Chapter 7 Reading

Question 1

what are the two types of cost accounting choices?

Answer 1

• stock-costing choices
• denominator-level choices

Question 2

stock-costing choices = ?

Answer 2

choices that relate to which costs are to be recorded as stock when they’re incurred

two alternative stock costing choices: variable / absorption costing

Question 3

denominator-level choices = ?

Answer 3

the choices that relate to the pre-selected level of the cost allocation base used for setting budgeted fixed manufcaturing cost rates

four alternatives include: theoretical capacity/practical capacity/ normal utilisation/ master-budget utilisation

Question 4

what are the two most commonly encountered methods of costing stock?

Answer 4

• variable costing
• absorption costing

Question 5

absorption costing = ?

Answer 5

the required method under GAAP for external reporting in most countries

Question 6

management accountants most frequently use…

Answer 6

variable costing for decision making and performance evaluation purposes

Question 7

inventoriable costs = ?

Answer 7

costs related to product rather than expenses on a period basis

Question 8

difference between variable and absorption costing?

Answer 8

absorption costing - fixed overhead’s classed as product cost

variable costing - fixed overhead’s classed as period cost

Question 9

variable costing = ?

Answer 9

a method of stock costing in which all variable manufacturing costs are included as inventoriable costs

all fixed manufacturing costs are excluded from inventoriable costs; they’re costs of the period in which they’re incurred

Question 10

absorption costing = ?

Answer 10

a method of stock costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs

stock ‘absorbs’ all manufacturing costs

Question 11

period cost = ?

Answer 11

cost associated with the period

unaffected by number of goods manufactured

Question 12

product costs = ?

Answer 12

cost associated with number of goods manufactured

e.g., cost is £100,000, 100 units produced … product cost is £1,000 per unit

Question 13

contribution margin = ?

Answer 13

sales - variable costs

Question 14

when is a contribution margin used and when is a gross margin used?

Answer 14

contribution margin used for variable-costing income statements (sales - variable costs)

gross margin used for absorption costing income statements (sales - COGS)

Question 15

standard costing system = ?

Answer 15

uses budgeted estimates for both variable and fixed costs

Question 16

absorption-costing operation profit - variable costing operation profit = ?

Answer 16

fixed manufacturing costs in closing stock - fixed manufacturing costs in opening stock

Question 17

sunk cost = ?

Answer 17

a cost that has already been incurred and cannot be recovered

sunk costs should be irrelevant to decision making

Question 18

capacity = ?

Answer 18

constraint and upper limit

Question 19

theoretical capacity?

Answer 19

the denominator-level concept that is based on the production of output at full efficiency for all of the time

e.g., company produces 2400 units per hour during 8 hr shifts … 2400 x 8 = …

theoretical as it doesn’t account for potential incidental setbacks (e.g., breakages)

Question 20

practical capacity = ?

Answer 20

denominator-level concept that reduces theoretical capacity for unavoidable operating interruptions (e.g., schedules maintenance time, holidays etc)

practical as it accounts for potential pauses in production

Question 21

theoretical & practical capacity measure denominator in terms of what plant can supply, normal & master-budget utilisation measure denominator in terms of…

Answer 21

demand fo the output of the plant

Question 22

normal utilisation = ?

Answer 22

denominator-level concept based on the level of capacity utilisation that satisfies average customer demand over a period (e.g., 2-3 yrs)

Question 23

master budget utilisation = ?

Answer 23

denominator-level concept based on the anticipated level of capacity utilisation for the next budget period