Part 1
Study Unit 4
Cost Management Concepts
Jim Clemons, CMA
Remember most common reasons for
missing questions!
1.
2.
3.
4.
5.
6.
7.
8.
Misreading the requirement (stem) – Read the question first
Not understanding what is required
Making a math error – Try to not do calculations of paper first, with the
idea of “transferring” to the exam later. If you know how to use your
memory button(s) well on your calculator, use it (i.e. save subcalculations in your calculator).
Applying the wrong rule or concept
Being distracted by one or more of the answers – the most common
wrong answers are the incorrect alternatives
Incorrectly eliminating answers from considerations – read all answers
first, some are more correct or complete then others
Not having any knowledge of the topic tested – don’t agonize over it. If
possible try to make an educated guess by eliminating obvious wrong
answers. If you guess, use the same letter each time.
Employing bad intuition when guessing
Required Cognitive Skills
• Knowledge: Ability to remember previously learned material such
as specific facts, criteria, techniques, principles, and procedures
(identify, define).
• Comprehension: Ability to grasp and interpret the menaing of
material (classify, explain, distinguish).
• Application: Ability to break down material into its component parts
so that its organizational structure can be
understood…(differentiate, estimate, order).
• Synthesis: Ability to put parts together to form a new whole or
proposed set of operations; ability to relate ideas and formulate
hypothesis (combine, formulate, revise).
• Evaluation: Ability to judge the value of material for a given purpose
on the basis of consistency, logical accuracy, and comparison to
standards (criticize, justify, conclude).
4.1 Cost Management Terminology
• Financial Accounting
– Reporting to external users
– Financial statements
– Historical focus
• Management Accounting
– Reporting to internal users
– Improve organizational decision making
– Future focus
• Cost Accounting
– Supports both financial and management accounting
“Information about the cost of resources acquired and consumed by
an organization underlies effective reporting for both internal and
external users”.
4.1 Cost Management Terminology
IMA Definition of Cost
Management Accounting: Measurement in
monetary terms of the amount of resources used
for some purpose. The term by itself is not
operational. It becomes operational when modified
by a term that defines the purpose, such as
acquisition cost, incremental cost, or fixed cost.
4.1 Cost Management Terminology
• Cost Object
– Entity to which costs can be attached
– Examples:
• Products
• Processes
• Employees
• Departments
• Facilities
4.1 Cost Management Terminology
• Manufacturing v. Nonmanufacturing
– Direct materials
– Direct labor
– Manufacturing overhead
• Indirect materials
– Tangible inputs unable to trace
• Indirect labor
– Labor that cannot be traced
• Factory operating costs
– Utilities, real estate taxes, insurance, depreciation
4.1 Cost Management Terminology
Manufacturing Costs
• Prime cost
– Direct materials + direct labor
– Costs attributable to the product
• Conversion cost
– Direct labor + manufacturing overhead
– Costs of converting raw materials into finished product
4.1 Cost Management Terminology
Nonmanufacturing Costs
•
Selling (Marketing) expenses
– How much to get the product to the consumer
– Sales Personnel
• Salaries
• Expensive dinners
• Fancy sporting events
• Morale boosting trips to exotic locations
– Product Transportation
• Administrative Expenses
• Other costs not related to producing or marketing the product
• Adrien’s salary
• Adrien’s expensive dinners
• Fancy sporting events for Adrien to attend
• Trips to exotic locations to boost Adrien’s morale
4.1 Cost Management Terminology
Product v. Period
• To capitalize or to expense?
– Product Costs
– Capitalized as part of finished goods inventory. Become
component of cost of goods sold
• Period Costs
– Expensed as incurred
– Not capitalized and excluded from cost of goods sold
4.1 Cost Management Terminology
• Distinction between product costs and period
costs important for external reporting purposes.
– GAAP
• All manufacturing costs must be treated as product costs,
and all selling and administrative costs must be treated as
period costs.
• ABSORPTION COSTING
– Internal Reporting
• Capitalize only variable manufacturing costs as product
costs, treat all other costs (variable S&A and the fixed
portion of both production and S&A expenses) as period
costs.
• VARIABLE COSTING
4.1 Cost Management Terminology
Direct Costs - Can be TRACED
• Direct materials
• Direct Labor
Indirect Costs - Cannot be associated with a particular cost
objective
• Indirect materials
• Indirect labor
4.1 Cost Management Terminology
Indirect costs collected in cost pools
• Cost Pool
– Account where similar cost elements are
accumulated
Example - Manufacturing Overhead
4.1 Cost Management Terminology
Common Costs
• Indirect cost
• Shared by two or more users
• Rationally allocated
• Examples:
• Depreciation for HQ building
• Allocated amongst departments
4.1 Cost Management Terminology
Practice Question 1
A firm calculates that its annual cost to hold excess goods in
order to avoid any chance of running out of inventory is $50,000.
This $50,000 is an example of a
A
Prime cost.
B
Quality cost.
C
Carrying cost.
D
Stockout cost.
4.1 Cost Management Terminology
Practice Question 1 Answer
Correct Answer: C
The costs of holding or storing inventory are
carrying costs. Examples include the costs of
capital, insurance, warehousing, breakage, and
obsolescence.
4.1 Cost Management Terminology
Practice Question 2
Roberta Johnson is the manager of Sleep-Well Inn, one of a chain
of motels located throughout the U.S. An example of an
operating cost at Sleep-Well that is both direct and fixed is
A
Johnson’s salary.
B
Water.
C
Toilet tissue.
Advertising for the Sleep-Well
D
Inn chain.
4.1 Cost Management Terminology
Practice Question 2 Answer
Correct Answer: A
Direct costs are ones that can be associated with a
particular cost object in an economically feasible way,
that is, they can be traced to that object. Fixed costs
are those that remain unchanged in total over the
relevant range of production. A motel manager’s salary
is traceable to the single location she manages, and it
remains fixed over a set period of time regardless of
the number of guests.
4.1 Cost Management Terminology
Practice Question 3
Finley Painters Co., a painting contractor, maintains a job-order cost system. Job costs
are accumulated by tracking the actual cost of paint and other materials used on each
job, as well as the actual cost of wages earned by the painters on each job. In addition,
overhead is applied to each job by using a predetermined rate based on the actual
painters’ wages. Leonard Wayne, painter, earned $168 today by working on Job 08-45.
In computing prime cost and conversion cost for Job 08-45, how would the wages
earned today by Wayne be classified?
A
As a component of both prime and
conversion cost.
B
As a component of prime cost but not as a
component of conversion cost.
C
As a component of conversion cost but
not as a component of prime cost.
D
As a component of neither prime cost nor
conversion cost.
4.1 Cost Management Terminology
Practice Question 3 Answer
Correct Answer: A
Manufacturing costs are often grouped into the following
classifications: prime cost, which equals direct materials
plus direct labor (i.e., those costs directly attributable to a
product), and conversion cost, which equals direct labor
plus manufacturing overhead (i.e., the costs of converting
raw materials into the finished product). The wages
earned by a painter working for a painting contractor are
thus properly classified as both a prime cost and a
conversion cost.
4.1 Cost Management Terminology
Practice Question 4
Conversion cost pricing
A
Places minimal emphasis on the
cost of materials used in
manufacturing a product.
B
Could be used when the customer
furnishes the material used in
manufacturing a product.
C
Places heavy emphasis on indirect
costs and disregards consideration
of direct costs.
D
Places heavy emphasis on direct
costs and disregards consideration
of indirect costs.
4.1 Cost Management Terminology
Practice Question 4 Answer
Correct Answer: B
Conversion costs consist of direct labor and
factory overhead, the costs of converting raw
materials into finished goods. Normally, a
company does not consider only conversion
costs in making pricing decisions, but if the
customer were to furnish the raw materials,
conversion cost pricing would be appropriate.
4.2 Cost Behavior and Relevant Range
• Relevant Range – Limits within which per-unit variable
cost remain constant and fixed cost are not changeable.
– “In the short-run” (All costs are considered variable in the
long-run)
– “The efficiency of a company’s current manufacturing plant”
“Cost behavior and estimates are valid only within a relevant range, or the
normal level of operating activity. Beyond the relevant range, cost
relationships are likely to change, and with them, cost estimates”.
Ask yourself – “How wide is the relevant range of activity? When does the
company leave one relevant range and enter another one with a different
cost function? The answer is company specific, and greatly affects the
cost estimates used in decision making.”
4.2 Cost Behavior and Relevant Range
Types of Costs and their characteristics
•
Variable cost
– Total cost varies in proportion to changes in the level of
activity
– The cost per unit remains constant, regardless of the level of
activity
Exhibit 1 - Variable Cost
4.2 Cost Behavior and Relevant Range
Types of Costs and their characteristics
•
Fixed cost
– Total cost remains fixed, regardless of changes in the level
of activity.
– The cost per unit varies inversely with changes in the level
of activity.
Exhibit 2 – Fixed Cost
4.2 Cost Behavior and Relevant Range
Types of Costs and their characteristics
•
•
Mixed or semivariable cost
– Have both a fixed and variable component.
– Both the total cost and unit cost will vary changes in the
level of activity.
Two methods of estimating mixed:
–
–
Regression or scattergraph method – more complex, usually applied using
computers and not tested on the exam.
High-low method – less accurate, but quicker.
Cost at highest activity level – Cost at lowest activity level
Driver at highest activity level – Driver at lowest activity level
What is a driver? Machine Hours for examples
Exhibit 3 - Mixed Cost
High-Low Method Example (p. 138)
High Month: May
Low Month: July
Numerator: $3,400 -$1,900 = $1,500
Denominator: 1,600 –800 = 800 hours
Variable Costs: $1,500 / 800 = $1.875 per hour
Fixed Costs: $1,900 –(800 x $1.875) = $400
Exhibit 3 - Mixed Cost
4.2 Cost Behavior and Relevant Range
Types of Costs and their characteristics (continued)
Four of the five cost are linear-costs which change at a constant rate
(or remain unchanged) over the short run
Fixed cost per unit is an example of a nonlinear-cost function.
Another type of nonlinear-cost is a step-cost function.
•
Step cost
– Total cost remain constant over the.
– Unit cost decrease a usage within the step range.
Exhibit 4 – Step Cost
4.2 Cost Behavior and Relevant Range
Types of Costs and their characteristics (continued)
•
Linear vs. Nonlinear Cost Functions
–
Fixed cost per unit and step cost have non-linear-cost functions
–
Fixed costs
• Has asymptotic (linear asymptote is not parallel to the x- or y-axis, it is called an oblique
asymptote or slant asymptote ) character – it will never intersect the X-axis.
–
Step cost – if steps are relatively narrow, cost are usually treated as variable,
but if steps are wide they more similar to fixed costs.
Question #1
The difference between variable costs and fixed
costs is?
1. Variable costs per unit fluctuate and fixed costs per unit
remain constant.
2. Variable costs per unit are fixed over the relevant range and
fixed costs per unit are variable.
3. Total variable costs are variable over the relevant range and
fixed in the long term, while fixed costs never change.
4. Variable costs per unit change in varying increments, while
fixed costs per unit change in equal increments.
Question #2
The difference between the sales price and total
variable costs is?
1.
2.
3.
4.
Net profit.
The breakeven point.
The contribution margin.
Gross operating profit.
Question #3
Ace, Inc. estimates its total materials handling
costs at two production levels as follows:
Cost
Gallons
$160,000
$132,000
80,000
60,000
What is the estimated total cost for handling 75,000 gallons?
(Hint: High/Low Method)
Question #3 (continued)
1.
2.
3.
4.
Numerator: $160k -$132k = $28k
Denominator: 80k gallons –60k gallons = 20k
Variable Costs: $28k / 20k gallons = $1.40 per gallon
Fixed Costs = Total Cost –Variable Portion $160k –(80k x
$1.40) = $48k
5. $48k + (75k x $1.40) = $153,000
4.2 Cost Behavior and Relevant Range
Types of Costs and their characteristics (continued)
•
Relevant Range and Marginal Cost (MC)
–
–
Marginal cost is the cost incurred by a one-unit increase in the activity level of a
particular cost driver.
Similar to variable cost in the relevant range it stays constant across the relevant
range.
4.2 Cost Behavior and Relevant Range
Practice Question 1
Which one of the following
categories of cost is most likely
not considered a component of
fixed factory overhead?
A.
B.
C.
D.
Rent.
Property taxes.
Depreciation.
Power.
4.2 Cost Behavior and Relevant Range
Practice Question 1 Answer
• Correct Answer: D
A fixed cost is one that remains unchanged within the relevant range for a
given period despite fluctuations in activity. Such items as rent, property
taxes, depreciation, and supervisory salaries are normally fixed costs
because they do not vary with changes in production. Power costs,
however, are at least partially variable because they increase as usage
increases.
Incorrect Answers:
A: Rent is an example of fixed factory overhead.
B: Property taxes are an example of fixed factory overhead.
C: Depreciation is an example of fixed factory overhead.
4.2 Cost Behavior and Relevant Range
Practice Question 2
CMA StudyUnit 4.2: Ethics for Management Accountants and Cost Management Concepts
Taylor Company is determining the cost behavior of several items in order to budget for the
upcoming year. Past trends have indicated the following dollars were spent at three different levels
of output:
Unit Levels
10,000
12,000
15,000
Cost A
$25,000
$29,000
$35,000
Cost B
10,000
15,000
15,000
Cost C
15,000
18,000
22,500
In establishing a budget for 14,000 units, Taylor should treat Costs A, B, and C, respectively, as
A
Semivariable, fixed, and variable.
B
Variable, fixed, and variable.
Semivariable, semivariable, and
semivariable.
C
D
Variable, semivariable, and semivariable.
4.2 Cost Behavior and Relevant Range
Practice Question 2 Answer
Correct Answer: A
To properly understand the nature of a cost, its behavior in total and
on a per-unit basis can be examined. Dividing the total costs incurred
by the activity levels yields the following per-unit results:
Cost A
Cost B
Cost C
Cost A increases disproportionately across the relevant range in total
and decreases proportionately on a per-unit basis; A is thus a
semivariable cost. Cost C increases steadily across the relevant range
in total but remains constant on a per-unit basis; C is thus a variable
cost.
10,000
12,000
15,000
$2.50
1
4.3
$2.42
4.15
4.3
$2.33
1
4.3
4.2 Cost Behavior and Relevant Range
Practice Question 3
Cell Company has discovered that the cost of processing customer invoices is strictly
variable within the relevant range. Which one of the following statements concerning
the cost of processing customer invoices is incorrect?
A
The total cost of processing customer invoices will increase as the volume of
customer invoices increases.
B
The cost per unit for processing customer invoices will decline as the volume
of customer invoices increases.
C
The cost of processing the 100th customer invoice will be the same as the
cost of processing the first customer invoice.
D
The average cost per unit for processing a customer invoice will equal the
incremental cost of processing one more customer invoice.
4.2 Cost Behavior and Relevant Range
Practice Question 3 Answer
Correct Answer: B
Variable cost per unit remains constant in the
short run regardless of the level of production.
4.2 Cost Behavior and Relevant Range
Practice Question 4 Answer
CMA StudyUnit 4.2: Ethics for Management Accountants and Cost Management
Concepts
Ace, Inc., estimates its total materials handling costs at two production levels as follows:
Cost
Gallons
$160,000
$132,000
80,000
60,000
What is the estimated total cost for handling 75,000 gallons?
A
B
C
D
$146,000
$150,000
$153,000
$165,000
4.2 Cost Behavior and Relevant Range
Practice Question 4 Answer
Correct Answer: C
The high-low method can be applied to calculate the two portions of a
mixed cost. The numerator is the difference between the cost at the
highest level of activity and the cost at the lowest level ($160,000 –
$132,000 = $28,000). The denominator is the difference between the
highest level of activity from the lowest level (80,000 – 60,000 = 20,000).
The variable portion of the total mixed cost is derived by dividing these
two figures ($28,000 ÷ 20,000 = $1.40 per gallon). The fixed portion can
be calculated by inserting the appropriate values for either the high or
low level as follows:
Total cost – Variable
portion
$160,000 – (80,000 ×
=
$1.40)
Fixed portion =
= $160,000 – $112,000
=
The total handling cost for a production level of 75,000 can now be
determined: $48,000 + (75,000 × $1.40) = $153,000.
$48,000
1.4 Cost of Goods Calculations
Cost of Goods Sold
Beginning Balance
+ Purchases (Costs added during the period)
= available
– Ending
= Used
–
–
Or
Beginning Balance
+ Purchases (Costs added during the period)
- Costs removed during the period
= Ending balance
–
Straight forward for a retailer but more complex for a manufacturers since they have
three distinct classes of inventory:
•
Raw material
•
Work in Process Inventory
•
Finished Goods Inventory
Exhibit 5 – Mfg. Cost flow
1.4 Cost of Goods Calculations
****See handout on Mfg. Cost of goods calculation****
Remember: Total manufacturing cost are calculated on a separate
statement called a cost of Goods Manufacturing Statement (or
Manufacturing Statement, which compiles three major elements of
manufacturing costs:
New Material
Direct Labor
Factory overhead
Calculations through cost of goods manufactured are found on
the Manufacturing Statement. The total and the remainder
are found on the income statement.
1.4 Cost of Goods Calculations Example
Madtack Company’s beginning and
ending inventories for the month of
November are
1-Nov
Direct
materials
Work-inprocess
Finished
goods
30-Nov
Production data for the month of
November follows:
Direct labor
$200,000
Actual factory overhead
132,000
$67,000
$62,000
Direct materials purchased
163,000
145,000
171,000
Transportation in
4,000
85,000
78,000
Purchase returns and
allowances
2,000
Madtack uses one overhead control
account and charges overhead to
production at 70% of direct labor cost. The
company does not formally recognize overor underapplied overhead until year end.
1.4 Cost of Goods Calculations Example
Madtack Company’s prime cost for November is
Madtack Company’s prime cost for
November is
A.
B.
C.
D.
$370,000
$168,000
$363,000
$170,000
1.4 Cost of Goods Calculations Example
Correct Answer: A
Prime costs are the combined costs of direct materials
and direct labor.
Beginning materials inventory
Add: purchases
Add: transportation in
Less: purchase returns
$67,000
163,000
4,000
-2,000
Materials available
Less: ending materials inventory
$232,000
-62,000
Materials used in production
$170,000
Direct materials
Direct labor
Total prime costs
$170,000
200,000
$370,000
1.4 Cost of Goods Calculations Example
Madtack Company’s cost of goods
sold for November is
A.
$484,000
B.
$491,000
C.
$502,000
D.
$476,000
1.4 Cost of Goods Calculations Example
Total manufacturing costs
$510,000
Add: beginning work-in-process
Less: ending work-in-process
145,000
-171,000
Costs transferred to finished goods
$484,000
Beginning finished goods inventory
Add: cost of goods manufactured
$85,000
484,000
Goods available for sale
Less: ending finished goods inventory
$569,000
-78,000
Cost of goods sold
$491,000
1.4 Cost of Goods Calculations Example
Madtack Company’s total
manufacturing cost for November is
A.
$370,000
B.
$510,000
C.
$502,000
D.
$476,000
1.4 Cost of Goods Calculations Example
Correct Answer: B
This solution requires a series of computations. Total manufacturing cost
is the sum of direct materials cost, direct labor cost, and manufacturing
overhead.
Beginning materials
Add: purchases
Add: transportation in
Less: purchase returns
$67,000
163,000
4,000
-2,000
Materials available
Less: ending materials
$232,000
-62,000
Materials used in production
$170,000
Direct materials
Direct labor
Manufacturing overhead (DL × 70%)
$170,000
200,000
140,000
Total manufacturing costs
$510,000
4.3 Cost Classifications
• Controllable VS. Noncontrollable
• Avoidable Vs. Committed
• Incremental vs. Differential
• Engineered s. Discretionary
• Outlays vs. Opportunity
• Relevant vs. Sunk
4.3 Cost Classifications
• Joined vs. Separable
• Normal vs. Abnormal Spoilage
• Rework, Scrap, and Waste
• Other
– Carrying costs
– Transferred-in costs
– Value-adding costs
•
Manufacturing Capacity
–
–
–
Normal capacity
Practical capacity
Theoretical (ideal) capacity
4.3 Cost Classifications
Practice Question 1
In joint-product costing and
analysis, which one of the
following costs is relevant when
deciding the point at which a
product should be sold to
maximize profits?
A.
B.
C.
D.
Separable costs after the split-off
point.
Joint costs to the split-off point.
Sales salaries for the period when
the units were produced.
Purchase costs of the materials
required for the joint products.
4.3 Cost Classifications
Practice Question 1 Answer
Correct Answer: A
Joint products are created from processing a common input. Joint costs are
incurred prior to the split-off point and cannot be identified with a particular
joint product. As a result, joint costs are irrelevant to the timing of sale.
However, separable costs incurred after the split-off point are relevant
because, if incremental revenues exceed the separable costs, products should
be processed further, not sold at the split-off point.
Incorrect Answers:
B: Joint costs have no effect on the decision as to when to sell a product.
C: Sales salaries for the production period do not affect the decision.
D: Purchase costs are joint costs.
4.3 Cost Classifications
Practice Question 2
A company produces stereo speakers for automobile
manufacturers. The automobile manufacturers reject
approximately 3% of the stereo speakers received as
being of unacceptable quality. The company inspects
the rejected speakers to determine which ones should
be reworked and which ones should be discarded. The
discarded speakers are classified as
A.
B.
C.
D.
Waste.
Scrap.
Spoilage.
Rework costs.
4.3 Cost Classifications
Practice Question 2 Answer
Correct Answer: C
Rejected units that are discarded are classified as spoilage. Spoilage is separated into
abnormal or normal spoilage. Normal spoilage is an inherent result of the normal
production process. Abnormal spoilage is spoilage that is not expected to occur under
normal, efficient operating conditions.
Incorrect Answers:
A: Waste is input material that is either lost in the production process or has no
sales value.
B: Scrap is input material that has a relatively minor sales value at the end of the
production process.
D: Rework costs are incurred to make unacceptable units appropriate for sale or
use.
4.4 Costing Techniques
•
Absorption vs. Variable Costing
– Need to understand:
• Under absorption costing, which costs are considered product
costs and which are considered period costs?
• Under variable costing, which costs are considered products
and which are considered period costs?
• When is income under variable costing higher than income
under absorption costing?
• What formula can be used to calculate the difference between
income under variable costing and income under absorption
costing?
• What managerial behavior does variable costing render
ineffective?
4.4 Costing Techniques
•
Absorption vs. Variable Costing (continued)
•
Absorption costing
– Also called full costing treats all manufacturing costs as
product costs.
– Inventoried cost of the product thus includes all prodcution
costs, fixed and variable. Required by GAAP.
– Gross Margin (gross profit) = Sales revenue and absorption
cost of COGS, and covers S, G & A.
4.4 Costing Techniques
•
Absorption vs. Variable Costing (continued)
•
Variable costing
– Also called direct costing considers only variable
manufacturing cost as product cost.
– Fixed cost are period costs and expensed as incurred.
– Simple and easy to calculate. First consideration in
determining whether product should be manufactured (does it
cover variable production costs).
– Contribution margin = net sales revenue minus all variable
costs (mfg. & S, G & A). “Contributions toward covering fixed
costs”.
4.4 Costing Techniques
Practice Question 1
Which one of the following considers
the impact of fixed overhead costs?
A.
B.
C.
D.
Full absorption costing.
Marginal costing.
Direct costing.
Variable costing.
4.4 Costing Techniques
Practice Question 1 Answer
Correct Answer: A
Full absorption costing treats fixed factory overhead costs as product costs.
Thus, inventory and cost of goods sold include (absorb) fixed factory
overhead.
Incorrect Answers:
B: Marginal costing considers only the incremental costs of producing an
additional unit of product. In most cases marginal costs are variable costs.
C: Direct (variable) costing treats only variable costs as product costs.
D: Direct (variable) costing treats only variable costs as product costs.
4.4 Costing Techniques
Practice Question 2
A standard costing system is most
often used by a firm in conjunction
with
A.
B.
C.
D.
Management by objectives.
Target (hurdle) rates of return.
Participative management programs.
Flexible budgets.
4.4 Costing Techniques
Practice Question 2 Answer
Correct Answer: D
A standard cost is an estimate of what a cost should be under
normal operating conditions based on accounting and
engineering studies. Comparing actual and standard costs
permits an evaluation of the effectiveness of managerial
performance. Because of the impact of fixed costs in most
businesses, a standard costing system is usually not effective
unless the company also has a flexible budgeting system. Flexible
budgeting uses standard costs to prepare budgets for multiple
activity levels.
4.4 Costing Techniques
Practice Question 3
Which method of inventory costing treats direct manufacturing costs and
manufacturing overhead costs, both variable and fixed, as inventoriable
costs?
A
Direct costing.
B
Variable costing.
C
Absorption costing.
D
Conversion costing.
4.4 Costing Techniques
Practice Question 3 Answer
Correct Answer: C
Absorption (full) costing considers all
manufacturing costs to be inventoriable as
product costs. These costs include variable and
fixed manufacturing costs, whether direct or
indirect. The alternative to absorption is known
as variable (direct) costing.
4.4 Costing Techniques
Practice Question 4
CMA StudyUnit 4.4: Ethics for Management Accountants and Cost Management Concepts
A difference between standard costs used for cost control and budgeted costs
A
Can exist because standard costs must be
determined after the budget is completed.
B
Can exist because standard costs represent
what costs should be, whereas budgeted costs
represent expected actual costs.
C
Can exist because budgeted costs are historical
costs, whereas standard costs are based on
engineering studies.
D
Cannot exist because they should be the same
amounts.
4.4 Costing Techniques
Practice Question 4 Answer
Correct Answer: B
Standard costs are predetermined, attainable unit costs.
Standard cost systems isolate deviations (variances) of
actual from expected costs. One advantage of standard
costs is that they facilitate flexible budgeting. Accordingly,
standard and budgeted costs should not differ when
standards are currently attainable. However, in practice,
budgeted (estimated actual) costs may differ from
standard costs when operating conditions are not
expected to reflect those anticipated when the standards
were developed.
What to do next
• If you have not read the material for Study
Unit 1, do so this Sunday.
• Make sure you complete the two multiple
choice quizzes.
• Identify anything that you don’t understand
and email it to Ron.
• Read Study Unit 2 and complete both multiple
choice quizzes for next week.