CFC Cost Accounting & Management 2 — Questions and Answers
Question 1: A company uses activity-based costing. Which cost driver would be most appropriate for a machine setup activity?
- Number of machine hours
- Number of production runs (Correct answer)
- Number of direct labor hours
- Number of units produced
Correct answer: Number of production runs
Setup costs vary with the number of production runs (batches), not individual units or machine hours.
Question 2: Under absorption costing, when production exceeds sales, operating income will be:
- Equal to variable costing income
- Lower than variable costing income
- Higher than variable costing income (Correct answer)
- Unrelated to variable costing income
Correct answer: Higher than variable costing income
Under absorption costing, fixed overhead is deferred in ending inventory, making income higher than variable costing when production > sales.
Question 3: Which of the following is a characteristic of a process costing system?
- Costs are accumulated by job order
- Products are homogeneous and mass-produced (Correct answer)
- Each unit has a unique cost
- Overhead is applied based on actual hours per job
Correct answer: Products are homogeneous and mass-produced
Process costing suits homogeneous, mass-produced goods where costs are averaged over all units in a period.
Question 4: A company's contribution margin ratio is 40% and fixed costs are $200,000. What sales level is needed to achieve a target profit of $60,000?
- $500,000
- $650,000 (Correct answer)
- $520,000
- $600,000
Correct answer: $650,000
Required sales = (Fixed costs + Target profit) / CM ratio = ($200,000 + $60,000) / 0.40 = $650,000.
Question 5: The joint cost allocation method that assigns costs based on each product's ability to absorb costs is the:
- Physical units method
- Weighted average method
- Net realizable value method (Correct answer)
- Constant gross margin method
Correct answer: Net realizable value method
The net realizable value method allocates joint costs in proportion to each product's NRV, reflecting its relative market value.
Question 6: Standard costing variance analysis shows a favorable material quantity variance. This means:
- Actual price paid was less than standard price
- Actual quantity used was less than standard quantity allowed (Correct answer)
- More units were produced than budgeted
- Actual labor hours were less than standard
Correct answer: Actual quantity used was less than standard quantity allowed
A favorable material quantity variance occurs when actual quantity used is less than the standard quantity allowed for actual output.
Question 7: Which cost is always irrelevant to a make-or-buy decision?
- Variable cost of making internally
- Opportunity cost of facilities
- Sunk costs already incurred (Correct answer)
- Avoidable fixed costs
Correct answer: Sunk costs already incurred
Sunk costs are past costs that cannot be recovered and are irrelevant to any future decision including make-or-buy.
CFC Cost Accounting & Management 2
A company uses activity-based costing.
Which cost driver would be most appropriate for a machine setup activity?