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Sample Topics

Marginal and Absorption Costing

Marginal (Variable) costing: Marginal costing or variable costing is a costing accounting technique where in only variable costs are accounted for determining the product cost. Under variable costing direct materials, direct labor and variable manufacturing overheads are broadly the product costs and fixed manufacturing overheads form to be the period costs. 
Absorption costing: Absorption costing is a costing accounting technique where all costs whether fixed or variable are accounted for as the product for. Under absorption costing all manufacturing costs are considered are absorbed by the units produced. Under absorption costing, all costs related to manufacturing whether variable or fixed are product costs.
Sample Questions:

Example 1. The​ ________ method allows managers to increase operating income through production by producing more products than needed.



  • variable costing

  • direct costing

  • marginal costing

  • absorption costing


Example 2. How would ABC Company treat fixed manufacturing costs, under the absorption costing method and the variable costing method? 



  • Product Cost under absorption; Product Cost under variable 

  • Period Cost under absorption; Product Cost under variable

  • Period Cost under absorption; Period Cost under variable  

  • Product Cost under absorption; Period Cost under variable


Example 3. The term gross margin is used in reports prepared using:



  • both absorption costing and variable costing.

  • absorption costing but not variable costing.

  • variable costing but not absorption costing.

  • neither variable costing nor absorption costing.


Example 4. Determine which costing method​ (variable costing or absorption​ costing) accounts for fixed manufacturing costs as costs of the​ period:


a. at the time of​ incurrence, or b. at the time the finished units to which the fixed overhead relates are sold.



  • Absorption costing uses​ (a) and variable costing uses​ (b).

  • Variable costing uses​ (a) and absorption costing uses​ (b).

  • Variable costing uses​ (a) and absorption costing uses neither.

  • Absorption costing uses​ (a) and variable costing uses neither.


Example 5. Why is net profit always greater in absorption costing than indirect costing? Why cost accountants use two types of costing methods i-e absorption costing and direct costing? Identify a case where absorption costing yields higher net profit than direct costing?

Differential Analysis

Differential cost analysis: Differential cost analysis is performed by computing the difference between two or more cost alternative scenarios. Since, it calculates differential cost it is implied that this technique is used when there is more than one alternative to pursue. Differential cost can be both fixed as well as variable cost.
Sample Questions: 

Example 1. Differential analysis can be used to determine whether to keep or drop a customer. The format is similar to differential analysis used for making product line decisions. What is the difference between differential analysis used to evaluate customer decisions and differential analysis used to make product line decisions? Select one:



  • In differential analysis for customer decisions, factor costs, shadow costs, and imputed costs are traced directly to customers rather than to product lines.

  • In differential analysis for customer decisions, sales revenue, variable costs, and fixed costs are traced directly to customers, rather than to product lines.

  • In differential analysis used customer decisions, discounted prices, increasing costs, and stop/loss costs are traced directly to customers, rather than to product lines.

  • In differential analysis for customer decisions, sales predictions, variable input costs, and unallocated overhead costs are traced directly to customers, rather than to product lines.


Example 2.


1. Describe Differential analysis to drop/keep customers.


2. Describe Differential analysis regarding product line offerings


3. Describe Differential analysis regarding Make-or-Buy decisions


4. Discuss the role qualitative information may have in differential analysis


5. Discuss sunk and opportunity costs, why must managers consider these things?Provide a brief explanation of why a managerial decision may be made, at times, that doesn’t align with the quantitative recommendations of the analysis.


Example 3. Performance Drinks – A further study of: Regression Analysis Contribution Margin Reporting Cost-Volume-Profit Analysis Differential Analysis Capital Budgeting.


Example 4. In differential analysis, what types of costs are relevant?


Example 5.  Please list, in order, the five steps that are used in differential analysis.

Incremental Analysis

Incremental Analysis: Incremental analysis is technique used for decision making. Under the incremental analysis approach, two or more alternatives are compared for increase in cost under each given alternative as compared to the base alternative. Make or buy decision, accepting additional business, elimination of segment and retain or replace decision are the examples of incremental analysis.
Sample Questions:

Example 1. Explain the concept of incremental analysis. Is an incremental analysis often the most direct route to a business decision?


Example 2. What is incremental analysis? In what types of situations is incremental analysis most useful? Discuss


Example 3. Often the most direct route to a business decision is an incremental analysis. What is meant by an incremental analysis?


Example 4. Describe one of the methods of incremental analysis and the outside factors that a manager should consider when performing this type of incremental analysis.

Make-or-Buy Decisions

Make or buy decision: A make or buy decision is the act of selecting the choice between making or buying a product from an outside source. Under make or buy decision making process, both options are compared for viability and the most profitable option is chosen.
Sample Questions:

Example 1. In operational management, there are requirements to conduct a make or buy decision. Describe what a make or buy decision is and list the advantages of each. Provide an example of a buy decision.


Example 2. Briefly describe the ” Gray Zone” in the Make or Buy decision process. In your opinion, does the “Gray Zone” in make or buy decisions offer the most value to the purchaser or supplier.


Example 3. The plan procurement process from the PMBOK ® Guide really begins with a make-or-buy decision. What are some things an organization should take into account during a make-or-buy decision? Why are these important?


Example 4. What costs are relevant in a make-or-buy decision?


Example 5. Make or buy decisions involve decisions concerning whether to out-source or not. TRUE OR FALSE

Analysis of Financial Statements

Analysis of Financial Statements:  The financial statements include enormous amount of data. In order make the statements more understandable to the stakeholders, the information is evaluated by making analysis of the financial statement. The analysis of financial statements is generally made using horizontal analysis, vertical analysis and ratio analysis. 
  Horizontal Analysis: This involves comparing the financial statements of one year with the past year(s). The comparison is done between the exact line items; for example, comparing the values of the interest income of the current year with the past year(s) and expressing them in terms of the percentage or dollar.
  Vertical Analysis: This involves presenting each line item as a percentage of another item. For example, presenting all the items listed under asset side of the balance as a percentage of total assets.
 Ratio Analysis: This type of analysis involves comparing two different line items and expressing them in terms of ratios. The two items/accounts may either belong to the same financial statement (say two items of income statement) or it can be from two different statements. Ratio between the net income and the amount of equity is one such example where the accounts belong to different statements. Further, the line items considered for calculating the ratios belong to the same year.
Sample Questions:

Example 1. Distinguish between horizontal and vertical analysis of financial statement data.


Example 2. Vertical analysis of financial statements is accomplished by preparing common-size statements. True False


Example 3. Example and how to1. Types and purpose of analysis of financial statements and what each indicates


Example 4. Investment Analysis and Portfolio Management (with Thomson ONE – Business School Edition and Stock-Trak Coupon) (10th Edition) Describe briefly two decisions that requires the analysis of financial statements


Example 5. In determining whether a company’s financial condition is improving or deteriorating over time, horizontal analysis of financial statement data would be more useful than vertical analysis.True False

Analyzing and Recording Transactions

Analyzing and Recording Transactions: Transactions are the events that occur in business. Transaction are recorded in the books of accounts and form the base of accounting. Transactions can involve exchange of goods, services or financial instruments. Analyzing transactions is an ongoing process. When a transaction occurs, its analyzed to determine the accounts that it will effect and for how it shall be journalized. Transactions are first recorded in form of journal entry and are then posted to ledger account.After transactions are recorded and posted to their respective ledgers, these are then analyzed for the impact they would have on the financial statements.
Sample Questions:

Example 1. Just as we did in chapter two, analyzing transactions is critical to making sure that we understand the transactions prior to recording it in the appropriate account. What are the three steps recommended by the author of your text for analyzing the effects of business transactions? Which step did you find most difficult/easy, and most helpful? Explain!


Example 2. The accounting process involves all of the following except:



  • communicating financial information to users by preparing financial reports.

  • analyzing and interpreting financial reports.

  • identifying economic transactions that are relevant to the business.

  • recording nonquantifiable economic events


Example 3. When a company uses special journals, the general journal is used for selected transactions and events including:



  • Recording adjusting transactions.

  • Posting transactions to special journals.

  • Accumulating debits and credits

  • Collecting detailed listings of amounts


Example 4. Recording Purchases and Cash Payment Transactions.Cycle Tech had the following purchases and cash payment transactions for the month of March:


Accounting


Instruction: Prepare the following reports: Purchases Journal, Cash Disbursements Journal, and a General Ledger.

Adjusting and Closing Entries

Adjusting Entries: Adjusting journal entry are the entries made at the end of the accounting period to adjust the accounts as per accrual system of accounting. Closing Entries: Closing entries are passed at the end of the accounting year to close various temporary accounts. The major temporary accounts are revenues and expenses accounts. They are closed by transferring their balance to income statement after which the net results of the operations performed during the year can be known.
Sample Questions:

Example 1. Describe the difference and similarities between adjusting and closing entries?


Example 2. What are the major differences between the perpetual inventory system and the periodic inventory system? What are special considerations for each when doing adjusting and closing entries?


Example 3. Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $16.20 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2014. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2018 (before adjusting and closing entries).


What is the appropriate adjusting entry for patent amortization in 2018 to reflect the revised estimate? (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)


Example 4. Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $24.30 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2012. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2016 (before adjusting and closing entries).


What is the appropriate adjusting entry for patent amortization in 2016 to reflect the revised estimate. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

Bank Reconciliation Statement

Bank reconciliation statement: To adjust for the differences between bank’s column of cash book and bank’s statement a bank reconciliation statement is prepared.Bank reconciliation is performed to adjust errors and omissions in the cash book to reach at the same balance as that of the bank statement.  To adjust for the differences between bank’s column of cash book and bank’s statement a bank reconciliation statement is prepared. At the end of the process of bank reconciliation, the adjusted balance of the bank statement and the cash book should be equal.
Sample Questions:

Example 1. What is bank reconciliation statement?


Example 2. Explain the importance of Bank Reconciliation Statement and give real examples explaining all possible items that make differences between cash balance in general ledger and bank statement balance.


Example 3. When Cash is presented on a Balance Sheet, what are the details of the Cash A/C? How does a Bank Reconciliation Statement factor into the Cash Balance? Please be specific in your details.


Example 4. A firm’s bank reconciliation statement shows a book balance of $32,740, an NSF check of $1,350, and a service charge of $95. Its adjusted book balance is



  • $31,485.

  • $34,185.

  • $33,995.

  • $31,295.