Finance for Non-Finance Managers Cost Management 2 — Questions and Answers
Question 1: A manufacturer produces 10,000 units and total costs are $150,000. Fixed costs are $50,000. What is the variable cost per unit?
- $5
- $10 (Correct answer)
- $15
- $20
Correct answer: $10
Variable costs = $150,000 - $50,000 = $100,000; divided by 10,000 units = $10 per unit.
Question 2: Which cost behavior pattern remains constant per unit but increases in total as production volume rises?
- Fixed cost
- Variable cost (Correct answer)
- Semi-fixed cost
- Sunk cost
Correct answer: Variable cost
Variable costs are constant per unit but increase in total as more units are produced.
Question 3: A company's break-even point in units is 2,000. If it sells 2,500 units, what is the margin of safety?
- 500 units (Correct answer)
- 2,000 units
- 2,500 units
- 4,500 units
Correct answer: 500 units
Margin of safety = actual sales - break-even sales = 2,500 - 2,000 = 500 units.
Question 4: Direct labor hours used to allocate manufacturing overhead is an example of which costing concept?
- Cost driver (Correct answer)
- Cost object
- Cost pool
- Absorption base
Correct answer: Cost driver
A cost driver is a factor that causes overhead costs to be incurred, used as the allocation base.
Question 5: When a factory produces below normal capacity, the resulting unabsorbed overhead is treated as:
- An asset on the balance sheet
- A period cost expensed immediately (Correct answer)
- Additional product cost
- Deferred revenue
Correct answer: A period cost expensed immediately
Under-absorbed overhead from idle capacity is typically written off as a period cost in the income statement.
Question 6: Which method assigns the average cost of beginning inventory and new purchases to all units available for sale?
- FIFO
- LIFO
- Weighted average cost (Correct answer)
- Specific identification
Correct answer: Weighted average cost
The weighted average cost method blends the cost of beginning inventory with new purchases to determine a single per-unit cost.
Question 7: A step cost is best described as a cost that:
- Decreases as volume increases
- Remains fixed over a wide range then jumps to a new level (Correct answer)
- Varies proportionally with output
- Is incurred only once per project
Correct answer: Remains fixed over a wide range then jumps to a new level
Step costs are fixed within a relevant range but increase in steps when capacity thresholds are crossed.
Finance for Non-Finance Managers Cost Management 2
A manufacturer produces 10,000 units and total costs are $150,000.
Fixed costs are $50,000.
What is the variable cost per unit?