Cost Accounting Test 1 Flashcards

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Questions and Answers

The primary user of financial accounting information is a ________.

Distribution manager

Department manager

Factory shift supervisor

Current shareholder (correct)

The primary user of management accounting information is a(n) ________.

The controller (correct)

Bondholder

External regulator

A shareholder evaluating a stock investment

Which of the following statements concerning an organization's strategy is true?

Businesses usually follow one of two broad strategies: offering a quality product at a high price, or offering a unique product or service priced lower than the competition.

A good strategy will always overcome poor implementation.

Cost accountants formulate strategy in an organization since they have more inputs about costs.

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. (correct)

Cost tracing is ________.

The assignment of direct costs to the chosen cost object Signup and view all the answers

Cost allocation is ________.

The assignment of indirect costs to the chosen cost object Signup and view all the answers

The general term used to identify both the tracing and the allocation of accumulated costs to a cost object is ________.

Cost assignment Signup and view all the answers

Indirect manufacturing costs ________.

May include both variable and fixed costs Signup and view all the answers

Inventoriable costs and period costs flow through the income statement at a merchandising company similar to the way costs flow at a manufacturing company.

True Signup and view all the answers

For external reporting ________.

Costs are classified as either inventoriable or period costs Signup and view all the answers

Inventoriable costs are costs of a product that are ________.

Costs of a product that are considered assets in a company's balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold Signup and view all the answers

Costs expensed on the income statement in the accounting period incurred are called ________.

Period costs Signup and view all the answers

A plant manufactures several different products. The wages of the plant supervisor can be classified as a(n) ________.

Inventoriable cost Signup and view all the answers

The income statement of a service-sector firm reports ________.

Period costs only Signup and view all the answers

Which of the following is an inventoriable cost?

Manufacturing overhead cost Signup and view all the answers

Inventoriable costs are expensed on the income statement ________.

When the products are sold Signup and view all the answers

Costs that are initially recorded as assets and expensed when goods sold are called ________.

Inventoriable costs Signup and view all the answers

For merchandising companies, inventoriable costs include ________.

Incoming freight costs Signup and view all the answers

For manufacturing firms, inventoriable costs include ________.

Plant supervisor salaries Signup and view all the answers

How would the daily profit be affected if the daily volume of sales drops by 10%?

Profits are reduced by $4,000 Signup and view all the answers

For a manufacturing-sector company, the cost of factory depreciation is classified as a ________.

Manufacturing overhead cost Signup and view all the answers

Under GAAP, for the purposes of calculating inventory costs, product costs include ________.

Only inventoriable costs Signup and view all the answers

Which of the following is true if the production volume decreases?

Fixed cost per unit increases Signup and view all the answers

The contribution margin income statement ________.

Can be used to predict future profits at different levels of activity Signup and view all the answers

The breakeven point decreases if ________.

The total fixed costs decrease Signup and view all the answers

If this proposed reduction in selling price is implemented ________.

Operating income will decrease by $9,500 Signup and view all the answers

In a company with low operating leverage, ________.

Less risk is assumed than in a highly leveraged firm Signup and view all the answers

A company with a higher degree of operating leverage is at greater risk during economic downturns because of its higher fixed costs.

True Signup and view all the answers

If a company would like to increase its degree of operating leverage it should ________.

Increase its fixed costs relative to its variable costs Signup and view all the answers

For decision making, a listing of the relevant costs ________.

Will help the decision maker concentrate on the pertinent data Signup and view all the answers

In evaluating different alternatives, it is useful to concentrate on ________.

Relevant costs Signup and view all the answers

Which of the following costs always differ among future alternatives?

Relevant costs Signup and view all the answers

Which of the following costs is relevant in a decision-making process?

Variable costs Signup and view all the answers

Which of the following is true of relevant information?

Past costs are not relevant. Signup and view all the answers

When deciding to accept a one-time-only special order from a wholesaler, management should ________.

Determine whether excess capacity is available Signup and view all the answers

When there is an excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price if ________.

Incremental revenues exceed incremental costs Signup and view all the answers

Which of the following is an irrelevant cost?

Depreciation Signup and view all the answers

Which of the following is true of depreciation cost?

Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment that has already been purchased is a past cost. Signup and view all the answers

Altec Services Corporation has relevant costs of $40 per unit to manufacture 1,000 units of Part A. A current supplier offers to make Part A for $35 per unit. Alternatively, the company can rent out the capacity for $25,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is ________.

$25,000 Signup and view all the answers

If there are 496 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?

100 units of Standard and 49 units of Premium Signup and view all the answers

Zephyr Energies, Inc. is considering eliminating one of its product lines. What financial effects occur if the product line is discontinued?

Net income will decrease by the amount of the contribution margin of the product line being discontinued Signup and view all the answers

Discontinuing unprofitable products will ________.

Increase profitability if the resources no longer required by the discontinued product can be eliminated Signup and view all the answers

Study Notes

Financial Accounting vs. Management Accounting

Primary user of financial accounting: Current Shareholder.
Primary user of management accounting: Controller.

Organizational Strategy

Strategy aligns an organization's capabilities with market opportunities to achieve objectives.
Cost accountants play a role in formulating strategy due to their cost insights.

Cost Tracing and Allocation

Cost tracing refers to the assignment of direct costs to a cost object.
Cost allocation involves the assignment of indirect costs to a cost object.
General term for tracing and allocation of costs: Cost Assignment.

Indirect Manufacturing Costs

Indirect manufacturing costs may include both variable and fixed costs.

Cost Classification for Reporting

Inventoriable costs are assets on the balance sheet until sold, then expensed as cost of goods sold.
Period costs are expensed in the period incurred.

Income Statement Dynamics

Service-sector firms report only period costs.
For merchandising companies, inventoriable costs flow similarly to manufacturing firms.

Cost of Goods and Breakeven Analysis

For merchandising firms, inventoriable costs include incoming freight costs.
For manufacturing firms, costs such as plant supervisor salaries count as inventoriable costs.
Fixed costs per unit increase as production volume decreases.

Contribution Margin and Operating Leverage

The contribution margin format assists in predicting future profits at varying activity levels.
To increase operating leverage, a firm should increase fixed costs relative to variable costs, which elevates risk during downturns.

Relevant Costs in Decision Making

Relevant costs focus on costs that differ among future alternatives.
Historical and sunk costs are generally not relevant for decision-making.
Accepting a special order should be based on whether incremental revenues exceed incremental costs.

Financial Impact of Discontinuation

Discontinuing a product line decreases net income by the amount of the contribution margin of that line.
Eliminating unprofitable products can enhance profitability if unnecessary resources are removed.

Key Formulas and Calculations

Daily profit change from a sales drop calculated as:
- Initial profit = Revenue - Total Costs.
- Profit after drop = Revenue after drop - Total Fixed Costs & Variable Costs.
Reduction in operating income from price decrease evaluated by comparing revenue loss with contribution increase.

General Cost Principles

Depreciation is considered a past cost and is typically irrelevant in decision-making.
The opportunity cost of manufacturing vs. purchasing is critical for maximizing profit, considering alternative incomes from renting capacity.

This summary encapsulates foundational concepts in cost accounting crucial for test preparation and reinforces important terminology and principles.

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Test your knowledge with these flashcards focused on key concepts in cost accounting. Each card presents a question related to the primary users of financial and management accounting information. Great for students preparing for exams!