Cost Accounting
Midterm Exam
Course Introduction
Cost Accounting is a foundational course that explores the methods and techniques used to capture, analyze, and control costs within an organization. Students will learn about various cost concepts, cost behavior, and costing systems including job order, process, and activity-based costing. The course emphasizes the role of cost accounting in planning, budgeting, performance evaluation, and decision-making processes. Through real-world case studies and practical examples, learners will develop the skills necessary to provide relevant cost information to managers, enabling them to optimize efficiency and support strategic business objectives.
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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Q1) To take advantage of changing market opportunities, the annual budget should be strictly enforced.
A)True
B)False
Answer: False
Q2) Describe the major differences between management accounting and financial accounting for the following:
1. Primary users
2. Focus and emphasis
3. Rules of measurement and reporting
Answer: 1.The primary users of management accounting information are managers of the organization. The primary users of financial accounting are external users such as investors, banks, regulators, and suppliers.
2.Management accounting is future oriented. Financial accounting is past oriented.
3.Management accounting measurement and reporting does not have to follow GAAP but are based on cost-benefit analysis. Financial accounting measurement and reporting must be prepared in accordance with GAAP and be certified by external, independent auditors.
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Chapter 2: An Introduction to Cost Terms and Purposes
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Sample Questions
Q1) Which of the following statements about the direct/indirect cost classification is true?
A) Indirect costs are always traced.
B) Indirect costs are always allocated.
C) The design of sales target affects the direct/indirect classification.
D) The direct/indirect classification depends on the cost control measures.
Answer: B
Q2) Cost assignment ________.
A) includes future and arbitrary costs
B) associates accumulated costs with certain cost objects
C) is the same as cost accumulation
D) is the difference between budgeted and actual costs
Answer: B
Q3) Since costs that are inventoried are not expensed until the units associated with them are sold, a manager can produce more units than are expected to be sold in a period without reducing a firm's net income.
A)True
B)False
Answer: True
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Chapter 3: Cost-Volume-Profit Analysis
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Sample Questions
Q1) Sales of Blistre Autos are 380,000, variable cost is 230,000, fixed cost is 90,000 tax rate is 40%. Calculate the operating leverage of the company.
A) 1.50 times
B) 4.17 times
C) 1.53 times
D) 2.50 times
Answer: D
Q2) At breakeven point, ________.
A) operating income is equal to zero
B) contribution margin minus fixed costs is equal to profits earned
C) revenues equal fixed costs minus variable costs
D) breakeven revenues equal fixed costs divided by the variable cost per unit
Answer: A
Q3) In the profit-volume graph the point at which the profit-volume line and x-axis intersect is the breakeven point.
A)True
B)False
Answer: True
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5
Chapter 4: Job Costing
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Sample Questions
Q1) Which of the following statements about actual costing is true?
A) Manufacturing costs of a job are available earlier under actual costing.
B) Corrective actions can be implemented sooner under actual costing.
C) Actual costing uses budgeted indirect-cost rates calculated annually.
D) Actual costing uses actual indirect-cost rates calculated annually.
Q2) ABC Manufacturing Inc. ends the month with two jobs still in progress. Job 5 has $10,000 of materials, $2,000 of direct labor and $8,000 of manufacturing overhead allocated. Job 6 was $30,000 of materials, $2,000 of direct labor and $10,000 of manufacturing overhead allocated. The cost of goods sold for the month was $40,000 and of that 30% was overhead. There were no finished goods in stock as the month ends. If the manufacturing overhead is underallocated by $10,000, which of the following choices would be the correct way to prorate it, assuming the proration is based on the allocated overhead in the ending balances of work-in-process, finished goods, and cost of goods sold?
A) Job 5 would be allocated another $2,500 of cost
B) Job 6 would be allocated another $4,000 of cost
C) Cost of goods sold would be reduced by $3,300
D) Cost of goods sold would be increase by $10,000
Q3) Differentiate between a cost pool and a cost-allocation base.
Q4) What is the difference between an actual cost system and a normal cost system?
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Chapter 5: Activity-Based Costing and Activity-Based Management
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Q1) The goal of a properly constructed ABC system is to ________.
A) have the most accurate cost system
B) identify more indirect costs
C) develop the best cost system that meets the cost/benefit test
D) have separate allocation rates for each department
Q2) Identification of a cost-allocation base is not a critical element when using a strategy that will refine a costing system.
A)True
B)False
Q3) When allocating the total indirect cost pool to cost pools such as setup costs including depreciation and maintenance costs of setup equipment, wages of setup employees, and allocation of supervisors is called a second-stage allocation.
A)True
B)False
Q4) Companies that overcost products risk becoming less effective on pricing and losing market share when competition utilizes more accurate cost systems.
A)True
B)False
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Chapter 6: Master Budget and Responsibility Accounting
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Sample Questions
Q1) Budgeting includes only the financial aspects of the plan and NOT any nonfinancial aspects such as the number of physical units manufactured or the hours that the direct laborers are expected to work.
A)True
B)False
Q2) Which of the following best describes a bill of materials?
A) It is a document that is prepared by a vendor to invoice a manufacturer for a purchase of materials
B) It is a document that is used to order materials
C) It is a document that requests materials be removed from the warehouse and put into production
D) It is a document that identifies how each product is manufactured, specifying materials and components and the quantities of materials in each finished good
Q3) ________ is the usual starting point for budgeting.
A) The revenues budget
B) The estimated net income
C) The production budget
D) The cash budget
Q4) Describe the benefits of preparing an operating budget to an organization.
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Chapter 7: Flexible Budgets, Direct-Cost Variances, and Management Control
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Sample Questions
Q1) Standard labor rate is $7.50 per hour. Standard labor allowed per unit is 0.7 hours. Actual cost per labor hour is $7.00 and actual labour hour per unit is 1 hours. What is the standard labor cost per output unit?
A) $4.90
B) $5.25
C) $7.50
D) $7.00
Q2) Which of the following can be a reason for a favorable price variance for direct materials?
A) a decrease in the price of materials due to an oversupply of materials
B) an unexpected increase in the price of materials
C) less amount of material used during production than planned for actual output
D) workers taking less time to produce the products
Q3) A purchasing manager's performance is best evaluated using information such as
A) usage efficiency and direct materials price variance
B) direct materials flexible-budget variance
C) direct manufacturing labor flexible-budget variance
D) price and terms bargaining effectiveness, achievement of quality goals, and direct materials price variance
Page 9
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Chapter 8: Flexible Budgets, Overhead Cost Variances, and Management Control
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Sample Questions
Q1) Fixed overhead costs ________.
A) never have any unused capacity
B) have no spending variance
C) have no efficiency variance
D) have no production-volume variance
Q2) What is a standard costing system?
Q3) While calculating the costs of products and services, a standard costing system ________.
A) allocates overhead costs on the basis of the actual overhead-cost rates
B) uses standard costs to determine the cost of products
C) does not keep track of overhead cost
D) traces direct costs to output by multiplying the standard prices or rates by the actual quantities
Q4) The major challenge when planning fixed overhead is ________.
A) calculating total costs
B) calculating the cost-allocation rate
C) choosing the appropriate level of capacity
D) choosing the appropriate planning period
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Q5) Explain how fixed manufacturing overhead costs are treated under Generally Accepted Accounting Principles?
Chapter 9: Inventory Costing and Capacity Analysis
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Sample Questions
Q1) Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a
A) stable measure; avoiding the recalculation of unit costs when expected demand levels change
B) fixed costs spread over available capacity
C) can result in a downward demand spiral
D) in fixed overhead costs calculated based on capacity available
Q2) For financial reporting, SFAS 151 requires:
A) the allocation of fixed manufacturing overhead to production must be based on theoretical capacity of the facilities
B) the allocation of fixed manufacturing overhead to production must be based on normal capacity of the facilities
C) the allocation of fixed manufacturing overhead to production must be based on practical capacity of the facilities
D) the allocation of fixed manufacturing overhead to production must be based on the average of the capacity of the facilities over the three most recent period
Q3) What is throughput costing? What advantages does it have over variable and absorption costing?
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Chapter 10: Determining How Costs Behave
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Sample Questions
Q1) The high-low method ________.
A) measures the difference between actual cost and estimated cost for each observation of the cost driver
B) calculates the standard deviation of residuals
C) calculates the slope coefficient using only two observed values within the relevant range and their respective costs
D) measures how well the predicted values, y, based on the cost driver, X, match actual cost observations, Y
Q2) The incremental unit-time learning model with a 80% learning curve indicates that if it takes 150 minutes to manufacture the first unit of a new model, then the second unit will take only 120 minutes to manufacture.
A)True
B)False
Q3) The trend in large corporations is a movement away from quantitative analysis of cost drivers to the conference method.
A)True
B)False
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Chapter 11: Decision Making and Relevant Information
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Sample Questions
Q1) Decisions about whether a producer of goods or services will insource or outsource are also called make-or-buy decisions.
A)True
B)False
Q2) Which of the following is true of historical costs?
A) They are useful for making future predictions.
B) They are relevant for decision making.
C) They are always accounted as opportunity costs.
D) They cannot be fixed costs.
Q3) Altec Services Corporation has relevant costs of $46 per unit to manufacture 1,050 units of Part A. A current supplier offers to make Part A for $33 per unit. Alternatively, the company can rent out the capacity for $30,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is ________.
A) $0
B) $13,650
C) $43,650
D) $30,000
Q4) What are opportunity costs? Explain why opportunity costs are not recorded in financial accounting systems.
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Chapter 12: Strategy, Balanced Scorecard, and Strategic
Profitability Analysis
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Q1) Which component of strategy measures the changes in operating income attributed solely to an increase in the quantity of output between Year 1 and Year 2?
A) the growth component
B) the price-recovery component
C) the productivity component
D) the cost leadership component
Q2) The cost leadership strategy is for products and services that are similar to a competitors products and services.
A)True
B)False
Q3) Which of the following statements is true of productivity factors?
A) Partial-productivity focus on a multiple inputs simultaneously.
B) Total factor productivity (TFP) focus on a single input.
C) It is the ratio of the quantity of output produced to the costs of all inputs used based on current prices.
D) Comparable data for total factor productivity measurements are easily available.
Q4) What are the four key perspectives in the balanced scorecard?
Q5) Define engineered and discretionary costs and give two examples of each.
Page 14
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Chapter 13: Pricing Decisions and Cost Management
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Q1) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information:
-A new transformer has three production runs each year, each with $15,000 in setup costs.
-The new transformer incurred $50,000 in development costs and is expected to be produced over the next three years.
-Direct costs of producing the transformers are $40,000 per run of 5700 transformers each.
-Indirect manufacturing costs charged to each run are $115,000.
-Destination charges for each transformer average $2.00.
-Customer service expenses average $0.70 per transformer.
-The transformers are selling for $35 the first year and will increase by $2 each year thereafter.
-Sales units equal production units each year.
What is the estimated life-cycle operating income for the first three years?
A) $556,170
B) $2,221,170
C) $179,590
D) $2,196,970
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Chapter 14: Cost Allocation, Customer-Profitability Analysis, and
Sales-Variance Analysis
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Sample Questions
Q1) To reduce distribution-channel costs, a company could ________.
A) improve the efficiency of the ordering process
B) make fewer customer visits
C) eliminate distribution to retailers and only service wholesalers
D) reduce product-handling costs
Q2) Once a cost pool has been established, it should NOT need to be revisited or revised.
A)True
B)False
Q3) An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object.
A)True
B)False
Q4) Price discounts are influenced by ________.
A) the volume of product purchased
B) the prime cost of production
C) the operational budget
D) the contribution -margin per unit
Q5) Why do managers prepare cost-hierarchy-based operating incomes statements?
Q6) Why would a manager perform customer-profitability analysis?
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Chapter 15: Allocation of Support-Department Costs,
Common Costs, and Revenues
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Q1) Buildz Corp has been servicing the Production Casting Department for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Production Casting Department. As a result, data center costs are expected to increase from $800,000 per year to $1,000,000 per year. The Production Molding Department will use 20% of the data center efforts.
Required:
a.Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year.
b.Using the incremental cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year.
Q2) Contract disputes regarding cost allocation can be reduced by defining which of the following?
A) the material items allowed for production
B) the terms used, such as what constitutes direct labor
C) permissible tax deductions
D) minimum profit level the company should earn
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Chapter 16: Cost Allocation: Joint Products and Byproducts
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Q1) List the reasons that the sales value at split-off method of joint cost allocation should be used.
Q2) Joint processing costs are relevant in deciding whether to process the product further.
A)True
B)False
Q3) The net realizable value (NRV) method method allocates joint costs to joint products produced during the accounting period in such a way that each individual product achieves an identical gross-margin percentage.
A)True
B)False
Q4) Explain why some companies carry their inventories at NRV minus an estimated operating income margin instead of the NRV itself.
Q5) Define the terms main product, joint product, and byproduct. Give at least one example of each type of product.
Q6) Explain why some companies choose not to allocate joint costs to products.
Q7) Under the benefits-received criterion, the physical-measure method is much less desirable than the sales value at split-off method. Why?
Page 18
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Chapter 17: Process Costing
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Q1) The purpose of the equivalent-unit computation is to ________.
A) convert completed units into the amount of partially completed output units that could be made with that quantity of input
B) use a common metric to estimate the amount of work done on units in a period
C) predict the future production capabilities of the organization
D) satisfy the GAAP requirements which requires all partially completed goods to be reported as equivalent-units
Q2) Conversion costs include direct materials and direct labor but excludes all other manufacturing and non-manufacturing costs.
A)True
B)False
Q3) The accounting entry to record the conversion cost of the Assembly Department is: Work in Process-Assembly Department
Accounts Payable Control
A)True
B)False
Q4) List and describe the five steps in process costing.
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Chapter 18: Spoilage, Rework, and Scrap
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Q1) What is the advantage and disadvantage of early inspections?
Q2) If a company inspects units only at the end of the production process, the units in ending work-in-process inventory are not assigned any costs of normal spoilage.
A)True
B)False
Q3) A company produces 11,000 units of which 600 are spoiled units because the process, even though carefully and efficiently executed is unable to produce good units 100% of the time. Another 80 units are spoiled because machines broke down and there also were operator errors. What is the normal spoilage rate (round to two decimal places)
A) 6.18%
B) 5.81%
C) 5.45%
D) 0.73%
Q4) 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
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Chapter 19: Balanced Scorecard: Quality and Time
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Q1) Appraisal costs are costs incurred to preclude the production of products that do not conform to specifications.
A)True
B)False
Q2) An example of a nonfinancial measure for customer satisfaction is ________.
A) number of defective units shipped as a percentage of total units shipped
B) warranty claims by customers
C) liability claims incurred to the company
D) rework costs due to inefficiency
Q3) In the formula for calculating the average waiting time, the squared manufacturing time indicates ________.
A) that the shorter the manufacturing time, the greater the chance that the machine will remain idle in the process
B) that the shorter the manufacturing time, the greater the chance that the machine will be in use when an order arrives
C) the disproportionately large impact the manufacturing time has on the waiting time
D) a measure of the unused capacity or cushion
Q4) What are ISO 9000 and ISO 14000?
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Chapter 20: Inventory Management, Just-in-Time, and Simplified Costing Methods
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Q1) The economic order quantity model completely ignores ________.
A) carrying costs
B) ordering costs
C) stockout costs
D) the size of a purchase order
Q2) Why do conflicts arise between the EOQ model's optimal order quantity and the order quantity that managers regard as optimal?
Q3) Which of the following statements is true of costs associated with goods for sale?
A) Information-gathering technology increases the reliability and timeliness of inventory information and increases the costs related to inventory.
B) Opportunity costs are not recorded in financial accounting systems because they are not a significant component in several cost categories.
C) Purchasing costs include incoming freight costs and are reduced by discounts
D) Opportunity costs are recorded in financial accounting systems but are a not significant component in several cost categories.
Q4) What are five features of a just-in-time manufacturing system?
Q5) What are the principles of lean accounting? Are there any limitations? Discuss.
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Chapter 21: Capital Budgeting and Cost Analysis
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Q1) The Comil Corporation recently purchased a new machine for its factory operations at a cost of $328,325. The investment is expected to generate $115,000 in annual cash flows for a period of four years. The required rate of return is 13%. The old machine has a remaining life of four years. The new machine is expected to have zero value at the end of the four-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return?
A) 12%
B) 13%
C) 14%
D) 15%
Q2) The internal rate of return method assumes that project cash flows can be reinvested at the project's ________.
A) internal rate of return
B) required rate of return
C) growth rate
D) accounting rate of return
Q3) Explain capital budgeting and then briefly discuss each of the five stages of a capital budgeting project?
Q4) 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 seller of a product has no idle capacity and can sell all it can produce at $40 per unit. Outlay cost is $19. What is the opportunity cost, assuming the seller sells internally?
A) $19
B) $21
C) $40
D) $59
Q2) The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.
A)True
B)False
Q3) Effective management control systems should also motivate managers and other employees.
A)True
B)False
Q4) What does Section 482 of the U.S. Internal Revenue Code govern?
Q5) The cost used in cost-based transfer prices can be actual cost or budgeted cost.
A)True
B)False
Q6) What is decentralization and what are its benefits?
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Chapter 23: Performance Measurement, Compensation, and
Multinational Considerations
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Q1) Springfield Corporation, whose tax rate is 34%, has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 9%, and equity capital with a market value of $16,000,000 and a cost of equity of 14%. What is Springfield's weighted average cost of capital (WACC)?
A) 14.00%
B) 9.97%
C) 11.80%
D) 12.64%
Q2) Discuss the issues and complications that may arise when multinational corporations conduct performance measurement and comparisons among divisions located in different countries.
Q3) An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks. A)True B)False
Q4) Executive compensation plans are based on both financial and nonfinancial performance measures. Discuss
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