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

The correct answer is Total Cost.

Key Points The profitability of buying from an external supplier in a "make or buy" decision isn't solely determined by whether the supplier's price is below the firm's own fixed cost. The decision typically involves a more comprehensive analysis of costs, as well as various other factors.

In a "make or buy" decision, we should consider both variable and fixed costs. Variable costs are directly related to the production or purchase of the product, while fixed costs remain constant regardless of whether you make or buy the product. The decision should aim to minimize total costs, not just fixed costs.

Here are some key considerations in the decision-making process:

Total Cost Analysis: Compare the total cost of making the product in-house (which includes both variable and fixed costs) to the cost of buying it from an external supplier. This analysis should help you determine which option is more cost-effective.

Economies of Scale: Consider whether producing in-house allows you to achieve economies of scale, potentially reducing your variable costs per unit as production volume increases.

Quality and Expertise: Assess the quality and expertise that the supplier can provide compared to what you can achieve in-house. Quality can have a significant impact on customer satisfaction and reputation.

Capacity and Resource Allocation: Evaluate whether in-house production consumes resources and capacity that could be more efficiently used elsewhere in the organization.

Risk Management: Consider the risks associated with both options, including the risk of supply chain disruptions, quality issues, and equipment breakdowns.

The correct answer is 28,000 units

Important PointsTotal sales =  Rs. 60,000

Total variable costs = Rs. 30,000

 Contribution = total sales - total variable costs

 Contribution   = 60000 - 30000 = 30,000

 Contribution Per Unit = Contribution / Unit Sold

 Contribution Per Unit = 30000 / 20000

 Contribution Per Unit = 1.5 

Calculation of the volume of sales to earn a profit of Rs 24,000.

Sales = (Total Fixed Cost + Expected Profit) / Contribution per unit

Sales = (18000 + 24000) / 1.5

Sales = 28,000 Units.

Volume of sales to earn a profit of Rs. 24,000 is 28000 units

The correct answer is 

Key Points Profit Volume Ratio (P/V Ratio):

• The Profit Volume (P/V) Ratio is a measurement of the rate of change of profit as a function of sales volume.
• It's one of the most essential ratios for calculating profitability because it shows the contribution made in relation to sales.
• The PV ratio or P/V ratio is arrived by using following formula: 
  P/V ratio = contribution x100 / sales
• Contribution means the difference between sale price and variable cost

Important Points Solution;

     P/V ratio = contribution x100 / sales
     P/V ratio = 40000 x 100 / 2,00,000

     P/V ratio = 20 %

The correct answer Rent, lighting and supervision cost are common costs.

Key Points

• The statement "Rent, lighting, and supervision cost are common costs" is correct.
• Common costs are expenses that are shared or allocated among multiple cost objects or departments within an organization. In this case, rent, lighting, and supervision costs are mentioned as common costs. These costs are typically incurred for the benefit of multiple departments or activities within a company rather than being directly attributable to a specific cost object or department.
• For example, rent expense may be incurred for a facility that houses various departments or activities within a company. Similarly, lighting and supervision costs may apply to multiple areas or departments within the organization. In these cases, the costs are shared or allocated based on some predetermined method, such as square footage, usage, or headcount.
• Identifying and appropriately allocating common costs is important for cost accounting and financial analysis purposes. It allows for a more accurate understanding of the costs associated with different departments or cost objects, enabling better decision-making and cost control within the organization.

Blanket overhead rate is one single overhead absorption rate for the whole factory.

Key Points

Blanket overhead rate:​ 

• It is a common absorption rate used throughout a factory and for all jobs and units of output, irrespective of the departments in which they were produced or processed.​
• It is a standard absorption rate that is applied across a plant to all tasks and units of output, regardless of the sections in which they have been generated or produced.

Important Points

It is calculated as under:

Blanket Rate = Overhead cost for the entire factory/Total quantum of the base (quantity or value)

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.

Key Points

Profit 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 PointsCalculation 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   

Contribution = 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

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.