Management Accounting midterm

Question 1

Define a cost object

Answer 1

Anything for which a separate measurement of costs is desired. It can be a product, a machine, a service, a process, or any other entity.

Question 2

A structured method used by businesses to track and allocate costs associated with their operations is called a :

Answer 2

costing system

Question 3

The process of gathering and organizing cost data according to specific categories such as materials, labor, fuel, advertising, or shipping is called :

Answer 3

cost accumulation

Question 4

What are direct costs?

Answer 4

Costs that can be specifically traced to a particular cost object, such as materials and labor directly used in production.

Question 5

What are indirect costs?

Answer 5

Costs that cannot be easily attributed to a specific cost object and are allocated based on a predetermined allocation method, such as overhead costs

Question 6

The real costs incurred by a business in its operations, also known as historical costs, as opposed to budgeted or forecasted costs are called:

Answer 6

actual costs

Question 7

If a company pays temporary wages only in periods of high production, then this is a _________ cost

Answer 7

variable

Question 8

Define cost driver:

Answer 8

Also known as a cost generator or cost determinant, a cost driver is any factor that influences the total costs incurred by an organization. Changes in the level of the cost driver lead to corresponding changes in the total cost of a related cost object.

Question 9

Give an example of a cost driver:

Answer 9

For​ example, the number of vehicles assembled is a driver of the costs of steering wheels on a​ motor-vehicle assembly line.

Question 10

Why do managers consider direct costs to be more accurate than indirect costs?

Answer 10

Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions.

Question 11

Name three factors that will affect the classification of a cost as direct or indirect.

Answer 11

 the materiality of the cost in question
 available information-gathering technology
 design of operations

Question 12

Describe the duties of a merchandising sector company?

Answer 12

These companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution.

Question 13

Manufacturing companies have 3 types of inventory. What are they?

Answer 13

1. Direct materials inventory. Direct materials in stock and awaiting use in the
   manufacturing process.
2. Work-in-process inventory. Goods partially worked on but not yet completed. Also called work in progress.
3. Finished goods inventory. Goods completed but not yet sold.

Question 14

What are inventoriable costs?

Answer 14

Inventoriable costs are the expenses directly related to producing a product, like raw materials and direct labor, which are recorded as assets on the balance sheet until the product is sold.

Question 15

What are period costs?

Answer 15

Period costs are expenses incurred in running the business that aren’t directly tied to producing specific goods, such as rent, utilities, and administrative salaries. These costs are expensed in the period they’re incurred.

Question 16

When do inventoriable costs become expenses?

Answer 16

Inventoriable costs become expenses when the associated product is sold, at which point they’re recognized as part of the cost of goods sold (COGS) on the income statement.

Question 17

In a bakery, what type of costs would expense of ingredients and direct labor when making cupcakes be?

Answer 17

They would be labelled as an inventoriable cost because they are directly assosciated with producing the cupcake and recorded as an asset until the cupcakes are sold. once sold , these costs become recognized as expenses under the COGS.

Question 18

What are manufacturing overhead costs?

Answer 18

These are manufacturing costs that are related to the cost object but cannot be traced to that object in an economically feasible way

Question 19

As the cost driver level increases, total fixed cost remains __________

Answer 19

unchanged

Question 20

Formula for Prime Costs:

Answer 20

Direct Materials+Direct Manufacturing Labor+Additional Direct Costs

Question 21

Unit costs must be interpreted with _________

Answer 21

caution; if they include fixed costs
per unit.

Question 22

When an item is a fixed cost , unit costs _____ with changes in the level of the cost driver

Answer 22

increase

Question 23

When item is a variable cost, unit costs ________ with changes in the level of the cost driver.

Answer 23

remain the same

Question 24

Stock-related costs are also known as ________ costs

Answer 24

inventoriable

Question 25

For service-sector companies, all costs in the income statement are considered ______ costs since there are no ________costs.

Answer 25

period; inventoriable

Question 26

Formula for COGS:

Answer 26

Opening Finished Goods Stock+Cost of Goods Manufactured−Closing Finished Goods Stock

Question 27

What does the useful life of an asset refer to?

Answer 27

The useful life of an asset refers to the period over which it is expected to be economically feasible to use the asset in business operations.

Question 28

What does the Cost of Goods Manufactured refer to?

Answer 28

The cost of goods manufactured refers to the total cost of goods that have been brought to completion during a specific accounting period.

Question 29

What does Cost of Goods Manufactured refer to?

Answer 29

This includes all manufacturing costs incurred, regardless of whether the goods were started before or during the current period.

Question 30

Formula for budgeted indirect cost rate:

Answer 30

Budgeted Indirect Cost/Budgeted Direct Labour hours

Question 31

Assigning direct costs to a cost object is called ________.

Answer 31

cost tracing

Question 32

________ is the process of distributing indirect costs to products.
A) Cost allocation
B) Job cost recording
C) Cost pooling
D) Cost tracing

Answer 32

Cost allocation

Question 33

A ________ links an indirect cost to a cost object.
A) cost-­‐‑allocation base
B) cost pool
C) cost assignment
D) cost tracing

Answer 33

cost-allocation base

Question 34

The cost allocation base ________.
A) is a grouping of individual indirect cost items
B) are costs related to a particular cost object that cannot be traced to that cost object in an economically
feasible way
C) is anything for which a measurement of costs is desired
D) is a systematic way to link an indirect cost or group of indirect costs to cost objects

Answer 34

D

Question 35

Direct costs of a cost object are costs related to a particular cost object that can be allocated to that cost
object in an economically feasible (cost-­‐‑effective) way. Why is this incorrect?

Answer 35

Because they are traced and NOT allocated

Question 36

Process costing is used by business to ________.

Answer 36

to price identical products

Question 37

Job costing is used by businesses to________.

Answer 37

to price unique products for different jobs

Question 38

What differentiates job costing from process costing?

Answer 38

Process costing is used when each unit of output is identical, and job costing deals with unique products not produced in batches.Process costing uses conversion!

Question 39

Which of the following companies will use a process costing system?
A) an oil refining company
B) a manufacturer of ships
C) a custom watch manufacturer
D) an advertising firm

Answer 39

an oil refining company

Question 40

Oil refining companies primarily use _______ costing to estimate costs.

Answer 40

process; Process costing is used to estimate costs in oil refining companies as the same process is
used to extract oil.

Question 41

Job costing is the logical choice when the production process has _______ jobs, while process costing is typically used when it is not necessary to keep separate cost records for individual jobs and the products are relatively ______

Answer 41

heterogenous; homogenous

Question 42

The actual indirect-­‐‑cost rate is calculated by ________.

Answer 42

dividing actual total INDIRECT costs by the actual direct labour hours

Question 43

formula to calculate the indirect costs under normal costing

Answer 43

Budget-indirect cost rate * Actual direct labour-hours

Question 44

How does normal costing allow for more timely reporting of job costs?

Answer 44

Normal costing involves allocating indirect costs to products or jobs using predetermined rates based on a standard cost system. This means that job costs can be calculated and reported immediately after a job is finished, without waiting for actual indirect costs to be determined.

Question 45

What are some examples of revenue costs?

Answer 45

: Examples of revenue costs include salaries and rent. These expenses are directly related to the day-to-day operations of the business and are expensed in the period they are incurred.

Question 46

Revenue costs are also known as ____ expenses and ______ expenses

Answer 46

period; operating

Question 47

All direct production costs are called ____ costs

Answer 47

prime

Question 48

Why are period costs treated as expenses of the accounting period in which they are incurred?

Answer 48

Because they are expected to not benefit future periods

Question 49

What is a cost allocation base?

Answer 49

A cost allocation base is the unit, activity, or item that allocates costs in an organization. It can be used to measure and assign expenses to departments and activities accurately.

Question 50

Overhead allocation rate (formula)

Answer 50

Budgeted overhead/ Budgeted cost allocation base

• where budgeted cost allocation base could be labour hours or machine hours

Question 51

The overheaded allocation rate is given in percentage and represents the percentage of _____

Answer 51

either direct machine costs or direct labour costs !!!!

Question 52

Underallocated manufacturing
overhead (formula)

Answer 52

Actual manufacturing overhead costs - Allocated plant overhead costs

Question 53

Conversion costs =

Answer 53

Direct labour + Factory overhead

Question 54

Direct materials + Conversion costs =

Answer 54

Total Production Costs

Question 55

Under the weighted average method, we do NOT MAKE A DISTINCTION between wHAT?

Answer 55

Between opening work in progress and production in current month

Question 56

How to calculate the amount of under or overallocated?

Answer 56

Underallocated = Actual overhead - Allocated overhead
, where allocated overhead = Expected overhead/expected hours * actual hours

Question 57

Formula for manufacturing overhead:

Answer 57

Overhead costs/Cost of direct manufacturing

Question 58

What is the primary purpose of allocating R&D costs?
A) To provide information for economic decisions.
B) To report to external parties when using generally accepted accounting principles.
C) To calculate costs of a government contract.
D) All of these answers are correct.

Answer 58

A - To provide information for economic decisions

Question 59

In the context of R&D costs, why is it important to allocate expenses?

Answer 59

To accurately reflect the financial implications of research efforts.

Question 60

10) Which purpose of cost allocation is used to cost products at a “fair” price?
A) to provide information for economic decisions
B) to motivate managers and other employees
C) to justify costs or compute reimbursement
D) to measure income and assets for reporting to external parties

Answer 60

C) to justify costs or compute reimbursement

Question 61

Which purpose of cost allocation is used to decide on the selling price for a customized product or
service?
A) to provide information for economic decisions
B) to motivate managers and other employees
C) to justify costs or compute reimbursement
D) to measure income and assets for reporting to external parties

Answer 61

A) to provide information for economic decisions

Question 62

What purpose of cost allocation involves costing inventories for the balance sheet?

Answer 62

To measure income and assets

Question 63

When evaluating a make or buy decision, which purpose of cost allocation is typically employed?

Answer 63

To provide information for economic decisions

Question 64

Which purpose of cost allocation aims to encourage the sales department to focus on high-margin products?

Answer 64

To motivate managers and other employees

Question 65

What purpose of cost allocation involves costing inventories for reporting on a company’s tax return?

Answer 65

To measure income and assets

Question 66

Distinguish between the single-rate and the dual-rate methods.

Answer 66

The single-rate (cost-allocation) method makes no distinction between fixed costs and variable costs in the cost pool. It allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base. The dual-rate (cost allocation) method classifies costs in each
cost pool into two pools—a variable-cost pool and a fixed-cost pool—with each pool using a different cost-allocation base

Question 67

Why might a manager prefer that budgeted rather than actual cost-allocation rates be used
for costs being allocated to his or her department from another department?

Answer 67

The use of budgeted indirect cost allocation rates rather than actual indirect rates has several
attractive features to the manager of a user department:
a. The user knows the costs in advance and can factor them into ongoing operating
choices.
b. The cost allocated to a particular user department does not depend on the amount
of resources used by other user departments.
c. Inefficiencies at the department providing the service do not affect the costs allocated
to the user department.

Question 68

How does the reciprocal method allocate costs?

Answer 68

The reciprocal (allocation) method allocates support-department costs to operating
departments by fully recognizing the mutual services provided among all support departments.

Question 69

Absorption costing is also known as the _______ method

Answer 69

full costing

Question 70

What are the two types of overhead costs?

Answer 70

Variable and fixed

Question 71

Which costs are included in product cost (inventoriable cost) under the absorption costing method?

Answer 71

DM, DL, and Fixed Overhead

Question 72

Define a joint cost:

Answer 72

The cost of a production process that yields multiple products or services simultaneously. For instance, the distillation of coal produces coke, gas, and other products concurrently, incurring joint costs.

Question 73

Define split-off point:

Answer 73

The juncture in a production process where one or more products become separately identifiable, occurring in a joint-cost setting. An example is when coal is distilled to yield coke, gas, and other products, marking the split-off point.

Question 74

Define seperable costs:

Answer 74

Costs incurred beyond the split-off point that are assignable to one or more individual products. After the split-off point in the coal distillation process, costs related to further processing of coke, gas, or other products are separable costs.

Question 75

What is a by-product:

Answer 75

A product with a low sales value compared to the main or joint product(s) resulting from the same process. For instance, in the coal distillation process, if tar or ammonia is produced alongside coke and gas, and has lower sales value, it’s considered a by-product.

Question 76

True or false: Joint costs are incurred beyond the splitoff point and are assignable to individual
products.

Answer 76

False

Question 77

True or false:Separable costs are assignable after the splitoff point.

Answer 77

True

Question 78

True or false: A byproduct has a minimal sales value.

Answer 78

True

Question 79

: What criterion does the “sales value at splitoff” method align with? *with regard to joint costs

Answer 79

It aligns with the benefits-received criterion in cost allocation, which suggests that costs should be allocated in proportion to the benefits or value derived by each product or department.

Question 80

How does the “sales value at splitoff” method allocate costs?

Answer 80

It assigns costs according to the revenue-generating potential of each product. Products with higher sales values receive a larger portion of the joint costs.

Question 81

What are the 4 allocation methods for joint costs?

Answer 81

• Physical measures
• Output (market) value
• Taking into account additional steps after the split-off point: net realizable value
• Aiming for similar profit margins: constant gross margin

Question 82

Why should joint costs be allocated?

Answer 82

• a company may want to measure its performance
• ## we may need to valuate inventory for reporting purposes

Question 83

Total cost to account for (under WAVO)

Answer 83

Opening WIP (for materials) + Opening WIP (for conversions) + Material Costs + Conversion costs

Question 84

Under weighted average method equivalent units (materials) =

Answer 84

Completed + Ending WIP

Question 85

Under weighted average method equivalent units (conversion) =

Answer 85

Completed + Ending WIP * coversion rate

Question 86

Cost of completed output (weighted average method) =

Answer 86

Completed units * average cost of equivalent unit (average of materials and conversion)

Question 87

Cost of WIP End (weighted average method)=

Answer 87

Ending work in progress units * cost per equivalent unit (materials)

Question 88

The difference between the weighted average and FIFO is that when calculataing total costs under FIFO

Answer 88

we don’t add the sum of WIP opening and completed; we look at them seperately

Question 89

Formula for cost of completed output (materials) under FIFO =

Answer 89

Beginning WIP + Units started and completed * cost per equivalent unit of materials , where cost per equivalent unit of materials = Cost of completed materials/Equivalent unit of materials

Question 90

Formula for started and completed (FIFO method) =

Answer 90

Completed - Beginning WIP

Question 91

Formula for cost of completed output (FIFO method) =

Answer 91

Opening WIP cost + Started and Completed * cost per equivalent unit ,
where cost per equivalent unit = Costs added/ Equivalent unit (materials)

Question 92

If the number you get when calculating underallocated is positive this means you are dealing with

Answer 92

underallocation

Question 93

Elaborate what Method 1 : Proration based on overheads means?

Answer 93

So here this means that we calculate the share of overheads already included and multiply these calculated shares by the remaining overhead

Question 94

Elaborate what proration based on year end values means?

Answer 94

It means that we look at share of value at year end and multiply these percentages by the under or overallocated amount

Question 95

True or false: When input prices have decreased in a month, the ending work-in-process is valued higher under the weighted average method
than under the FIFO method

Answer 95

True

Question 96

Which of the following allocation methods for joint costs most closely follows a cause-and-effect logic in allocating joint costs?
A Physical measures
B Constant gross margin
C Net realizable value
D No difference: all to the same extent

Answer 96

D

Question 97

Define relevant costs. Why are historical costs irrelevant?

Answer 97

Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs
are irrelevant because they are past costs and therefore cannot differ among alternative future courses of action.

Question 98

allocated overhead amount in end of year balances means you look at:

Answer 98

hours and not at sales

Question 99

Cost per equivalent unit (FIFO)

Answer 99

Costs added/ equivalent unit

Question 100

Equivalent units (conversion; FIFO)

Answer 100

Completed - BegWIP * conversion + Ending WIP *conversion

Question 101

Write off method means that all overhead goes immediately to :

Answer 101

COGS

Question 102

Break even point in terms of units:

Answer 102

Fixed cost / Contribution Margin , where contribution margin = price per unit - variable costs per unit

Question 103

Contribution Margin ratio (per unit)=

Answer 103

contribution margin (=price - vc)/price

Question 104

Break even point (in sales)=

Answer 104

Fixed Costs / Contribution Margin ratio

Question 105

Contribution margin ratio (in sales)=

Answer 105

Sales - Variable costs/Sales

Question 106

Target profit CPV =

Answer 106

FC + Target profit / Contribution margin ratio

Question 107

When counting cost per equivalebt unit in FIFO we look at

Answer 107

Costs Added Only And divide by equivalent unit ( Complete + end - beg)

Question 108

Units needed to sell to receive after tax profit:

Answer 108

Total fixed costs+(Target after tax profit/(1-tax rate)/ Unit contribution margin

Question 109

: How to calculate the Contribution Margin (CM)?

Answer 109

Contribution Margin= Total Sales- Variable Cost

Question 110

How to calculate the Contribution Margin (CM) ratio?

Answer 110

CM Ratio= Unit Contribution Margin/Unit Selling Price.

Question 111

Break-Even Point in Units=F

Answer 111

=Fixed Costs/Unit Contribution Margin

Question 112

Break-Even Point in Dollars=

Answer 112

Fixed Costs/Contribution Margin Ratio

Question 113

How to calculate the required sales in units and dollars?

Answer 113

Required Sales in Units = (Fixed Costs+ Target Net Income) / Unit
Contribution Margin
Required Sales in Dollars = (Fixed Costs+ Target Net Income) /
Contribution Margin Ratio

Question 114

To which function of management is CVP analysis most applicable?

Answer 114

planning

Question 115

Cost of goods manufactured =

Answer 115

Manufacturing costs - Change in inventory (End - Beg WIP)

Question 116

Formula for absorption profit=

Answer 116

Revenues - COGS + Production volume variance, where production volume variance = (actual production - budgeted production) * Fixed Costs

Question 117

Production Volume Variance =

Answer 117

(actual production - budgeted production) * Fixed Costs

Question 118

What are Denominator-level Capacity decisions?

Answer 118

Denominator-level Capacity decisions involve determining the capacity level for fixed manufacturing cost rates within a company’s operations.

Question 119

What choices are available for Denominator-level Capacity decisions?

Answer 119

: The choices include theoretical, practical, normal utilization, and master-budget utilization.

Question 120

What is Theoretical Capacity?

Answer 120

Theoretical Capacity represents the maximum possible output achievable under ideal conditions, without any downtime or interruptions.

Question 121

What is Practical Capacity?

Answer 121

Practical Capacity considers real-world limitations and inefficiencies such as equipment downtime, maintenance, and employee breaks, providing a more realistic assessment of production potential.

Question 122

What is Normal Utilization?

Answer 122

Normal Utilization refers to the level of capacity utilization that satisfies average customer demand over time, accounting for seasonal fluctuations or cyclical trends.

Question 123

What is Master-budget Utilization?

Answer 123

Master-budget Utilization is the capacity level expected for the current budget period based on the organization’s strategic and financial plans, serving as a basis for budgeting fixed manufacturing costs.

Question 124

How do Denominator-level Capacity decisions impact fixed manufacturing costs?

Answer 124

The choice of capacity level influences budgeted fixed manufacturing cost rates, affecting product costing, pricing decisions, and overall profitability.

Question 125

In what kind of companies are variable costs per unit low and therefore the margin is just the selling pricr?

Answer 125

In a lot of online service settings, like streaming platforms, education etc.

Question 126

CVP analysis assumptionss:

Answer 126

Fixed and variable costs can be distinguished; seperated
Cost and revenue behaviour is similar within a certain range (fixed costs do not change; no new machines or buildings)
No increase in price of labour
Concerns a single product/service or constant mix of products
we ignore the time value of money

Question 127

What impacts the break even point?

Answer 127

• the extent to which costs are fixed
• ## relative importance of fixed and variable costs in a firm’s cost structure (this is called operating leverage)

Question 128

Economies are good (with regard to fixed costs) if ____ is high

Answer 128

volume

Question 129

What can economies of scale lead to? (a downside)

Answer 129

large losses

Question 130

How can we estimate cost behaviour?

Answer 130

For cost-based decision making, we need to have a good idea of the cost driver,

Question 131

Cost behaviour depends on the choice of _____ and ____ span and _____

Answer 131

cost object and time span, because in the long run all costs are variable
It also depends on company assets

Question 132

The relevant range of cost behaviour refers to:

Answer 132

fact that company assets have a limited capacity

Question 133

Most of the time we assume that cost behaviour is ______

Answer 133

linear

Question 134

In what cases is cost behaviour not going to be linear?

Answer 134

• new production techniques with learning curves
• start up of new machines
  *this is because we are changing our production inputs

Question 135

Describe the assumptions underlying CVP analysi

Answer 135

Changes in the level of revenues and costs arise only because of changes in the number
of product (or service) units sold.
2. Total costs can be separated into a fixed component that does not vary with the units sold
and a variable component that changes with the number of units sold.
3. When represented graphically, the behaviors of total revenues and total costs are linear
(represented as a straight line) in relation to number of units sold within a relevant range
and time period.
4. The selling price, variable cost per unit, and fixed costs are known and constan

Question 136

Contribution margin is the difference between______ and _________.
Contribution margin per unit is the difference between _________ and _______ per unit.
Contribution-margin percentage is the _______ per unit divided by _____.

Answer 136

total revenues; total variable costs
selling price; variable cost
contribution margin; selling price

Question 137

With regard to making decisions, what do you think are the main limitations of CVP
analysis? Explain.

Answer 137

The CVP analysis is based on a simple assumption that focuses only on two factors: revenue and
cost. It assumes that the relationship between revenue and cost is linear. CVP analysis is
applicable within a relevant range of activity and it is assumed that productivity and efficiency of
operations will remain constant. CVP analysis also assumes that costs can be accurately divided
into fixed and variable categories and selling price and variable cost per unit remain constant
while these assumptions may not be true. CVP is limited in terms of the details and the amount
of information that it can provide, especially in a multi-product operation.

Question 138

Is CVP analysis more focused on the short or the long term?

Answer 138

The CVP analysis is more focused on the short run because the variables cannot be influenced
(fixed costs, selling price, and variable costs per unit). So the only variable that can be altered is
the production and sales volume.

Question 139

If actual units are greater than budgeted units our profit will ___ because PVV will ____

Answer 139

rise; rise

Question 140

If actual units are less than budgeted units our profit will _____ because PVV will _____

Answer 140

decrease; decrease

Question 141

What is the most fundamental difference between traditional costing and ABC?

Answer 141

Traditional costing uses one plant-wide overhead rate to allocate overhead. Contrarily ABC uses multiple activity rates. Therefore traditional costing is easier to implement, compared to ABC which is more difficult to implement.
Another difference is that traditional costing methods only allocate product costs, whereas ABC may also allocate period costs

Question 142

Traditional costing is more commonly used for ____ than ABC

Answer 142

COGS

Question 143

Activity based costing is a lot more ____ and thereby cannot be used for external reports

Answer 143

subjective

Question 144

A company implementing ABC will also have to implement ____

Answer 144

traditional costing for external purposes

Question 145

Why may a company prefer ABC over traditional costing?

Answer 145

Because it is more accurate

Question 146

What kind of costs do we look at with activity based costing?

Answer 146

We look at costs of things that are not easily traceable, non-direct costs , basically overhead costs

Question 147

What does overhead refer to?

Answer 147

Overhead refers to the ongoing business expenses not directly attributed to creating a product or service.