Costing Methods & Profitability Flashcards
7 cards from real CPP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Costing Methods & Profitability flashcards as text
A software company has high fixed development costs but near-zero marginal costs per additional user. This cost structure is best described as:
Answer: High operating leverage with economies of scale
Near-zero marginal cost combined with high fixed costs creates high operating leverage, and each additional user spreads fixed costs further, creating economies of scale.
The 'death spiral' in cost accounting occurs when:
Answer: Reducing volume causes per-unit costs to rise, leading to price increases that further reduce volume
The death spiral happens when a company drops products or volume; remaining products absorb more fixed costs, raising their costs, which can lead to further cuts in a downward cycle.
In target costing, the allowable cost is determined by:
Answer: Subtracting the required profit margin from the target selling price
Allowable cost = Target selling price - Required profit margin; the company then works backward to engineer costs to meet this target.
A company evaluates a product line using segment margin analysis. A product segment shows a positive contribution margin but a negative segment margin. What does this imply?
Answer: The segment has direct fixed costs exceeding its contribution margin
A negative segment margin with a positive contribution margin means the segment's own traceable fixed costs exceed what its contribution margin can cover.
Which method of overhead absorption is most appropriate for a highly automated manufacturing facility where labor hours are minimal?
Answer: Machine hour rate
In automated facilities, machine hours better reflect actual overhead consumption than labor hours since automation replaces labor as the primary driver of overhead costs.
A company evaluates two projects with identical NPVs. Project A has a higher Internal Rate of Return (IRR) but requires $2M in investment; Project B requires $500K and has a lower IRR. From a capital-constrained profitability perspective, which metric should the analyst prioritize?
Answer: Profitability Index (PI), because it measures value created per dollar invested
Under capital constraints, the Profitability Index (NPV/Initial Investment) identifies which projects create the most value per dollar of scarce capital.
Economic Value Added (EVA) differs from traditional accounting profit primarily because it:
Answer: Deducts a charge for the cost of equity capital employed
EVA = Net Operating Profit After Tax - (Capital Employed × Weighted Average Cost of Capital), explicitly charging for the cost of all capital, including equity.