CBS Cost Accounting & Management 3 — Questions and Answers
Question 1: In a liquidating Chapter 7 bankruptcy, which cost concept is most relevant when deciding whether to complete work-in-process inventory before selling?
- Standard cost variance
- Incremental (differential) cost analysis (Correct answer)
- Full absorption costing
- Overhead efficiency variance
Correct answer: Incremental (differential) cost analysis
Incremental cost analysis compares the additional costs to complete WIP against the higher proceeds from selling finished goods versus scrap.
Question 2: Activity-based costing (ABC) differs from traditional costing in bankruptcy analysis primarily because ABC:
- Ignores fixed costs entirely
- Assigns overhead using multiple cost drivers tied to activities (Correct answer)
- Is required by GAAP for Chapter 11 companies
- Eliminates the need for a predetermined overhead rate
Correct answer: Assigns overhead using multiple cost drivers tied to activities
ABC uses multiple activity cost drivers (e.g., machine setups, orders processed) to more accurately trace overhead costs to products or services.
Question 3: A debtor's operating leverage factor is 4. If sales increase 10%, operating income will increase by approximately:
- 4%
- 10%
- 40% (Correct answer)
- 14%
Correct answer: 40%
Operating leverage factor × % change in sales = 4 × 10% = 40% increase in operating income.
Question 4: When a CBS specialist evaluates whether a debtor's pricing is below cost, which cost floor concept prevents long-run viability concerns?
- Sunk cost floor
- Full cost (absorption cost) floor (Correct answer)
- Marginal revenue floor
- Discretionary cost ceiling
Correct answer: Full cost (absorption cost) floor
Long-run sustainable pricing must cover full absorption cost (including fixed overhead allocation) to ensure all costs are recovered over time.
Question 5: Process costing calculates cost per equivalent unit. If a department has 5,000 units 60% complete and 10,000 fully completed units, what are the equivalent units for conversion costs?
- 15,000
- 13,000 (Correct answer)
- 12,000
- 10,000
Correct answer: 13,000
Equivalent units = 10,000 (complete) + (5,000 × 60%) = 10,000 + 3,000 = 13,000.
Question 6: A reorganizing debtor wants to discontinue a product line. The relevant costs in this decision are:
- All historical costs of the product line
- Only future avoidable costs and lost revenues (Correct answer)
- Allocated corporate overhead that will be reallocated
- Depreciation on fully paid equipment
Correct answer: Only future avoidable costs and lost revenues
Relevant costs are future, avoidable costs—those that will be eliminated if the segment is dropped—along with any avoidable revenues.
Question 7: A joint cost allocation method that is most commonly defended for legal purposes (e.g., creditor disputes over intercompany pricing) because it mirrors market realities is the:
- Physical quantity method
- Net realizable value (NRV) method (Correct answer)
- Constant gross margin NRV method
- Weighted average method
Correct answer: Net realizable value (NRV) method
The NRV method allocates joint costs in proportion to each product's net realizable value (sales price minus separable costs), reflecting market-based values.
CBS Cost Accounting & Management 3
In a liquidating Chapter 7 bankruptcy, which cost concept is most relevant when deciding whether to complete work-in-process inventory before selling?