CMA Part 1: Measurement Concepts, Classification of Costs, and Costing Methods

Comprehensive practice questions covering cost classification, costing systems, activity-based costing, joint product allocation, variable vs. absorption costing, lean management, and quality control concepts for the CMA Part 1 exam.

What is the primary function of cost management?

To help management focus on factors that make the company successful by identifying, summarizing, and reporting on critical success factors.

Define 'Critical Success Factors' according to the transcript.

A limited number of characteristics, conditions, or variables that have a direct and important impact on the efficiency, effectiveness, and viability of an organization.

What is the difference between effectiveness and efficiency?

Effectiveness is reaching or exceeding set goals (like maximizing shareholder value), while efficiency is the effective use of resources in carrying out operations.

Distinguish between a 'cost' and an 'expense'.

A cost is a resource given up to achieve an objective (economic concept), whereas an expense is a cost charged against revenue in a specific accounting period (accounting concept).

What are implicit costs?

Costs that do not involve a specific cash payment and are not recorded in accounting records, such as opportunity costs.

Define 'Opportunity Cost'.

The contribution to income lost by not using a limited resource in its best alternative use.

Which costs are considered 'conversion costs'?

Direct labor and manufacturing overhead (the costs of converting direct materials into finished goods).

What is the definition of 'prime costs'?

The direct manufacturing inputs consisting of direct material and direct labor.

What is the formula for the cost function of total manufacturing costs?

$y = F + Vx$ (or $y = Vx + F$), where $y$ is total costs, $F$ is fixed costs, $V$ is variable cost per unit, and $x$ is total production.

Define 'Relevant Range' in the context of fixed costs.

The range of activity within which total fixed costs remain unchanged.

What is a 'Step Cost' (or Semi-fixed cost)?

A cost that is fixed over a small range of activity and jumps to a higher level once that range is exceeded (e.g., nursing staff based on patient load).

Define 'Sunk Costs'.

Costs that have already been incurred and cannot be recovered; they are irrelevant to future decision-making.

What are 'Committed Costs'?

Fixed costs required to establish and maintain the company's infrastructure, such as property, plant, equipment, and intangible assets like franchises.

Distinguish between Normal and Abnormal Spoilage.

Normal spoilage is expected and its costs are allocated to good units; abnormal spoilage is preventable and its costs are expensed as a loss.

How is overhead applied under 'Normal Costing'?

Multiplying a predetermined overhead rate by the actual amount of the allocation base used for production.

How is overhead applied under 'Standard Costing'?

Multiplying a predetermined overhead rate by the standard amount of the allocation base allowed for the actual output produced.

In a Standard Cost system, how are immaterial variances handled at period-end?

They are closed out $100\%$ to cost of goods sold (COGS).

In a Standard Cost system, how are material variances handled at period-end?

They are prorated among COGS and relevant inventory accounts (work-in-process and finished goods) based on the overhead applied during the period.

What is the formula for calculating the Predetermined Overhead Application Rate?

$$Budgeted Monetary Amount of Manufacturing Overhead \div Budgeted Activity Level of Allocation Base$$

What are the three categories of costs in 'Life-Cycle Costing'?

1) Upstream Costs (R&D, Design); 2) Manufacturing Costs; 3) Downstream Costs (Marketing, Distribution, Service).

Define the 'Splitoff Point' in joint product costing.

The point in the production process where joint products stop sharing the same process and become different, identifiable products.

What are the two methods of accounting for byproducts?

The Production Method (recognized at production as a reduction of main product costs) and the Sales Method (recognized at the time of sale as revenue or other income).

What is 'Equivalent Units' of production?

A calculation used in process costing to determine how many complete units could have been made from the work performed on units in beginning, ending, and completed inventory.

Define 'Activity-Based Costing' (ABC).

A system that assigns resource costs to activities based on resource consumption drivers and then assigns activity costs to cost objects based on activity consumption drivers.

Identify the four levels of the ABC cost hierarchy.

1) Unit-level; 2) Batch-level; 3) Product-level; 4) Facility-level (or facility-sustaining).

Compare Variable and Absorption costing treatment of Fixed Manufacturing Overhead.

Under Absorption costing, fixed overhead is a product cost (inventoried); under Variable costing, it is a period cost (expensed as incurred).

Describe the effect on operating income of Absorption vs. Variable costing when Production > Sales.

Operating income under Absorption costing will be greater than under Variable costing because fixed overhead is deferred in inventory.

Describe the 'Downward Demand Spiral'.

A cycle where low production causes higher fixed costs per unit, leading to price increases, which further reduces demand and production.

Name the three methods for allocating multiple shared service department costs.

1) Direct Method; 2) Step-down (Sequential) Method; 3) Reciprocal Method.

What is the primary formula for the 'High-Low Points Method' to find variable cost per unit?

$Difference in Associated Costs \div Difference in Activity Levels$ using the highest and lowest activity levels.

What does the Coefficient of Determination ($R^2$) indicate in regression analysis?

The percentage of the total variation in the dependent variable (costs) that can be explained by variations in the independent variable (activity volume).

Define the five principles of 'Lean Thinking'.

1) Specify Value; 2) Identify the Value Stream; 3) Create Flow; 4) Implement Pull; 5) Seek Perfection (Continuous Improvement).

What is 'Kanban'?

A visual signal or card used in JIT and lean manufacturing to trigger the movement of materials or production of components only when they are needed.

Distinguish between MRP, MRPII, and ERP.

MRP manages material requirements; MRPII adds finance and personnel integration; ERP integrates all company functions (sales, accounting, HR, etc.) into a single system.

Define the four categories of the 'Costs of Quality'.

1) Prevention; 2) Appraisal; 3) Internal Failure; 4) External Failure.

What is a 'Pareto Diagram'?

A histogram that ranks quality problems by frequency to identify the $20\%$ of causes that result in $80\%$ of problems.

What is an 'Ishikawa Diagram'?

Also known as a fishbone or cause-and-effect diagram, it visually organizes root causes of quality problems into categories like Machines, Materials, Methods, and Manpower.

Define 'Kaizen'.

A Japanese term meaning 'continuous improvement,' referring to constant incremental improvements in quality and efficiency.

What is 'Business Process Reengineering' (BPR)?

The radical redesign of business processes to achieve quantum leaps in performance, starting from a 'clean sheet' rather than incremental changes.

What are the primary activities in Michael Porter's 1985 Value Chain?

Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Service.