Finance for Non-Finance Managers Cost Management 5 — Questions and Answers
Question 1: Which inventory costing method typically 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 older (lower) costs to cost of goods sold during inflation, leaving newer higher-cost inventory on the balance sheet and reporting higher income.
Question 2: A company has sales of $500,000, variable costs of $300,000, and fixed costs of $120,000. What is the contribution margin ratio?
- 24%
- 40% (Correct answer)
- 60%
- 76%
Correct answer: 40%
Contribution margin = $500,000 - $300,000 = $200,000; CM ratio = $200,000 / $500,000 = 40%.
Question 3: Life-cycle costing considers costs:
- Only during the manufacturing phase
- From product design through disposal (Correct answer)
- Limited to the first year of production
- Excluding marketing and distribution
Correct answer: From product design through disposal
Life-cycle costing tracks all costs a product incurs from initial R&D and design through end-of-life disposal.
Question 4: Which variance would alert a manager that workers took longer than standard to complete production?
- Materials price variance
- Labor rate variance
- Labor efficiency variance (Correct answer)
- Overhead spending variance
Correct answer: Labor efficiency variance
The labor efficiency variance compares actual hours worked to standard hours allowed, highlighting time overruns.
Question 5: Joint costs in a manufacturing process are costs incurred:
- After a product reaches the split-off point
- Before multiple products separate at the split-off point (Correct answer)
- Only for the primary product in a process
- For packaging and distribution of final goods
Correct answer: Before multiple products separate at the split-off point
Joint costs are shared production costs incurred up to the split-off point where distinct products first become identifiable.
Question 6: When evaluating whether to eliminate an unprofitable segment, a manager should focus on:
- Total allocated overhead of the segment
- Whether segment contribution margin covers its avoidable fixed costs (Correct answer)
- The segment's share of company-wide revenue
- Historical sunk costs invested in the segment
Correct answer: Whether segment contribution margin covers its avoidable fixed costs
A segment should be eliminated only if its contribution margin is insufficient to cover the fixed costs that would actually be avoided by closing it.
Question 7: Throughput costing (super-variable costing) treats which costs as the only true variable product costs?
- Direct labor and direct materials
- All variable manufacturing costs
- Direct materials only (Correct answer)
- Overhead and direct labor only
Correct answer: Direct materials only
Throughput costing considers only direct materials as truly variable; all other costs including direct labor are treated as period costs.
Finance for Non-Finance Managers Cost Management 5
Which inventory costing method typically results in the highest net income during a period of rising prices?