CMS Manufacturing Cost Analysis 3 — Questions and Answers
Question 1: What is the primary purpose of a cost-volume-profit (CVP) analysis?
- To allocate overhead costs to individual products
- To understand how changes in costs and volume affect profitability (Correct answer)
- To determine the optimal reorder point for raw materials
- To calculate the depreciation schedule for capital equipment
Correct answer: To understand how changes in costs and volume affect profitability
CVP analysis examines the relationship between costs, sales volume, and profit to support pricing, production, and planning decisions.
Question 2: Under absorption costing, fixed manufacturing overhead is treated as:
- A period cost expensed in the period incurred
- A product cost included in inventory until sold (Correct answer)
- A discretionary cost subject to management approval
- An opportunity cost relevant to pricing decisions
Correct answer: A product cost included in inventory until sold
Absorption costing treats fixed manufacturing overhead as a product cost, meaning it is inventoried and only expensed when goods are sold.
Question 3: A machine costs $200,000, has a salvage value of $20,000, and a useful life of 9 years. What is the annual straight-line depreciation?
- $22,222
- $20,000 (Correct answer)
- $24,444
- $18,000
Correct answer: $20,000
Straight-line depreciation = (Cost − Salvage) / Life = ($200,000 − $20,000) / 9 = $20,000 per year.
Question 4: Which cost classification separates costs into their fixed and variable components to aid in flexible budgeting?
- Full costing
- Semi-variable (mixed) cost analysis (Correct answer)
- Job order costing
- Marginal costing
Correct answer: Semi-variable (mixed) cost analysis
Semi-variable (mixed) costs have both fixed and variable components and must be separated using methods like the high-low method for flexible budget preparation.
Question 5: When evaluating a make-or-buy decision, which costs are most relevant?
- Historical sunk costs already spent on equipment
- Avoidable costs that would be eliminated by outsourcing (Correct answer)
- Allocated fixed overhead that will continue regardless
- Depreciation on existing fully-paid machinery
Correct answer: Avoidable costs that would be eliminated by outsourcing
Relevant costs in make-or-buy decisions are avoidable costs—those that can be eliminated by choosing to buy externally rather than make in-house.
Question 6: A favorable material price variance indicates that:
- More material was used than the standard quantity allowed
- Material was purchased at a lower cost than the standard price (Correct answer)
- Labor was more efficient than the standard hours allowed
- Fixed overhead was under-applied during the period
Correct answer: Material was purchased at a lower cost than the standard price
A favorable material price variance occurs when actual purchase price is less than the standard price, reducing material costs below budget.
Question 7: In lean manufacturing, 'cost of poor quality' (COPQ) includes all EXCEPT:
- Scrap and rework costs
- Warranty and field repair costs
- Standard direct material costs for good units (Correct answer)
- Inspection and testing costs
Correct answer: Standard direct material costs for good units
Standard direct material costs for good units are normal production costs, not quality-failure costs; COPQ covers prevention, appraisal, and internal/external failure costs.
CMS Manufacturing Cost Analysis 3
What is the primary purpose of a cost-volume-profit (CVP) analysis?