Cost Accounting Interview Preparation Guide

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To get a basic understanding of cost accounting I recommend reading the managerial accounting topics found in the second half of an introductory accounting textbook. Such a textbook is often 1,200+ pages in length since it covers both financial and managerial accounting. (A textbook containing only financial accounting topics is not helpful.) A person in the U.S. should be able to obtain a 5-year-old edition of a 1,200-page introductory accounting textbook from a re-seller on Amazon.com for approximately $5.

The production volume variance is associated with a standard costing system used by some manufacturers. This variance indicates the difference between:
1) the company's budgeted amount of fixed manufacturing overhead costs
2) the amount of the fixed manufacturing overhead costs that were assigned to (or absorbed by) the company's production output.

An incremental cost is the increase in total costs resulting from an increase in production or other activity.

Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could use the net incremental cash flows to decide whether to invest in new, more efficient equipment or to retain its existing equipment.

A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with volume or activity. Generally, a product's direct materials are a variable cost.

In accounting contribution margin is defined as revenues minus variable expenses. In other words, the contribution margin reveals how much of a company's revenues will be contributing (after covering the variable expenses) to the company's fixed expenses and net income. The contribution margin can be presented as:
1) The total amount for the company
2) The amount for each product line
3) The amount for a single unit of product
4) As a ratio or percentage of net sales

When a fixed cost remains constant in total, the fixed cost per unit of output or input will change inversely with the change in the quantity of output or input. For instance, if the rent of the production facility is fixed at $120,000 per year and there are 30,000 machine hours of good output during the year, the rent will be $4 ($120,000/30,000) per machine hour. If there are 40,000 machine hours during the year, the rent will be $3 ($120,000/40,000) per machine hour.

A fixed cost is one that does not change in total within a reasonable range of activity. For example, the rent for a production facility is a fixed cost if the rent will not change when there are reasonable changes in the amount of output or input. If there is a need to double the output the rent will change when the company occupies additional work space.

In accounting, an independent variable is ideally a factor that causes a change in the total amount of the dependent variable. In other words, an independent variable should be something that drives a mixed cost to increase or decrease.

In accounting, a dependent variable is likely to be the total of a mixed cost that will change as the result of several factors. A factor that causes the change in the total cost is referred to as the independent variable.

★ Depreciation, repairs and maintenance, electricity, etc. for the production facilities and equipment.
★ Salaries, wages and fringe benefits of the indirect manufacturing personnel such as production supervisors, material handlers, quality assurance, and other factory support personnel.
★ Factory supplies, outside services pertaining to manufacturing, and other manufacturing related costs.

Under traditional cost accounting, the indirect manufacturing costs are spread or allocated to the products manufactured based on direct labor hours, direct labor costs, or production machine hours. However, in recent decades the indirect manufacturing costs have increased significantly and are less likely to be caused by the quantity of direct labor or production machine hours.

Indirect materials such as oil for greasing the baking pans, etc. will likely be viewed as part of the manufacturing supplies and will be allocated to products along with other manufacturing overhead.

Indirect manufacturing costs are a manufacturer's product costs other than direct materials and direct labor. Indirect manufacturing costs are also referred to as manufacturing overhead, factory overhead, factory burden, or burden.

Direct materials are the traceable matter used in manufacturing a product. The direct materials for a manufacturer of dessert products will include flour, sugar, eggs, milk, vegetable oil, spices, and other ingredients in the recipes. In manufacturing, the direct materials are listed in each product's bill of materials.

When the coefficient of correlation is squared, it becomes the coefficient of determination. This means that an r of +0.80 or -0.80 will result in a coefficient of determination of 0.64 or 64%. This tells you that 64% of the change in the total of the dependent variable is associated with the change in the independent variable. An r of +0.20 or -0.20 indicates that only 4% (0.20 x 0.20) of the change in the dependent variable is explained by the change in the independent variable.

When the coefficient of correlation is negative, such as -0.80, there is an inverse relationship. An increase in the independent variable will mean a decrease in the dependent variable. A decrease in the independent variable will mean an increase in the dependent variable.

When the coefficient of correlation is a positive amount, such as +0.80, it means an increase in the independent variable will result in an increase in the dependent variable. Also, a decrease in the independent variable will mean a decrease in the dependent variable.

In simple linear regression analysis, the coefficient of correlation (or correlation coefficient) is a statistic which indicates the relationship between the independent variable and the dependent variable. The coefficient of correlation is represented by r and it has a range of -1.00 to +1.00.

The coefficient of determination is symbolized by r-squared, where r is the coefficient of correlation. Hence, a coefficient of determination of 0.64 or 64% means that the coefficient of correlation was 0.8 or 80%. (The range for the coefficient of correlation is -1 to +1, and therefore the range for the coefficient of determination is 0 to +1.)

The coefficient of determination is a statistic which indicates the percentage change in the amount of the dependent variable that is "explained by" the changes in the independent variables.

Sales mix is the relative proportion or ratio of a business's products that are sold. Sales mix is important because a company's products are likely to vary in their profitability.

★ Selling price per unit
★ Fixed manufacturing costs per month
★ Variable manufacturing costs per unit
★ Fixed SG&A expenses per month
★ Variable SG&A expenses per unit
★ Fixed interest expense per month

The contribution margin ratio is the percentage of sales, service revenues or selling price that remains after all variable costs and variable expenses have been covered. In other words, the contribution margin ratio is the percentage of revenues that is available to cover a company's fixed costs, fixed expenses, and profit. (The contribution margin ratio is different from the gross margin ratio or gross profit percentage and cannot be computed directly from the reported amounts on the company's external income statement.)

Simple linear regression analysis is a statistical tool for quantifying the relationship between just one independent variable (hence "simple") and one dependent variable based on past experience (observations). For example, simple linear regression analysis can be used to express how a company's electricity cost (the dependent variable) changes as the company's production machine hours (the independent variable) change.