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

The correct answer is 50%

Key Points Contribution margin = Total sales - Total variable costs
Total sales in 2021 = Rs. 1,00,000
Total variable costs in 2021 = Rs. 1,10,000 (i.e. Rs. 1,00,000 sales in 2021 x 110% variable cost ratio)
Contribution margin in 2021 = Rs. (-10,000) (i.e. Rs. 1,00,000 - Rs. 1,10,000)

Total sales in 2022 = Rs. 4,00,000
Total variable costs in 2022 = Rs. 2,00,000 (i.e. Rs. 4,00,000 sales in 2022 x 50% variable cost ratio)
Contribution margin in 2022 = Rs. 2,00,000 (i.e. Rs. 4,00,000 - Rs. 2,00,000)

Profit volume ratio = (Contribution margin / Sales) x 100
PVR in 2021 = (-10,000 / 1,00,000) x 100 = -10%
PVR in 2022 = (2,00,000 / 4,00,000) x 100 = 50%

Hence, the correct answer is 50%

Depreciation of the machinery would not be included in the cash budget.

Key PointsCash budget is:

• A projection of a company's cash inflows and cash outflows over a certain time period, such as weekly, monthly, quarterly, or yearly.
• A cash budget also will give a firm clarity into its cash demands and reserves, allowing it to make more effective cash usage decisions.
• After the sales, purchasing, and capital expenditures budgets have been established, management usually produces the cash budget. These budgets must be completed well before cash budget in order to precisely predict how cash will be influenced throughout the course of the term.

Conclusion:

Capital costs, operating labour, and petrol are all expenses that necessitate cash budgeting since they entail cash outflow. Depreciation, on the other hand, is a non-cash expense. It does not require a cash budget because it does not involve any financial outflow.

Key Points

 ​Factory Overhead Rate:

• The expenses incurred in the manufacturing process, excluding the expenditures of direct labour and direct supplies, are referred to as factory overhead.
• Typically, factory overhead is gathered into cost pools and distributed to the units produced throughout the time period.
• Total factory overhead rate is the total cost per unit of production that a manufacturing company needs to bear in order to produce a product.
• It includes all the indirect costs associated with production, such as rent, utilities, maintenance, and other overhead expenses.

Important Points To calculate the total factory overhead rate, we need to add the fixed overhead cost to the variable overhead cost per standard labour hour:

Fixed overhead cost = Rs. 2,20,000 per month

Variable overhead cost per standard labour hour = Rs. 25

Normal monthly output = Rs. 12,000 per standard labour hour

Total factory overhead rate = (Fixed overhead cost / Normal monthly output) + Variable overhead cost per standard labour hour

Total factory overhead rate = (Rs. 2,20,000 / Rs. 12,000) + Rs. 25

Total factory overhead rate = Rs. 18.33 + Rs. 25

Total factory overhead rate = Rs. 43.33 per standard labour hour

Key Points

Cost accounting - Cost Accounting may be defined as “Accounting for costs classification and analysis of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted”.  

There are various types of cost accounting, such as:

• Standard costing
• Activity based costing 
• Marginal costing
• Service costing
• Job costing 
• Process costing
• Contract costing

Service costing - Service costing, also known as operating costing, is a cost estimation tool used by businesses that offer services. For example, service costing is used by transportation firms, electrical providers, hospitals, movie theatres, hotels, schools, and universities to determine cost per unit.

Process costing - Process costing is a costing approach used mostly in manufacturing, where units are mass-produced in a continuous manner using one or more processes. Manufacturing erasers, chemicals, paper industry, and processed foods are all examples of this.

Contract costing - Contract costing is a type of particular order costing in which work is performed according to the customer's specified requirements and each order is of a long duration. Contractors who perform construction and engineering work such as roads, dams, buildings, canals, railway lines, bridges, a city or town's drainage system, hospital, schools, or colleges buildings or private structures, shipbuilding, and so on use contract costing.

Batch costing - Batch costing is a type of special order costing in which each batch is handled as an independent cost unit, with expenses accrued and calculated individually for each batch. Each batch is made up of a number of similar units. Batch costing is a costing approach used by businesses that produce a similar product or component in large quantities.

Additional Information

Standard costing - The method of calculating the cost of a manufacturing process is known as standard costing. It's a type of cost accounting that allows a company, for example, to budget for miscellaneous expenses such as direct material, direct labour, and overhead for the following year. These companies will also be able to correlate the standard price to the real price.

Activity based costing - A costing approach known as activity-based costing (ABC) assigns overhead and indirect expenses to associated products and services. Unlike traditional costing techniques, this accounting costing method acknowledges the link between expenses, overhead activities, and produced items, attributing indirect costs to products with less arbitrariness.

Marginal costing -  The cost of one more unit of output is known as marginal cost. The notion is used to determine the optimum production quantity for a corporation, where producing further units costs the least amount of money. It's computed by multiplying the change in manufacturing expenses by the change in production quantity.

Job costing - Job costing is a way of accounting used to keep track of the costs of different projects and activities. It entails examining direct and indirect expenses, which are often divided into three categories: labour, materials, and overhead.

Key Points

Job order costing -

• Employed mostly by businesses that provide work tailored to the needs of the client, job order costing is a method of allocating the cost of production to a single manufacturing job.
• Additionally, when each output is unique from the others, this system is employed. Therefore, the same product cannot be used by others.

Important PointsA brewery - Beer is produced and sold by businesses known as breweries. This is type of production of product. Product Costing used in this type of business.

An oil refinery - An industrial facility known as an oil refinery turns or refines crude oil into a variety of petroleum products that can be used, including diesel, gasoline, and heating oils like kerosene. In this type of businesses process costing is used. 

A company that makes frozen pizzas - These companies are also nature of production of food and beverages. These companies basically use product costing. ​

A print shop that specializes in wedding invitations - In these types of businesses work is done according to the requirements of customers. Thus, this is an example of job order costing. 

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 PointsFeatures 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. 

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 PointsFeatures 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.

 Key Points

Zero-based Budgeting:

• 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.

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.

The correct statement is Opening Stock + Net Purchases + Direct Expenses - Closing Stock = Cost of Goods Sold.

Key Points

• Cost of goods sold (COGS) is the cost of merchandise that is sold to the customers.
• It includes the cost of raw materials purchased, direct expenses incurred, the value of opening stock, i.e., the value of the last year’s unsold stock and excludes closing stock if any, i.e., the value of the current year’s unsold stock.
• The formula to calculate COGS is:
  • Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock.

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

Explanation:

In 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.

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.

Key PointsStandard Costing:

• A standard cost system is a method of cost accounting in which standard costs are used in recording certain transactions and the actual costs are compared with the standard costs, to learn the amount and reason for any variations from the standard.
• Standard costing is a technique of cost control.
• The CIMA Official Terminology defines it as “a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance.”

Important Points

​Steps involved in Standard Costing

1. Setting or establishing standards for each element of cost;
2. Ascertainment of actual cost;
3. Comparison of standard costs and revenues with actual results;
4. Determination and analysis of variances;
5. Taking appropriate corrective action on the basis of ‘management by exception’; and
6. Stimulating improved performance.

Hence, standard costing is a technique that involves a comparison of the actual cost with the standard cost to find variation.

Key Points

Minimum Stock Level:

• A minimum stock level is a threshold value that indicates the level below which actual material stock items should not normally be allowed to fall.
• In other words, a minimum stock level is a minimum quantity of a particular item of material that must be kept at all times.
• The fixing of this level acts as a safety measure. For this reason, the minimum stock level is commonly known as safety stock or buffer stock.​
• Minimum stock Level = Re-ordering Level – (Normal/Average Consumption x Normal/Average Reorder Period)

Hence, the minimum level of stock represents the minimum quantity of stock that should be held at all times.

Additional Information

When determining the minimum level for different stocks, the following variables should be taken into account:

1. The result of the maximum consumption of an inventory item and its maximum delivery time is the reorder level.
2. Consumption rates on average: Consumption rates on average for each inventory item.
3. For each item, the maximum consumption and delivery period are used to calculate the level of reordering.
4. The average time between reorders for each item: The minimum and maximum periods can be averaged to determine this time.

Key Points

Total Cost:

• Total cost comprises fixed costs (costs that occur regardless of the quantity produced) and variable costs (costs incurred with each item produced).
• It also calculates by multiplying the average cost per unit by the number of units produced.
• Formula: Total Cost = Total Fixed Costs + Total Variable Costs​

Important Points

• Both variable and fixed costs are included in the total cost.
• It accounts for all expenses incurred during production or when providing a service.
• Assume, for instance, that a textile business manufactured 1,000 shirts last month at a cost of $9 for each item.
• The business also pays $1,500 in rent each month.
• The overall cost is comprised of a fixed cost of $1,500 each month and a variable cost of $9,000 ($9 x 1,000), totaling a total of $10,500.