CBS Cost Accounting & Management 2 — Questions and Answers
Question 1: In a bankruptcy reorganization, which cost behavior classification is most critical when projecting whether a debtor can service post-confirmation obligations?
- Sunk costs
- Fixed vs. variable cost structure (Correct answer)
- Historical average costs
- Allocated overhead rates
Correct answer: Fixed vs. variable cost structure
Understanding fixed versus variable costs allows the trustee and court to project break-even points and sustainable cash flows under the reorganization plan.
Question 2: A company in Chapter 11 uses job-order costing. Under-applied overhead at year-end is typically disposed of by:
- Crediting Accounts Payable
- Debiting the reorganization estate account
- Adjusting Cost of Goods Sold or allocating among WIP, Finished Goods, and COGS (Correct answer)
- Writing it off as a post-petition administrative expense automatically
Correct answer: Adjusting Cost of Goods Sold or allocating among WIP, Finished Goods, and COGS
Under-applied overhead is normally closed to Cost of Goods Sold or prorated among WIP, Finished Goods, and COGS based on relative balances.
Question 3: A debtor's contribution margin ratio is 35% and fixed costs are $700,000. What is the break-even sales level?
- $245,000
- $1,000,000
- $2,000,000 (Correct answer)
- $700,000
Correct answer: $2,000,000
Break-even sales = Fixed Costs ÷ CM Ratio = $700,000 ÷ 0.35 = $2,000,000.
Question 4: Which costing method assigns only variable manufacturing costs to products and treats fixed overhead as a period cost?
- Absorption costing
- Activity-based costing
- Variable (direct) costing (Correct answer)
- Standard costing
Correct answer: Variable (direct) costing
Variable (direct) costing includes only direct materials, direct labor, and variable overhead in product cost, expensing fixed overhead immediately.
Question 5: In assessing a bankrupt manufacturer, the CBS specialist finds that direct labor is $30/unit, direct materials $50/unit, variable overhead $10/unit, and fixed overhead is $200,000 for 10,000 units. What is the absorption cost per unit?
- $90
- $110 (Correct answer)
- $120
- $100
Correct answer: $110
Absorption cost = $30 + $50 + $10 + ($200,000 ÷ 10,000) = $30 + $50 + $10 + $20 = $110.
Question 6: A bankruptcy trustee reviewing cost reports notices a large spending variance in the overhead budget. This variance arises from:
- Producing more units than budgeted
- Actual overhead costs differing from budgeted overhead costs (Correct answer)
- Actual hours differing from standard hours allowed
- Selling price changes post-petition
Correct answer: Actual overhead costs differing from budgeted overhead costs
The spending variance measures the difference between actual overhead incurred and the budgeted (flexible budget) overhead for actual hours worked.
Question 7: A debtor company's standard material cost is $5/lb and 3 lbs per unit; actual production used 3.2 lbs at $4.80/lb for 1,000 units. The material price variance is:
- $640 favorable (Correct answer)
- $640 unfavorable
- $600 favorable
- $1,000 unfavorable
Correct answer: $640 favorable
Price variance = (Standard price − Actual price) × Actual quantity = ($5.00 − $4.80) × 3,200 lbs = $0.20 × 3,200 = $640 favorable.
CBS Cost Accounting & Management 2
In a bankruptcy reorganization, which cost behavior classification is most critical when projecting whether a debtor can service post-confirmation obligations?