The business environment and concepts (BEC) test includes a broad range of general business topics. These are topics that students cover in a business school program of study. The operations management section of the test includes questions on cost accounting, which can be challenging for CPA candidates. Use these tips to prepare for the cost accounting section of this test.
The big four
For starters, there are four key cost accounting terms that you need to understand. Make sure that you have all four of these terms written down on the same document. It’s a great way to keep things straight as you study for the BEC test:
- Direct costs: These costs can be directly traced to a product or service. If you manufacture jeans, for example, your denim material costs and the cost to run your sewing machines are both direct costs. Direct costs are traced to the product.
- Indirect costs (overhead): Indirect costs cannot be easily assigned to a product or service. Instead, these costs are allocated using a predetermined overhead rate. Assume, for example, that you pay a salary to a production supervisor in your jean manufacturing business. Since you pay the salary regardless of how many jeans you produce, you can’t trace the cost to pairs of jeans. Instead, you may allocate the cost based on labor hours worked or machine hours incurred.
- Period cost: This is a cost you incur due to the passage of time. Interest expense on a loan and the cost of insurance are both period costs. These costs are incurred each month, regardless of your production levels or your sales.
- Product cost: These are costs that are incurred to make a product or service. Product costs relate to production and sales, not to the passage of time.
To complicate matters, each cost can fit into two of the four definitions. Say, for example, that you pay a fixed dollar amount of insurance premiums on the company headquarters. That spending would be considered a fixed period cost. When you put together these definitions in a document, add an example for each type of cost. This strategy will help you avoid confusion.
Total costs, profit margin and sale price
Eventually, every cost has to be assigned to a product or service that you sell. If you make jeans, your direct manufacturing costs and your overhead costs must all be assigned to your product.
You need to know your total costs to compute a profit margin and assign a sales price. After all, you’re charging the customer a price to recover all of your costs and generate a profit. If you don’t know all of your costs, you won’t earn your budgeted profit margin. This is a great concept to keep in mind for all cost accounting questions.
The BEC test focuses on general business knowledge. Every business manager has to create a budget and review variances. A variance is defined as your budgeted amounts vs. the actual results.
Now, keep in mind that companies budget for both sales and production costs. This creates confusion about favorable and unfavorable variances. As the term implies, favorable means that the actual results are “better” than what you budgeted. If actual costs are lower than budgeted, that’s a favorable variance. On the other hand, actual sales must be higher than budgeted to create a favorable sales variance. Keep these differences in mind.
Cost accounting topics can be challenging, because the language of cost accounting is different from the other accounting areas you’ll study for the CPA exam. Use these tips to manage the cost accounting questions on your BEC test.
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