Advanced Cost Accounting Exam Preparation Guide
Course Introduction
Advanced Cost Accounting delves into the intricate methodologies and analytical techniques used to allocate, control, and manage costs within organizations. Building upon foundational cost accounting principles, this course explores advanced topics such as activity-based costing, standard costing, variance analysis, cost behavior, budgeting, and performance evaluation. Emphasis is placed on using cost information for strategic decision-making, pricing, profitability analysis, and operational efficiency. Students will engage with real-world case studies and contemporary issues in cost management, preparing them for roles that require sophisticated financial analysis and critical thinking in both manufacturing and service sectors.
Recommended Textbook
Horngrens Cost Accounting A Managerial Emphasis 16th Edition by Srikant M. Datar
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Chapter 1: The Manager and Management Accounting
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Sample Questions
Q1) For each report listed below, identify whether the major purpose of the report is for (1) routine internal reporting, (2) nonroutine internal reporting, or for (3) external reporting to investors and other outside parties.
Item:
a.study detailing sale information of the top-ten selling products
b.weekly report of total sales generated by each store in the metropolitan area
c.annual Report sent to shareholders
d.monthly report comparing budgeted sales by store to actual sales
Answer: a.(2) nonroutine internal reporting
b.(1) routine internal reporting
c.(3) external reporting to investors and other outside parties
d.(1) routine internal reporting
Q2) Processing orders and shipping products or providing services to customers is known as ________.
A) after-sales services
B) distribution
C) marketing
D) supply chain
Answer: B
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3
Chapter 2: An Introduction to Cost Terms and Purposes
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Q1) In determining product cost, what concerns does a manufacturing firm have when contracting with a government agency?
Answer: Government contracts often reimburse on the basis of "cost of a product" plus a pre specified profit margin. Government agencies provide detailed guidelines on the cost items they allow and disallow when calculating the cost of a product. For example, expenses such as marketing, distribution, and customer service costs may be prohibited but research and development costs are sometimes partially allowed as part of the cost.
Q2) Merchandising companies purchase products and sell them to customers without changing their basic form.
A)True
B)False
Answer: True
Q3) If a worker is paid for 40 hours, but is idle for 5 of those 40 hours, the 5 hour of idle time would be considered a component of direct labor.
A)True
B)False
Answer: False
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Chapter 3: Cost-Volume-Profit Analysis
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Q1) If a company?'s breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety percentage is 20%.
A)True
B)False
Answer: True
Q2) Katrina's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,100, variable costs are $500, and fixed costs are $100,000. How many dresses are sold when operating income is zero?
A) 200 dresses
B) 167 dresses
C) 310 dresses
D) 91 dresses
Answer: B
Q3) Explain what net income and what taxes can have on a manager's decision?
Answer: Net income is operating income plus nonoperating revenues such as interest revenue minus nonoperating costs such as interest cost minus income taxes. Some decisions might not result in a large operating income, but their tax consequences make them attractive because they have a positive effect on net income-the measure that drives shareholders' dividends and returns.
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Chapter 4: Job Costing
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Sample Questions
Q1) Which of the following differentiates job costing from process costing?
A) Job costing is used when each unit of output is identical, and process costing deals with unique products.
B) Job costing is used when each unit of output is identical and not produced in batches, and process costing deals with unique products produced on large scale.
C) Process costing is used when each unit of output is identical, and job costing deals with unique products not produced in batches.
D) Job costing is used by manufacturing industries, and process costing is used by service industries.
Q2) Which account is debited if materials costing $100,000 are sold?
A) Revenues account
B) Work-in-Process Control account
C) Materials Control account
D) Cost of Goods Sold account
Q3) The sum of all entries in underlying subsidiary ledgers equals the total amount in the corresponding general ledger control accounts.
A)True
B)False
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Chapter 5: Activity-Based Costing and Activity-Based Management
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Q1) Overcosting a particular product may result in:
A) pricing the product too high
B) pricing the product too low
C) operating efficiencies
D) understating total product costs
Q2) If the separate activities of design, process design, and prototyping are combined into one activity called "design" in an ABC system, management is forming one homogeneous cost pool.
A)True
B)False
Q3) Activity-based costing (ABC) can eliminate cost distortions because ABC systems
A) establish a cause-and-effect relationship with the activities performed
B) use single cost pool for all overhead costs, thereby enabling simplicity
C) use a broad average to allocate all overhead costs
D) never consider interactions between different departments in assigning support costs
Q4) How does ABC costing system help service companies?
Q5) Explain how a top-selling product may actually result in losses for the company.
Q6) How are cost drivers selected in activity-based costing systems?
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Chapter 6: Master Budget and Responsibility Accounting
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Q1) Some companies are budgeting annual carbon emissions of their operations after considering an annual global emissions budget, a share for individual sectors of the economy, and what a reasonable annual allocation would be for the company.
A)True
B)False
Q2) To determine the predicted results, such as the change in budgeted operating income if there was a decrease in the selling price of a product by 5% and an increase in material costs of 3%.
A)True
B)False
Q3) To prepare the direct materials labor costs budget, which of the following budget must be prepared first?
A) direct material purchase budget
B) production budget
C) direct material usage budget
D) budgeted manufacturing overhead
Q4) The sales department in any organization is usually a profit center.
A)True
B)False
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Chapter 7: Flexible Budgets, Direct-Cost Variances, and Management Control
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Q1) Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance.
Q2) The flexible-budget variance for materials is $2,000 (U). The sales-volume variance is $18,000 (U). The price variance for material is $38,000 (F). The efficiency variance for direct manufacturing labor is $12,000 (F). Calculate the efficiency variance for materials.
A) $40,000 favorable
B) $18,000 unfavorable
C) $6,000 favorable
D) $40,000 unfavorable
Q3) Which of the following information is needed to prepare a flexible budget?
A) actual units sold
B) actual variable cost
C) actual selling price per unit
D) actual fixed cost
Q4) Direct material price variance is likely to be unfavorable if the purchasing manager switched to a lower-price supplier.
A)True
B)False
Page 9
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Chapter 8: Flexible Budgets, Overhead Cost Variances, and Management Control
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Q1) Which of the following is the correct mathematical expression is used to calculate variable overhead efficiency variance?
A) (Actual rate ? Budgeted rate) × Budgeted quantity
B) (Actual quantity × Budgeted rate) - (Budgeted input quantity allowed for actual output × Budgeted rate)
C) (Actual quantity ÷ Budgeted rate) ? (Budgeted quantity ÷ Budgeted rate)
D) (Actual quantity ÷ Budgeted rate) × Budgeted quantity allowed for actual output
Q2) When distribution costs are high, managers can use standard costing to analyze variances for spending and efficiency variances.
A)True
B)False
Q3) The variable overhead flexible-budget variance can be further explained by calculating the:
A) price variance and the efficiency variance
B) static-budget variance and sales-volume variance
C) spending variance and the efficiency variance
D) sales-volume variance and the spending variance
Q4) What is a standard costing system?
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Chapter 9: Inventory Costing and Capacity Analysis
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Q1) In absorption costing, fixed manufacturing overhead is treated as a period cost.
A)True
B)False
Q2) It is most difficult to estimate ________ because of the need to predict demand for the next few years.
A) practical capacity
B) theoretical capacity
C) master-budget capacity utilization
D) normal capacity utilization
Q3) ________ is the level of capacity based on producing at full efficiency all the time.
A) Practical capacity
B) Theoretical capacity
C) Normal capacity
D) Demand capacity
Q4) Absorption costing helps managers to artificially inflate profits by encouraging the production of products that absorb the highest amount of fixed manufacturing costs.
A)True
B)False
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Chapter 10: Determining How Costs Behave
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Sample Questions
Q1) Nonlinear cost functions can result because of learning curves.
A)True
B)False
Q2) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver.
a.Direct materials cost is $2.70 per pound
b.Total cost is fixed at $800 per month regardless of the number of units produced.
c.Auto rental has a fixed fee of $90.00 per day plus $1.75 per mile driven.
d.Machine operating costs include $1,000 of maintenance per month, and $15.00 of coolant usage costs for each day the machinery is in operation.
Q3) Simple regression analysis estimates the relationship between the dependent variable and one independent variable.
A)True
B)False
Q4) Explain the difference between the cumulative average-time learning model and the incremental unit-time learning model.
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Chapter 11: Decision Making and Relevant Information
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Q1) Performance evaluation focuses on responsibility centers for a specific period, not on projects or individual items of equipment over their useful lives.
A)True
B)False
Q2) For managers attempting to maximize operating income for a product offering with a great deal of variety, product-mix decisions must usually take into account:
A) more than one constraining resource
B) just those products with the greatest contribution margin per constraining resource
C) products that produce a profit above the full costs of the product
D) how to maximize the selling price of all the products
Q3) Incremental revenue is the sum of differential revenues of two alternatives.
A)True
B)False
Q4) A sunk cost is a relevant cost in a decision making.
A)True
B)False
Q5) Explain the five-step decision process that managers can use to make decisions.
Q6) Why is the depreciation of an old equipment irrelevant to decision making?
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Chapter 12: Strategy, Balanced Scorecard, and Strategic
Profitability Analysis
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Q1) Partial productivity and total factor productivity measures work best together because both measures have the same kind of strengths and weaknesses.
A)True
B)False
Q2) Which of the following statements is true of productivity measures?
A) Partial productivity and total factor productivity measures never work best together.
B) Partial productivity explicitly considers gains from using fewer physical inputs as well as substitution among inputs.
C) All productivity measures are physical measures lacking financial content.
D) Total factor productivity considers the trade-offs across various inputs based on current input prices.
Q3) The revenue effect of growth is calculated by multiplying the difference in units sold (current year minus the previous year) by selling price in the current year.
A)True
B)False
Q4) Define engineered and discretionary costs and give two examples of each.
Q5) What are the four key perspectives in the balanced scorecard?
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Chapter 13: Pricing Decisions and Cost Management
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Sample Questions
Q1) In a noncompetitive environment, the key factor affecting pricing decisions is the
A) customer's willingness to pay
B) price charged for alternative products
C) information on competitor's cost structure
D) minimum price acceptable to the firm
Q2) Crimpson Company has invested $2,200,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $306,000 annually. The company plans annual sales of 7700 juicer machines at a selling price of $300 each.
What is the cost base of each juicer machine for Crimpson Company?
A) $260.26
B) $39.74
C) $300.00
D) $285.71
Q3) Which of the following is true of target pricing?
A) it is used for short-term pricing decisions.
B) it is one form of cost-based pricing.
C) a price is an estimate of customers' perceived value of the product.
D) a price is calculated by adding a markup component to the cost base.
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Chapter 14:
Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis
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Q1) Dartmouth Building Products Inc. provides the following information. Corporate advertising costs = $850,000
Division A - $5,000,000
Division B - $20,000,000
Number of ads run relevant on Division A products 500 Number of ads run relevant to Division B products 3667
Assume that customers with higher revenues benefited more from corporate advertising costs than customers with lower revenues. What is the allocated corporate costs for Division A?
A) $748,000
B) $212,500
C) $170,000
D) $850,000
Q2) It is possible that the smallest customer in terms of revenue is the most profitable customer.
A)True
B)False
Q3) Why would a manager perform customer-profitability analysis?
Q4) Explain the importance of customer-profitability analysis.
Page 16
Q5) What actions might be taken with an unprofitable customer?
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Chapter 15: Allocation of Support-Department Costs, Common
Costs, and Revenues
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Q1) If management wants to choose a method of revenue allocation that best captures the "benefits received" by customers then they would use ________ to allocate revenue to products in a bundle.
A) stand-alone revenue -allocation based on unit costs
B) stand-alone revenue-allocation based on selling prices
C) stand-alone revenue-allocation based on physical units
D) stand-alone revenue-allocation based on unit costs
Q2) Complete reciprocated costs is the support department's own costs plus any interdepartmental cost allocations.
A)True
B)False
Q3) To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using ________.
A) selling prices
B) unit costs
C) physical units
D) stand-alone product revenues
Q4) What is an operating department and how is it different from a support department? Give examples of each.
Page 17
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Chapter 16: Cost Allocation: Joint Products and Byproducts
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Q1) In joint costing, the constant gross-margin percentage method recognizes that the profit margin is not just attributable to the joint process but is also derived from the costs incurred after split-off.
A)True
B)False
Q2) Classification of main products, joint products, and byproducts can always be done with ease.
A)True
B)False
Q3) The drawback of the constant gross-margin percentage NRV method in joint costing is that it ________.
A) recognizes that profits are derived from the costs incurred after split-off
B) assumes the profit margin to be identical across all products
C) attempts to approximate the sales values at split-off by subtracting from final selling prices the separable costs incurred after the split-off point
D) ignores the separable costs of further processing
Q4) What are the reasons for allocating joint costs to individual products or services?
Q5) What are joint costs, separable costs, and a split-off point?
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Chapter 17: Process Costing
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Q1) The weighted-average cost is the total of all costs entering the Work-in-Process account (whether they are from beginning work-in-process or from work started during the current period) divided by total equivalent units of work done to date.
A)True
B)False
Q2) The last step in a process-costing system is to compute cost per equivalent unit.
A)True
B)False
Q3) List and describe the five steps in process costing.
Q4) Weighted-average cost per equivalent unit is obtained by dividing the sum of costs for beginning work in process plus costs for work done in the current period by total equivalent units of work done to date.
A)True
B)False
Q5) Describe the differences between process costing and job costing. Discuss some typical products which would be more likely to use process costing as compared to some which would be more likely to use job costing.
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Chapter 18: Spoilage, Rework, and Scrap
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Q1) What are the objectives in accounting for spoilage?
Q2) Normal spoilage is computed on the basis of the number of ________.
A) good units that pass inspection during the current period
B) units that pass the inspection point during the current period
C) units that are in ending work in process
D) units that started during the particular period
Q3) Spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions is referred to as ________.
A) incremental spoilage
B) normal spoilage
C) irregular spoilage
D) direct spoilage
Q4) When rework is normal and NOT attributable to a specific job, the costs of rework are charged to manufacturing overhead and are spread, through overhead allocation, over all jobs.
A)True
B)False
Q5) How can a company account for scrap? Include in your explanation a discussion of the two aspects of accounting for scrap.
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Chapter 19: Balanced Scorecard: Quality and Time
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Q1) The costs of quality are the costs incurred ________.
A) to enhance large scale production
B) to prevent the production of a low quality product
C) due to defective and low quality product
D) because of warranties, normal spoilage, abnormal spoilage, and scrap
Q2) Which of the following types of costs are incurred in precluding the production of products that do not conform to specifications?
A) prevention costs
B) appraisal costs
C) internal failure costs
D) external failure costs
Q3) Increasing the capacity of a bottleneck resource increases manufacturing cycle times and delays.
A)True
B)False
Q4) External failure costs are costs incurred on defective products after they have been shipped to customers.
A)True
B)False
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Chapter 20: Inventory Management, Just-in-Time, and Simplified Costing Methods
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Q1) Picture Company has one particular product that has an annual demand of 5,000 units. Total manufacturing costs per unit total $50. Ordering costs for the product total $60 per purchase order. Currently, the carrying costs per unit are 25% of manufacturing costs.
Required:
Determine the economic manufacturing order quantity.
Q2) The reorder point is the quantity level of inventory at which a new purchase order is made.
A)True
B)False
Q3) Companies that have low manufacturing lead time usually find that a version of backflush costing will report cost numbers totally different to what a sequential costing approach would report.
A)True
B)False
Q4) The only product of a company has an annual demand of 14,000 units. The cost of placing an order is $70 and the cost of carrying one unit in inventory for one year is $20.
Required:
Determine the economic order quantity.
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Chapter 21: Capital Budgeting and Cost Analysis
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Q1) The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return.
A)True
B)False
Q2) While calculating terminal recovery of working capital there are no tax consequences as there is no gain or loss on working capital.
A)True
B)False
Q3) In the "make decisions by choosing among alternatives" stage of the capital budgeting process, a company determines which investment yields the greatest benefit and the least cost to the organization.
A)True
B)False
Q4) In the "Identify projects" stage of capital budgeting, companies gather information from all parts of the value chain to evaluate alternative projects.
A)True
B)False
Q5) How is inflation related to capital budgeting? Discuss.
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Chapter 22: Management Control Systems, Transfer
Pricing, and Multinational
Considerations
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Q1) The management accounting systems, which provide information about the firm's costs, revenues, and income.
A)True
B)False
Q2) Which of the following transfer-pricing methods always achieves goal congruence?
A) a market-based transfer price
B) a cost-based transfer price
C) a negotiated transfer price
D) full-cost plus a standard profit margin
Q3) Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the markup required.
A)True
B)False
Q4) Dual pricing is not widely used. Explain its disadvantages.
Q5) Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization.
Q6) What does Section 482 of the U.S. Internal Revenue Code govern?
Page 24
Q7) How does cost-based transfer price method help managers to determine transfer prices?
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Chapter 23: Performance Measurement, Compensation, and Multinational Considerations
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Q1) Make a list of steps of designing an accounting based performance measure. Give an example of decisions taken under each step.
Q2) Economic value added is equal to ________.
A) After-tax operating income - [Weighted-average cost of capital + (Total assetsCurrent liabilities)]
B) Pre-tax operating income - [Weighted-average cost of capital + (Total assetsCurrent liabilities)]
C) After-tax operating income - [Weighted-average cost of capital × (Total assetsCurrent liabilities)]
D) Pre-tax operating income - [Weighted-average cost of capital × (Total assetsCurrent liabilities)]
Q3) Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income ________.
A) places importance on the reduction of underperforming assets
B) calculates a percentage return rather than an absolute return
C) concentrates on maximizing an absolute amount of dollars
D) concentrates on maximizing the return on sales
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