Cost Classifications & Costing Systems

Question 1

What are the three main types of costs based on their behavior as activity levels change?

Answer 1

• Fixed costs
• Variable costs
• Mixed costs

Question 2

How do fixed costs behave within the relevant range of activity?

Answer 2

Total fixed costs remain unchanged, but the cost per unit decreases as activity level increases.

Question 3

What happens to total variable costs as production levels increase?

Answer 3

Increase

Question 4

What is a mixed cost?

Answer 4

A cost that has both a fixed and a variable component.

Question 5

Define ‘relevant range’ in the context of fixed costs.

Answer 5

The range of activity within which total fixed costs remain unchanged.

Question 6

True or False:

Variable costs per unit change as production levels change.

Answer 6

False

Question 7

What is the unit contribution?

Answer 7

Selling price per unit minus all unit variable costs.

Question 8

What are the three main cost measurement methods?

Answer 8

• Standard costing
• Normal costing
• Actual costing

Question 9

What does standard costing involve?

Answer 9

Assigning planned costs to units produced based on standard costs for inputs.

Question 10

What is the purpose of a predetermined overhead application rate?

Answer 10

To allocate overhead costs to units produced based on a standard amount of the allocation base.

Question 11

What is the difference between a semi-variable and a semi-fixed cost?

Answer 11

A semi-variable cost increases smoothly with activity, while a semi-fixed cost increases in steps.

Question 12

What happens to fixed costs per unit as production increases within the relevant range?

Answer 12

Decrease

Question 13

What is the standard cost of an input for one unit of output?

Answer 13

Standard price per unit of the input × standard quantity of the input allowed per unit of output

Question 14

What is the difference between under-applied and over-applied overhead cost?

Answer 14

• Under-applied overhead occurs when the actual overhead costs are greater than the overhead applied to production.
• Over-applied overhead occurs when the applied overhead exceeds the actual overhead costs.

These variances happen because overhead is applied using a predetermined rate. At the end of the period, the difference must be adjusted (either closed to Cost of Goods Sold or allocated between accounts).

Question 15

How are immaterial variances in overhead costs handled at the end of an accounting period?

Answer 15

Immaterial variances may be closed out 100% to cost of goods sold expense on the income statement.

Question 16

How should material variances in overhead costs be accounted for?

Answer 16

Material variances should be prorated among cost of goods sold and the relevant inventory accounts on the balance sheet.

Question 17

What is the purpose of standard costing?

Answer 17

Standard costing enables management to compare actual costs with what the costs should have been for the actual amount produced.

Question 18

In what environments can standard costing be used?

Answer 18

Standard costing can be used in either a process costing or a job-order costing environment.

Question 19

What is the main difference in cost application between normal costing and standard costing?

Answer 19

• In normal costing, the predetermined overhead application rate is multiplied by the actual amount of the allocation base used.
• In standard costing, it is multiplied by the amount of the allocation base allowed.

Question 20

Why is normal costing not appropriate in a process costing environment?

Answer 20

It is too difficult to determine the actual costs of the specific direct materials and direct labor used for a specific production run.

Question 21

What is the main purpose of using a predetermined manufacturing overhead application rate in normal costing?

Answer 21

To normalize factory overhead costs and avoid month-to-month fluctuations in cost per unit.

Question 22

What is the key characteristic of actual costing?

Answer 22

• No predetermined or estimated costs are used.
• Actual direct labor, materials, and manufacturing overhead costs are allocated to the units produced.

Question 23

What are the two main differences between variable and absorption costing?

Answer 23

• Treatment of fixed manufacturing overhead
• Income statement presentation of the different costs

Question 24

Under which costing method is fixed factory overhead considered a product cost?

Answer 24

Absorption costing

Question 25

How are **fixed factory overheads** treated under variable costing?

Answer 25

Fixed factory overheads are reported as **period costs** and expensed in the period in which they are incurred.

Question 26

Why is **variable costing** not acceptable for external financial reporting?

Answer 26

Because **fixed manufacturing overhead** is **not accounted** for as a product cost, which does not conform to GAAP.

Question 27

What is reported under **absorption costing** that is different from **variable costing**?

Answer 27

Under absorption costing, a **gross profit** is reported, while under variable costing, a **contribution margin** is reported.

Question 28

What is the main use of **job order costing**?

Answer 28

Job order costing is used when units of a product or service are **distinct** and **separately identifiable**.

Question 29

What **type of costing system** is used when many identical units of a product are manufactured?

Answer 29

Process costing