Cost Accounting Concepts: Objective Questions and Answers

Cost Accounting Concepts and Objective Questions

Here are some key cost accounting concepts and objective-type questions to test your understanding:

Key Cost Accounting Concepts

1. Costing: Refers to the allocation of costs to cost centers and cost units.
2. Economic Order Quantity (EOQ): The optimal order quantity that minimizes total inventory costs.
3. Idle Time: Time spent by workers on unproductive activities.
4. Apportionment: The process of distributing overheads to various cost centers.
5. Profit under Absorption Costing: Higher when production exceeds sales compared to marginal costing.
6. Purpose of Cost Accounting: To ascertain and control costs.
7. Minimum Stock: The minimum level of inventory that must be maintained at all times.
8. Labor Turnover: Measured as a percentage of workers who leave during a specific period.
9. Overhead Classification: Fixed, variable, and semi-variable categories.
10. Activity-Based Costing (ABC): Useful for identifying non-value-added activities.
11. Allocation: The process of assigning indirect costs to cost objects.
12. Activity-Based Costing Focus: Activities as the fundamental cost drivers.
13. Marginal Cost Formula: Variable Cost + Direct Costs.
14. Carrying Costs: Costs incurred to maintain and control stock levels.
15. Absorption Costing: Fixed and variable production costs are included in inventory valuation.

Objective Type Questions

1. Which document authorizes the issue of materials from the store?
   1. Purchase Order
   2. Material Requisition Note
   3. Goods Receipt Note
   4. Inspection Report

   Answer: b) Material Requisition Note

2. Rent of factory premises is an example of:
   1. Fixed overhead
   2. Variable overhead
   3. Direct cost
   4. Semi-variable overhead

   Answer: a) Fixed overhead

3. Activity-Based Costing helps in:
   1. Better product pricing decisions
   2. Reducing financial costs
   3. Improving tax efficiency
   4. None of the above

   Answer: a) Better product pricing decisions

4. Budgetary control is most effective when:
   1. Budgets are rigid and unchangeable
   2. Actual results are frequently compared to budgeted amounts
   3. Fixed costs are completely excluded from budgets
   4. Only production costs are considered

   Answer: b) Actual results are frequently compared to budgeted amounts

5. Which of the following is an indirect labor cost?
   1. Wages of a machine operator
   2. Salaries of factory supervisors
   3. Overtime wages for assembly-line workers
   4. Bonus payments to production workers

   Answer: b) Salaries of factory supervisors

6. The process of ensuring materials are available in the right quantity, quality, and time is called:
   1. Material Handling
   2. Material Planning
   3. Material Control
   4. Material Valuation

   Answer: c) Material Control

7. Time wage system is suitable when:
   1. Quality is more important than quantity
   2. Quantity is more important than quality
   3. The job requires high skill
   4. The job is repetitive

   Answer: a) Quality is more important than quantity

8. Which of the following is NOT an advantage of ABC?
   1. Helps in cost control
   2. Simplifies the costing process
   3. Identifies non-value-added activities
   4. Supports strategic decision-making

   Answer: b) Simplifies the costing process

9. The main objective of budgetary control is to:
   1. Increase sales
   2. Control costs
   3. Maximize shareholder wealth
   4. Ensure compliance with regulations

   Answer: b) Control costs

10. Variance analysis helps in:
    1. Determining future budgets
    2. Identifying deviations from the budget
    3. Calculating profit margin
    4. Preparing financial statements

    Answer: b) Identifying deviations from the budget

11. Which of the following is NOT a feature of management accounting?
    1. Historical data focus
    2. Decision-making orientation
    3. Future planning
    4. No statutory requirement
12. In marginal costing, fixed costs are treated as:
    1. Product costs
    2. Period costs
    3. Overheads
    4. Direct costs
13. The term "idle time" in labor cost refers to:
    1. Productive hours
    2. Wages paid during downtime
    3. Normal working hours
    4. Total working hours
14. Which method is most suitable for apportioning overheads in ABC costing?
    1. Direct labor hours
    2. Machine hours
    3. Cost drivers
    4. Prime cost
15. Budgetary control involves:
    1. Setting budgets only
    2. Comparing actual performance with budgets
    3. Evaluating costs retrospectively
    4. Estimating future expenses without control

One Mark Questions

1. What is budgetary control?

   Answer: Budgetary control is a system of planning and monitoring financial and operational activities using budgets to ensure that organizational goals are achieved.

2. What is the formula for profit under marginal costing?

   Answer: Profit = Contribution - Fixed Costs

3. How are fixed costs treated under absorption costing?

   Answer: Fixed costs are included in product cost under absorption costing.

4. Define breakeven point.

   Answer: The breakeven point is where total revenue equals total cost, resulting in no profit or loss.

5. What is the effect of overtime payment on productivity?

   Answer: The effect of overtime payment on productivity can vary:

   1. Positive Effect: Overtime payment may motivate workers to put in extra effort, increasing productivity.
   2. Negative Effect: Prolonged overtime can lead to worker fatigue, reducing efficiency and productivity over time.
   3. Cost Impact: Higher overtime costs can increase per-unit cost, affecting overall profitability.
6. What is a flexible budget?

   Answer: A flexible budget is a budget that adjusts to changes in activity levels, making it more suitable for dynamic environments.

7. Define variance analysis.

   Answer: Variance analysis compares actual performance with budgeted performance to identify deviations and their causes.

8. What is contribution?

   Answer: Contribution is the difference between sales and variable costs. It helps cover fixed costs and generate profit.

9. What is Rowan System?

   Answer: The Rowan System is a method of wage payment where the bonus is calculated based on the proportion of time saved to the time allowed. It ensures fair compensation by limiting the bonus to a percentage of the worker's standard wage.

10. What is cost management?

    Answer: Cost management is the process of planning, controlling, and monitoring costs to ensure that a business operates within its budget and achieves its financial objectives efficiently. It involves strategies for cost control, cost reduction, and maximizing profitability.