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 company uses process costing. At period end, the work-in-process inventory is 40% complete. What are these units called in the equivalent units calculation?
Answer: Equivalent units of production
In process costing, partially complete units are converted to 'equivalent units of production' to fairly allocate costs across complete and incomplete units.
A 'whale curve' in customer profitability analysis typically reveals that:
Answer: A small group of top customers generates more than 100% of total profits, offset by unprofitable customers
The whale curve shows cumulative profitability peaks above 100% because the most profitable customers subsidize losses from unprofitable customer relationships.
Under variable costing (direct costing), fixed manufacturing overhead is treated as:
Answer: A period cost expensed in the period incurred
Variable costing treats fixed manufacturing overhead as a period cost rather than a product cost, expensing it entirely in the period regardless of production volume.
A price-volume analysis shows that a 10% price reduction leads to a 5% volume increase. What is the net effect on total revenue?
Answer: Revenue decreases by approximately 4.5%
New revenue = (0.90 × price) × (1.05 × volume) = 0.945 of original revenue, a decrease of approximately 5.5% — closest to a ~4.5-5.5% decline.
Which scenario best illustrates the concept of 'contribution margin erosion' in pricing decisions?
Answer: A company grants successive customer discounts until the price approaches variable cost
Contribution margin erosion occurs when repeated discounting drives the effective price toward variable cost, gradually eliminating the margin available to cover fixed costs and profit.
A company calculates its Cost of Goods Sold as $800,000 and average inventory as $200,000. What is the inventory turnover, and what does a low ratio generally indicate?
Answer: 4x; potential overstocking or slow-moving inventory
Inventory turnover = COGS / Average Inventory = $800,000 / $200,000 = 4x; a low ratio relative to industry peers signals excess inventory or weak sales velocity.
In a service business, the primary challenge with cost allocation compared to manufacturing is:
Answer: Services cannot be inventoried, making period-cost matching and job costing more complex
Unlike manufactured goods, services cannot be stored as inventory, requiring careful matching of costs to service delivery periods and specific client engagements.