CPP Costing Methods & Profitability 2 — Questions and Answers
Question 1: A manufacturer uses Activity-Based Costing (ABC) and identifies that its 'order processing' activity costs $500,000 annually with 10,000 orders processed. What is the cost driver rate?
- $5 per order
- $50 per order (Correct answer)
- $500 per order
- $0.05 per order
Correct answer: $50 per order
$500,000 divided by 10,000 orders equals $50 per order as the cost driver rate.
Question 2: Which costing method is most susceptible to producing misleading profitability information when product mix changes significantly?
- Activity-Based Costing
- Traditional volume-based absorption costing (Correct answer)
- Variable costing
- Target costing
Correct answer: Traditional volume-based absorption costing
Traditional volume-based absorption costing distorts product costs when product mix shifts because it allocates overhead based on a single volume driver like labor hours.
Question 3: A company's fixed costs are $200,000, variable cost per unit is $30, and selling price is $50. At what sales volume does the company break even?
- 4,000 units
- 6,667 units
- 10,000 units (Correct answer)
- 5,000 units
Correct answer: 10,000 units
Break-even = Fixed Costs / Contribution Margin per unit = $200,000 / ($50 - $30) = 10,000 units.
Question 4: Under throughput accounting, which cost is treated as a period expense rather than a product cost?
- Direct materials only
- All operating expenses except direct materials (Correct answer)
- Variable overhead
- Direct labor
Correct answer: All operating expenses except direct materials
Throughput accounting treats all operating expenses except direct materials as period costs, focusing only on materials as the true variable cost.
Question 5: When a company switches from FIFO to LIFO inventory costing during a period of rising prices, what is the expected effect on reported profitability?
- Profitability increases because COGS decreases
- Profitability decreases because COGS increases (Correct answer)
- Profitability is unchanged
- Profitability increases because inventory value increases
Correct answer: Profitability decreases because COGS increases
Under LIFO in rising price environments, the most recently purchased (higher-cost) inventory is expensed first, increasing COGS and decreasing reported profit.
Question 6: A pricing analyst uses 'customer profitability analysis.' Which cost would typically be EXCLUDED from calculating an individual customer's profitability?
- Cost of goods sold for products purchased
- Customer-specific sales support costs
- Corporate headquarters administrative overhead (Correct answer)
- Returns and allowances for that customer
Correct answer: Corporate headquarters administrative overhead
Corporate headquarters overhead is not traceable to individual customers and is typically excluded from customer-level profitability analysis.
Question 7: Which profitability metric measures how efficiently a company uses its assets to generate earnings?
- Gross margin percentage
- Return on Assets (ROA) (Correct answer)
- Contribution margin ratio
- Operating leverage
Correct answer: Return on Assets (ROA)
Return on Assets (ROA) = Net Income / Total Assets, measuring how efficiently assets generate profit.
CPP Costing Methods & Profitability 2
A manufacturer uses Activity-Based Costing (ABC) and identifies that its 'order processing' activity costs $500,000 annually with 10,000 orders processed.
What is the cost driver rate?