QFC Cost Accounting & Management 3 — Questions and Answers
Question 1: Which of the following is a characteristic of a relevant cost in decision-making?
- It is a sunk cost incurred in a prior period
- It differs between decision alternatives and occurs in the future (Correct answer)
- It is fixed regardless of the decision made
- It represents allocated overhead
Correct answer: It differs between decision alternatives and occurs in the future
Relevant costs are future costs that differ between alternatives; sunk costs and identical costs are irrelevant.
Question 2: Activity-based costing (ABC) improves cost accuracy primarily by:
- Assigning all overhead using a single plant-wide rate
- Using multiple cost drivers linked to specific activities (Correct answer)
- Eliminating fixed overhead from product costs
- Allocating costs based solely on direct labor hours
Correct answer: Using multiple cost drivers linked to specific activities
ABC uses multiple activity cost pools and cost drivers that better reflect the consumption of resources by each product.
Question 3: A company is deciding whether to make or buy a component. The relevant costs for the make option include all EXCEPT:
- Direct materials for production
- Avoidable fixed overhead
- Allocated corporate overhead unchanged by the decision (Correct answer)
- Direct labor for production
Correct answer: Allocated corporate overhead unchanged by the decision
Allocated corporate overhead that will not change regardless of the decision is a sunk/unavoidable cost and is irrelevant.
Question 4: The transfer price that allows a selling division to recover variable costs plus an opportunity cost represents:
- Market-based transfer pricing
- Cost-plus transfer pricing
- Negotiated transfer pricing
- Minimum acceptable transfer price (Correct answer)
Correct answer: Minimum acceptable transfer price
The minimum transfer price = Variable cost per unit + Opportunity cost per unit lost by the selling division.
Question 5: Which variance measures the difference between budgeted fixed overhead and standard fixed overhead absorbed by actual output?
- Fixed overhead spending variance
- Fixed overhead volume variance (Correct answer)
- Variable overhead efficiency variance
- Sales volume variance
Correct answer: Fixed overhead volume variance
The fixed overhead volume variance = Absorbed fixed overhead − Budgeted fixed overhead, reflecting under/over-absorption due to output volume.
Question 6: Joint costs should be allocated to joint products primarily for:
- Internal pricing and operational decisions
- Inventory valuation and external financial reporting (Correct answer)
- Performance evaluation of division managers
- Capital budgeting analysis
Correct answer: Inventory valuation and external financial reporting
Joint cost allocation is required for inventory valuation on the balance sheet and cost of goods sold on the income statement for external reporting.
Question 7: The contribution margin per unit of a scarce resource is used to:
- Calculate the break-even point in units
- Rank products when one input is a binding constraint (Correct answer)
- Determine the optimal safety stock level
- Measure return on investment for a segment
Correct answer: Rank products when one input is a binding constraint
When a resource is scarce, products should be ranked by contribution margin per unit of that constrained resource to maximize total profit.
QFC Cost Accounting & Management 3
Which of the following is a characteristic of a relevant cost in decision-making?