ABA Managerial & Cost Accounting 3 — Questions and Answers
Question 1: A manufacturer produces 10,000 units and sells 8,000. Under absorption costing versus variable costing, which statement is true?
- Absorption costing shows lower net income because fixed overhead is expensed immediately
- Absorption costing shows higher net income because some fixed overhead is deferred in ending inventory (Correct answer)
- Both methods produce identical net income when units produced equal units sold
- Variable costing shows higher net income because variable costs are lower
Correct answer: Absorption costing shows higher net income because some fixed overhead is deferred in ending inventory
When production exceeds sales, absorption costing defers some fixed overhead in ending inventory, resulting in higher net income than variable costing, which expenses all fixed overhead immediately.
Question 2: Which of the following is a characteristic of a relevant cost in decision-making?
- It is a sunk cost already incurred
- It differs between decision alternatives and will occur in the future (Correct answer)
- It is a fixed cost that does not change with volume
- It has been allocated from a cost pool
Correct answer: It differs between decision alternatives and will occur in the future
Relevant costs are future costs that differ between alternatives; sunk costs and costs identical across alternatives are irrelevant to the decision.
Question 3: A company's breakeven point in sales dollars is $500,000 and its contribution margin ratio is 40%. What are the company's total fixed costs?
- $125,000
- $200,000 (Correct answer)
- $300,000
- $500,000
Correct answer: $200,000
Fixed costs equal breakeven sales multiplied by CMR: $500,000 × 40% = $200,000.
Question 4: The term 'throughput costing' treats which costs as period costs?
- Only selling and administrative expenses
- All costs except direct materials (Correct answer)
- Direct labor and variable overhead only
- Fixed manufacturing overhead only
Correct answer: All costs except direct materials
Throughput costing (super-variable costing) treats all costs except direct materials as period costs, expensing them immediately rather than attaching them to inventory.
Question 5: In process costing using the weighted-average method, equivalent units are calculated by:
- Adding units completed to ending WIP equivalent units, then subtracting beginning WIP equivalent units
- Adding units completed to ending WIP equivalent units without adjusting for beginning WIP (Correct answer)
- Multiplying total units by the percentage of completion for all units
- Dividing total costs by the number of physical units started
Correct answer: Adding units completed to ending WIP equivalent units without adjusting for beginning WIP
The weighted-average method combines beginning WIP work already done with current period work, so equivalent units = units transferred out + (ending WIP × % complete), without removing beginning WIP work.
Question 6: Which variance is calculated as (Actual Quantity Purchased × Actual Price) minus (Actual Quantity Purchased × Standard Price)?
- Direct materials quantity variance
- Direct materials price variance (Correct answer)
- Direct labor rate variance
- Variable overhead spending variance
Correct answer: Direct materials price variance
The direct materials price variance isolates the effect of paying a different price than standard for the actual quantity of materials purchased.
Question 7: A segment should be eliminated if:
- Its contribution margin is positive and exceeds its avoidable fixed costs
- Its contribution margin is less than its avoidable fixed costs (Correct answer)
- Its allocated common fixed costs exceed its sales revenue
- It generates a net operating loss under full absorption costing
Correct answer: Its contribution margin is less than its avoidable fixed costs
A segment should be dropped only when the contribution margin it generates is insufficient to cover the fixed costs that can be avoided by eliminating the segment.
ABA Managerial & Cost Accounting 3
A manufacturer produces 10,000 units and sells 8,000.
Under absorption costing versus variable costing, which statement is true?