CFC Cost Accounting & Management 5 — Questions and Answers
Question 1: A flexible budget differs from a static budget in that it:
- Is prepared before the period begins
- Adjusts revenues and costs for the actual level of activity (Correct answer)
- Uses only fixed costs in its calculations
- Is prepared by department managers rather than finance
Correct answer: Adjusts revenues and costs for the actual level of activity
A flexible budget recalculates expected revenues and variable costs based on the actual activity level achieved, enabling meaningful variance analysis.
Question 2: The 'reciprocal method' of service department cost allocation is considered most accurate because it:
- Allocates costs using direct labor hours only
- Ignores interdepartmental services to simplify calculations
- Fully recognizes mutual services provided between service departments (Correct answer)
- Requires costs to be allocated only once per period
Correct answer: Fully recognizes mutual services provided between service departments
The reciprocal method uses simultaneous equations to capture the full extent of services exchanged between service departments.
Question 3: When evaluating a capital-intensive production line, which cost behavior pattern would fixed manufacturing overhead costs exhibit on a per-unit basis as volume increases?
- Remain constant per unit
- Increase per unit
- Decrease per unit (Correct answer)
- Vary proportionally with volume
Correct answer: Decrease per unit
Fixed costs remain constant in total, so per-unit fixed cost decreases as more units spread the cost over a larger base.
Question 4: Which inventory valuation approach is MOST likely to result in the lowest cost of goods sold during a period of rising prices?
- FIFO (Correct answer)
- LIFO
- Weighted-average
- Specific identification
Correct answer: FIFO
Under FIFO during rising prices, older (cheaper) costs flow into COGS first, resulting in lower COGS and higher gross profit.
Question 5: In transfer pricing, the minimum transfer price a selling division should accept is:
- Market price of the product
- Variable cost plus opportunity cost (Correct answer)
- Full absorption cost of the product
- The price negotiated with external customers
Correct answer: Variable cost plus opportunity cost
The minimum acceptable transfer price equals variable cost plus any opportunity cost (contribution margin foregone from external sales).
Question 6: A company is operating at full capacity. An additional order is received at a price below the regular selling price. The financial analysis should focus on:
- Whether the price covers total average cost per unit
- Whether the price covers variable cost per unit only
- The contribution margin per unit compared to contribution from displaced regular sales (Correct answer)
- The historical profit margin of the company
Correct answer: The contribution margin per unit compared to contribution from displaced regular sales
At full capacity, accepting a special order means displacing regular sales, so the key comparison is the special order's contribution vs. the opportunity cost of lost regular business.
Question 7: Backflush costing is most suitable for companies that:
- Have high work-in-process inventory balances
- Operate under JIT with minimal inventory levels (Correct answer)
- Use job-order costing for custom products
- Require detailed cost tracking at each production stage
Correct answer: Operate under JIT with minimal inventory levels
Backflush costing delays cost recognition until completion or sale, which is efficient for JIT environments with negligible WIP inventory.
CFC Cost Accounting & Management 5
A flexible budget differs from a static budget in that it: