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

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.

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 

• E- shop refers to a website that allows the purchase and sale of goods over the internet.
• The consumers can browse through the goods from the catalog of goods provided by the sellers and purchase the goods with Internet access.
• E-shop caters to the needs of the customers globally allowing the sellers to expand their market worldwide.
• It is a reliable source of shopping which is available for 24 hours a day and 7 days a week, thereby making it accessible to customers at any time of the day.

​ Additional Information

• E- store refers to a virtual store of a retailer which allows the retailer to sell goods online. It allows the customers to purchase goods of a retailer by browsing the products online on the particular e-store website.
• E- visibility's increasing the presence of a business online using techniques like better online advertising and content marketing, using SEO and leveraging social media platforms.

Key Points 

• Down cost is not a direct or indirect cost.
• Supplementary costs or overhead cost are those costs which can not be directly allocated to a product or service and do not change with the change in level of output.
• Oncosts are the additional costs incurred in the process of production.These are not direct costs but include the indirect costs, overheads.

Additional Information

• Direct costs are those costs which can be directly attributable to a product, service or a cost unit or cost centre. Direct material, direct labour and direct expenses are the direct costs.
• Indirect costs refer to the costs which can not be directly charged to a product or service. Indirect costs include indirect material, indirect labour and indirect expenses which are also called overheads.

Key Points 

• Standard costing is not a method of costing. It is a technique of costing.
• Standard Costing is a technique which is used to set predetermined standards or costs and compares actual costs with the standard costs to identify variances.
• Standard costing does not allocate costs to product, service or process or jobs. It is an approach to set standards and analyse variances in the cost of material, labour or overhead.

Additional Information 

• Operating Costing is a method of costing which is used to ascertain the cost of operating or providing services. It is used in industries where the output is service. For example, transport, hotel, electricity, healthcare industries apply operating costing.
• Job costing is a method of costing used to determine the cost of a specific job or specific work order where each job is a separate cost unit and done according to customer's specific requirements. Furniture manufacturers, shipbuilding industries , law and consulting firm are examples who employ job costing.
• Contract costing is a costing method where a contractor undertakes a contract for a contractee for a certain sum of money which is determined by adding the expenses of all the activities and stages of the project. It is used in industries who undertake construction work or infrastructure development.

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

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.

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

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.

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.