Finance for Non-Finance Managers Cost Management 3 — Questions and Answers
Question 1: Activity-Based Costing (ABC) differs from traditional costing primarily because it:
- Ignores indirect costs entirely
- Uses multiple cost drivers to assign overhead more accurately (Correct answer)
- Assigns all costs directly to products
- Relies solely on direct labor hours for allocation
Correct answer: Uses multiple cost drivers to assign overhead more accurately
ABC uses activity-specific cost drivers for each cost pool, resulting in more accurate product costing than single-rate methods.
Question 2: A company has contribution margin of $200,000 and fixed costs of $150,000. What is operating income?
- $350,000
- $200,000
- $150,000
- $50,000 (Correct answer)
Correct answer: $50,000
Operating income = Contribution margin - Fixed costs = $200,000 - $150,000 = $50,000.
Question 3: Which of the following is an example of an opportunity cost?
- Rent paid for a factory
- Wages paid to workers
- Revenue foregone by not renting unused space (Correct answer)
- Depreciation on equipment
Correct answer: Revenue foregone by not renting unused space
Opportunity cost is the value of the best alternative forgone, such as rental income given up by using space internally.
Question 4: Target costing starts with:
- Actual production costs plus a markup
- The market price minus the desired profit margin (Correct answer)
- Competitor's cost structure
- Total fixed costs divided by expected volume
Correct answer: The market price minus the desired profit margin
Target costing = Market price - Desired profit; the company then designs to meet this cost target.
Question 5: The difference between standard cost and actual cost is called a:
- Variance (Correct answer)
- Margin
- Benchmark
- Differential
Correct answer: Variance
A variance is the deviation between what was budgeted (standard) and what actually occurred.
Question 6: Under full absorption costing, which costs are included in inventory valuation?
- Only direct materials
- Direct materials and direct labor only
- All variable manufacturing costs only
- All manufacturing costs, both fixed and variable (Correct answer)
Correct answer: All manufacturing costs, both fixed and variable
Full absorption costing includes all manufacturing costs — direct materials, direct labor, and both fixed and variable overhead — in product cost.
Question 7: A favorable materials price variance indicates that:
- More materials were used than planned
- Materials were purchased at a lower price than standard (Correct answer)
- Less output was produced than expected
- The selling price exceeded budget
Correct answer: Materials were purchased at a lower price than standard
A favorable price variance means actual purchase price was below the standard price set in the budget.
Finance for Non-Finance Managers Cost Management 3
Activity-Based Costing (ABC) differs from traditional costing primarily because it: