Cost Accounting Concepts

Questions and Answers

What happens to fixed cost per unit as production volume increases?

It increases because fixed costs remain the same.

It remains constant regardless of production volume.

It increases as total fixed costs are spread over more units.

It decreases as fixed costs are distributed over more units. (correct)

What does the Contribution Margin Ratio indicate?

The total fixed costs allocated to each product sold.

The percentage of sales revenue covering fixed costs. (correct)

The total variable costs for every unit sold.

The relationship between direct costs and total costs.

Why are equivalent-unit calculations necessary in process costing?

To accurately distribute costs between completed and partially completed units. (correct)

To calculate the price elasticity of the product.

To determine the total material costs of completed units.

To assign fixed costs to variable cost calculations.

If a company has high fixed costs and low variable costs, which of the following statements is true regarding operating leverage?

It amplifies the changes in profits based on sales volume changes. Signup and view all the answers

What is the formula for calculating the breakeven point in sales volume?

Breakeven Point (Sales Volume) = Fixed Costs / Contribution Margin Per Unit. Signup and view all the answers

What defines a linear cost function in terms of its mathematical representation?

Y = A + BX, where Y signifies total cost. Signup and view all the answers

What is the correct definition of 'differential cost'?

The change in total costs between two alternatives. Signup and view all the answers

In a weighted average process-costing method, how is the weighted average cost determined?

By dividing total costs in the WIP account by total equivalent units of work done. Signup and view all the answers

Which of the following correctly describes period costs?

Costs expensed directly as incurred. Signup and view all the answers

What is the main function of 'cost assignment' in cost accounting?

To gather and allocate costs to a specific cost object. Signup and view all the answers

What is the primary characteristic of simple costing systems?

They utilize a single volume-based cost driver across all products. Signup and view all the answers

In normal costing, how are indirect costs calculated?

From budgeted indirect cost rates multiplied by actual activity levels. Signup and view all the answers

Which statement best describes activity-based costing (ABC)?

ABC allocates costs based on multiple activities that consume resources. Signup and view all the answers

What is a significant drawback of traditional costing systems?

They apply overhead costs uniformly regardless of consumption differences. Signup and view all the answers

In job costing, how is each cost object treated?

Each cost object is accounted for separately to reflect its unique costing needs. Signup and view all the answers

What defines process costing?

It applies in scenarios where identical or similar items are mass-produced. Signup and view all the answers

Which of the following is a feature of actual costing?

Indirect costs are based on actual rates and direct costs are actual. Signup and view all the answers

What is the primary intent of using multiple cost drivers in ABC?

To achieve a more accurate representation of resource consumption. Signup and view all the answers

Which costs are guaranteed to be treated as actual in normal costing?

Direct costs. Signup and view all the answers

How can traditional costing lead to over or under costing of products?

Through a limited number of cost drivers that do not represent actual resource use. Signup and view all the answers

Study Notes

Normal vs. Actual Costing

Normal costing allocates indirect costs using budgeted indirect cost rates multiplied by actual activity consumption.
Direct costs are based on actual figures, while manufacturing overhead costs are budgeted.
Examples of overhead costs include electricity, rent, and water.
Actual costing relies on actual indirect cost rates for overhead, with both direct and manufacturing overhead costs based on actual amounts.

Job Costing

Job costing tracks costs for each cost object, such as products, batches, or projects.
Pricing varies for custom products or services due to differing processes and levels of work involved.

Process Costing

Suitable for mass production of identical or similar items using multiple processes.
Each item produced is treated the same.

Simple Costing Systems (Traditional Costing)

Overhead costs are allocated using a single volume-based cost driver, like labor hours or machine hours.
This method can lead to over or under-costing products as it applies overhead uniformly across all items.

Activity Based Costing (ABC)

ABC allocates costs based on various activities that drive overhead expenses.
It identifies specific activities in production and assigns costs based on actual consumption, enhancing accuracy with multiple cost drivers.

Linear Cost Function

Represents the relationship between total cost and activity level using the formula: Y = A + BX.
Y signifies total cost, A denotes fixed costs, B indicates variable cost per unit, and X represents the cost driver.

Cost Assignment

Gathering costs to specific cost objects includes tracing and allocating expenses.
Tracing involves direct costs (e.g., materials and labor for a product), while allocating pertains to indirect costs.

Fixed vs. Variable Costs

Fixed costs do not change with activity level but can change due to external factors (e.g., rent increases).
Variable cost per unit remains constant regardless of quantity produced (e.g., material cost remains $1 per kg).

Relevant Range

Defines the range of activity levels over which fixed costs remain constant.

Conversion Costs and Prime Costs

Conversion costs are linked to changing raw materials into finished products.
Prime costs encompass all direct costs, including materials and labor.

Inventoriable Costs vs. Period Costs

Inventoriable costs include direct materials, direct labor, and manufacturing overhead, capitalized as assets until sold.
Period costs are expensed immediately when incurred.

Equivalent Costs

Express partially complete units in terms of fully complete units for accurate cost allocation.

Sensitivity Analysis

Understanding how changes in costs or volumes affect profit through contribution margin and sales prices.

Contribution Margin

Reflects the amount available to cover fixed costs from each unit sold.

Break Even Point (BEP)

The sales level at which revenues equal costs, resulting in zero profit.
Calculated using fixed costs divided by contribution margin per unit or contribution margin ratio.

Weighted Average Process-Costing Method

Determines the cost per equivalent unit for all work completed to date and assigns this to completed and incomplete units.

Operating Leverage

Represents the ratio of fixed to variable costs.
Higher operating leverage suggests greater fluctuation in profit with changes in sales volume.

Incremental Revenue and Costs

Incremental revenue refers to additional revenue from an activity, while incremental costs refer to additional costs incurred.

Differential Revenue and Costs

Differential revenue assesses the revenue difference between two options, and differential cost assesses the cost difference.

Over and Under Costing

Over costing occurs when low-resource-intensive products receive inflated cost allocations.
Under costing applies when resource-heavy products are assigned low costs.

Value Chain Components

Research and Development: Aligns research with business activities and enhances products.
Design: Involves product design, delivery, and manufacturing considerations.
Production: Includes materials, labor, and manufacturing processes.
Marketing: Focuses on customer preferences and advertising strategies.
Distribution: Covers the costs of delivering products to customers.
Customer Service: Involves responses to customer inquiries post-sale.

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Description

Explore the differences between normal costing and actual costing in this quiz. Understand how indirect costs are calculated and how budgeted and actual costs affect manufacturing overhead. Test your knowledge with examples of overhead costs such as electricity and rent.