Question 1. What Is Cost Accounting?
Cost accounting involves the techniques for:
figuring out the fees of merchandise, methods, projects, and so forth. With a purpose to file the proper quantities at the economic statements, and
assisting management in making choices and in the planning and manipulate of an organisation.
For example, value accounting is used to compute the unit value of a manufacturer's products with the intention to record the price of stock on its balance sheet and the value of products sold on its profits assertion. This is finished with techniques which includes the allocation of producing overhead fees and through the use of technique costing, operations costing, and process-order costing structures.
Cost accounting assists management through supplying analysis of cost conduct, cost-quantity-income relationships, operational and capital budgeting, widespread costing, variance analyses for charges and revenues, transfer pricing, interest-primarily based costing, and extra.
Cost accounting had its roots in production corporations, however these days it extends to carrier companies. For example, a bank will use cost accounting to decide the fee of processing a consumer's test and/or a deposit. This in flip may additionally provide management with guidance in the pricing of these services.
Question 2. What Is Cost Allocation?
Cost allocation is the assigning of a not unusual fee to several fee items. For instance, a enterprise would possibly allocate or assign the fee of an high-priced pc machine to the three fundamental regions of the organization that use the machine. A organization with only one electric meter would possibly allocate the energy bill to numerous departments within the corporation.
Allocation means that the assigning of the fee is particularly arbitrary. Some people describe the allocation as the spreading of value, due to the arbitrary nature of the allocation. Efforts have been made over time to enhance the bases for allocation. In production, the overhead allocations have moved from plant-wide prices to departmental prices, from direct hard work hours to system hours to activity based costing. The purpose is to allocate or assign the prices based on the root reasons of the not unusual prices instead of simply spreading the prices.
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Question 3. What Is A Cost Driver?
Ideally, a cost motive force is an interest that is the foundation motive of why a value happens.
In the beyond century, the foundation cause of oblique manufacturing charges has modified from a unmarried value driving force (consisting of direct exertions hours) to numerous cost drivers. Due to state-of-the-art production and improved demands from customers, direct exertions is now not the principle cost driver of indirect production overhead.
In addition to direct labor, cutting-edge drivers of indirect manufacturing prices include the range of system setups required, the number of engineering change orders, the demands from clients for unique inspections, dealing with and garage, the wide variety of additives within the gadgets produced, and the variety of production gadget hours.
Manufacturers that need to understand the proper expenses in their merchandise need to recognize what is using their oblique manufacturing fees. For these agencies it isn't always enough to merely unfold overhead fees to merchandise via the use of a single issue such as direct labor hours or manufacturing machine hours.
Question four. What Is The Traditional Method Used In Cost Accounting?
The traditional approach of cost accounting refers to the allocation of manufacturing overhead expenses to the products synthetic. The traditional approach (additionally known as the traditional method) assigns or allocates the manufacturing unit's indirect fees to the objects synthetic on the premise of volume which include the wide variety of gadgets produced, the direct hard work hours, or the production device hours. We will use machine hours in our discussion.
By the use of only device hours to allocate the producing overhead to merchandise, it's far implying that the gadget hours are the underlying reason of the manufacturing unit overhead. Traditionally, that could were affordable or as a minimum enough for the organization's external financial statements. However, in latest decades the producing overhead has been driven or as a result of many different factors. For instance, some clients are probably to call for additional production operations for their diverse merchandise. Other clients certainly want remarkable portions of uniform merchandise.
If a manufacturer desires to understand the actual fee to produce specific merchandise for precise clients, the conventional approach of value accounting is insufficient. Activity based totally costing (ABC) was advanced to conquer the shortcomings of the traditional method. Instead of simply one cost driver such as gadget hours, ABC will use many value drivers to allocate a manufacturer's oblique charges. A few of the fee drivers that would be used under ABC consist of the number of system setups, the kilos of fabric bought or used, the wide variety of engineering exchange orders, the quantity of machine hours, and so forth.
Question five. What Is A Plant-huge Overhead Rate?
A plant-wide overhead charge is a unmarried fee used to assign or allocate all of a enterprise's manufacturing overhead costs to its manufacturing output. (Manufacturing overhead costs are the indirect expenses of manufacturing inclusive of upkeep, protection, depreciation, strength, supervision, and many others.) Often the plant-huge charge is an quantity per machine hour, an quantity in keeping with exertions hour, or a percent of a product's direct fees.
Using a plant-extensive fee is logical whilst there may be one root motive of the indirect production costs and the enterprise manufactures comparable merchandise. For instance, a enterprise with a easy manufacturing operation that produces similar merchandise may want to have a plant-huge overhead price of $forty per gadget hour if it has budgeted $800,000 of general manufacturing overhead prices and it expects to provide 20,000 machine hours of exact output.
On the opposite hand, if the employer manufactures numerous products, a number of which use high priced gadget while some use best cheaper equipment, a plant-extensive price isn't appropriate. In reaction to this case, producers have advanced departmental overhead prices. Thus, best the products that use the high priced equipment in a particular department might be assigned a better overhead price of perhaps $70 according to departmental gadget hour. The products requiring a less difficult operation inclusive of assembling can be assigned overhead at a price of possibly $20 in keeping with direct labor hour.
Some agencies have moved beyond both the plant-huge rate and the departmental quotes due to the fact they need to consider all of the activities which might be driving up manufacturing overhead prices. These agencies are trying to find the foundation reasons of the oblique production prices so that it will assign the charges to merchandise in a more logical manner (rather than merely spreading the prices arbitrarily through plant-wide or departmental production hours). This attempt is called activity based totally costing.
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Question 6. What Is Elastic Demand?
Elastic call for manner that call for for a product is touchy to rate modifications. For instance, if the selling rate of a product is improved, there may be fewer gadgets bought. If the promoting rate of a product decreases, there may be an boom within the range of devices bought. Elastic demand is also referred to as the price elasticity of demand.
The time period inelastic call for way that the demand for a product is not sensitive to fee adjustments.
Elastic demand is a prime situation for a producer that tries to set product fees based on fees. For instance, if the producer's manufacturing and sales have declined and it fails to reduce fixed prices, the producer might be worse off by means of increasing selling fees.
Use the search container on AccountingCoach.Com for our Q&A on dying spiral which is pertinent to elastic demand.
Question 7. What Are Indirect Manufacturing Costs?
Indirect manufacturing prices are a manufacturer's product fees other than direct materials and direct labor. Indirect manufacturing costs are also referred to as production overhead, factory overhead, manufacturing unit burden, or burden.
Under traditional fee accounting, the oblique manufacturing charges are allotted (or unfold) to the goods manufactured primarily based on direct exertions hours, direct labor costs, or production gadget hours. However, in latest decades the indirect manufacturing fees have extended drastically and are less in all likelihood to be caused by the quantity of direct exertions or manufacturing gadget hours. (This may not be a trouble for economic reporting if the amount of stock is constantly small, however it could be a problem for pricing and other selections.)
Examples of indirect manufacturing charges consist of:
depreciation, upkeep and maintenance, power, and so on. For the production facilities and system
salaries, wages and fringe advantages of the oblique manufacturing personnel such as production supervisors, material handlers, pleasant guarantee, and different manufacturing facility assist employees
factory elements, out of doors services referring to production, and other manufacturing associated costs.
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Question eight. What Is Setup Cost?
Setup cost is the value incurred to get system ready to method a extraordinary batch of products. Hence, setup fee is appeared as a batch-level price in interest primarily based costing.
Setup fees consist of the charges of changing the equipment or dies on the gadget, transferring substances or additives, and testing the preliminary output to be positive it meets the specifications. In addition to the out-of-pocket expenses, including the exertions cost of putting in the gadget, there's a far extra fee. The extra value of setup is the lost possibility of producing worthwhile output whilst the gadget is idled at some stage in the setup time.
Setup value is regarded as a non-value-added cost that need to be minimized.
Question 9. What Is The Major Weakness Of The Traditional Method Of Allocating Factory Overhead?
Under the traditional technique of allocating factory overhead (production overhead, burden), maximum of the manufacturing facility overhead prices are allotted on the basis of simply one aspect which include gadget hours or direct labor hours. In different phrases, the conventional approach implies there may be simplest one driver of the factory overhead and the driving force is system hours (or direct labor hours, or a few other indicator of volume produced).
In fact there are numerous drivers of the factory overhead: gadget setups, specific inspections, special managing, special garage, and so on. The greater range in products and/or in consumer needs, the larger the hassle of allocating all the costs of these numerous activities thru simplest one pastime such as the production machine's hours.
Under the traditional approach, the prices of appearing all the numerous activities might be contained in a single price pool and might be divided via the quantity of manufacturing device hours. This effects is one average fee that is implemented to all products irrespective of the quantity of activities and the complexity of these sports. Since the fee of a few of the diverse activities do now not correlate at all with the quantity of manufacturing machine hours, the resulting allocations are misleading.
Activity-primarily based costing is meant to conquer the weakness of the traditional technique with the aid of having diverse pools of fees after which allocating every pool's expenses on the premise of its root cause.
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Question 10. What Is The Death Spiral?
In fee accounting and managerial accounting, the term dying spiral refers back to the repeated removal of merchandise because of spreading costs on the idea of extent in place of their root reasons. The death spiral is likewise called the downward call for spiral.
To illustrate the dying spiral let's expect that Product X is a simple, high-volume product that calls for little production attention. If the accountant spreads the agency's manufacturing overhead expenses primarily based on quantity, Product X will appear to have high overhead prices. (In fact, Product X causes very little overhead value mainly whilst compared to the agency's many complicated, low-extent products.) If control responds to Product X's allocated excessive overhead expenses and 1) seeks a fee growth which causes the client to move the manufacturing to a competitor with a decrease rate, 2) outsources the manufacturing, or 3) drops the product, then the organization's manufacturing volume will lower.
If the business enterprise does not lessen its constant overhead to correspond to the reduced manufacturing extent and the accountant continues to spread the overhead prices—including the fee of excess potential—on the idea of volume, the final merchandise will should be assigned more of the overhead charges. If management once more reacts to the brand new, better, allotted charges by using searching for rate will increase which cause a loss of income, outsources manufacturing, or drops the goods, the agency's production quantity will once more lower. If fixed fees aren't decreased therefore and the accountant once more spreads the overhead on the basis of a brand new, even smaller extent, the whole agency should die from the high fixed fees and a small quantity of merchandise being produced and offered.
To avoid the dying spiral, a few companies try to allocate overhead prices based on activities and product complexities instead of without a doubt spreading them on extent. Also, a few agencies do now not allocate the prices of extra ability to merchandise a good way to reduce the dying spiral.
Question eleven. What Are Semivariable Costs?
Semivariable charges are prices or prices whose conduct is partially constant and partly variable. Semivariable prices also are known as combined prices.
A not unusual instance of a semivariable fee is the once a year fee of running a car. Some of the car's working charges will vary with the variety of miles driven at the same time as different prices could be the identical in overall regardless of the miles driven. For instance, the car's gasoline charges may be variable. However, the depreciation, coverage and licensing may be fixed. Looking handiest on the automobile's preservation prices may suggest that a few preservation is completed each November (no matter the wide variety of miles driven) whilst different upkeep is done each 6,000 miles.
A manufacturer's strength fee is every other instance of a semivariable price. Part of the monthly energy bill will consist of 1) a set amount, and a pair of) a separate quantity based totally at the wide variety of kilowatt hours of energy actually utilized by the agency.
The producer's power value is likewise a semivariable fee in relationship with the agency's gadget hours. The portion of the strength value used to operate the production device is variable, however the part of the strength value used for lights and air conditioning the producing facility is a hard and fast value.
These easy examples illustrate that it may be tough to understand how expenses behave. There are many elements, sports, and drivers that influence the level of charges.
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Question 12. What Is The Coefficient Of Correlation?
In simple linear regression evaluation, the coefficient of correlation (or correlation coefficient) is a statistic which suggests the connection among the independent variable and the based variable. The coefficient of correlation is represented via r and it has a number of -1.00 to +1.00.
When the coefficient of correlation is a nice amount, which includes +zero.Eighty, it method an growth inside the unbiased variable will result in an growth inside the based variable. (Also, a lower inside the impartial variable will imply a lower inside the dependent variable.) When the coefficient of correlation is poor, together with -zero.80, there's an inverse courting. (An growth inside the unbiased variable will imply a lower within the dependent variable. A decrease inside the impartial variable will mean an boom within the structured variable.)
A coefficient of correlation of +zero.Eight or -zero.Eight shows a strong correlation between the unbiased variable and the structured variable. An r of +zero.20 or -zero.20 shows a weak correlation between the variables. When the coefficient of correlation is zero.00 there's no correlation.
When the coefficient of correlation is squared, it turns into the coefficient of determination. This approach that an r of +0.Eighty or -zero.Eighty will result in a coefficient of determination of zero.Sixty four or sixty four%. (This tells you that 64% of the exchange within the general of the dependent variable is related to the change in the unbiased variable.) An r of +0.20 or -0.20 shows that best 4% (0.20 x zero.20) of the exchange within the structured variable is defined by means of the alternate in the independent variable.
It is vital to recognise that correlation does not guarantee that a purpose-and-impact courting exists between the unbiased variable and the based variable. However, a motive-and-impact courting will suggest there is correlation. It is likewise important to plan the facts/observations used inside the regression evaluation if you want to detect and assessment any outlier.
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Question thirteen. What Is Simple Linear Regression Analysis?
Simple linear regression analysis is a statistical device for quantifying the connection among just one impartial variable (subsequently "easy") and one based variable based totally on past enjoy (observations). For example, simple linear regression analysis may be used to specific how a business enterprise's electricity price (the established variable) modifications as the organization's manufacturing machine hours (the independent variable) change.
Fortunately there may be software to compute the first-class fitting instantly line (hence "linear") that expresses the beyond relationship among the dependent and independent variable. Continuing our example, you'll enter 1) the quantity of the past monthly strength bills, and a pair of) the variety of gadget hours happening at some point of the length of every of the payments. Next, the software will likely use the least squares approach to provide the components for the exceptional becoming line. The line will seem within the shape y = a + bx. In addition, the software program will provide statistics regarding the correlation, confidence, dispersion round the line, and greater.
(In all likelihood there are numerous unbiased variables inflicting a exchange in the amount of the established variable. Therefore, you have to now not expect that simplest one impartial variable will give an explanation for a excessive percent of the trade within the based variable. To growth the share, you must think about the many impartial variables that might purpose a change inside the dependent variable. Next you need to check the impact of the aggregate of these unbiased variables or drivers by means of the usage of a couple of regression analysis software.)
Prior to the use of easy linear regression analysis it's miles vital to comply with these preliminary steps:
are seeking for an impartial variable that is probably to purpose or power the alternate in the based variable
make certain that the past quantities for the unbiased variable arise within the actual equal length as the quantity of the dependent variable
plot the past observations on a graph using the y-axis for the cost (month-to-month strength bill) and the x-axis for the interest (device hours used all through the precise duration of the electricity invoice)
overview the plotted observations for a linear sample and for any outliers
remember that there can be correlation with out cause and impact
Question 14. How Can A Manufacturer Determine The Precise Cost Of Its Products?
A producer might also in no way be capable of determine the correct cost of its character products. The motive is that most of the producing charges (aside from substances and some hard work) are indirect fees. This way that maximum of the producing expenses aren't at once traceable to individual merchandise and will want to be allotted to them. Examples of indirect production expenses encompass the rent, belongings taxes, depreciation, heat, lights, indirect manufacturing people pay and advantages, repairs, upkeep, and others that arise in the factory.
In addition to the manufacturing costs, there are promoting, widespread and administrative (SG&A) fees and perhaps hobby price. Generally, accountants do now not don't forget these costs to be product prices. As a result these prices are reported at the earnings statement after they occur and with none allocation to the products. However, these costs are associated with some or all of the goods.
The manufacturer can attempt to calculate the prices and expenses of every of its merchandise, however I don't think the result could be the real, precise fee. In addition to the allocations (that are regarded as arbitrary), bear in mind that adjustments in quantity will have an effect on a product's value. For instance, if a organisation's total constant fees continue to be steady but its volume of merchandise decreases with the aid of 20%, the fee of each product will increase. If quantity increases, the value of every product will lower.
Activity-primarily based costing (ABC) is an attempt to enhance the allocation of fees via identifying extra of the basis causes of the costs (rather than simply spreading charges to merchandise based on machine hours). Even with ABC there will be arbitrary allocations which will prevent knowing every product's specific cost.
Question 15. What Is The Weakness Of Traditional Cost Allocations?
Traditional price allocations are regularly based on volume along with number of merchandise synthetic, quantity of direct exertions hours, range of manufacturing machine hours, variety of square ft, and many others. Unfortunately, it's miles becoming more common that the not unusual fees or oblique expenses that require allocation are not as a result of extent. In other words, traditional price allocations are frequently based on something aside from the root reasons of the fees.
It is possible that a giant amount of producing overhead won't be as a result of manufacturing system hours, yet the overhead is allotted the use of those hours. For instance, some of a producer's low quantity merchandise may additionally require massive amounts of engineering adjustments, extra inspections, common device setups with unusually brief production runs, unique handling, extra garage, and so on. To allocate those unique prices to all merchandise on the idea of the range of production gadget hours (rather than allocating those prices primarily based on their root causes) will bring about character product prices that are erroneous and deceptive.
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Question 16. What Is The Coefficient Of Determination?
The coefficient of willpower is a statistic which shows the share alternate in the quantity of the based variable that is "defined through" the modifications inside the unbiased variables.
For example, a producer may additionally have located through easy linear regression analysis related to 15 monthly observations that 64% of the alternate inside the general cost of strength (the dependent variable) become associated with the trade in the month-to-month manufacturing gadget hours (the unbiased variable). In this situation the coefficient of determination is 0.64 or 64%.
The coefficient of determination is symbolized via r-squared, where r is the coefficient of correlation. Hence, a coefficient of willpower of zero.Sixty four or sixty four% means that the coefficient of correlation became 0.Eight or 80%. (The range for the coefficient of correlation is -1 to +1, and therefore the range for the coefficient of dedication is zero to +1.)
It is vital to word that a high coefficient of determination does no longer assure that a motive-and-impact relationship exists. However, a purpose-and-effect courting between the impartial variable and the structured variable will bring about a excessive coefficient of determination.
Question 17. What Is An Independent Variable?
In accounting, an impartial variable is preferably a factor that reasons a alternate within the overall quantity of the established variable. In other phrases, an impartial variable must be something that drives a combined price to boom or lower.
To illustrate, let's assume that a manufacturer's production system uses a giant quantity of energy. Hence, the month-to-month strength price (the based variable) will boom when there's an increase inside the number of production system hours (the independent variable).
In truth there are probably to be many independent variables that cause a trade in the amount of the dependent variable. In the case of the monthly energy fee, the impartial variables can also encompass the non-manufacturing machines the usage of electricity, the bodily length of the goods, the ability level of the operators, the out of doors temperature and humidity, etc.
Multiple regression analysis is a statistical tool which can assist in figuring out the massive independent variables.
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Question 18. Why Does A Cost System Developed For Inventory Valuation Distort Product Cost Information?
The value device for stock valuation may also had been advanced to offer a reasonable overall price of stock and a reasonable general cost of goods offered if you want to have moderately correct monetary statements. If a business enterprise has small stock amounts and extensive income, a easy cost system that spreads production overhead expenses solely on the premise of system hours can result in a fairly accurate balance sheet and income announcement.
While a simple price gadget the usage of just one fee driving force (machine hours) may also bring about accurate economic statements, it frequently fails to provide the proper fee of person products that vary in complexity. For example, one product might require only a few system hours however will require many hours of unique coping with. The prices assigned on the premise of machine hours alone could be too low in relationship to the real value of manufacturing this product. Another product might require many machine hours but no other sports. This product's fee may be overstated due to the fact the rate assigned thru the device hours will include an quantity for different activities that generally arise for the alternative products synthetic.
A value machine evolved for inventory valuation is restrained to the fee of direct substances, direct hard work, and production overhead. The total value of imparting products to a client will also encompass nonmanufacturing prices. One patron might require a agency to incur extra promoting, handing over, storing, and administrative fees. Another client may not require any of these sports and their associated costs.
Activity based costing attempts to calculate the genuine cost of a product and patron via assigning fees and charges based totally on their root reasons. Because there are many root reasons, the corporation will assign expenses primarily based on many price drivers. This consequences in greater accuracy for the price and rate of a specific product for a particular client than simply spreading the manufacturing expenses on the premise of 1 value motive force along with system hours.
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Question 19. Are There Two Abc Methods In Accounting?
Some accountants use ABC to intend Activity Based Costing. Under this ABC a manufacturer will use many price drivers to assign overhead prices to merchandise. The objective of Activity Based Costing is to assign the overhead fees primarily based on their root causes instead of simply spreading the charges on the premise of direct exertions hours or production machine hours.
A second use of ABC entails categorizing inventory gadgets into "A" objects, "B" gadgets, and "C" objects. The "A" objects are a pretty small wide variety of objects which account for the majority of the inventory's value. For example, the "A" items might be 20% of the objects in inventory which account for 70% of the stock price. At the other intense the "C" gadgets might be 60% of the gadgets in stock however they account for most effective 10% of the stock fee. The "B" objects is probably 20% of the gadgets accounting for 20% of the stock cost. Under this system, the "A" objects will acquire the most attention seeing that they account for 70% of the value. This ABC is once in a while called Pareto analysis or Pareto's rule and it may be carried out to more than stock. For instance, 20% of a employer's clients would possibly account for 70% of the organization's income.