Appendix 10: Answers to Reinforcement Quiz ñ Section I, Chapter 2
Answers to Reinforcement Quiz ñ Section I, Chapter 2
1. Which of the following is not a use of cost accounting information?
a. making a decision to outsource a program or activity
b. making an investment of government funds
c. establishing user fees for a function or service
d. determining the effectiveness or efficiency of a program or service
Answer: (b). Cost accounting information is not useful for making
investment decisions. Investment decisions are based on the entityís
investment objectives and risk tolerance.
2. Describe the types of costs.
Answer: Costs can be direct or indirect. Direct costs are those that can
be directly attributed to a cost objective. Indirect costs are jointly or
commonly used by two or more cost objectives and cannot practically or
economically be attributed to an objective.
3. Costs should be assigned on a direct basis at all times. True or false?
Answer: False. Although the direct basis is preferred, in many instances,
it is neither practical nor economical to assign costs on a direct basis.
4. Which is the preferred sequence for assigning costs?
a. allocation, direct tracing, cause-and-effect
b. cause-and-effect, direct tracing, allocation
c. direct tracing, cause-and-effect, allocation
d. direct tracing, allocation, cause-and-effect
e. There is no preferred sequence.
Answer: (c) is the preferred sequence for assigning costs.
5. OMB Circular A-87 (incorporated and adopted by the December 2014
OMB Uniform Guidance) was established to allow state and local
governments to determine indirect costs that could be recovered under
federal awards. True or false?
Answer: True. The federal government recognized that state and local
governments incurred indirect costs, such as general, administrative and
support, on behalf of federal awards. The indirect cost rate determination
process is the established mechanism that nonfederal entities must use to
claim their fair share of indirect costs under federal awards.
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Appendix 10: Answers to Reinforcement Quiz ñ Section I, Chapter 2
6. Describe the factors in determining if a cost is reasonable under the
December 2014 OMB Uniform Guidance.
Answer: A cost is reasonable if it does not exceed that which would be
incurred by a prudent person under the circumstances prevailing at the
time the decision was made to incur the cost. The question of
reasonableness is particularly important when governmental units are
predominantly federally funded.
7. Determine the fringe benefit percentage (based on direct salaries) for
reimbursement under a federal grant given the following information:
Direct salaries $ 2,500,000
Payment to retirees $ 150,000
Contribution to retirement system $ 200,000
Travel reimbursement $ 80,000
Health care contribution for employees $ 100,000
Rent $ 150,000
Life insurance contribution $ 50,000
Supplies and materials $ 75,000
a. 14 percent
b. 17.2 percent
c. 23.2 percent
d. 32.2 percent
Answer: (a). The following items are associated with fringe benefits:
contribution to retirement system ($200,000), health care contribution for
employees ($100,000), and life insurance contribution ($50,000). The
fringe benefit percentage is $350,000/$2,500,000. Payments to retirees
are not fringe benefits since the payments are based on past
contributions. The other items are operating costs.
8. Describe the two criteria for determining whether a cost is an indirect cost.
Answer: Indirect costs are those incurred for a common purpose,
benefiting more than one cost objective or not readily assignable to an
objective without considerable effort.
9. The amount charged for a user fee can be different based on the cost
recovery objective. True or false?
Answer: True. Depending on the cost recovery objective, different costs
would be included in calculating the user fee. If the government wanted to
recover expenditures (outlays), then capital purchases would be included,
even though they benefit future periods. If the government wants to
recover expenses, an allocation for depreciation would be included. If a
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Appendix 10: Answers to Reinforcement Quiz ñ Section I, Chapter 2
government wants to recover expenses plus debt service, payments for
principal retirement would be included.
10.Given the following information, how many units must be sold to break-
even at a price of $25 per unit?
Fixed costs $1 million
Labor cost $15.00 per unit
Material cost $7.50 per unit
a. 40,000
b. 160,000
c. 280,000
d. 400,000
Answer: (d). To determine the number of units that need to be sold, the
formula would be:
X= $1,000.000/($25.00-($15 +$7.50))
X = 1,000,000/$2.50
X = 400,000
11.Describe three cost recovery objectives.
The user fee will recover only direct costs.
The user fee will recover all expenditures, including capital assets.
The user fee ...

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AGA CGFM Study Guide 2: Governmental Accounting, Financial Reporting and Budgeting