Cost Management Paper 10

Answer (D) is correct. The contribution margin is calculated by subtracting all variable costs from sales revenue. It represents the portion of sales that is available for covering fixed costs and profit.

Answer (B) is correct. Standard costs are predetermined, attainable unit costs. Standard cost systems isolate deviations (variances) of actual from expected costs. One advantage of standard costs is that they facilitate flexible budgeting. Accordingly, standard and budgeted costs should not differ when standards are currently attainable. However, in practice, budgeted (estimated actual) costs may differ from standard costs when operating conditions are not expected to reflect those anticipated when the standards were developed.

Answer (D) is correct. 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.

Answer (C) is correct. Gross margin or gross profit is the excess of sales over cost of goods sold, calculated on a full absorption basis. Cost of goods sold would include all manufacturing costs, both fixed and variable.

Answer (D) is correct. Like products that are mass produced should be accounted for using process costing techniques to assign costs to products. Costs are accumulated by departments or cost centers rather than by jobs, work-inprocess is stated in terms of equivalent units, and unit costs are established on a departmental basis. Process costing is an averaging process that calculates the average cost of all units.

Answer (A) is correct. A standard-cost system records the product at standard (predetermined) costs and compares expected with actual cost. This comparison allows deviations (variances) from expected results to be identified and investigated. A standard-cost system can be used in job-order, processcosting, and activity-based systems to isolate variances.

Answer (D) is correct. In both normal and standard costing, immaterial efficiency variances are accounted for as an addition to cost of goods sold.

Answer (B) is correct. Contribution margin is the net sales revenue minus all variable costs. Thus, Sully’s contribution margin is equal to $4,800 [($30 Selling price × 400 Clocks) – ($18 Variable manufacturing expense × 400 Clocks)].

Answer (A) is correct. Setting standards at an ideal level can motivate employees. However, if the standards are too high, employees may get discouraged. If the standards are too low, employees will not be competitive or driven. Setting the correct level of standards is a difficult task, but it can motivate employees when done correctly.

Answer (D) is correct. Cost of goods sold is based on the manufacturing costs incurred in production but does not include selling or general and administrative expenses. Manufacturing costs equal $38,500 [$13,700 DM + $4,800 DL + (800 hours x $25) OH]. Thus, per-unit cost is $5.50 ($38,500 / 7,000 units).