CIA Cost Accounting 3 — Questions and Answers
Question 1: Which of the following costs would be classified as a conversion cost?
- Raw materials purchased
- Direct materials used
- Direct labor and manufacturing overhead (Correct answer)
- Selling and administrative expenses
Correct answer: Direct labor and manufacturing overhead
Conversion costs consist of direct labor and manufacturing overhead — the costs required to convert raw materials into finished goods.
Question 2: The predetermined overhead rate is calculated by dividing:
- Actual overhead by actual activity
- Budgeted overhead by budgeted activity (Correct answer)
- Actual overhead by budgeted activity
- Budgeted overhead by actual activity
Correct answer: Budgeted overhead by budgeted activity
The predetermined overhead rate uses budgeted figures for both overhead and the chosen activity base to apply overhead in advance.
Question 3: Which inventory valuation method will result in the lowest net income during a period of rising prices?
- FIFO
- LIFO (Correct answer)
- Weighted average
- Specific identification
Correct answer: LIFO
Under LIFO during rising prices, the most recently purchased (higher-cost) inventory is sold first, increasing COGS and reducing net income.
Question 4: Joint costs in a joint production process should be allocated using which primary purpose?
- Decision-making about whether to process further
- External financial reporting of inventory values (Correct answer)
- Pricing decisions for individual products
- Capital budgeting analysis
Correct answer: External financial reporting of inventory values
Joint cost allocation is primarily used for inventory valuation and external financial reporting, not for decision-making, since joint costs are sunk at the split-off point.
Question 5: If a company's actual overhead exceeds applied overhead, the difference is referred to as:
- Over-applied overhead
- Under-applied overhead (Correct answer)
- Favorable overhead variance
- Budgeted overhead variance
Correct answer: Under-applied overhead
Under-applied overhead occurs when actual overhead incurred exceeds the overhead applied to production using the predetermined rate.
Question 6: Target costing begins with:
- Actual production costs and adds a desired profit margin
- A market-determined selling price minus a desired profit (Correct answer)
- Budgeted fixed costs divided by expected volume
- Standard labor hours multiplied by the wage rate
Correct answer: A market-determined selling price minus a desired profit
Target costing starts with the competitive market price, subtracts the desired profit margin, and the result is the maximum allowable cost.
Question 7: Which cost behavior pattern is best described as remaining constant in total but decreasing on a per-unit basis as volume increases?
- Variable cost
- Mixed cost
- Fixed cost (Correct answer)
- Step cost
Correct answer: Fixed cost
Fixed costs remain constant in total regardless of volume, so the fixed cost per unit decreases as production increases.
CIA Cost Accounting 3
Which of the following costs would be classified as a conversion cost?