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business
cost accounting

Questions and Answers of Cost Accounting

What are the main cost and limitation of implementing ABC systems?
ABC systems only apply to manufacturing companies. Do you agree? Explain.
Activity-based costing is the wave of the present and the future. All companies should adopt it? Do you agree? Explain.
Increasing the number of indirect-cost pools is guaranteed to sizably increase the accuracy of product or service costs. Do you agree? Explain.
The controller of a retail company has just had a $50,000 request to implement and ABC system quickly turned down. A senior vice president, in rejecting the request, noted. Given a choice, I will
Differences in operating income between variable costing and absorption costing are due solely to accounting for fixed costs. Do you agree? Explain.
Why is the term direct costing a misnomer?
Do companies in either the service sector or the merchandising sector make choices about absorption costing versus variable costing?
Explain the main conceptual issue under variable costing and absorption costing regarding the timing for the release of fixed manufacturing overhead as expense.
Companies that make no variable-cost/fixed-cost distinctions must use absorption costing, and those that do make variable-cost/fixed-cost distinctions must use variable costing. Do you agree? Explain.
The main trouble with variable costing is that it ignores the increasing importance of fixed costs in manufacturing companies? Do you agree? Why?
Give an example of how, under absorption costing, operating income could fall even though the unit sales level rises.
What are the factors that affect the breakeven point under?(a) Variable costing and(b) Absorption costing?
Critics of absorption costing have increasingly emphasized its potential for leading to undesirable incentives for managers. Give an example.
What are two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant manager?
What denominator-level capacity concepts emphasize the output a plant can supply? What denominator-level capacity concepts emphasize the output customers demand for products produced by a plant?
Describe the downward demand spiral and its implication for pricing decision.
Will the financial statements of a company always differ when different choices at the start of the accounting period are made regarding the denominator-level capacity concept?
What is the IRS’s requirement for tax reporting regarding the choice of a denominator-level capacity concept?
The difference between practical capacity and master-budget capacity utilization is the best measure of management’s ability to balance the costs of having too much capacity and having too little
Give three examples of industries that use process-costing system?
In process costing, why are costs often divided into two main classifications?
Explain equivalent units. Why are equivalent-unit calculations necessary in process costing?
What problems might arise in estimating the degree of completion of semi conductor chips in a semi conductor plant?
Name the five steps in process costing when equivalent units are computed?
Name the three inventory methods commonly associated with process costing.
Describe the distinctive characteristic of weighted-average computations in assigning costs to units completed and to units in ending work in process.
Describe the distinctive characteristic of FIFO computations in assigning costs to units completed and to units in ending work in process.
Why should the FIFO method be called a modified or department FIFO method?
Identify a major advantage of the FIFO method for purposes of planning and control.
Identify the main difference between journal entries in process costing and job costing?
The standard-costing method is particularly applicable to process-costing situation. Do you agree? Why?
Why should the accountant distinguish between transferred-in costs and additional direct material costs for each subsequent department in a process-costing system?
Transferred-in costs are those costs incurred in the preceding accounting period. Do you agree? Why?
There’s no reason for me to get excited about the choice between the weighted-average and FIFO methods in my process-costing system. I have long term contracts with my materials suppliers at fixed
Why do better decision regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net income?
Name six cost categories that are important in managing goods for sale in a retail company.
What assumptions are made when using the simplest version of the economic-order-quantity (EOQ) decision model?
Given examples of costs included in annual carrying costs of inventory when using the EOQ decision model.
Give three examples of opportunity costs that typically are not recorded in accounting systems although they are relevant when using the EOQ model.
What are the steps in computing the cost of a prediction error when using the EOQ decision model?
Why might goal-congruence issues arise when an EOQ model is used to guide decision on how much to order?
Describe JIT purchasing and its benefits.
What are three factors causing reductions in the cost to place purchase orders for materials?
You should always choose the supplier who offers the lowest price per unit. Do you agree? Explain.
What is supply-chain analysis, and how can it benefit manufactures and retailers?
What are the main features of JIT production?
Distinguish inventory-costing systems using sequential tracking from those using back flush costing.
Describe three different versions of back flush costing.
Discuss the differences between lean accounting and traditional cost accounting.
Capital budgeting has the same focus as accrual accounting. Do you agree? Explain.
List and briefly describe each of the five stages in capital budgeting.
What is the essence of the discounted cash flow methods?
Only quantitative outcomes are relevant in capital budgeting analysis. Do you agree? Explain.
How can sensitivity analysis be incorporated in DCF analysis?
What is the payback method? What are its main strengths and weaknesses?
Describe the accrual accounting rate-of-return method. What are its main strengths and weaknesses?
The trouble with discounted cash flow methods is that they ignore depreciation. Do you agree? Explain.
Let’s be more practical. DCF is not the gospel. Managers should not become so enchanted with DCF that strategic considerations are overlooked. Do you agree? Explain.
All overhead costs are relevant in NPV analysis. Do you agree? Explain.
Bill Watts, president of Western Publications, accepts a capital budgeting project proposed by Division X. this is the division in which the president spent his first 10 years with the company. ON
Distinguish different categories of cash flows to be considered in an equipment replacement decision by a taxpaying company.
Describe three ways income taxes can affect the cash inflows or outflows in a motor vehicle-replacement decision by a taxpaying company.
How can capital budgeting tools assist in evaluating a manager who is responsible for retaining customers of a cellular telephone company?
Distinguish the nominal rate of return from the real rate of return.
I am going to focus on the customers of my business and leave cost-allocation issues to my accountant. Do you agree with this comment by a division president? Why?
A given cost may be allocated for one or more purposes. List four purposes.
What criteria might be used to guide cost-allocation decisions? Which are the dominant critera?
A company should not allocate all of its corporate costs to its divisions. Do you agree? Explain?
Once a company allocates corporate costs to divisions these costs should not be reallocated to the indirect-cost-pools of the division. Do you agree? Explain.
Why is customer-profitability analysis a vitally important topic to managers?
How can the extent of price discounting be tracked on a customer-by-customer basis?
A customer-profitability profile highlights those customers who should be dropped to improve profitability. Do you agree? Explain.
Give examples of three different levels of costs in a customer-cost hierarchy.
Show how managers can gain insight into the causes of a sales-volume variance by subdividing the components of this variance.
How can the concept of a composite unit be used to explain why an unfavorable total sales-mix variance of contribution margin occurs?
Explain why a favorable sales-quantity variance occurs.
Distinguish between a market-share variance and a market-size variance.
Why might some companies not compute market-size and market-share variances?
Explain how the direct materials mix and yield variances provide additional information about the direct materials efficiency variance.
Distinguish between the single-rate and the dual-rate methods.
Describe how the dual-rate method is useful to division managers in decision making.
How do budgeted cost rates motivate the support-department manager to improve efficiency?
Give examples of allocation bases used to allocate support-department cost pools to operating departments.
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?
To ensure unbiased cost allocations, fixed costs should be allocated on the basis of estimated long-run use by user-department managers. Do you agree? Why?
Distinguish among the three methods of allocating the costs of support departments to operating departments.
What is conceptually the most defensible method for allocating support-department costs? Why?
Distinguish between two methods of allocating common costs.
What role does the Cost Accounting Standards Board play when companies contract with the U.S. government?
What is one key way to reduce cost-allocation disputes that arise with government contracts?
Describe how companies are increasingly facing revenue-allocation decision.
Distinguish between the stand-alone and the incremental revenue-allocation methods.
Identify and discuss arguments that individual product managers may put forward to support their preferred revenue-allocation method.
How might a dispute over the allocation of revenues of a bundled product be resolved?
Give two examples of industries in which joint costs are found. For each example, what are the individual products at the split off point?
What is a joint cost? What is a separable cost?
Distinguish between a joint product and a byproduct?
Why might the number of products in a joint-cost situation differ from the number of outputs? Give an example.
Provide three reasons for allocating joint costs to individual products or services?

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