FCMA Notes New

FUNDAMENTALS OF COST AND MANAGEMENT ACCOUNTING BY KHALID AZIZ
Difference between Financial and Management Accounting
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Difference between Financial and Cost Accounting

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Difference between Management and Cost Accounting
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Types of Costs (Cost Classifications)
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Costs can be classified into different categories for different purposes.
Costs may be categorized according to their:
1. management function,
2. ease of traceability,
3. timing of charge against revenue,
4. behavior in accordance with activity, and
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5. relevance to decision making.
According to Management Function

1. Manufacturing costs - incurred in the factory to convert raw materials into finished goods. It includes cost
of raw materials used (direct materials), direct labor, and factory overhead.
2. Nonmanufacturing costs - not incurred in transforming materials to finished goods. These include selling
expenses (such as advertising costs, delivery expense, salaries and commission of salesmen) and
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administrative expenses (such as salaries of executives and legal expenses).

According to Ease of Traceability
1. Direct costs - those that can be traced directly to a particular object of costing such as a particular product,
department, or branch. Examples include materials and direct labor. Some operating expenses can also be
classified as direct costs, such as advertising cost for a particular product.
2. Indirect costs - those that cannot be traced to a particular object of costing. They are also called common
costs or joint costs. Indirect costs include factory overhead and operating costs that benefit more than one
product, department, or branch.
According to Timing of Charge against Revenue

1. Product costs - are inventoriable costs. They form part of inventory and are charged against revenue, i.e.
cost of sales, only when sold. All manufacturing costs (direct materials, direct labor, and factory overhead) are
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product costs.
2. Period costs - are not inventoriable and are charged against revenue immediately. Period costs include non-
manufacturing costs, i.e. selling expenses and administrative expenses.
According to Behavior in Accordance with Activity
1. Variable costs - vary in total in proportion to changes in activity. Examples include direct materials, direct
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labor, and sales commission based on sales.
2. Fixed costs - costs that remain constant regardless of the level of activity. Examples include rent, insurance,
and depreciation using the straight line method.
3. Mixed costs - costs that vary in total but not in proportion to changes in activity. It basically includes a fixed
cost potion plus additional variable costs. An example would be electricity expense that consists of a fixed
amount plus variable charges based on usage.
According to Relevance to Decision Making
1. Relevant cost - cost that will differ under alternative courses of action. In other words, these costs refer to
those that will affect a decision.
2. Standard cost - predetermined cost based on some reasonable basis such as past experiences, budgeted
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amounts, industry standards, etc. The actual costs incurred are compared to standard costs.
3. Opportunity cost - benefit forgone or given up when an alternative is chosen over the other/s. Example: If a
business chooses to use its building for production rather than rent it out to tenants, the opportunity cost
would be the rent income that would be earned had the business chose to rent out.
4. Sunk costs - historical costs that will not make any difference in making a decision. Unlike relevant costs,
they do not have an impact on the matter at hand.
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5. Controllable costs - refer to costs that can be influenced or controlled by the manager. Segment managers
should be evaluated based on costs that they can control.
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PRACTICE BANK
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SET 1
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SET 2
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SET 3
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Answers Set 1
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Answers Set 2
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Answers Set 3
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SET 4
Practice Problem #1
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A partial listing of costs incurred during December at Rooks Corporation appears below:
Factory supplies $7,000

Administrative wages 92,000
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Direct materials 176,000
Sales staff salaries 32,000
Factory depreciation 2,000
Headquarters building rent 47,000
Indirect labor 23,000
Marketing expenses 136,000
Direct labor 82,000
Required: Determine the total of the manufacturing overhead costs for

December.
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Practice Problem #2
Jarvis Company provided the following information regarding its first year of operations:
Administrative salaries $60,000

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Indirect materials 4,000
Factory supervision salaries 28,000
Direct labor 80,000
Direct materials used 100,000
Research and development costs 32,000
Factory building rent 18,000
Sales revenues 432,000
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Selling expenses 7,000
Required: a) Total overhead costs

b) Total product costs
c) Total period costs
Practice Problem #3
Management of Wallen Corporation has provided the following financial information for September.
Direct materials cost was $57,000, direct labor cost was $43,000, and manufacturing overhead was
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$71,000. Selling expense was $15,000 and administrative expense was $32,000.
Required: Determine the conversion cost for September.
True / False Questions
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1. Managerial accounting must follow GAAP.
True False
2. Managerial accounting emphasizes decisions affecting the future.

True False
3. Manufacturing costs are product costs.

True False
4. Period costs are expensed in the period incurred.

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True False
5. Direct materials and direct labor are also called prime costs.
True False
6. Conversion costs are manufacturing costs.

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True False
7. Sales commissions are a product cost because they are incurred when a unit of product is
sold.
True False
8. Manufacturing companies have one inventory account.

True False
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9. A direct cost cannot be easily traced to a cost object.

True False
10. A cost that differs between two alternatives is a sunk cost.

True False
11. Manufacturing overhead can be a variable cost or a fixed cost, but not both.
True False
12. Depreciation on administrative office’s equipment is a product cost.

True False
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13. Direct material costs are generally fixed costs.
True False
14. Conversion cost equals product cost less direct labor cost.
True False
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15. Only direct costs can be classified as product costs; indirect costs are classified as period costs.
True False
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Multiple Choice Questions
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1. Which of the following is not a characteristic of managerial accounting:
a) Emphasizes decisions affecting the future
b) Mandatory for external reports
c) Need not follow GAAP
d) Reports to those inside the organization
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2. Which of the following is not a manufacturing cost:
a) Direct materials
b) Manufacturing overhead
c) Administrative costs
d) Direct labor
3. How many classes of inventory accounts do manufacturing companies have:

a) One
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b) Three
c) Two
d) Four
4. Costs that are taken directly to the income statement as expenses in the period in which they
are incurred are:
a) Product costs
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b) Prime costs
c) Sunk costs
d) Period costs
5. Prime costs + Conversion Costs equals:

a) Product costs
b) Prime costs
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c) Manufacturing costs
d) A meaningless total because direct labor is counted twice.
6. Potential benefits given up when one alternative is selected over another are:
a) Prime costs
b) Sunk costs
c) Opportunity costs
d) Direct costs
7. A direct cost is one which:
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a) Is not worth the effort of tracing to a specific cost object
b) Remains constant no matter the activity level
c) Can be easily and conveniently traced to a specific cost object
d) Always sunk
8. At production level of 2,000 units a cost is $20,000; at production level of 4,500 units
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the same cost is $45,000. This is an example of a:
a) Variable cost
b) Direct cost
c) Fixed cost
d) Sunk cost
9. An example of a fixed cost in a manufacturing company is:

a) The cost of raw materials
b) The cost of electricity for running machines
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c) Wages of assembly line workers
d) Depreciation on factory equipment
10. Mary’s job pays $400 a week. She thinks she will have to quit her job if she goes to college.
The wages that she will lose if she chooses college are:
a) Sunk cost
b) Opportunity cost
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c) Indirect cost
d) Prime cost
11. The costs of prescription drugs administered to patients by nurses on the fourth floor
of Central Hospital should be classified as:
a) Direct patient costs.
b) Indirect patient costs.
c) Overhead costs of the nursing station.
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d) Period costs of thehospital.
12. All of the following costs would be found in a company's accounting records except:
a) Sunk cost.
b) Opportunity cost.
c) Indirect costs.
d) Direct costs.
13. Which of the following would most likely be included as part of manufacturing overhead in
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the production of a wooden table?
a) The amount paid to the individual who stains the table.
b) The commission paid to the salesperson who sold thetable.
c) The cost of glue used in the table.
d) The cost of the wood used in the table.
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14. Inventoriable costs are also known as:
a) Variable costs.
b) Conversion costs.
c) Product costs.
d) Fixed costs.
15. At production level of 2,000 units a cost is $20,000; at production level of 4,500 units
the same cost is $20,000. This is an example of a:
a) Variable cost
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b) Direct cost
c) Fixed cost
d) Sunk cost
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Solutions to Practice Problems
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Practice Problem #1:
Factory supplies $7,000

Indirect labor 23,000
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Total Overhead $32,000
a)
Factory depreciation $16,000
Indirect materials 4,000
Factory supervision salaries 28,000
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Factory building rent 18,000
Total overhead costs $66,000
b)
Direct materials used $100,000
Direct labor 80,000
Total overhead costs 66,000
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Total product costs $246,000
c)
Administrative salaries $60,000
Research and development costs 32,000
Selling expenses 7,000
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Total period costs $188,000
Direct labor $43,000

Manufacturing overhead 71,000
Total Conversion Cost $114,000
Solutions to True / False Problems
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1. False - because managerial accounting may use financial and non- financial
information.
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2. True
3. True
4. True
5. True
6. True
7. False - sales commissions are a selling expense.
8. False - manufacturing companies have three inventory accounts: Direct
materials, Work in Process, Finished Goods.
9. False - direct costs have a direct and easily traceable relationship to cost
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objects.
10. False - costs that differ among alternatives are differential costs.
11. True
12. False - administrative costs are never product costs.
13. False – direct materials costs are variable costs as the total cost increases
when more units are produced.
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14. False – conversion cost equals product cost minus direct materials cost
15. False – indirect manufacturing costs, i.e. manufacturing overhead, are

classified as product costs
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Solutions to Multiple Choice Questions
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1. B
2. C
3. B
4. D
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5. D
6. C
7. C
8. A
9. D
10. B
11. A
12. B
13. C
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14. C
15. C
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SET 5
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1. Basic objective of cost accounting is .
A. tax compliance.
B. .financial audit.
C. cost ascertainment.
D. profit analysis.
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ANSWER: C
2. Direct cost incurred can be identified with .
A. each department.
B. each unit of output.
C. each month.
D. each executive.
ANSWER: B
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3. Overhead cost is the total of .
A. all indirect costs.

B. all direct costs.
C. indirect and direct costs.
D. all specific costs.
ANSWER: A
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4. Imputed cost is a .
A. notional cost.
B. real cost.
C. normal cost.
D. variable cost.
ANSWER: A
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5. Operating costing is suitable for .
A. job order business.

B. contractors.
C. sugar industries. D. service industries.
ANSWER: D
6. Process costing is suitable for .
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A. hospitals.
B. oil reefing firms.
C. transport firms.
D. brick laying firms.
ANSWER: B
7. Cost classification can be done in . a. two ways.
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A. two ways.
B. three ways.
C. four ways.
D. several ways.
ANSWER: D
8. Costing refers to the techniques and processes of .
A. ascertainment of costs.
B. allocation of costs.
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C. apportion of costs.
D. distribution of costs.
ANSWER: A
9. Cost accounting was developed because of the .

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A. limitations of the financial accounting.

B. limitations of the management accounting.
C. limitations of the human resource accounting.
D. limitations of the double entry accounting.
ANSWER: A
10. Multiple costing is a technique of using two or more costing methods for ascertainment of
cost by
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A. the same firm.

B. the several firms.
C. the same industry
D. the several industries.
ANSWER: A
11.Wages paid to a labour who was engaged in production activities can be termed as .
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A. direct cost.
B. indirect cost.
C. sunk cost.
D. imputed cost.
ANSWER: A
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12.The cost which is to be incurred even when a business unit is closed is a .
A. imputed cost.
B. historical cost.
C. sunk cost D. shutdown cost.
ANSWER: D
13.Classification of cost is useful .
A. to find gross profit.

B. to find net profit.
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C. to identify costs.
D. to identify efficiency.
ANSWER: C
14.Elements of costs are .

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A. three types.
B. four types.
C. five types.
D. seven types.
ANSWER: A
15.Direct expenses are also called .
A. major expenses.
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B. chargeable expenses.
C. overhead expenses.
D. sundry expenses.
ANSWER: B
16. Indirect material used in production is classified as .

A. office overhead.
B. selling overhead.
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C. distribution overhead.
D. factory overhead.
ANSWER: D
17. Warehouse rent is a part of .
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A. prime cost.
B. factory cost.
C. distribution cost.
D. production cost.
ANSWER: C
18. Indirect material scrap is adjusted along with .
A. prime cost.
B. factory cost.
C. labour cost.
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D. cost of goods sold.
ANSWER: B
19. Sale of defectives is reduced from .
A. prime cost.
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B. works cost.
C. cost of production.
D. cost of sales.
ANSWER: C
20. Tender is an .
A. estimation of profit.
B. estimation of cost.
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C. estimation of selling price.

D. estimation of units.
ANSWER: C
21. Cost of sales plus profit is .
A. selling price.
B. value of finished product.
C. value of goods produced.

D. value of stocks.
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ANSWER: A
22. Prime cost includes .
A. direct materials, direct wages and indirect expenses.

B. indirect materials and indirect labour and indirect expenses.
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C. direct materials, direct wages and direct expenses.
D. direct materials, indirect wages and indirect expenses
ANSWER: C
23. Total of all direct costs is termed as .
A. prime cost.
B. works cost.
C. cost of sales.
D. cost of production.
ANSWER: A
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24. Depreciation of plant and machinery is a part of .
A. factory overhead.
B. selling overhead.
C. distribution overhead.
D. administration overhead
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ANSWER: A
35. Toy manufacturing industry should use .
A. unit costing.
B. process costing.
C. batch costing.
D. multiple costing.
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ANSWER: C
SET 6
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ANSWERS
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FUNDAMENTALS OF COST AND MANAGEMENT ACCOUNTING BY KHALID AZIZ

Difference between Financial and Management Accounting

Difference between Financial and Cost Accounting

5. relevance to decision making.

According to Management Function

administrative expenses (such as salaries of executives and legal expenses).

According to Timing of Charge against Revenue

Factory supplies $7,000

Required: Determine the total of the manufacturing overhead costs for

Administrative salaries $60,000

Factory depreciation 16,000

Sales staff salaries 32,000

Required: a) Total overhead costs

Required: Determine the conversion cost for September.

True / False Questions

2. Managerial accounting emphasizes decisions affecting the future.

3. Manufacturing costs are product costs.

4. Period costs are expensed in the period incurred.

6. Conversion costs are manufacturing costs.

8. Manufacturing companies have one inventory account.

9. A direct cost cannot be easily traced to a cost object.

10. A cost that differs between two alternatives is a sunk cost.

12. Depreciation on administrative office’s equipment is a product cost.

Multiple Choice Questions

3. How many classes of inventory accounts do manufacturing companies have:

5. Prime costs + Conversion Costs equals:

7. A direct cost is one which:

9. An example of a fixed cost in a manufacturing company is:

d) Period costs of thehospital.

Solutions to Practice Problems

Factory supplies $7,000

Practice Problem #2:

Total product costs $246,000

Total period costs $188,000

Practice Problem #3:

Direct labor $43,000

Solutions to True / False Problems

15. False – indirect manufacturing costs, i.e. manufacturing overhead, are

Solutions to Multiple Choice Questions

2. Direct cost incurred can be identified with .

A. all indirect costs.

5. Operating costing is suitable for .

A. job order business.

6. Process costing is suitable for .

8. Costing refers to the techniques and processes of .

9. Cost accounting was developed because of the .

A. limitations of the financial accounting.

A. the same firm.

13.Classification of cost is useful .

A. to find gross profit.

14.Elements of costs are .

15.Direct expenses are also called .

16. Indirect material used in production is classified as .

17. Warehouse rent is a part of .

18. Indirect material scrap is adjusted along with .

19. Sale of defectives is reduced from .

C. estimation of selling price.

C. value of goods produced.

22. Prime cost includes .

A. direct materials, direct wages and indirect expenses.

35. Toy manufacturing industry should use .

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