Finance for Non-Finance Managers Cost Management 4 — Questions and Answers
Question 1: Which costing approach is most appropriate when a company wants to set a floor price for a special one-time order with spare capacity?
- Full absorption costing
- Target costing
- Variable (marginal) costing (Correct answer)
- Standard costing
Correct answer: Variable (marginal) costing
Variable costing shows the minimum price needed to cover incremental costs when fixed costs are already covered by existing volume.
Question 2: A cost that has already been incurred and cannot be recovered regardless of future decisions is called a:
- Relevant cost
- Differential cost
- Sunk cost (Correct answer)
- Incremental cost
Correct answer: Sunk cost
Sunk costs are past expenditures that are irrelevant to future decision-making because they cannot be changed.
Question 3: If a company increases production volume within its relevant range, what happens to the fixed cost per unit?
- It increases
- It decreases (Correct answer)
- It stays the same
- It becomes variable
Correct answer: It decreases
As volume increases, the same total fixed cost is spread over more units, so fixed cost per unit decreases.
Question 4: Which cost classification is most useful for a 'make-or-buy' decision?
- Historical cost
- Sunk cost
- Differential (incremental) cost (Correct answer)
- Absorption cost
Correct answer: Differential (incremental) cost
Make-or-buy decisions require comparing only the costs that differ between the two alternatives — differential costs.
Question 5: Kaizen costing focuses on:
- Setting costs based on competitor pricing
- Continuous incremental cost reductions during production (Correct answer)
- One-time redesign of a product to cut costs
- Eliminating all indirect costs from products
Correct answer: Continuous incremental cost reductions during production
Kaizen costing is a Japanese philosophy of continuous, ongoing cost improvement throughout the production process.
Question 6: Which of the following best describes a 'cost pool' in activity-based costing?
- The total revenue generated by a product line
- A grouping of overhead costs associated with a specific activity (Correct answer)
- The labor hours required per product
- The direct materials budget for a department
Correct answer: A grouping of overhead costs associated with a specific activity
A cost pool groups together all overhead costs driven by the same activity, which are then allocated using a single cost driver.
Question 7: A company's operating leverage is high when:
- Variable costs are a large proportion of total costs
- Fixed costs are a large proportion of total costs (Correct answer)
- The contribution margin ratio is very low
- Sales volume is below break-even
Correct answer: Fixed costs are a large proportion of total costs
High operating leverage means a large share of costs are fixed, so small sales changes produce larger swings in profit.
Finance for Non-Finance Managers Cost Management 4
Which costing approach is most appropriate when a company wants to set a floor price for a special one-time order with spare capacity?