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# Cost Accounting 1

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SECTION A:

Q1 What is cost accounting? What are its objectives?

Q2 Briefly explain the different ways of ‘classifying cost’.

Q3 What do you mean by ABC analysis? State its advantages.

Q4 What is idle time? What are the causes for idle time? How should idle time wages be treated in cost Accounts?

Q5 What is cost volume profit analysis? Explain.

SECTION – B:

Q1 What is standard costing? How is it different from Historical costing?

Q2 What is flexible budget. Explain

Q3 What is responsibility Accounting. Explain the responsibility centers.

CASE STUDY

A retail dealer in garments is currently selling 24000 shirts annually. He supplies the following details for the year ended 31st December, 2007.

Rs

Selling Price per shirt 40

Variable Cost per shirt 25

Fixed cost:

staff salaries for the year 120000

General office cost for the year 80000

Advertising costs for the year 40000

As a cost accountant of the firm, you are required to answer the following each part independently:-

(i) Calculate the break-even point and margin of safety in sales revenue and no of shirts sold.

(ii) Assume that 20000 shirts were sold in a year. Find out the net profit of the firm.

(iii) If it is decided to introduce selling commission of Rs 3 per shirt, how many shirts would require to be sold in a year to earn a net income of Rs 15000/-.

SECTION – C

Q1 Which of the following best describes a fixed cost? A cost which:

(a) Represents a fixed proportion of total costs

(b) Remains at the same level up to a particular level of output

(c) Has a direct relationship with output

(d) Remains at the same level when output increases

Q2 A business’s telephone bill should be classified into which one of these categories?

(a) Fixed cost

(b) Stepped fixed cost

(c) Semi-variable cost

(d) Variable cost

Q3 The total production cost for making 20,000 units was £21,000 & total production cost for making 50,000 was £34,000. When production goes over 25,000 units, more fixed costs of £4,000 occur. So full production cost per unit for making 30,000 units is:

(a) £0.30

(b) £0.68

(c) £0.84

(d) £0.93

Q4 Which of the following is least likely to be an objective of cost accounting system?
(a) Product Costing

(b) Optimum Sale Mix determination

(c) Maximization of profits

(d) Sales Commission determination

Q5 The classification of costs as either direct or indirect depends upon

(a) The timing of the cash outlay for the cost

(b) The cost object to which the cost is being related

(c) The behavior of the cost in response to volume changes

(d) Whether the cost is expensed in the period in which it is incurred

Q6 Which of the following is false with regard to the supplementary rate method for accounting of under or over absorption of overheads?

(a) It facilitates the absorption of actual overhead for production

(b) Correction of costs through supplementary rates is necessary for maintaining data for comparison

(c) The supplementary rate can be determined only after the end of the accounting period

(d) It requires a lot of clerical work

(e) The value of stock is distorted under this method.

Q7 Which of the following factors should not be taken into consideration for determining the basis for applyingoverheads to products?

(b) Convenience

(c) Time factor

(d) Seasonal fluctuation of overhead costs

(e) Manual or machine work.

Q8 Storekeeping expenses are to be apportioned on the basis of

(a) Floor area of the production departments

(b) Direct labor hours of each product

(c) Number of units manufactured of each product

(d) Number of material requisitions

(e) Sales price of each product.

Q9 A company has a margin of safety of Rs.40 lakh and earns an annual profit of Rs.10 lakh. If the fixed costs amount toRs.20 lakh, the annual sales will be

(a) Rs.160 lakh

(b) Rs.140 lakh

(c) Rs.120 lakh

(d)Rs.200 lakh

(e) Rs.180 lak

Q10 Which of the following statements is false with respect to the use of predetermined overhead absorption rates?

(a) Product cost can be worked out promptly

(b) Use of predetermined overhead rate will provide data available for decision making but not for cost control

(c) Product costs are not affected unnecessarily due to the vagaries of the calendar or seasonal fluctuations

(d) By using normal capacity as base while determine the overhead rate, losses due to idle capacity is highlighted and real cost of production is reflected

(e) Product cost can be estimated prior to commencement of production and can help the management in price quotation and fixing selling price well in advance.

Q11 In process costing, equivalent units, using first in first out (FIFO) are a measure of

(a) Work done on the beginning as well as ending work-in-process inventory

(b) Work done on units started in the production process during the period

(c) Work done in the department during the period

(d) Work required to complete the beginning work-in-process inventory

(e) Work performed on the ending work-in-process inventory.

Q12 A company’s approach to a make or buy decision

(a) Depends on whether the company is operating at or below break-even level

(b) Depends on whether the company is operating at or below normal volume

(c) Depends on whether the company is operating at practical capacity level

(d) Involves an analysis of avoidable costs

(e) Requires use of absorption costing.

Q13 Which of the following statements is false?

(a) Historical costs are useful solely for estimating costs that lie ahead

(b) Abnormal cost is controllable

(c) Conversion cost is the production cost minus direct material cost

(d) Administrative expenses are mostly fixed

(e) Notional costs are not included while ascertaining costs.

Q14 Ramesha Ltd. manufactures product DN for last seven years. The company maintains a margin of safety of 37.5%with an overall contribution to sales ratio of 40%. If fixed cost is Rs.5 lakh, the profit of the company is

(a) Rs.12.50 lakh

(b) Rs. 4.25 lakh

(c) Rs. 3.00 lakh

(d) Rs.24.00 lakh

(e) Rs.20.00 lakh.

Q15 Which of the following statements is true for a firm that uses variable costing?

(a) Profits fluctuate with sales

(b) An idle facility variation is calculated

(c) Product costs include variable administrative costs

(d) Product costs include variable selling costs

(e)The cost of a unit of product changes because of changes in number of units manufactured.

Q16 If the price rises, which of the following methods of valuing stock will give the highest profit?

(a) LIFO method

(b) Replacement cost method

(c) FIFO method

(d) Simple average method

(e) Specific order method.

Q17 An accounting system that collects financial and operating data on the basis of underlying nature and extent to the cost drivers is

(a) Direct costing

(b) Target costing

(c) Activity based costing

(d) Variable costing

(e) Cycle-time costing.

Q18 In allocating factory service department costs to producing departments, which of the following items would most likely be used as an activity base?

(a) Salary of service department employees

(b) Units of electric power consumed

(c) Direct materials usage

(d) Units of finished goods shipped to customers

(e) Units of product sold.

Q19 Apportionment of overhead cost may be defined as

(a) Charge to a cost center of an overhead cost item with no estimation

(b) Charge to cost center for the use of an overhead cost

(c) Charge to cost units for the use of an overhead cost

(d) Classification of overhead cost as fixed or variable

(e) Charge each cost center with a share of an overhead cost using an apportionment basis to estimate the benefit extracted by each cost center.

Q20 An increase in variable costs where selling price and fixed cost remain constant will result in which of the following?

(a) An increase in margin of safety

(b) No change in margin of safety

(c) A fall in the sales level at which break even point will occur

(d) A rise in the sales level at which break even point will occur

(e) No change in the sales level at which break even point will occur.

Q21 Which of the following is a cause of materials usage variance?

(a) Emergency buying in smaller quantities

(b) Carriage, freight and other charges absorbed instead of being charged to suppliers

(c) Cash discount not taken

(d) Rectification required when many components do not pass through inspection

(e) Claims not made on suppliers for substandard materials or short receipt of materials.

Q22 The following are the causes of labour efficiency variance except

(b) Defective tools, equipment and materials

(c) Defective supervision

(d) Bad workmanship due to dissatisfaction among the workers

(e) Employing people of different grades than planned.

Q23 Which of the following transfer pricing methods will preserve the sub-unit autonomy?

(a) Cost-based pricing

(b) Negotiated pricing

(c) Variable-cost pricing

(d) Full-cost pricing

(e) Marginal cost pricing.

Q24 The most fundamental responsibility center affected by the use of market-based transfer prices is

(a) Revenue center

(b) Cost center

(c) Profit center

(d) Investment center

(e) Production center.

Q25 Target pricing

(a) Is a pricing strategy used to create competitive advantage

(b) Considers the variable costs and excludes fixed costs

(c) Is often used when costs are difficult to control

(d) Is more appropriate when applied to mature and long-established products

(e) Is well suited for complex products that require many sub-assemblies.

Q26 A segment of an organization is referred to as a profit center if it has

(a) Responsibility for developing markets and selling the output of the organization

(b) Responsibility for combining materials, labor and other factors of production into a final output

(c) Authority to provide specialized support to other units within the organization

(d) Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply

(e) Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply and significant control over the amount of invested capital.

Q27 Which of the following is false about standard costing system?

(a) It is based on a cost control concept

(b) It assumes stability in the current manufacturing process

(c) The goal is to meet cost performance standards

(d) It assumes production workers have the best knowledge to reduce costs

(e) It motivates employees to try to reach target established.

Q28 Which of the following service departments’ costs is apportioned on the basis of rate of labor turnover?

(a) Payroll department

(b) Personnel department

(c) Canteen service

(d) Store-keeping department

(e) Maintenance department.

Q29 Which of the following bases is appropriate to apportion the cost incurred on supervision of machine?

(a) Floor area occupied by each machine

(b) Equitable basis

(c) Value of each machine

(d) On the basis of past experience

(e) Estimated time devoted.

Q30 Which of the following bases is used for apportionment of overtime premium of workers engaged in a particular department?

(a) Direct allocation

(b) Direct labor hours

(c) Number of workers

(d) Technical estimates

(e) Relative areas of departments.

Q31 The rate used in addition to the original rates for ascertaining the true profit for adjusting the under or over absorption of

(a) Predetermined rate

(b) Blanket rate

(c) Moving average rate

Q32 Any activity for which a separate measurement of costs is desired is known as

(a) Cost unit

(b) Cost center

(c) Cost object

(d) Cost pool

(e) Cost allocation.

Q33 Which of the following is true regarding the difference between marginal costing and absorption costing?

(a)Under marginal costing, fixed costs are treated as product costs while it is excluded under absorption costing

(b)Under absorption costing, under absorption or over absorption of overhead occurs but it does not occur under marginal costing

(c)The net income under absorption costing is always more than the net income under marginal costing

(d)If production is equal to sales, net income under absorption costing is greater than net income under marginal costing

(e)In case of decreased inventory, the net income under marginal costing is less than the net income under absorption costing.

Q34 Which of the following statements is false?

(a) The aggregate of indirect material, indirect wages and indirect expenses is overhead costs

(b)Direct costs are never treated as overhead costs even in cases where efforts involved in identifying and accounting are disproportionately large

(c)The overheads can be apportioned to a cost center in accordance with the principles of benefit and/or responsibilities

(d) Capital expenditure should be excluded from costs and should not be treated as overhead

(e) Expenditure that does not relate to production shall not be treated as overhead.

Q35 An increase in variable costs where selling price and fixed cost remain constant will result in which of the following?

(a) An increase in margin of safety

(b) A fall in the sales level at which break even point will occur

(c) A rise in the sales level at which break even point will occur

(d) No change in the sales level at which break even point will occur

(e)No change in angle of incidence.

Q36 Which of the following statements is true for a firm that uses variable costing?

(a) Product costs include variable selling costs

(b) An idle facility variation is calculated

(c) The cost of a unit of product changes because of changes in number of units manufactured

(d) Profits fluctuate with sales

(e) Product costs include variable administrative costs.

Q37 Which of the following can improve break-even point?

(a) Increase in variable cost

(b) Increase in fixed cost

(c) Increase in sale price

(d) Increase in sales volume

(e) Increase in production volume.

Q38 Which of the following statements is/are true?

I. A cost unit is a unit of output in the production of which costs are incurred.

II. A cost center is the smallest segment of activity or area of responsibility for which costs are accumulated.

III. Typically departments are cost centers and there may be many departments in a cost center.

(a) Only (I) above

(b) Only (II) above

(c) Both (I) and (III) above

(d) Both (I) and (II) above

(e) Both (II) and (III) above.

Q39 The Rowan Plan

(a) Is the best for efficient workers

(b) Pays lower bonus that that of Halsey beyond 50% saving in time.

(c) Pays increased bonus at an increasing rate as the efficiency

(d) None of the above

Q40 A written request to a supplier for specified goods at an agreed upon price is called a

(a) Receiving Report

(b) Purchase order

(c) Material requisition form

(d) Purchase requisition