Part 1
Study Unit 1
Ethics for Management Accountants
and
Cost Management Concepts
ICMA’s Requirements for CMA
Designation
• Become a Member! Preferably of a local chapter
(there are benefits).
• Pass both parts of the exam within 3 years (of starting
the process).
• Satisfy the education requirements.
• Satisfy the experience requirements.
• Comply with IMA’s Statement of Ethical Professional
Practice.
• To remain a CMA you have to maintain active member,
full-fill the requirements for CE, comply with IMA’s
Ethics statements and applicable state laws.
Gleim CMA Review System
• Gleim Suggested Study Steps – see page 8
– Alternative steps – per Ron
• Multiple Choice Quizzes
• Audiovisual Presentation
• True/False Study Questions
• Knowledge Transfer Outline
• Essay
• CMA Test Prep Online
– Practice Exam vs. Study Session
Table of Contents
Study Unit 1 Study Unit 2 Study Unit 3 Study Unit 4 Study Unit 5 Study Unit 6 Study Unit 7 Study Unit 8 Study Unit 9 Study Unit 10 -
Ethics for Management Accountants and Cost Management
Concepts
Cost Accumulation Systems
Cost Allocation Techniques
Operational Efficiency and Business Process Performance
Budgeting Concepts and Forecasting Techniques
Budget Methodologies and Budget Preparation
Cost and Variance Measures
Responsibility Accounting and Performance Measures
Internal Controls – Risk and Procedures for Control
Internal Controls – Internal Auditing and Systems Controls
* See class schedule for dates
Part 1 Exam
• Topics
–
–
–
–
–
Planning, Budgeting and Forecasting
Performance Management
Cost Management
Internal Controls
Professional Ethics
30%
25%
25%
15%
5%
Level C
Level C
Level C
Level C
Level C
Exam format
• 3 hrs - 100 multiple choice questions = approx. 1.5 minutes per question
(on average).
– Find ways to “bank” time
– Look for short-cuts
– You will find that you most question do not seem “easy”, don’t get
discouraged
– You “earn” points for each question answered correctly
– Some questions are “test” questions that carry no point value. You will not
know which ones they are
– Extra time can be carried forward to the Essay portion
• 1 hr - 2 Essay questions with up to 8 sub-parts
– You can’t go back to multiple-choice part once you enter this portion of the
exam
– Whatever you have typed on the screen will be saved as your answer,
irrespective if the timer runs out on you
Exam format
– If you find you have weaknesses in any topic ref. Appendix A for
ref. the appropriate sub –units.
– The coverage percentage given for each major topic within each
examination part represents the relative weight given to that
topic in an examination part. The number of questions
presented in each major topic area approximates this
percentage.
– You will be expected to understand the “impact” of taxes when
reporting and analyzing financial results.
– You are “assumed” to have knowledge of preparation of
financial statements, business economics, time-value of money
concepts, statistics and probability.
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).
Test Coverage
• Level A: Requiring the skill levels of knowledge and
comprehension.
• Level B: Requiring the skill levels of knowledge,
comprehension, application, and analysis.
• Level C: Requiring all six skill levels – Knowledge,
comprehension, application, analysis, synthesis, and
evaluation.
• Examples of each are given in Appendix C, page 407.
Exam Strategies
• Budget your time, know your “time hacks”
• See how many Essay sub-questions you will be given.
There are two parts with different amounts of subparts
• Answer the questions in consecutive order, and limit
the number you want to come back to no more than
say 10, but make sure you answer it before going on to
the next.
• Never leave a question unanswered, score is based on
number of correct answers.
• Do not allow the answer choices to affect your reading
of the question
The essays
•
•
•
•
•
Remember, 2 essay questions with up to 8 parts each!
The ICMA grades on both subject matter and writing skills on the essay portion of the CMA exam. For
writing skills to be graded, the response must be relevant to the question asked. The criteria for grading
are as follows:
– Use of standard English – includes proper grammar, punctuation, and spelling
– Organization – response is arranged logically and coherently
– Clarity – analysis is clearly communicated with well-constructed sentences and appropriate
vocabulary.
Ref. Scenario for Essay Questions 16-19
– Handout for in-class students
– Separate file for online students
The CMA exam uses essays to reflect a more "real-world" environment in which candidates must apply the
knowledge they have acquired. Essays are graded on both writing skills and subject matter. Partial credit IS
available for essays that have some correct and some incorrect points. Finally, it is important to remember
that essays are not intended to test typing ability, so the time you allocated for essay response is adequate
to complete the questions even if you do not have the best typing skills.
Answering multiple-choice questions is an effective method to study the material for both the multiplechoice and essay sections of the exam. They are an excellent diagnostic tool that will allow you to quickly
identify your weak areas. Also, think about what your answer would be if the question were not multiplechoice. When reviewing the correct and incorrect answer explanations, your "essay answers" should be
somewhat equivalent to the detailed answer explanations.
Prepping for the exam
• Decide if you will be using one of the approved financial calculators on
the exam?
• Focus on what you don’t know
• Realize that you will be more proficient in some topics more than
others
• Read, quiz, evaluate (what you don’t know), sit for lecture, re-quiz,
identify anything you need help with one on one?
• Practice the Essay questions – use the Gleim Essay Wizard
• Mid-way through the course, create a short mock multiple choice
exams (say no more than 50 questions) to condition for the longer 100
question exam.
• Right after our cram session take the Gleim online CMA Practice Exam
that came with your Gleim study material. It is a 4 hour exam.
• Contact instructor and review anything not quite clear.
Ethics tested on the Exams
• Ethics is tested from:
– Individual Perspective – Part 1
– Organizational Perspective – Part 2
• Questions could be either Multiple Choice or Essay
• Make sure you study the IMA Framework on Ethics, ref. the
IMA website, or following URL:
http://www.imanet.org/PDFs/Public/Press_Releases/STATEMENT%20OF%20ETHICAL%20PROFESSIONAL%20PRACTICE_2.2.12.pdf
http://www.imanet.org/resources_and_publications/ethics_center_helpline.aspx
–
–
–
–
Have it “conceptually” memorized.
Similar to the AICPA version
You will then be able to answer any question from there
Stay “within” an objective view, and don’t get side-tracked in
emotional distractors
1.1 Ethics for Management
Accountants
• Candidates need to be prepared to answer ethics
questions that will be integrated with any of the
other topics tested on Part 1. This includes
multiple-choice or essay type questions.
• You have to:
– Identify the exact nature of ethical dilemma
– How to resolve it
• Memorize content of IMA’s Statement of Ethical
Professional Practices (see page 20)
1.1 Ethics for Management Accountants
Question 1 - CMA1 Study Unit 1:
Ethics for Management Accountants
and Cost Management Concepts
In accordance with IMA’s Statement
of Ethical Professional Practice, a
member who fails to perform
professional duties in accordance
with relevant standards is acting
contrary to which one of the
following standards?
1.1 Ethics for Management Accountants
•
Correct Answer: A
One of the responsibilities of an IMA member under the competence standard is to “maintain an
appropriate level of professional expertise by continually developing knowledge and skills.” (S)he
must also “perform professional duties in accordance with relevant laws, regulations, and technical
standards.” The third requirement under this standard is to “provide decision support information
and recommendations that are accurate, clear, concise, and timely.”
Incorrect Answers:
B: The confidentiality standard concerns an IMA member’s responsibility not to disclose or use
the firm’s confidential information.
C: The integrity standard pertains to conflicts of interest, avoidance of acts discreditable to the
profession, and refraining from activities that prejudice the ability to carry out duties ethically.
D: Credibility is the fourth standard of IMA’s Statement of Ethical Professional Practice. It requires
that information be communicated “fairly and objectively,” and that all information that could
reasonably influence users be disclosed.
1.1 Ethics for Management Accountants
Question 2 - CMA1 Study Unit 1:
Ethics for Management Accountants
and Cost Management Concepts
According to IMA’s Statement of
Ethical Professional Practice, a
member has a responsibility to
recognize professional limitations.
Under which standard of ethical
conduct would this responsibility be
included?
1.1 Ethics for Management Accountants
•
Correct Answer: A
The competence standard pertains to an IMA member’s responsibility to
“recognize and communicate professional limitations or other constraints that
would preclude responsible judgment or successful performance of an activity.”
Incorrect Answers:
B: The confidentiality standard concerns an IMA member’s responsibility not to
disclose or use the firm’s confidential information.
C: The integrity standard deals with conflicts of interest, avoidance of acts
discreditable to the profession, and refraining from activities that prejudice the
ability to carry out duties ethically.
D: Credibility is the fourth standard of IMA’s Statement of Ethical Professional
Practice. It requires that information be communicated “fairly and objectively,” and
that all information that could reasonably influence users be disclosed.
1.1 Ethics for Management
Accountants
• See Essay Scenario 1 & 2
• See Essay Scenario 16, 17, 18, 19
1.2 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”.
1.2 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.
1.2 Cost Management Terminology
• Cost Object
– Entity to which costs can be attached
– Examples:
• Products
• Processes
• Employees
• Departments
• Facilities
1.2 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
1.2 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
1.2 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
1.2 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
1.2 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
1.2 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
1.2 Cost Management Terminology
Indirect costs collected in cost pools
• Cost Pool
– Account where similar cost elements are
accumulated
Example - Manufacturing Overhead
1.2 Cost Management Terminology
Common Costs
• Indirect cost
• Shared by two or more users
• Rationally allocated
• Examples:
• Depreciation for HQ building
• Allocated amongst departments
1.2 Cost Management Terminology
Question 1 - CMA1 Study Unit 1:
Ethics for Management Accountants
and Cost Management Concepts
Inventoriable costs
A.
Include only the prime costs of
manufacturing a product.
B.
Include only the conversion costs of
manufacturing a product.
1.2 Cost Management Terminology
•
Correct Answer: D
Under an absorption costing system, inventoriable (product) costs include all costs necessary
for good production. These include direct materials and conversion costs (direct labor and
overhead). Both fixed and variable overhead is included in inventory under an absorption
costing system. Inventoriable costs are treated as assets until the products are sold because
they represent future economic benefits. These costs are expensed at the time of sale.
Incorrect Answers:
A: Overhead costs as well as prime costs (direct materials and labor) are included in
inventory.
B: Materials costs are also included.
C: Inventory costs are expensed when the goods are sold, not when they are transferred to
finished goods.
1.2 Cost Management Terminology
Question 2 - CMA1 Study Unit 1: Ethics for Management
Accountants and Cost Management Concepts
A company experienced a machinery breakdown on one of its
production lines. As a consequence of the breakdown,
manufacturing fell behind schedule, and a decision was made
to schedule overtime to return manufacturing to schedule.
Which one of the following methods is the proper way to
account for the overtime paid to the direct laborers?
A.
The overtime hours times the sum of the straight-time wages
and overtime premium would be charged entirely to
manufacturing overhead.
B.
The overtime hours times the sum of the straight-time wages
and overtime premium would be treated as direct labor.
1.2 Cost Management Terminology
•
Correct Answer: D
Direct labor costs are wages paid to labor that can feasibly be specifically identified with the
production of finished goods. Factory overhead consists of all costs, other than direct
materials and direct labor, that are associated with the manufacturing process. Thus, straighttime wages would be treated as direct labor; however, because the overtime premium cost is
a cost that should be borne by all production, the overtime hours times the overtime
premium should be charged to manufacturing overhead.
Incorrect Answers:
A: The straight-time wages times the overtime hours should still be treated as direct labor.
B: Only the straight-time wages times the overtime hours is charged to direct labor.
C: Labor costs are not related to repairs and maintenance expense.
1.3 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.”
1.3 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
1.3 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
1.3 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
1.3 Cost Behavior and Relevant Range
Types of Costs and their characteristics (continued)
•
Step cost
– Total cost remain constant over the.
– Unit cost decrease a usage within the step range.
Exhibit 4 – Step Cost
1.3 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
1.3 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.
1.3 Cost Behavior and Relevant Range
Question 1 - CMA1 Study Unit 1:
Ethics for Management Accountants
and Cost Management Concepts
Which one of the following
categories of cost is most likely not
considered a component of fixed
factory overhead?
A.
B.
C.
Rent.
Property taxes.
Depreciation.
1.3 Cost Behavior and Relevant Range
• 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.
1.3 Cost Behavior and Relevant Range
Question 2 - CMA1 Study Unit 1: Ethics
for Management Accountants and Cost
Management Concepts
Jackson Co. has the following information
for the first quarter of this year:
Machine
Cleaning
Hours
Expense
January
2,100
$ 900
February
2,600
1,200
March
1,600
800
April
2,000
1,000
Using the high-low method, what is
Jackson’s variable cost of cleaning per
machine hour?
A.
$.40
B.
$.48
1.3 Cost Behavior and Relevant Range
Correct Answer: A
The high-low method is
used to segregate the fixed
and variable components of
a mixed cost. In this
problem, March had the
lowest activity level and
February had the highest.
February
March
Difference
$1,200
(800)
for
for
2,600
(1,600)
hours
hours
$ 400
for
1,000
hours
The variable portion is thus
$.40 per machine hour.
Incorrect Answers: B: The
average of the high and low
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
Madtack Company’s beginning and ending inventories for
the month of November are
1-Nov
30-Nov
Production data for the month of
November follows:
Direct labor
$200,000
Actual factory
overhead
132,000
Direct materials
$67,000
$62,000
Direct materials
purchased
163,000
Work-in-process
145,000
171,000
Transportation in
4,000
Finished goods
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 over- or underapplied
overhead until year end.
1.4 Cost of Goods Calculations
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
Correct Answer: A
Prime costs are the combined costs of direct materials and
direct labor.
Beginning materials inventory
$ 67,000
Add: purchases
163,000
Add: transportation in
4,000
Less: purchase returns
(2,000)
Materials available
Less: ending materials inventory
$232,000
(62,000)
Materials used in production
$170,000
Direct materials
$170,000
Direct labor
Total prime costs
200,000
$370,000
1.4 Cost of Goods Calculations
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
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
$ 67,000
Add: purchases
163,000
Add: transportation in
4,000
Less: purchase returns
(2,000)
Materials available
Less: ending materials
$232,000
(62,000)
Materials used in production
$170,000
Direct materials
$170,000
Direct labor
200,000
Manufacturing overhead (DL × 70%)
140,000
Total manufacturing costs
$510,000
1.4 Cost of Goods Calculations
Total manufacturing costs
Add: beginning work-in-process
$510,000
145,000
Less: ending work-in-process
(171,000)
Costs transferred to finished goods
$484,000
Beginning finished goods inventory
$ 85,000
Add: cost of goods manufactured
484,000
Goods available for sale
Less: ending finished goods inventory
Cost of goods sold
$569,000
(78,000)
$491,000
1.5 Cost Classifications
• Controllable VS. Noncontrollable
• Avoidable Vs. Committed
• Incremental vs. Differential
• Engineered s. Discretionary
• Outlays vs. Opportunity
• Relevant vs. Sunk
1.5 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
1.5 Cost Classifications
Question 1 - CMA1 Study Unit 1:
Ethics for Management Accountants
and Cost Management Concepts
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.
1.5 Cost Classifications
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.
1.5 Cost Classifications
Question 2 - CMA1 Study Unit 1: Ethics for
Management Accountants and Cost
Management Concepts
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.
1.5 Cost Classifications
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.
1.6 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?
1.6 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.
1.6 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”.
1.6 Costing Techniques
Question 1 - CMA1 Study Unit 1: Ethics
for Management Accountants and Cost
Management Concepts
Which one of the following considers the
impact of fixed overhead costs?
A.
Full absorption costing.
B.
Marginal costing.
C.
Direct costing.
D.
Variable costing.
1.6 Costing Techniques
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.
1.6 Costing Techniques
Question 2 - CMA1 Study Unit 1: Ethics
for Management Accountants and Cost
Management Concepts
A standard costing system is most often
used by a firm in conjunction with
A.
Management by objectives.
B.
Target (hurdle) rates of return.
C.
Participative management programs.
D.
Flexible budgets.
1.6 Costing Techniques
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.
Incorrect Answers:
A: MBO is a behavioral, communication-oriented, responsibility approach to employee self-direction.
Although MBO can be used with standard costs, the two are not necessarily related.
B: Rates of return relate to revenues as well as costs, but a standard costing system concerns costs
only.
C: Participative management stresses multidirectional communication. It has no relationship to
standard costs.
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.