CA Cost Accounting 5 — Questions and Answers
Question 1: The theory of constraints (TOC) focuses management attention on:
- Reducing all costs equally across the organization
- Identifying and exploiting the bottleneck that limits throughput (Correct answer)
- Maximizing the utilization of every resource simultaneously
- Implementing activity-based cost drivers in all departments
Correct answer: Identifying and exploiting the bottleneck that limits throughput
TOC holds that the constraint (bottleneck) limits the entire system's output; improving non-constraints yields no benefit until the bottleneck is addressed.
Question 2: Backflush costing is MOST suitable for companies that:
- Have long production cycles with significant WIP inventory
- Operate in job shops with unique custom orders
- Use JIT manufacturing with minimal WIP and rapid throughput (Correct answer)
- Need detailed cost tracking at each production stage
Correct answer: Use JIT manufacturing with minimal WIP and rapid throughput
Backflush costing delays cost assignment until production is complete (or sold), which is appropriate when WIP levels are negligible, as in JIT environments.
Question 3: Which transfer pricing method sets the price equal to the variable cost plus a lump-sum fixed-cost contribution?
- Market-based transfer price
- Cost-plus transfer price
- Dual-rate transfer price (Correct answer)
- Negotiated transfer price
Correct answer: Dual-rate transfer price
Dual-rate pricing charges the receiving division variable cost for marginal decisions while compensating the supplying division for fixed costs via a separate lump-sum, eliminating distortions.
Question 4: When evaluating a decision to drop a product line, the MOST relevant cost to consider is:
- Allocated corporate overhead that will be redistributed
- Avoidable fixed costs directly associated with the product line (Correct answer)
- Historical product development costs
- Depreciation on shared production equipment
Correct answer: Avoidable fixed costs directly associated with the product line
Only avoidable costs — those that will actually disappear if the product line is dropped — are relevant; allocated and sunk costs remain regardless of the decision.
Question 5: A company's product mix decision under a single binding constraint should maximize:
- Total gross profit per product
- Contribution margin per unit of constraining resource (Correct answer)
- Net income per unit sold
- Total revenue across all products
Correct answer: Contribution margin per unit of constraining resource
When one resource is scarce, the optimal mix maximizes contribution margin per unit of the constrained resource (e.g., per machine hour or labor hour).
Question 6: Life-cycle costing differs from traditional period costing because it:
- Focuses only on manufacturing costs incurred during production
- Tracks costs and revenues over the entire lifespan of a product from design to abandonment (Correct answer)
- Allocates costs based on activity cost drivers
- Ignores R&D and post-sale service costs
Correct answer: Tracks costs and revenues over the entire lifespan of a product from design to abandonment
Life-cycle costing accumulates all costs incurred from product conception through disposal, providing a complete picture of total profitability across the product's life.
Question 7: Target costing determines the allowable cost by:
- Adding a desired profit margin to the actual manufacturing cost
- Subtracting the desired profit from the market-determined selling price (Correct answer)
- Using the lowest competitor's cost as the benchmark
- Averaging historical costs over the past three years
Correct answer: Subtracting the desired profit from the market-determined selling price
Target cost = Target selling price (set by market) − Target profit; the company must then engineer the product to meet this cost constraint.
CA Cost Accounting 5
The theory of constraints (TOC) focuses management attention on: