CFM Cost Accounting & Management 1 — Questions and Answers
Question 1: What is the difference between fixed costs and variable costs?
- Fixed costs change with production volume; variable costs do not
- Fixed costs remain constant regardless of production level; variable costs change proportionally with output (Correct answer)
- Fixed costs are always higher than variable costs
- Variable costs are sunk costs that cannot be recovered
Correct answer: Fixed costs remain constant regardless of production level; variable costs change proportionally with output
Fixed costs (like rent) remain constant within a relevant range regardless of output, while variable costs (like raw materials) change in proportion to production volume.
Question 2: What is the contribution margin?
- Gross profit minus depreciation
- Revenue minus all fixed costs
- Revenue minus variable costs, representing the amount available to cover fixed costs and profit (Correct answer)
- Net income divided by total revenue
Correct answer: Revenue minus variable costs, representing the amount available to cover fixed costs and profit
Contribution margin (revenue minus variable costs) shows how much each dollar of sales contributes to covering fixed costs and generating profit.
Question 3: In cost accounting, what is absorption costing?
- Costing only variable manufacturing costs to products
- Costing that assigns both fixed and variable manufacturing overhead to products (Correct answer)
- A method that expenses all overhead in the period incurred
- Costing that excludes direct materials from product cost
Correct answer: Costing that assigns both fixed and variable manufacturing overhead to products
Absorption costing (full costing) assigns all manufacturing costs — direct materials, direct labor, and both fixed and variable overhead — to products.
Question 4: What is activity-based costing (ABC)?
- Assigning overhead costs based solely on direct labor hours
- A system that assigns costs to products based on the activities that consume resources (Correct answer)
- Costing that treats all manufacturing costs as period costs
- Allocating overhead uniformly across all products
Correct answer: A system that assigns costs to products based on the activities that consume resources
ABC assigns overhead costs to products based on the actual activities (cost drivers) that cause those costs, providing more accurate product cost information than traditional methods.
Question 5: What does break-even analysis determine?
- The point at which a company's stock price equals its book value
- The sales level at which total revenues equal total costs and profit is zero (Correct answer)
- The minimum selling price for a product to cover variable costs only
- The production level at which fixed costs per unit are minimized
Correct answer: The sales level at which total revenues equal total costs and profit is zero
Break-even analysis calculates the sales volume (in units or dollars) at which total revenues exactly equal total costs, resulting in zero profit or loss.
Question 6: What is standard costing?
- Using historical average costs for all products
- A cost control system that sets predetermined costs and measures variance against actuals (Correct answer)
- Costing based on competitor pricing benchmarks
- Setting costs based on regulatory guidelines
Correct answer: A cost control system that sets predetermined costs and measures variance against actuals
Standard costing establishes predetermined (standard) costs for materials, labor, and overhead, then compares them to actual costs to identify variances for management action.
CFM Cost Accounting & Management 1
What is the difference between fixed costs and variable costs?