CFC Cost Accounting & Management 3 — Questions and Answers
Question 1: What does the term 'throughput contribution' mean in the Theory of Constraints?
- Sales revenue minus all variable costs
- Sales revenue minus direct material costs only (Correct answer)
- Contribution margin per unit of bottleneck resource
- Net profit after fixed overhead allocation
Correct answer: Sales revenue minus direct material costs only
In the Theory of Constraints, throughput contribution equals sales revenue minus direct material costs — only truly variable costs are deducted.
Question 2: A relevant cost in a special order decision is:
- Allocated corporate overhead
- Depreciation on existing equipment
- Variable manufacturing cost per unit (Correct answer)
- Historical purchase price of raw materials
Correct answer: Variable manufacturing cost per unit
Variable manufacturing costs change with each additional unit produced and are therefore relevant to a special order decision.
Question 3: Equivalent units of production are used in process costing primarily to:
- Allocate joint costs between by-products
- Express partially complete units in terms of fully complete units (Correct answer)
- Calculate the contribution margin per unit
- Determine the breakeven point for each process
Correct answer: Express partially complete units in terms of fully complete units
Equivalent units convert work-in-process inventory into a measure of fully completed units for cost-per-unit calculations.
Question 4: If a company has a margin of safety of 25%, a 10% decline in sales would result in profit declining by approximately:
- 10%
- 25%
- 40% (Correct answer)
- 50%
Correct answer: 40%
Operating leverage = 1 / margin of safety ratio = 1 / 0.25 = 4; profit change = 10% × 4 = 40%.
Question 5: Which overhead variance measures the difference between budgeted fixed overhead and the fixed overhead absorbed by production?
- Fixed overhead expenditure variance
- Fixed overhead volume variance (Correct answer)
- Fixed overhead efficiency variance
- Fixed overhead capacity variance
Correct answer: Fixed overhead volume variance
The fixed overhead volume variance measures whether actual output absorbed more or less fixed overhead than the original budget.
Question 6: Under a just-in-time (JIT) system, which of the following would you expect to decrease significantly?
- Direct labor costs
- Product quality standards
- Raw material and WIP inventory levels (Correct answer)
- Customer order lead times
Correct answer: Raw material and WIP inventory levels
JIT aims to minimize inventory by synchronizing production with demand, dramatically reducing raw material and WIP holdings.
Question 7: A by-product generated during joint production is most commonly accounted for by:
- Allocating a portion of joint costs to it at the split-off point
- Recording proceeds at the time of sale and crediting production costs (Correct answer)
- Capitalizing it at net realizable value on the balance sheet
- Expensing all related costs as period costs immediately
Correct answer: Recording proceeds at the time of sale and crediting production costs
The most common by-product method credits production costs (or recognizes revenue) only when the by-product is sold, avoiding complex cost allocation.
CFC Cost Accounting & Management 3
What does the term 'throughput contribution' mean in the Theory of Constraints?