Cost accounting MCQ Quiz - Objective Question with Answer for Cost accounting - Download Free PDF

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Cost accounting Question 1 Detailed Solution

The correct answer is Treated as a reduction in production costs.

Key Points

• Treated as a reduction in production costs:
  • Abnormal gains in process costing refer to unexpected and non-recurring positive variances that occur during the manufacturing process.
  • These gains are treated as a reduction in production costs, effectively lowering the total cost of production. This treatment helps in maintaining accurate cost records and reflecting the true cost efficiency of the production process.
  • By reducing the production costs, abnormal gains improve the profitability reported in the financial statements and provide a clearer picture of production efficiency.

  

  Additional Information

  • As a separate expense:
    • This option is incorrect because abnormal gains are not expenses. They represent unforeseen efficiencies or positive variances that should reduce costs rather than increase expenses.
    • This is incorrect because adding abnormal gains to production costs would inflate the total production costs inaccurately. It contradicts the purpose of reflecting the true cost efficiency.
    • This approach is incorrect because ignoring abnormal gains would lead to an incomplete and potentially misleading financial picture. Proper accounting requires recognizing all variances, positive or negative.
    • This is incorrect because abnormal gains should adjust production costs, not be transferred directly to finished goods. Transferring them would misstate inventory values and cost of goods sold calculations.
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    Cost accounting Question 2:

    What is the weighted average method of process costing?
    1. It assigns costs only to the units completed in the current period.
    2. It calculates the average cost per equivalent unit from current period's costs only.
    3. It considers costs from both the previous and current periods.
    4. It accounts only for beginning inventory costs.
    5. It assigns costs based on FIFO principles.

    Answer (Detailed Solution Below)

    Option 3 : It considers costs from both the previous and current periods.

    Cost accounting Question 2 Detailed Solution

    The correct answer is It considers costs from both the previous and current periods.

    

    Key Points

    • It considers costs from both the previous and current periods:
      • The Weighted Average Method of process costing combines both the costs of beginning inventory and the costs incurred during the current period to calculate a single average cost per unit.
      • This method simplifies accounting by mixing all costs into one pool, ensuring that the cost per unit reflects both historical and current cost fluctuations.
      • It eliminates the need to distinguish between units from different periods, streamlining the costing process for continuous production environments.
      • This approach benefits companies by providing a stable cost assignment, aiding in financial planning and variance analysis.

      

      Additional Information

      • It assigns costs only to the units completed in the current period:
        • This method overlooks the costs associated with beginning inventory, which can lead to inaccurate cost per unit calculations if the beginning inventory represents a significant portion of total production.
        • This method excludes the impact of beginning inventory costs, which can misrepresent the true average cost, especially in industries with varying production and cost patterns.
        • This option neglects the costs incurred during the current period, leading to a potential underestimation of the total production costs.
        • The FIFO method separately tracks costs in chronological order, assigning the earliest costs to units first. It contrasts with the Weighted Average Method, which blends costs from all periods into one average.
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        Cost accounting Question 3:

        Which method assigns costs incurred first to units completed and transferred out?
        1. LIFO Method.
        2. Absorption Costing.
        3. Weighted Average Method.
        4. FIFO Method.
        5. Standard Costing.

        Answer (Detailed Solution Below)

        Option 4 : FIFO Method.

        Cost accounting Question 3 Detailed Solution

        The correct answer is FIFO Method.

        

        Key Points

        • FIFO Method:
          • The First-In, First-Out (FIFO) method is an inventory costing technique that assumes the earliest (first) costs incurred are the first to be allocated to the units completed and transferred out.
          • This approach is particularly useful in contexts where older inventory needs to be used first to prevent spoilage or obsolescence, making it common in industries like food and pharmaceuticals.
          • In financial terms, FIFO typically results in lower cost of goods sold and higher ending inventory values during periods of rising prices, as older, cheaper costs are applied first.
          • This method aligns with the actual flow of goods in many industries, providing a logical and straightforward means of cost assignment.

          

          Additional Information

          • LIFO Method:
            • The Last-In, First-Out (LIFO) method assumes that the most recently incurred costs are the first to be assigned to the units completed and transferred out. This method contrasts with FIFO and often results in higher cost of goods sold and lower ending inventory values during periods of rising prices.
            • Absorption costing, also known as full costing, is a method where all manufacturing costs, including fixed and variable costs, are absorbed by the units produced. It is more concerned with overall cost assignment rather than the specific order of costs transferred out.
            • The Weighted Average Method averages all costs incurred over a period of time and assigns this average cost to units completed and transferred out. It smooths cost fluctuations over time and does not prioritize the order of costs.
            • Standard costing assigns predetermined costs to units, reflecting expected costs rather than actual incurred costs. This method is used for budgeting and variance analysis rather than for actual cost allocation to completed units.
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            Cost accounting Question 4:

            How does the Rowan system calculate employee compensation?
            1. Time saved × Hourly Wage + Time Taken × Standard Hourly Rate.
            2. Time taken × Time rate + Time saved/Time allowed × Time taken × Rate per hour.
            3. Time saved × Time allowed.
            4. Fixed hourly rate × Total hours worked.
            5. Units produced × Fixed per unit rate.

            Answer (Detailed Solution Below)

            Option 2 : Time taken × Time rate + Time saved/Time allowed × Time taken × Rate per hour.

            Cost accounting Question 4 Detailed Solution

            The correct answer is Time taken × Time rate + Time saved/Time allowed × Time taken × Rate per hour.

            

            Key Points

            • Time taken × Time rate + Time saved/Time allowed × Time taken × Rate per hour:
              • The Rowan system is a method of calculating employee compensation based on both time taken and time saved. This formula rewards employees for efficiency without unduly encouraging haste that could compromise quality or safety.
              • The first part of the formula, "Time taken × Time rate," compensates employees for the actual hours they worked at their standard rate.
              • The second part, "(Time saved / Time allowed) × Time taken × Rate per hour," provides an additional bonus for the time saved, proportionally to the time taken. This encourages workers to complete tasks efficiently while maintaining a quality standard.
              • By incorporating both actual working time and efficiency gains, the Rowan system aims to balance fair compensation with productivity incentives.

              

              Additional Information

              • Time saved × Hourly Wage + Time Taken × Standard Hourly Rate:
                • This method does not properly emphasize the efficiency aspect the Rowan system aims to reward. It simply adds two unrelated components and may not accurately reflect the efficiency gains.
                • This option does not account for the actual time worked or the standard rate, failing to balance the need for fair wages directly related to hours worked.
                • While this method is simple and ensures workers are paid for every hour worked, it does not provide any incentive for workers to complete tasks more efficiently. This is standard hourly payment without any efficiency bonus.
                • This piece-rate method compensates based on output rather than time, which can lead to rushed work and potential quality issues. It is not aligned with the Rowan system’s approach of balancing time and efficiency.
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                Cost accounting Question 5:

                What type of costs are spread over the units completed and transferred out in process costing?
                1. Abnormal loss costs.
                2. Abnormal gain costs.
                3. Normal loss costs.
                4. Inter process profits.
                5. Overhead costs.

                Answer (Detailed Solution Below)

                Option 3 : Normal loss costs.

                Cost accounting Question 5 Detailed Solution

                The correct answer is Normal loss costs.

                

                Key Points

                • Normal loss costs:
                  • In process costing, normal loss costs are those that are expected and unavoidable under efficient operating conditions.
                  • These costs are spread over the units completed and transferred out because they are considered a standard part of production, and their cost needs to be absorbed by the good units produced.
                  • This allocation ensures that the unit cost of production reflects the reality of the production process, including the inevitable losses that occur.
                  • By spreading the normal loss costs over the completed units, the cost per unit remains consistent and accurate, aligning with the principles of fair and systematic cost allocation.

                  

                  Additional Information

                  • Abnormal loss costs:
                    • Abnormal loss costs pertain to losses that exceed the normal expected losses. These are not spread over the completed units but are treated as a separate expense due to their atypical nature, often warranting detailed investigation and separate reporting.
                    • Abnormal gain costs occur when the actual losses are less than the expected normal losses. These gains are also not distributed over the units produced; instead, they result in a cost adjustment that benefits the overall cost structure.
                    • Interprocess profits refer to the profits that arise when goods are transferred from one process to another at a price higher than their cost. These profits need detailed tracking and adjusting, and they are not directly spread over completed units.
                    • Overhead costs encompass all indirect costs associated with production, such as utilities, rent, and administrative expenses. While these costs are spread across units produced, they are a distinct category from normal loss costs, focusing on general production expenses rather than specific production losses.
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                    Top Cost accounting MCQ Objective Questions

                    Cost accounting Question 6

                    Indirect cost is that cost incurred by the firm which ________.
                    1. has already been incurred and cannot be avoided
                    2. can be easily traceable to a product
                    3. are common to several products
                    4. ​are aggregate of variable cost

                    Answer (Detailed Solution Below)

                    Option 3 : are common to several products

                    Cost accounting Question 6 Detailed Solution

                    

                    Key Points

                    • Costs that don't directly relate to a certain good or service that you're offering to customers are known as indirect costs.
                    • Indirect costs are common to several products rather than to be specific products.
                    • Rather, they focus mostly on operational requirements including overhead, maintenance, and administrative costs.
                    • Indirect expenditures can easily go unnoticed and necessitate the use of emergency finances, therefore it's critical for business owners to keep track of them.

                    

                    Important Points Features of Indirect Costs

                    • Costs that are incurred throughout a number of operations and hence cannot be attributed to particular cost objects are known as indirect costs.
                    • Products, services, geographic areas, distribution routes, and clients are a few examples of cost objects.
                    • In contrast, indirect costs are required to run the company as a whole.
                    • Since indirect costs do not significantly vary within specific production volumes or other activity indicators, they are regarded as fixed costs.
                    • Accounting and legal costs, executive salaries, office expenses, rent, security charges, telephone prices, and utility costs are a few examples of indirect costs.

                    Hence, Indirect cost is that cost incurred by the firm which is common to several products.

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                    Cost accounting Question 7

                    Batch costing is applied in industries ________.
                    1. engaged in construction industries
                    2. engaged in service industries
                    3. where distinct products are produced
                    4. where identical products are produced

                    Answer (Detailed Solution Below)

                    Option 4 : where identical products are produced

                    Cost accounting Question 7 Detailed Solution

                    

                    Key Points

                    • Batch Costing is that form of specific order costing which applies where similar articles are manufactured in batches either for sale-or use within the company”.
                    • A ‘Batch’ according to I.C.M. A., London is “a cost unit which consists of a group of similar articles which maintain its identity throughout one or more stages of production”.

                    

                    Important Points Features of Batch costing

                    • Batch costing focuses on a group of identical products produced for the company's own stock, and job costing is concerned with determining the cost of completing works in accordance with customer criteria.
                    • Manufacturing of pharmaceuticals, complicated product parts (such as automobiles, scooters, computers, watches, and televisions), biscuits, food items, and ready-to-wear clothing typically uses batch costing.
                    • The items produced in a batch are either consumed within a predetermined time frame or are employed for a defined purpose (for example, composite product spare parts are only to be used with a specific model) (e.g., medicines and food products).

                    Hence, Batch costing is applied in industries where identical products are produced.

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                    Cost accounting Question 8

                    The budgeting method under which the budget is prepared from the scratch is known as:
                    1. Incremental budgeting
                    2. Flexible budgeting
                    3. Static budgeting
                    4. Zero-Based Budgeting

                    Answer (Detailed Solution Below)

                    Option 4 : Zero-Based Budgeting

                    Cost accounting Question 8 Detailed Solution

                    

                    Key Points

                    • Zero-based budgeting (ZBB) is a method of planning a budget in which each new period's spending must be supported.
                    • Beginning with a "zero base," every function inside an organization is examined for its needs and expenditures as part of the zero-based budgeting process.
                    • In management accounting, zero-based budgeting is creating the budget from scratch, or with a zero-base.
                    • It entails reassessing each line item on the cash flow statement and providing evidence for each expense that a department will make.

                    Hence, the budgeting method under which the budget is prepared from the scratch is known as Zero-Based Budgeting.

                    

                    Important Points

                    Steps in Zero-based Budgeting

                    1. Identification of a task
                    2. Finding ways and means of accomplishing the task
                    3. Evaluating these solutions and also evaluating alternatives of sources of funds
                    4. Setting the budgeted numbers and priorities

                    

                    Additional Information

                    1. Incremental Budgeting: The concept behind incremental budgeting is that the easiest way to create a new budget is to just make minor adjustments to the one that is already in place.
                    2. Flexible Budgeting: A flexible budget is a financial plan that includes expected costs and revenues for various output levels. The change in activity volume or intensity is what causes the fluctuation. It establishes the benchmark for calculating the differences between the company's actual performance and its budgeted performance for control purposes.
                    3. Static Budgeting: A budget that includes predicted values for inputs and outputs that are thought of before the period in question begins is a static budget. Even with changes in sales and production quantities, a static budget, which is a projection of revenues and expenses for a given period, stays the same.

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                    Cost accounting Question 9

                    A firm has total sales of Rs. 4,00,000 and variable cost of Rs. 2,00,000. If the firm has made profit of Rs. 50,000, then the profit volume ratio of the firm is _______.

                    Answer (Detailed Solution Below)

                    Option 1 : 50%

                    Cost accounting Question 9 Detailed Solution

                    

                    Key Points

                    P rofit volume ratio - The Profit Volume (P/V) Ratio measures the rate at which profit changes in response to changes in sales volume.

                    P/V ratio = Contribution x100/ Sales

                    

                    Important Points Calculation of the contribution of the firm:

                    Sales = Rs. 4,00,000 (given)

                    Variable cost = Rs. 2,00,000 (given)

                    Contribution = Sales - Variable cost

                    Contribution = Rs. 4,00,000 - Rs. 2,00,000

                    P/V ratio = Contribution x100/Sales

                    P/V ratio = ( Rs.2,00,000 x 100)/ Rs. 4,00,000

                    P/V ratio = 50%.

                    

                    Additional Information P/V Ratio = (Sales – Variable cost)/Sales

                    P/V Ratio = (Fixed Cost + Profit)/Sales

                    P/V Ratio = Change in profit or Contribution/Change in Sales

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                    Cost accounting Question 10

                    XYZ Ltd. has a total fixed cost of Rs. 2,00,000. The selling price per unit is Rs. 50 and the variable cost is Rs. 30. The break-even points are ________.

                    1. 12,000 units
                    2. 10,000 units
                    3. 5000 units
                    4. 4000 units

                    Answer (Detailed Solution Below)

                    Option 2 : 10,000 units

                    Cost accounting Question 10 Detailed Solution

                    

                    
                    Key Points

                    Break-Even point:

                    • The point at which there is neither profit nor loss is known as the break-even point.
                    • The selling price and total cost are equal at the break-even point, and the company is in a neutral position.
                    • The company makes exactly as much money as it spends

                    

                    Important Points

                    To calculate the break-even point in units we use the formula:

                    Break-Even Point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

                    Break-even point in units = 2,00,000/(50 - 30) = 2,00,000/20 = 10,000 units.

                    

                    Additional Information

                    In sales Break-Even Point is calculated using the formula:

                    Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin.

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                    Cost accounting Question 11

                    Given: Opening inventory Rs. 3,500; Closing inventory Rs. 1,500; Cost of goods sold Rs. 22,000. What is the amount of purchase?

                    1. Rs. 20,000
                    2. Rs. 24,000
                    3. Rs. 27,000
                    4. Rs. 17,000

                    Answer (Detailed Solution Below)

                    Option 1 : Rs. 20,000

                    Cost accounting Question 11 Detailed Solution

                    Cost Of Goods Sold (COGS) includes all the costs and expenses related directly to the production of goods. It excludes indirect costs such as overhead and sales & marketing.

                    

                    Given:

                    • Opening inventory = Rs. 3,500,
                    • Closing inventory = Rs. 1,500, and
                    • Cost of goods sold (COGS) = Rs. 22,000

                    Solution:

                    • Formula of COGS:
                      • COGS = Opening inventory + Purchases - Closing inventory
                      • 22,000 = 3,500 + Purchases - 1,500
                      • 22,000 = 2,000 + Purchases
                      • Purchases = 22,000 - 2,000
                      • Purchases = 20,000

                      Therefore, the amount of purchase is Rs. 20,000.

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                      Cost accounting Question 12

                      The following are the two statements regarding concept of profit. Indicate the correct code of the statements being correct or incorrect. Statement (I) : Accounting profit is a surplus of total revenue over and above all paid-out costs, including both manufacturing and overhead expenses. Statement (II) : Economic or pure profit is a residual left after all contractual costs have been met, including the transfer costs of management, insurable risks, depreciation and payments to shareholders sufficient to maintain investment at its current level.

                      1. Both the statements are correct.
                      2. Both the statements are incorrect.
                      3. Statement (I) is correct while Statement (II) is incorrect.
                      4. Statement (I) is incorrect while Statement (II) is correct.

                      Answer (Detailed Solution Below)

                      Option 1 : Both the statements are correct.

                      Cost accounting Question 12 Detailed Solution

                      Statement (I): Accounting profit is a surplus of total revenue over and above all paid-out costs, including both manufacturing and overhead expenses.

                      Explanation:

                      I n an accounting sense, profit is a surplus of revenue over and above all paid-out costs, including both manufacturing and overhead expenses.

                      Accounting Profit = TR – (W + R + I + M)

                      • where TR = total revenue,
                      • W = wages and salaries,
                      • R = rent,
                      • I = interest, and
                      • M = cost of materials.

                      Obviously, while calculating accounting profit, only explicit or book costs, i.e., the cost recorded in the books of accounts, are considered.

                      Thus, the statement I is correct.

                      Statement (II): Economic or pure profit is a residual left after all contractual costs have been met, including the transfer costs of management, insurable risks, depreciation, and payments to shareholders sufficient to maintain investment at its current level.

                      Explanation:

                      1. The concept of ‘economic profit’ differs from that of ‘accounting profit’.
                      2. Economic Profit takes into accounts also the implicit or imputed costs.
                      3. The implicit cost is the opportunity cost. Opportunity cost is defined as the payment that would be ‘necessary to draw forth the factors of production from their most remunerative alternative employment.’
                      4. Alternatively, the opportunity cost is the income foregone which a businessman could accept from the second bast alternative use of his resources.
                      5. Accounting profit does not take into account the opportunity cost.
                      6. It should also be noted that the economic or pure profit makes provision also for
                         • insurable risks,
                         • depreciation, and
                         • necessary minimum payment to shareholders to prevent them from withdrawing their capital.
                      7. Pure profit may thus is defined as a residual left after all contractual costs have been met, including the transfer cost of management, insurable risks, depreciation, and payment to shareholders sufficient to maintain investment at its current level.
                      8. Thus, Pure Profit = Total Revenue – (Explicit Cost + Implicit Costs).

                      Thus, statement II is correct.

                      Therefore, Both statements are correct.