FAC FAC Managerial Accounting & Cost Concepts 2 — Questions and Answers
Question 1: Which inventory costing method results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted average
- Specific identification
Correct answer: FIFO
FIFO assigns the oldest (lower) costs to cost of goods sold during inflation, resulting in lower COGS and higher net income.
Question 2: Process costing is most appropriate for companies that manufacture which type of product?
- Custom-designed one-of-a-kind products
- Homogeneous products in continuous production (Correct answer)
- Low-volume specialty items
- Products built to individual customer specifications
Correct answer: Homogeneous products in continuous production
Process costing is used for identical products made in a continuous or mass production process, such as paint or chemicals.
Question 3: What is the purpose of calculating equivalent units of production in process costing?
- To count total units started in the period
- To assign costs to partially and fully completed units on an equal basis (Correct answer)
- To measure machine efficiency
- To track direct materials usage only
Correct answer: To assign costs to partially and fully completed units on an equal basis
Equivalent units convert partially completed units into whole-unit equivalents so that accurate cost per unit can be calculated.
Question 4: Which cost concept represents the benefit foregone by choosing one alternative over the next best alternative?
- Sunk cost
- Differential cost
- Opportunity cost (Correct answer)
- Controllable cost
Correct answer: Opportunity cost
Opportunity cost is the potential benefit sacrificed when one alternative is selected over the next best option.
Question 5: The predetermined overhead rate is calculated by dividing which two figures?
- Actual overhead by actual activity
- Estimated overhead by estimated activity (Correct answer)
- Actual overhead by estimated activity
- Estimated overhead by actual activity
Correct answer: Estimated overhead by estimated activity
The predetermined overhead rate is calculated before the period begins using estimated total overhead divided by estimated total activity.
Question 6: What is absorption costing?
- A method that assigns only variable manufacturing costs to products
- A method that includes all manufacturing costs — fixed and variable — in product cost (Correct answer)
- A costing approach that excludes overhead
- A method used exclusively for service businesses
Correct answer: A method that includes all manufacturing costs — fixed and variable — in product cost
Absorption (full) costing assigns all manufacturing costs, both fixed and variable, to each unit of product as required under U.S. GAAP.
FAC FAC Managerial Accounting & Cost Concepts 2
Which inventory costing method results in the highest net income during a period of rising prices?