Q1. Which of the following is NOT a component of prime cost?
(a) Direct materials
(b) Direct wages
(c) Direct expenses
(d) Factory overhead
Answer: (d)
Explanation: Prime cost consists of direct materials, direct wages, and direct expenses. Factory overhead is part of indirect cost, not prime cost.
Q2. In cost accounting, the term “cost object” refers to:
(a) Any item for which costs are accumulated and measured
(b) Only finished goods inventory
(c) Only direct labor hours
(d) Only selling expenses
Answer: (a)
Explanation: A cost object can be a product, service, department, project, or any activity to which costs are assigned for measurement and control.
Q3. Which costing method is most suitable for a company producing homogeneous products in continuous flow?
(a) Job costing
(b) Batch costing
(c) Process costing
(d) Contract costing
Answer: (c)
Explanation: Process costing accumulates costs for each process or department and is ideal for continuous, homogeneous production (e.g., chemicals, textiles).
Q4. Under marginal costing, which of the following costs is treated as period cost?
(a) Variable manufacturing overhead
(b) Fixed manufacturing overhead
(c) Direct material
(d) Direct labor
Answer: (b)
Explanation: Marginal costing treats fixed manufacturing overhead as a period cost (charged to the profit & loss account) rather than as product cost.
Q5. The contribution margin per unit is calculated as:
(a) Selling price – Variable cost per unit
(b) Selling price – Fixed cost per unit
(c) Variable cost – Fixed cost per unit
(d) Sales – Total cost
Answer: (a)
Explanation: Contribution margin = Sales revenue – Variable cost (or Selling price – Variable cost per unit). It contributes to covering fixed costs and profit.
Q6. Break‑even point in units equals:
(a) Fixed cost ÷ Contribution margin per unit
(b) Variable cost ÷ Contribution margin per unit
(c) Sales ÷ Fixed cost
(d) Profit ÷ Contribution margin per unit
Answer: (a)
Explanation: At break‑even, total contribution equals fixed cost; thus units = Fixed cost / Contribution per unit.
Q7. Which of the following is an example of a sunk cost?
(a) Future advertising expense
(b) Book value of machinery already purchased
(c) Expected raw‑material price increase
(d) Opportunity cost of using idle machine
Answer: (b)
Explanation: Sunk costs are past expenditures that cannot be recovered; the book value of already‑purchased machinery is sunk.
Q8. Opportunity cost is best defined as:
(a) The actual cash outflow incurred for a decision
(b) The benefit forgone by choosing one alternative over another
(c) The total cost of production
(d) The fixed cost allocated to a product
Answer: (b)
Explanation: Opportunity cost represents the value of the next best alternative foregone when a resource is used in a particular way.
Q9. In a cost sheet, “works cost” includes:
(a) Prime cost + factory overhead
(b) Prime cost + office overhead
(c) Prime cost + selling & distribution overhead
(d) Total cost + profit
Answer: (a)
Explanation: Works cost (also called factory cost) = Prime cost + Factory (works) overhead.
Q10. Which of the following statements about standard costing is FALSE?
(a) Standards are predetermined costs for materials, labour and overhead.
(b) Variances are analysed only for adverse outcomes.
(c) Standard costing helps in performance evaluation and control.
(d) Both favourable and adverse variances are investigated.
Answer: (b)
Explanation: Variance analysis examines both favourable and adverse deviations to understand causes and take corrective action.
Q11. The formula for calculating the variable overhead rate under absorption costing is:
(a) Variable overhead expense ÷ Actual activity level
(b) Fixed overhead expense ÷ Budgeted activity level
(c) Total overhead expense ÷ Standard activity level
(d) Variable overhead expense ÷ Standard activity level
Answer: (a)
Explanation: Variable overhead absorption rate = Actual variable overhead incurred divided by the actual level of the chosen activity base (e.g., machine hours).
Q12. Which costing technique assigns overheads to products based on activities that drive costs?
(a) Job costing
(b) Process costing
(c) Activity‑based costing (ABC)
(d) Uniform costing
Answer: (c)
Explanation: ABC identifies cost‑driving activities and allocates overheads to products according to their consumption of those activities.
Q13. If a company’s sales are ₹5,00,000, variable costs are ₹3,00,000 and fixed costs are ₹1,50,000, the profit is:
(a) ₹0
(b) ₹50,000
(c) ₹1,00,000
(d) ₹2,00,000
Answer: (b)
Explanation: Profit = Sales – Variable cost – Fixed cost = 5,00,000 – 3,00,000 – 1,50,000 = ₹50,000.
Q14. Which of the following costs is not included in the cost of inventory under ABS costing?
(a) Direct material
(b) Direct labour
(c) Variable manufacturing overhead
(d) Administrative salaries
Answer: (d)
Explanation: Under absorption costing, inventory includes direct materials, direct labour, and both variable and fixed manufacturing overhead. Administrative (period) costs are excluded.
Q15. The high‑low method is used to:
(a) Allocate joint costs
(b) Separate fixed and variable components of a mixed cost
(c) Determine standard labour rates
(d) Allocate service department costs
Answer: (b)
Explanation: The high‑low method uses the highest and lowest activity levels to estimate the variable cost per unit and the fixed cost element of a mixed cost.
Q16. In job costing, the document used to accumulate costs for a specific job is called:
(a) Cost sheet
(b) Job cost card
(c) Process account
(d) Overhead absorption sheet
Answer: (b)
Explanation: A job cost card (or job cost sheet) collects all direct materials, direct labour, and applied overhead attributable to a particular job.
Q17. Which of the following best describes “equivalent units” in process costing?
(a) Units that are 100% complete in all respects
(b) The number of physical units completed during a period
(c) The number of completed units that could have been produced given the amount of work done
(d) Units that are still in work‑in‑process at year‑end
Answer: (c)
Explanation: Equivalent units express partially completed units in terms of fully completed units, allowing costs to be spread over work done during the period.
Q18. Under the FIFO method of process costing, costs of beginning inventory are:
(a) Treated as if they were incurred during the current period
(b) Separated from costs added during the period
(c) Ignored for cost calculation
(d) Added to ending inventory only
Answer: (b)
Explanation: FIFO keeps the costs of opening WIP separate from costs incurred in the current period; unit costs are based only on current‑period work.
Q19. Which of the following is a characteristic of contract costing?
(a) Used for mass‑produced, identical items
(b) Costs are accumulated for a specific, usually long‑term, project
(c) Overheads are absorbed using a single plant‑wide rate
(d) Equivalent units are computed for each process
Answer: (b)
Explanation: Contract costing (or job costing for large projects) tracks costs for individual contracts such as construction, shipbuilding, or civil works.
Q20. The term “contribution to sales ratio” (C/S ratio) is also known as:
(a) Profit volume ratio
(b) Variable cost ratio
(c) Fixed cost ratio
(d) Operating leverage
Answer: (a)
Explanation: Contribution to sales ratio = Contribution / Sales, also called the profit‑volume (P/V) ratio; it shows how each rupee of sales contributes to covering fixed costs and profit.
Q21. If the fixed cost is ₹2,00,000 and the contribution margin per unit is ₹20, the break‑even sales in units is:
(a) 8,000 units
(b) 10,000 units
(c) 12,000 units
(d) 15,000 units
Answer: (b)
Explanation: Break‑even units = Fixed cost / Contribution per unit = 2,00,000 / 20 = 10,000 units.
Q22. Which of the following costs would be classified as a direct expense in cost accounting?
(a) Factory rent
(b) Wages of assembly line workers
(c) Royalty paid based on units produced
(d) Salary of the plant manager
Answer: (c)
Explanation: Direct expenses are costs that can be directly traced to a cost object other than materials or labour, such as royalties, hire charges, or subcontractor fees tied to production.
Q23. In activity‑based costing, the first step is to:
(a) Allocate overheads to products using a plant‑wide rate
(b) Identify activities and their cost drivers
(c) Compute the overhead absorption rate
(d) Prepare the cost sheet
Answer: (b)
Explanation: ABC begins with identifying the major activities performed in the organization and determining appropriate cost drivers for each activity.
Q24. Which costing method is most appropriate for a firm that prints customized wedding invitations?
(a) Process costing
(b) Operation costing
(c) Job costing
(d) Uniform costing
Answer: (c)
Explanation: Customized, low‑volume products like wedding invitations are best costed using job costing, where each order is treated as a distinct job.
Q25. The difference between actual cost and standard cost is known as:
(a) Variance
(b) Allowance
(c) Adjustment
(d) Differential
Answer: (a)
Explanation: Variance analysis compares actual costs incurred with predetermined standard costs; the difference is termed a variance (favourable or adverse).
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End of 25 MCQs on Cost Accounting.
