceeds actual overhead incurred during the period. Underapplied overhead occurs when actual overhead exceeds the amount applied to production. At period end, the difference is closed to cost of goods sold or prorated among inventory and cost of goods sold.

Question 23

Why should costing systems be selected based on the production environment?

Accepted Answer

Costing systems are chosen to match how products are made, because the system must trace costs in a way that reflects the production environment. Job costing fits unique, custom work, while process costing fits uniform, high-volume output. Selecting the wrong system distorts product costs and leads to poor pricing decisions.

Question 24

What is spoilage and how is normal spoilage treated?

Accepted Answer

Spoilage refers to units that do not meet quality standards and are discarded or sold for little value. Normal spoilage is expected under efficient operations and is treated as a product cost, included in good units. Abnormal spoilage is unexpected and is recorded as a separate loss, not added to inventory.

Question 25

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

Accepted Answer

Activity-based costing traces overhead to products through activities, using cost drivers that reflect how each activity consumes resources. Traditional costing spreads overhead across products using a single volume-based driver, such as direct labor hours. ABC often produces more accurate costs when products differ widely in complexity or batch size.

Question 26

What are the steps in implementing activity-based costing?

Accepted Answer

First, identify the major activities and assign overhead costs to each activity pool. Second, select a cost driver for each pool that reflects resource consumption. Third, compute an activity rate by dividing pool costs by driver volume, then assign costs to products using the actual driver usage of each product.

Question 27

Why might a plantwide overhead rate distort product costs?

Accepted Answer

A plantwide rate applies one overhead rate to all products, so it assumes every product consumes overhead in the same proportion to the base. When products differ in setups or inspections, a single rate shifts costs from complex products to simple ones. This distortion can lead to poor pricing and product mix choices.

Question 28

What is the difference between unit-level and batch-level activities?

Accepted Answer

Unit-level activities occur each time a unit is produced, such as machine hours or direct materials handling per unit. Batch-level activities occur each time a batch is run, such as machine setups, purchase orders, or inspections of a batch. Product-sustaining and facility-level activities support a product line or the whole facility.

Question 29

How does ABC help with customer profitability analysis?

Accepted Answer

Activity-based costing can reveal that customers who order frequently, in small quantities, or need special handling consume far more overhead than their revenue suggests. Assigning costs by activity lets managers measure each customer's true profitability. Unprofitable customers may be repriced, served differently, or dropped after the analysis.

Question 30

How does activity-based management differ from activity-based costing?

Accepted Answer

Activity-based costing is a costing method that assigns overhead to products, customers, and services through activities. Activity-based management uses the same activity information to improve operations, reduce non-value-added work, and guide strategic decisions. ABC provides the cost data, while ABM acts on it.

Question 31

Why have overhead costs grown in importance in modern manufacturing?

Accepted Answer

Automation, product variety, and support functions such as engineering, quality control, and scheduling have shifted costs from direct labor to overhead. As direct labor shrank as a share of total cost, a labor-based overhead rate became a poor allocation base. This shift is a main reason activity-based methods were developed.

Question 32

What are service department costs and how are they allocated?

Accepted Answer

Service department costs, such as human resources, maintenance, and information technology, support production departments but do not make products directly. They are allocated to production departments using a driver such as headcount, machine hours, or square footage. Direct, step-down, and reciprocal methods differ in how fully they recognize services provided among service departments.

Question 33

What is a standard cost, and how is it used?

Accepted Answer

A standard cost is a predetermined estimate of what a product or activity should cost under efficient operating conditions. Managers use standards to set budgets, evaluate performance, and control costs by comparing actual results against them. Standards are usually split into quantity and price components for analysis.

Question 34

What is a variance, and what does a favorable variance mean?

Accepted Answer

A variance is the difference between actual results and the standard or budgeted amount. A favorable variance means actual cost was lower than standard, or actual revenue was higher than planned, which increases profit. An unfavorable variance has the opposite effect and calls for investigation, not automatic blame.

Question 35

How are the materials price variance and materials quantity variance calculated?

Accepted Answer

Materials price variance equals the actual quantity purchased multiplied by the difference between actual and standard price per unit. Materials quantity variance equals the standard price multiplied by the difference between actual and standard quantity used for actual output. Together they explain the total direct materials variance.

Question 36

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

Accepted Answer

A flexible budget adjusts planned costs to the actual activity level achieved, showing what costs should have been at that volume. A static budget stays fixed at the originally planned volume, so comparing it with actual results mixes volume effects with spending effects. Flexible budgets give a fairer basis for evaluating cost control.

Question 37

How does cost-volume-profit analysis determine the break-even point?

Accepted Answer

Break-even sales in units equals total fixed costs divided by contribution margin per unit. The contribution margin is the selling price minus variable cost per unit, so each unit sold covers part of fixed costs. Once break-even is passed, each additional unit adds its contribution margin to operating profit.

Question 38

How do managers decide whether to make or buy a component?

Accepted Answer

Managers compare the relevant costs of making the component in-house with the purchase price from an outside supplier. Relevant costs include avoidable variable costs and any avoidable fixed costs, while unavoidable overhead is excluded. If the company has idle capacity, its opportunity cost is often zero, which favors making the item.

Question 39

What is a special order decision, and when should a company accept one?

Accepted Answer

A special order is a one-time request, often at a price below normal, that uses spare capacity. Accept it when the price exceeds variable costs and no regular sales are lost or other opportunity cost arises. Unchanged fixed costs are not relevant to the decision.

Question 40

How does target costing work when designing a new product?

Accepted Answer

Target costing starts with the price customers will pay, subtracts the desired profit margin, and derives the allowable cost for the product. Design teams then work to close any gap between allowable cost and estimated cost before production begins. It shifts cost control to the design stage, where most costs are locked in.

Cost Accounting Management Flashcards

1Cost Concepts and Terminology

2Cost Behavior and Classification

3Job, Process, and Normal Costing

4Activity-Based Costing and Overhead

5Standard Costs and Managerial Decisions

Learning Resources