CMS Manufacturing Cost Analysis 2 — Questions and Answers
Question 1: Which costing method assigns overhead costs to products based on the activities that drive those costs?
- Standard costing
- Activity-based costing (ABC) (Correct answer)
- Job order costing
- Process costing
Correct answer: Activity-based costing (ABC)
Activity-based costing (ABC) identifies cost drivers and assigns overhead based on actual activity consumption rather than broad allocation bases.
Question 2: A product's selling price is $150 and its total variable cost is $90. What is the contribution margin ratio?
- 60%
- 40% (Correct answer)
- 150%
- 90%
Correct answer: 40%
Contribution margin ratio = (Selling price − Variable cost) / Selling price = ($150 − $90) / $150 = 40%.
Question 3: In target costing, the allowable cost is determined by:
- Adding a standard markup to actual production costs
- Subtracting the desired profit from the market price (Correct answer)
- Multiplying labor hours by the overhead rate
- Averaging competitor product costs
Correct answer: Subtracting the desired profit from the market price
Target costing sets allowable cost as Market Price − Desired Profit Margin, pushing design and production teams to meet that cost.
Question 4: Which variance measures the difference between actual hours worked and standard hours allowed, multiplied by the standard labor rate?
- Labor rate variance
- Labor efficiency variance (Correct answer)
- Variable overhead spending variance
- Fixed overhead volume variance
Correct answer: Labor efficiency variance
Labor efficiency variance = (Actual hours − Standard hours allowed) × Standard rate, indicating how efficiently labor was used.
Question 5: Which of the following best describes a 'sunk cost' in manufacturing decision-making?
- A future cost that can be avoided by choosing an alternative
- A past expenditure that cannot be recovered regardless of future decisions (Correct answer)
- A variable cost that changes with production volume
- An incremental cost relevant to a make-or-buy decision
Correct answer: A past expenditure that cannot be recovered regardless of future decisions
Sunk costs are historical expenditures already incurred and irrecoverable, so they should be excluded from future decisions.
Question 6: A company produces 10,000 units with fixed overhead of $50,000. If production increases to 12,500 units, the fixed overhead cost per unit becomes:
- $5.00
- $4.00 (Correct answer)
- $6.25
- $7.50
Correct answer: $4.00
Fixed overhead per unit = $50,000 / 12,500 units = $4.00; total fixed costs remain constant while unit cost decreases.
Question 7: Which inventory valuation method results in the highest cost of goods sold during a period of rising prices?
- FIFO (First-In, First-Out)
- LIFO (Last-In, First-Out) (Correct answer)
- Weighted average cost
- Specific identification
Correct answer: LIFO (Last-In, First-Out)
Under LIFO, the most recently purchased (higher-cost) inventory is charged to COGS first, maximizing cost of goods sold when prices are rising.
CMS Manufacturing Cost Analysis 2
Which costing method assigns overhead costs to products based on the activities that drive those costs?