Absorption costing and Variable Costing

Absorption costing and Variable Costing

 *Absorption vs Variable Costing – Very Important Points* for CMA/CPA/CIMA 👇

*1. Basic Definition*

- *Absorption/Full Costing/Total costing*: Required by GAAP/IFRS for external reporting. Product cost /Inventoriable Costs/COGS = DM + DL + Variable mfg OH + *Fixed Mfg OH*. Fixed OH is “absorbed” into inventory.

- Volume based, It's tradional Costing system.

- *Variable/Direct/Marginal Costing*: Used for internal decision making. Product cost /Inventoriable Costs/COGS= DM + DL + Variable mfg OH only. *Fixed Mfg OH treated as period cost* and expensed immediately.

*2. Key Difference*

- *Treatment of Fixed Mfg OH* is the ONLY difference between both methods.

- All other costs treated same: DM, DL, Variable OH = product cost. _Selling/Admin_ = period cost in both.

*3. Profit Impact - Most Tested in Exams*

- *Production = Sales*: Profit same under both methods. No inventory change.

- *Production > Sales*: Inventory increases. *Absorption profit > Variable profit*. Reason: Some fixed OH deferred in ending inventory under absorption.

- *Sales > Production*: Inventory decreases. *Variable profit > Absorption profit*. Reason: Fixed OH from prior period inventory released to COGS under absorption.

- *Formula*: Difference in profit = Fixed OH rate per unit × Change in inventory units

Mfg fixed OH rate is callied as applied overhead or Overhead Absorption Rate=OAR=BUDGETED FIX MFG OH FOR THE PERIOD/ BUDGETED PRODUCTION QTTY.

*4. Income Statement Format*

- *Absorption*: Sales - COGS = *Gross Margin*. Then - Selling/Admin = Operating Income

- *Variable*: Sales - ALL Variable costs(MFG VARIABLE COST+NON MFG VARIABLE OH)= *Contribution Margin*. Then - Fixed costs(actual fix mfg OH+non mfg fixed OH)= Operating Income  

- Only variable costing gives contribution margin. CMA loves CVP + contribution format.

*5. Advantages/Disadvantages*

*Absorption Pros*:  

- GAAP/IFRS compliant. Matches fixed OH to revenue when sale happens  

- Shows full cost of production for pricing long-term  

*Absorption Cons*:  

- Managers may overproduce to boost profit by putting fixed OH into inventory  

- Not useful for CVP, make-buy, special order decisions  

*Variable Pros*:  

- Fixed cost clearly visible. No incentive to overproduce  

- Direct link to CVP analysis, BEP, contribution margin  

- Better for short-term decisions  

*Variable Cons*:  

- Not GAAP/IFRS compliant for external reports  

- Ignores fixed OH in inventory valuation  

*6. CMA/CPA Exam Traps*

- *Inventory valuation*: Absorption inventory higher by “Fixed OH rate × units in inventory”

- *Overhead volume variance*: Exists only in absorption costing. No variance in variable costing

- *Reconciliation*: Always reconcile: Absorption OI = Variable OI ± Fixed OH in inventory change

- *Decision making*: Use variable costing for special order, shutdown, product mix. Ignore fixed OH if unavoidable

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For online exam software access click here link 🖇️ www finzo.pw

 based on the notes above, here are *10 MCQs with answers on Absorption vs Variable Costing* in CMA/CPA style:

*MCQs + Answers*

*1. Basic Definition*  

Under GAAP/IFRS, which costing method must be used for external financial reporting?  

A. Variable costing  

B. Direct costing  

C. Absorption costing  

D. Marginal costing  

*Answer: C. Absorption costing*  

Note: Only absorption includes Fixed Mfg OH in product cost.

*2. Key Difference*  

What is the ONLY difference between absorption and variable costing?  

A. Treatment of direct materials  

B. Treatment of selling/admin costs  

C. Treatment of fixed manufacturing OH  

D. Treatment of direct labor  

*Answer: C. Treatment of fixed manufacturing OH*  

Note: DM, DL, Variable OH = product cost in both. S&A = period cost in both.

*3. Profit Impact*  

Company produces 10,000 units, sells 8,000 units. Fixed Mfg OH = $200,000. Which statement is TRUE?  

A. Variable profit > Absorption profit  

B. Absorption profit > Variable profit  

C. Both profits equal  

D. Cannot determine  

*Answer: B. Absorption profit > Variable profit*  

Calc: Inventory ↑ by 2,000 units. Fixed OH deferred = $200,000/10,000 × 2,000 = $40,000. Absorption profit higher.

*4. Formula Application*  

Fixed Mfg OH $120,000. Budgeted production 12,000 units. Actual: produced 12,000, sold 9,000. Profit difference?  

A. $0  

B. $30,000 higher under variable  

C. $30,000 higher under absorption  

D. $120,000 higher under absorption  

*Answer: C. $30,000 higher under absorption*  

OH rate = 120,000/12,000 = $10/unit. Inventory ↑ = 3,000 units. Diff = 10 × 3,000 = $30,000.

*5. Income Statement Format*  

Which income statement shows “Contribution Margin”?  

A. Absorption costing only  

B. Variable costing only  

C. Both absorption and variable  

D. Neither  

*Answer: B. Variable costing only*  

Note: Absorption shows Gross Margin. Only variable shows CM = Sales – All variable costs.

*6. Inventory Valuation*  

Ending inventory = 5,000 units. Fixed OH rate = $6/unit. How much higher is absorption inventory vs variable inventory?  

A. $0  

B. $5,000  

C. $30,000  

D. $6/unit  

*Answer: C. $30,000*  

Absorption inventory = Variable inventory + 6 × 5,000 = +$30,000.

*7. Overhead Variance*  

Which variance exists only under absorption costing, not variable costing?  

A. Material price variance  

B. Labor efficiency variance  

C. Fixed overhead volume variance  

D. Variable overhead spending variance  

*Answer: C. Fixed overhead volume variance*  

Note: Volume variance occurs because fixed OH applied ≠ budgeted fixed OH when production ≠ denominator level.

*8. Decision Making*  

For a special order at price above variable cost but below full cost, which method should be used?  

A. Absorption costing, because it shows full cost  

B. Variable costing, because fixed OH is sunk  

C. Neither, reject all orders below full cost  

D. Absorption costing for external, variable for internal  

*Answer: B. Variable costing*  

Note: CMA trap: Use variable costing for short-term decisions. Fixed OH is unavoidable so irrelevant.

*9. Production = Sales*  

If production units = sales units, which is TRUE?  

A. Absorption profit > Variable profit  

B. Variable profit > Absorption profit  

C. Both profits equal  

D. Absorption COGS > Variable COGS  

*Answer: C. Both profits equal*  

Note: No inventory change → no fixed OH deferred/released.

*10. Reconciliation*  

Variable costing operating income = $80,000. Fixed OH rate = $4/unit. Beginning inventory 0, ending inventory 2,000 units. Absorption OI = ?  

A. $72,000  

B. $80,000  

C. $88,000  

D. $96,000  

*Answer: C. $88,000*  

Inventory ↑ → Absorption OI = Variable OI + Fixed OH deferred = 80,000 + 4×2,000 = $88,000.

*CMA Memory Rule*:  

“UP = Absorption UP, DOWN = Variable UP”  

Inventory UP → Absorption profit UP  

Inventory DOWN → Variable profit UP.

Case-based variance analysis Qs for US CMA Part 1 — exam style with 3-level variances.

Case-based variance analysis Qs for US CMA Part 1 — exam style with 3-level variances. 👇

*Part A: 5 Cases with Questions*

*Case 1: Basic DM + DL Variances*  

Gamma Co budgeted 10,000 units. Actual 12,000 units.  

Standard: 2 lbs DM @ $5/lb, 1.5 hrs DL @ $20/hr  

Actual: 25,000 lbs DM purchased + used @ $5.20/lb, 17,000 hrs DL @ $21/hr  

Q1. DM price variance? F/U  

Q2. DM quantity/efficiency variance? F/U  

Q3. DL rate variance? F/U  

Q4. DL efficiency variance? F/U  

*Case 2: OH 3-Variance Method*  

Delta budgeted 8,000 DL hours. Fixed OH $160,000. VOH rate $10/DL hr.  

Actual: 7,500 DL hours, Actual OH $245,000. Produced 3,900 units. Standard = 2 hrs/unit  

Q5. Budget/Controllable variance?  

Q6. Volume/efficiency variance?  

Q7. Spending variance?  

*Case 3: Sales Variances*  

Epsilon budgeted: 5,000 units @ $40 = $200,000  

Actual: 5,500 units @ $38 = $209,000  

Industry volume increased 10%. Company market share fell from 20% to 19%  

Q8. Sales price variance?  

Q9. Sales volume variance?  

Q10. Sales mix vs sales quantity variance if 2 products? _Concept only_

*Case 4: Material + Yield Variance*  

Zeta uses 3 kg Input A + 2 kg Input B = 5 kg input for 1 unit output. Standard cost: A $4/kg, B $6/kg  

Actual: 11,000 kg A @ $4.10, 7,500 kg B @ $5.80 used to make 3,600 units  

Q11. Material mix variance? F/U  

Q12. Material yield variance? F/U  

Q13. Total material cost variance?

*Case 5: 4-Variance OH Method + Interpretation*  

Theta standard: 1 DL hr/unit, VOH $8/hr, FOH $12/hr based on 10,000 hrs capacity  

Actual: 9,500 units, 10,200 DL hrs, Actual VOH $78,000, Actual FOH $125,000  

Q14. VOH spending + efficiency variance?  

Q15. FOH budget + volume variance?  

Q16. If volume variance is unfavorable, what does it mean?

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*Part B: Answer Key + Workings*

*A1. DM + DL Variances*  

Std qty for 12,000 units = 12,000×2 = 24,000 lbs. Std hrs = 12,000×1.5 = 18,000 hrs  

Q1. DM Price = AQ×(AP-SP) = 25,000×(5.20-5) = *$5,000 U*  

Q2. DM Qty = SP×(AQ-SQ) = 5×(25,000-24,000) = *$5,000 U*  

Q3. DL Rate = AH×(AR-SR) = 17,000×(21-20) = *$17,000 U*  

Q4. DL Eff = SR×(AH-SH) = 20×(17,000-18,000) = *$20,000 F*  

Net labor variance = $3,000 U. Less hrs used but paid more per hr.

*A2. OH 3-Variance*  

Std rate VOH = $10/hr. FOH rate = 160k/8k = $20/hr. Total std rate = $30/hr  

Budgeted OH = 160k + 10×8k = $240,000  

Q5. Budget/Controllable = Actual OH - Budgeted OH @ actual hrs = 245k - [160k + 10×7,500] = 245k - 235k = *$10,000 U*  

Q6. Volume = FOH rate × (Budgeted hrs - Std hrs allowed) = 20×[8,000 - 3,900×2] = 20×[8,000-7,800] = *$4,000 U*  

Q7. Spending = Actual VOH - Budgeted VOH @ actual hrs = 78k - 10×7,500 = 78k-75k = *$3,000 U*  

Check: Total OH var = 245k - 30×7,800 = 245k-234k = $11,000 U = 10k+4k-3k

*A3. Sales Variances*  

Q8. Sales Price = Actual units×(AP-SP) = 5,500×(38-40) = *$11,000 U*  

Q9. Sales Volume = Std CM/unit × (Actual units - Budgeted units). Need CM. If CM = $40-$25=$15: 15×500 = *$7,500 F*  

Q10. Sales mix = Std CM × (Actual units×Actual mix% - Actual units×Budgeted mix%). Sales quantity = Std CM × (Actual units total - Budgeted units total) × Budgeted mix%. _CMA tests concept: mix = product proportion, quantity = total market size_

*A4. Material Mix + Yield*  

Std input for 3,600 units = 3,600×5 = 18,000 kg. Std mix: A 60% = 10,800kg, B 40% = 7,200kg  

Avg std price = 0.6×4 + 0.4×6 = $4.80/kg  

Q11. Mix = (AQ at actual mix - AQ at std mix) × Std price  

A: (11,000-10,800)×4 = $800 U. B: (7,500-7,200)×6 = $1,800 U. Total *$2,600 U*  

Q12. Yield = (Total AQ - Std Q for output) × Avg std price = (18,500-18,000)×4.80 = *$2,400 U*  

Q13. Total MCV = Price + Qty = [11k×0.1 + 7.5k×(-0.2)] + 2,600+2,400 = 1,100-1,500+5,000 = *$4,600 U*

*A5. OH 4-Variance*  

Std hrs for output = 9,500×1 = 9,500 hrs  

Q14. VOH Spending = 78k - 8×10,200 = 78k-81,600 = *$3,600 F*  

VOH Efficiency = 8×(10,200-9,500) = *$5,600 U*  

Q15. FOH Budget = 125k - 12×10,000 = 125k-120k = *$5,000 U*  

FOH Volume = 12×(10,000-9,500) = *$6,000 U* = idle capacity  

Q16. *Unfavorable volume var* = Under-utilized capacity. Produced less than denominator level. Fixed cost per unit went up.

*CMA Exam Tips for Variances:*

1. Price/Rate variance uses _actual qty/hours purchased/used_

2. Qty/Efficiency uses _standard price/rate_ 

3. Volume variance only for Fixed OH → measures capacity utilization

4. F = favorable = lower cost/higher revenue than std. U = opposite

Here are *case-based budgetary control Qs* for US CMA Part 1 + ACCA FMA/MA. 👇

*Part A: 6 Cases with Questions*

*Case 1: Master Budget Flow*  

Alpha Co Q1: Budgeted sales 5,000 units @ $50. 40% cash sales, 60% on credit collected 50% next month, 50% 2nd month. Opening AR $30,000.  

Q1. Cash collections from credit sales in Jan?  

Q2. If Dec sales were 4,000 units, total Jan cash collection?  

Q3. Which budget is prepared first in master budget?

*Case 2: Flexible Budget + Variance*  

Beta Co budgeted 8,000 units. Actual 10,000 units.  

Budgeted cost: DM $8/unit var, DL $6/unit var, VOH $4/unit var, Fixed OH $60,000  

Actual cost: DM $85,000, DL $58,000, VOH $43,000, FOH $62,000  

Q4. What is a flexible budget?  

Q5. VOH spending variance using flexible budget?  

Q6. Fixed OH volume variance? Why?

*Case 3: Production + Purchases Budget*  

Gamma wants ending FG = 20% of next month sales. Jan sales 6,000 units, Feb 8,000 units, Mar 7,000 units. Jan 1 FG inventory 1,000 units.  

Q7. Jan production units?  

Q8. If each unit needs 3kg RM, RM ending inventory = 10% of next month usage, RM price $5/kg. Feb RM purchases $?  

*Case 4: Cash Budget*  

Delta: Opening cash $10,000. Min cash balance $15,000. Jan receipts $80,000, payments $90,000. Can borrow in $5,000 multiples @ 1% monthly interest.  

Q9. Cash surplus/deficit before borrowing?  

Q10. Amount to borrow + ending cash balance?  

Q11. Why is cash budget prepared last?

*Case 5: Behavioral Aspects + Budget Types*  

Epsilon uses “use it or lose it” budget policy + budgetary slack.  

Q12. What problem does “use it or lose it” cause?  

Q13. What is budgetary slack?  

Q14. Which budget type helps reduce slack: zero-based or incremental? Why?

*Case 6: ACCA FMA - Budgetary Control Process*  

Zeta sets annual budget, compares actual vs budget monthly, investigates variances >10%.  

Q15. Name 4 steps in budgetary control process  

Q16. What type of control is budgetary control? Feedforward/Concurrent/Feedback?  

Q17. If actual sales < budget due to recession, should manager be blamed? Which variance?

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*Part B: Answer Key + Workings*

*A1. Master Budget Flow*  

Q1. Jan credit sales = 5,000×60%×50 = $150,000. Collected in Jan = 0, since 50% next month. *$0*  

Q2. Jan cash = Cash sales 5,000×40%×50 = $100,000 + Collection from Dec 4,000×60%×50%×50 = $60,000 + Collection from Nov = 0 = *$160,000* + Opening AR $30k if from Nov  

Q3. *Sales budget* is first. All other budgets depend on sales.

*A2. Flexible Budget*  

Q4. *Flexible budget* = budget adjusted for actual activity level. Used for variance analysis vs actual. Static budget stays at planned level.  

Q5. VOH flexible budget = 10,000×4 = $40,000. Actual $43,000 → *$3,000 U spending variance*  

Q6. *Fixed OH volume variance* = Budgeted FOH - Applied FOH = 60,000 - 60,000×10k/8k = 60k-75k = *$15,000 F*. Happens because more units absorbed fixed cost. CMA: only FOH has volume var.

*A3. Production + Purchases*  

Q7. Feb sales 8,000 → Desired ending FG = 20%×8,000 = 1,600. Production = Sales + Ending - Beginning = 6,000 + 1,600 - 1,000 = *6,600 units*  

Q8. Feb production for Mar sales: Mar 7,000 → FG end = 1,400. Production = 8,000+1,400-1,600=7,800 units. RM usage = 7,800×3=23,400kg. RM end = 10%×23,400=2,340kg. RM beg for Feb = 10%×Feb usage 8,000×3=24,000 → 2,400kg. Purchases = 23,400+2,340-2,400=23,340kg × $5 = *$116,700*

*A4. Cash Budget*  

Q9. Ending cash before borrowing = 10k+80k-90k = *$0*. Deficit = 0-15k = *$15,000 deficit*  

Q10. Borrow in $5k multiples → borrow *$15,000*. Ending cash = 0+15k = *$15,000*  

Q11. *Cash budget last* because it needs data from sales, production, purchases, expense budgets. It’s the “summary” budget.

*A5. Behavioral*  

Q12. *“Use it or lose it”* causes overspending at year-end to avoid budget cuts next year.  

Q13. *Budgetary slack* = intentionally underestimating revenue/overestimating costs to make targets easy.  

Q14. *Zero-based budgeting ZBB* reduces slack because every cost must be justified each year. Incremental just adds % to last year = carries slack forward.

*A6. Budgetary Control Process ACCA*  

Q15. *4 steps*: 1. Set objectives/budget 2. Record actual results 3. Compare actual vs budget 4. Investigate + corrective action  

Q16. *Feedback control* – compares actual after event occurred. Feedforward = before, concurrent = during.  

Q17. *No*, recession is uncontrollable/external. Should exclude “sales volume variance” when evaluating manager. Use controllable variance only.

*CMA/ACCA Exam Tips:*

1. Flexible budget = actual units × std cost. Static budget = planned units × std cost

2. Volume variance = only for fixed costs. Measures capacity use, not efficiency

3. Cash budget order: receipts → payments → borrowing/repayment

4. Budgetary control is not about blaming. CMA/ACCA test “controllable vs uncontrollable” variances

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MCQ questions with answer on BASIC COST CONCEPTS

MCQ questions with answer on BASIC COST CONCEPTS

MCQ questions with answer on BASIC COST CONCEPTS:(Answers provided at the end, first solve then check yourself)

Cost Concepts, Cost Behavior, Cost Accounting Basics, Manufacturing vs Merchandising vs Service Organizations, Relevant Range, Factors of Production, Short Run, High-Low Method, Cost Drivers, Cost Pools, and Activity-Based Costing (ABC) relevant for ACCA Foundation Management Accounting (FMA) and US CMA Part 1.

COST CONCEPTS & TYPES OF COSTS (1-25)

1. Cost is best defined as:
A. Revenue earned
B. Sacrifice of resources to achieve an objective
C. Profit earned
D. Assets owned

Answer: 

2. Direct material cost is:
A. Indirect labor
B. Cost traceable to product
C. Selling expense
D. Administrative expense

Answer: 

3. Factory rent is usually a:
A. Direct cost
B. Prime cost
C. Manufacturing overhead
D. Selling cost

Answer: 

4. Prime cost consists of:
A. DM + DL       B. DL + OH         C. DM + OH     D. DL + Selling

Answer: 

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5. Conversion cost consists of:
A. DM + DL
B. DL + MOH
C. DM + MOH
D. Selling + Admin

Answer: 

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6. Indirect materials are classified as:
A. Prime cost
B. Product cost
C. Manufacturing overhead
D. Period cost

Answer: 

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7. Product costs are:
A. Selling costs
B. Administrative costs
C. Manufacturing costs
D. Financing costs

Answer: 

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8. Period costs are expensed when:
A. Product sold
B. Incurred
C. Produced
D. Purchased

Answer: 

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9. Depreciation of factory equipment is:
A. Selling expense  B. Manufacturing overhead  C. Direct labor   D. Prime cost

Answer: 

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10. Salary of sales manager is:
A. Product cost
B. Direct labor
C. Selling expense
D. Manufacturing overhead

Answer: 

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11. Sunk cost is:
A. Future cost
B. Avoidable cost
C. Past cost
D. Relevant cost

Answer: 

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12. Opportunity cost means:
A. Actual cash paid
B. Cost of next best alternative forgone
C. Fixed cost
D. Variable cost

Answer: 

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13. Differential cost is:
A. Historical cost   B. Difference between alternatives
C. Fixed cost   D. Sunk cost

Answer: 

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14. Relevant costs are:
A. Past costs    B. Future costs affecting decisions
C. Sunk costs   D. Book values

Answer: 

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15. Avoidable costs can be:
A. Eliminated by decision
B. Past costs
C. Sunk costs
D. Committed costs

Answer: 

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16. Fixed cost per unit:
A. Constant
B. Increases with volume
C. Decreases as activity increases
D. Variable

Answer: 

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17. Variable cost per unit is:
A. Constant
B. Increasing
C. Decreasing
D. Unknown

Answer: 

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18. Total fixed cost:
A. Changes with units
B. Constant within relevant range
C. Variable
D. Mixed

Answer: 

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19. Total variable cost:
A. Constant   B. Changes proportionately with activity  C. Fixed  D. Semi-fixed

Answer: 

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20. Mixed cost contains:
A. Only fixed cost
B. Only variable cost
C. Fixed and variable elements
D. Product cost only

Answer: 

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21. Step cost remains fixed until:
A. Certain activity level reached
B. Revenue changes
C. Profit changes
D. Sales decrease

Answer: 

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22. Discretionary fixed cost example:
A. Factory rent
B. Advertising
C. Property tax
D. Insurance

Answer: 

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23. Committed fixed cost example:
A. Advertising    B. Training
C. Building depreciation    D. Research

Answer: 

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24. Incremental cost means:
A. Additional cost from a decision  B. Past cost
C. Fixed cost                                   D. Sunk cost

Answer: 

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25. Marginal cost usually refers to:
A. Fixed cost
B. Variable cost of one more unit
C. Sunk cost
D. Period cost

Answer: 

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MANUFACTURING, MERCHANDISING & SERVICE ORGANIZATIONS (26-40)

26. A manufacturing company:
A. Sells services
B. Produces goods
C. Trades securities
D. Lends money

Answer: 

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27. A merchandising company:
A. Manufactures products
B. Buys and resells goods
C. Provides consulting
D. Produces services

Answer: 

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28. Example of manufacturing company:
A. Hospital
B. Toyota
C. Bank
D. School

Answer: 

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29. Example of merchandising company:
A. Walmart
B. Factory
C. Hospital
D. Audit firm

Answer: 

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30. Example of service company:
A. Factory
B. Retailer
C. CPA Firm
D. Distributor

Answer: 

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31. Raw materials inventory exists mainly in:
A. Service firms
B. Manufacturing firms
C. Banks
D. Schools

 

Answer: 

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32. Work-in-process inventory exists in:
A. Manufacturing firms
B. Retail stores
C. Service firms
D. Banks

Answer: 

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33. Finished goods inventory exists in:
A. Manufacturing firms    B. Audit firms  C. Hospitals  D. Banks

Answer: 

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34. Merchandising firms usually have:
A. Raw materials inventory
B. WIP inventory
C. Merchandise inventory
D. None

Answer: 

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35. Service firms generally have:
A. No inventory
B. WIP inventory
C. Raw materials
D. Finished goods

Answer: 

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36. Cost of Goods Manufactured applies to:
A. Service firms
B. Manufacturing firms
C. Banks
D. Retailers

Answer: 

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37. Cost of Goods Sold is found in:
A. Manufacturing only  B. Merchandising and manufacturing
C. Service only  D. None

Answer: 

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38. Inventory sequence in manufacturing:
A. FG → RM → WIP
B. RM → WIP → FG
C. WIP → RM → FG
D. FG → WIP → RM

Answer: 

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39. Merchandising company purchases:
A. Raw materials
B. Finished goods
C. Labor
D. Overhead

Answer: 

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40. Main output of service company is:
A. Goods
B. Services
C. Inventory
D. Raw material

Answer: 

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RELEVANT RANGE & COST BEHAVIOR (41-60)

41. Relevant range means:
A. Expected activity range
B. Revenue range
C. Profit range
D. Sales range

Answer: 

42. Fixed costs remain constant within:
A. Relevant range  B. Entire universe
C. Any activity   D. None

Answer: 

43. Outside relevant range fixed cost may:
A. Remain same always  B. Change
C. Become variable   D. Disappear

Answer: 

44. Cost behavior studies relationship between:
A. Cost and activity
B. Cost and profit
C. Assets and liabilities
D. Debt and equity

 

Answer: 

45. Variable cost changes with:
A. Activity level
B. Time only
C. Interest rate
D. Inflation only

Answer: 

46. Fixed cost per unit decreases when:
A. Output increases
B. Output decreases
C. Cost increases
D. Revenue decreases

Answer: 

47. Example of variable cost:
A. Direct materials
B. Rent
C. Insurance
D. Salary

Answer: 

48. Example of fixed cost:
A. Direct material  B. Sales commission
C. Factory rent  D. Freight on units

Answer: 

49. Sales commission is usually:
A. Fixed  B. Variable  C. Sunk  D. Opportunity

Answer: 

50. Utility bill often represents:
A. Mixed cost
B. Fixed cost
C. Product cost
D. Sunk cost

Answer: 

FACTORS OF PRODUCTION & SHORT RUN (61-70)

61. Factors of production include:
A. Land
B. Labor
C. Capital
D. All of these

Answer: 

62. Human effort in production is:
A. Capital
B. Labor
C. Land
D. Entrepreneurship

Answer: 

63. Machinery is an example of:
A. Labor
B. Capital
C. Land
D. Revenue

Answer: 

64. Entrepreneur earns:
A. Rent  B. Interest  C. Profit  D. Wages

Answer: 

65. In short run at least one factor is:
A. Variable  B. Fixed
C. Revenue  D. Profit

Answer: 

66. Factory building in short run is generally:
A. Fixed input
B. Variable input
C. Revenue
D. Expense

Answer: 

67. Labor is often considered:
A. Fixed input
B. Variable input
C. Asset
D. Liability

Answer: 

68. Short run period means:
A. One month
B. One year
C. At least one fixed input
D. No fixed input

Answer: 

69. Long run means:
A. All inputs variable
B. All inputs fixed
C. One fixed input
D. No production

Answer: 

70. Marginal product refers to:
A. Additional output from additional input
B. Revenue
C. Cost
D. Profit

Answer: 

---

HIGH-LOW METHOD, COST DRIVER, COST POOL, ABC (71-100)

71. High-low method estimates:
A. Fixed and variable costs
B. Profit
C. Revenue
D. Assets

Answer: 

72. High-low method uses:
A. Highest and lowest activity levels
B. Highest costs only
C. Lowest costs only
D. Average costs

Answer: 

73. Variable cost per unit =
A. Cost difference ÷ Activity difference
B. Revenue difference
C. Profit difference
D. Fixed cost

Answer: 

74. Cost driver causes:
A. Revenue
B. Cost to occur
C. Profit
D. Assets

Answer: 

75. Machine hours are often a:
A. Cost driver
B. Revenue driver
C. Liability
D. Asset

Answer: 

76. Number of setups may be a:
A. Cost driver
B. Product cost
C. Sunk cost
D. Opportunity cost

Answer: 

77. Cost pool is:
A. Collection of related costs
B. Revenue account
C. Profit center
D. Asset account

Answer: 

78. ABC stands for:
A. Activity Based Costing
B. Annual Budget Costing
C. Accounting Budget Control
D. None

Answer

79. ABC allocates overhead using:
A. Cost drivers
B. Sales
C. Profit
D. Assets

Answer: 

80. ABC improves:
A. Cost accuracy
B. Inflation
C. Revenue
D. Tax

Answer: 

81. Unit-level activity occurs for:
A. Each unit produced
B. Each factory
C. Each company
D. Each year

Answer: 

82. Batch-level activity example:
A. Machine setup
B. Direct material
C. Factory rent
D. CEO salary

Answer: 

83. Product-level activity example:
A. Product design
B. Direct labor
C. Materials
D. Packaging

Answer: 

84. Facility-level activity example:
A. Factory security
B. Direct labor
C. Direct material
D. Packaging

Answer: 

86. Direct labor hours may be used as:
A. Cost driver
B. Revenue driver
C. Asset
D. Liability

Answer: 

87. Traditional costing often uses:
A. One cost driver
B. Many drivers
C. No driver
D. Revenue

Answer: 

88. ABC generally uses:
A. Multiple drivers  B. One driver
C. No drivers  D. Profit

Answer: 

89. Overhead allocation aims to:
A. Assign indirect costs  B. Increase profit
C. Reduce assets  D. Increase sales

Answer: 

90. Cost driver rate =
A. Cost pool ÷ Driver units
B. Revenue ÷ Units
C. Profit ÷ Units
D. Sales ÷ Units

Answer: 

Types of Cost…..

1.

Direct materials are:
A. Indirect costs
B. Prime costs
C. Period costs
D. Selling costs

Answer: 

---

2.

Prime cost consists of:
A. Direct materials + Direct labor
B. Direct labor + Overhead
C. Materials + Overhead
D. Fixed + Variable costs

Answer: 

---

3.

Conversion cost consists of:
A. Direct materials + Direct labor
B. Direct labor + Manufacturing overhead
C. Direct materials + Overhead
D. Selling + Administrative costs

Answer: 

---

4.

Factory supervisor salary is:
A. Direct labor
B. Manufacturing overhead
C. Selling expense
D. Direct material

Answer: 

---

5.

Which is a direct cost?
A. Factory rent
B. Lubricating oil
C. Direct material
D. Security salary

Answer: 

---

6.

Indirect materials are classified as:
A. Prime costs
B. Manufacturing overhead
C. Selling expenses
D. Administrative expenses

Answer: 

---

7.

The depreciation of factory equipment is:
A. Direct labor
B. Product cost
C. Selling expense
D. Administrative expense

Answer: 

---

8.

Product costs include:
A. Manufacturing costs
B. Selling costs
C. Interest costs
D. Marketing costs

Answer: 

---

9.

Period costs are expensed:
A. When incurred
B. When produced
C. When purchased
D. When materials are used

Answer: 

---

10.

Which is a period cost?
A. Direct materials
B. Factory insurance
C. Sales commission
D. Direct labor

Answer: 

---

11.

A variable cost:
A. Remains constant in total
B. Changes in total with activity
C. Never changes
D. Is always indirect

Answer: 

---

12.

An example of variable cost is:
A. Direct material
B. Factory rent
C. Property tax
D. Factory manager salary

Answer: 

---

13.

Total fixed cost:
A. Changes with production volume
B. Remains constant within relevant range
C. Is always zero
D. Is variable per unit

Answer: 

---

14.

Fixed cost per unit:
A. Remains constant
B. Increases with output
C. Decreases as output increases
D. Is irrelevant

Answer: 

---

15.

A mixed cost contains:
A. Only fixed cost
B. Only variable cost
C. Fixed and variable components
D. Product and period costs

Answer: 

---

16.

An example of mixed cost is:
A. Electricity bill
B. Direct materials
C. Factory rent
D. Property tax

Answer: 

---

17.

A step cost:
A. Changes continuously
B. Remains fixed over a range then jumps
C. Is variable per unit
D. Is irrelevant

Answer: 

---

18.

Which cost is relevant to decision making?
A. Sunk cost
B. Historical cost
C. Future cost differing between alternatives
D. Book value

Answer: 

---

19.

A sunk cost is:
A. Future cost
B. Cost already incurred
C. Opportunity cost
D. Avoidable cost

Answer: 

---

20.

Sunk costs are:
A. Relevant
B. Avoidable
C. Irrelevant for decisions
D. Variable

Answer: 

---

21.

Opportunity cost is:
A. Actual cash paid
B. Cost of forgone alternative
C. Fixed cost
D. Product cost

Answer: 

---

22.

Differential cost means:
A. Historical cost
B. Difference in cost between alternatives
C. Sunk cost
D. Fixed cost

Answer: 

---

23.

Incremental cost is:
A. Additional cost from a decision
B. Sunk cost
C. Fixed cost
D. Product cost

Answer: 

---

24.

Avoidable costs:
A. Cannot be eliminated
B. Can be eliminated by a decision
C. Are sunk costs
D. Are historical costs

Answer: 

---

25.

Unavoidable costs:
A. Can be eliminated
B. Continue regardless of decision
C. Are opportunity costs
D. Are variable costs

Answer: 

---

26.

Direct labor cost is:
A. Prime cost
B. Period cost
C. Selling cost
D. Administrative cost

Answer: 

---

27.

Factory insurance is:
A. Direct material
B. Manufacturing overhead
C. Selling expense
D. Opportunity cost

Answer: 

---

28.

Sales manager salary is:
A. Product cost
B. Selling expense
C. Direct labor
D. Manufacturing overhead

Answer: 

---

29.

Office rent is generally:
A. Administrative expense
B. Direct material
C. Manufacturing overhead
D. Prime cost

Answer: 

---

30.

Research and development cost is usually:
A. Period cost
B. Direct cost
C. Prime cost
D. Conversion cost

Answer: 

---

31.

Marginal cost generally refers to:
A. Fixed cost
B. Additional variable cost of one unit
C. Sunk cost
D. Opportunity cost

Answer: 

---

32.

Controllable costs are:
A. Managed by a responsible manager
B. Always fixed
C. Always variable
D. Never relevant

Answer: 

---

33.

Non-controllable costs:
A. Can be directly influenced
B. Cannot be significantly influenced
C. Are always sunk
D. Are always avoidable

Answer: 

---

34.

Committed fixed costs include:
A. Advertising
B. Factory building depreciation
C. Training costs
D. Promotion costs

Answer: 

---

35.

Discretionary fixed costs include:
A. Factory lease
B. Property tax
C. Advertising
D. Insurance

Answer: 

---

36.

The cost of idle capacity is generally:
A. Direct material
B. Fixed cost
C. Selling cost
D. Prime cost

Answer: 

---

37.Joint costs arise:
A. After split-off point
B. Before split-off point
C. During selling process
D. During marketing

Answer: 

---

38.

Further processing costs incurred after split-off are:
A. Joint costs
B. Sunk costs
C. Separable costs
D. Fixed costs

Answer: 

---

39.

By-product revenue is often:
A. Ignored completely
B. Treated as reduction of production cost
C. Treated as direct material
D. Treated as overhead

Answer: 

---

40.

Which is NOT a product cost?
A. Direct materials
B. Direct labor
C. Manufacturing overhead
D. Sales commission

Answer: 

---

41.

Which cost is most likely variable?
A. Factory rent
B. Direct materials
C. Property taxes
D. Factory insurance

Answer: 

---

42.

Which cost is most likely fixed?
A. Direct materials
B. Direct labor paid per unit
C. Factory rent
D. Sales commission

Answer: 

---

43.

Opportunity costs are:
A. Recorded in accounting records
B. Not recorded in accounting records
C. Historical costs
D. Product costs

Answer: 

---

44.

Relevant costs must be:
A. Past and unavoidable
B. Future and different between alternatives
C. Historical and fixed
D. Sunk and variable

Answer: 

---

45.

The salary of factory maintenance staff is:
A. Direct labor
B. Manufacturing overhead
C. Selling expense
D. Administrative expense

Answer: 

---

46.

Freight paid on raw materials purchased is generally:
A. Product cost
B. Selling cost
C. Administrative cost
D. Opportunity cost

Answer: 

---

47.

Advertising expense is:
A. Product cost
B. Prime cost
C. Selling expense
D. Conversion cost

Answer: 

---

48.

A cost traceable to a cost object is:
A. Direct cost
B. Indirect cost
C. Opportunity cost
D. Sunk cost

Answer: 

---

49.

Cost that cannot be conveniently traced is:
A. Prime cost
B. Direct cost
C. Indirect cost
D. Marginal cost

Answer: 

---

50.

Which cost is most relevant in a special order decision?
A. Sunk cost
B. Historical cost
C. Incremental cost
D. Book value

Answer: 

xam Tip (ACCA FMA & US CMA Part 1)

The most frequently tested cost classifications are:

1. Direct vs Indirect Cost
2. Product vs Period Cost
3. Prime vs Conversion Cost
4. Fixed vs Variable vs Mixed Cost
5. Relevant vs Irrelevant Cost
6. Sunk Cost
7. Opportunity Cost
8. Differential / Incremental Cost
9. Avoidable vs Unavoidable Cost
10. Committed vs Discretionary Fixed Cost

www.gmsisuccess.in

Case-based questions with answer on BASIC COST CONCEPTS:

Cost Concepts, Cost Behavior, Cost Accounting Basics, Manufacturing vs Merchandising vs Service Organizations, Relevant Range, Factors of Production, Short Run, High-Low Method, Cost Drivers, Cost Pools, and Activity-Based Costing (ABC) relevant for ACCA Foundation Management Accounting (FMA) and US CMA Part 1.

COST CONCEPTS & TYPES OF COSTS (1-25)

1. Cost is best defined as:
A. Revenue earned
B. Sacrifice of resources to achieve an objective
C. Profit earned
D. Assets owned

Answer: B

2. Direct material cost is:
A. Indirect labor
B. Cost traceable to product
C. Selling expense
D. Administrative expense

Answer: B

3. Factory rent is usually a:
A. Direct cost
B. Prime cost
C. Manufacturing overhead
D. Selling cost

Answer: C

4. Prime cost consists of:
A. DM + DL       B. DL + OH         C. DM + OH     D. DL + Selling

Answer: A

---

5. Conversion cost consists of:
A. DM + DL
B. DL + MOH
C. DM + MOH
D. Selling + Admin

Answer: B

---

6. Indirect materials are classified as:
A. Prime cost
B. Product cost
C. Manufacturing overhead
D. Period cost

Answer: C

---

7. Product costs are:
A. Selling costs
B. Administrative costs
C. Manufacturing costs
D. Financing costs

Answer: C

---

8. Period costs are expensed when:
A. Product sold
B. Incurred
C. Produced
D. Purchased

Answer: B

---

9. Depreciation of factory equipment is:
A. Selling expense  B. Manufacturing overhead  C. Direct labor   D. Prime cost

Answer: B

---

10. Salary of sales manager is:
A. Product cost
B. Direct labor
C. Selling expense
D. Manufacturing overhead

Answer: C

---

11. Sunk cost is:
A. Future cost
B. Avoidable cost
C. Past cost
D. Relevant cost

Answer: C

---

12. Opportunity cost means:
A. Actual cash paid
B. Cost of next best alternative forgone
C. Fixed cost
D. Variable cost

Answer: B

---

13. Differential cost is:
A. Historical cost   B. Difference between alternatives
C. Fixed cost   D. Sunk cost

Answer: B

---

14. Relevant costs are:
A. Past costs    B. Future costs affecting decisions
C. Sunk costs   D. Book values

Answer: B

---

15. Avoidable costs can be:
A. Eliminated by decision
B. Past costs
C. Sunk costs
D. Committed costs

Answer: A

---

16. Fixed cost per unit:
A. Constant
B. Increases with volume
C. Decreases as activity increases
D. Variable

Answer: C

---

17. Variable cost per unit is:
A. Constant
B. Increasing
C. Decreasing
D. Unknown

Answer: A

---

18. Total fixed cost:
A. Changes with units
B. Constant within relevant range
C. Variable
D. Mixed

Answer: B

---

19. Total variable cost:
A. Constant   B. Changes proportionately with activity  C. Fixed  D. Semi-fixed

Answer: B

---

20. Mixed cost contains:
A. Only fixed cost
B. Only variable cost
C. Fixed and variable elements
D. Product cost only

Answer: C

---

21. Step cost remains fixed until:
A. Certain activity level reached
B. Revenue changes
C. Profit changes
D. Sales decrease

Answer: A

---

22. Discretionary fixed cost example:
A. Factory rent
B. Advertising
C. Property tax
D. Insurance

Answer: B

---

23. Committed fixed cost example:
A. Advertising    B. Training
C. Building depreciation    D. Research

Answer: C

---

24. Incremental cost means:
A. Additional cost from a decision  B. Past cost
C. Fixed cost                                   D. Sunk cost

Answer: A

---

25. Marginal cost usually refers to:
A. Fixed cost
B. Variable cost of one more unit
C. Sunk cost
D. Period cost

Answer: B

---

MANUFACTURING, MERCHANDISING & SERVICE ORGANIZATIONS (26-40)

26. A manufacturing company:
A. Sells services
B. Produces goods
C. Trades securities
D. Lends money

Answer: B

---

27. A merchandising company:
A. Manufactures products
B. Buys and resells goods
C. Provides consulting
D. Produces services

Answer: B

---

28. Example of manufacturing company:
A. Hospital
B. Toyota
C. Bank
D. School

Answer: B

---

29. Example of merchandising company:
A. Walmart
B. Factory
C. Hospital
D. Audit firm

Answer: A

---

30. Example of service company:
A. Factory
B. Retailer
C. CPA Firm
D. Distributor

Answer: C

---

31. Raw materials inventory exists mainly in:
A. Service firms
B. Manufacturing firms
C. Banks
D. Schools

 

Answer: B

---

32. Work-in-process inventory exists in:
A. Manufacturing firms
B. Retail stores
C. Service firms
D. Banks

Answer: A

---

33. Finished goods inventory exists in:
A. Manufacturing firms    B. Audit firms  C. Hospitals  D. Banks

Answer: A

---

34. Merchandising firms usually have:
A. Raw materials inventory
B. WIP inventory
C. Merchandise inventory
D. None

Answer: C

---

35. Service firms generally have:
A. No inventory
B. WIP inventory
C. Raw materials
D. Finished goods

Answer: A

---

36. Cost of Goods Manufactured applies to:
A. Service firms
B. Manufacturing firms
C. Banks
D. Retailers

Answer: B

---

37. Cost of Goods Sold is found in:
A. Manufacturing only  B. Merchandising and manufacturing
C. Service only  D. None

Answer: B

---

38. Inventory sequence in manufacturing:
A. FG → RM → WIP
B. RM → WIP → FG
C. WIP → RM → FG
D. FG → WIP → RM

Answer: B

---

39. Merchandising company purchases:
A. Raw materials
B. Finished goods
C. Labor
D. Overhead

Answer: B

---

40. Main output of service company is:
A. Goods
B. Services
C. Inventory
D. Raw material

Answer: B

---

RELEVANT RANGE & COST BEHAVIOR (41-60)

41. Relevant range means:
A. Expected activity range
B. Revenue range
C. Profit range
D. Sales range

Answer: A

42. Fixed costs remain constant within:
A. Relevant range  B. Entire universe
C. Any activity   D. None

Answer: A

43. Outside relevant range fixed cost may:
A. Remain same always  B. Change
C. Become variable   D. Disappear

Answer: B

44. Cost behavior studies relationship between:
A. Cost and activity
B. Cost and profit
C. Assets and liabilities
D. Debt and equity

 

Answer: A

45. Variable cost changes with:
A. Activity level
B. Time only
C. Interest rate
D. Inflation only

Answer: A

46. Fixed cost per unit decreases when:
A. Output increases
B. Output decreases
C. Cost increases
D. Revenue decreases

Answer: A

47. Example of variable cost:
A. Direct materials
B. Rent
C. Insurance
D. Salary

Answer: A

48. Example of fixed cost:
A. Direct material  B. Sales commission
C. Factory rent  D. Freight on units

Answer: C

49. Sales commission is usually:
A. Fixed  B. Variable  C. Sunk  D. Opportunity

Answer: B

50. Utility bill often represents:
A. Mixed cost
B. Fixed cost
C. Product cost
D. Sunk cost

Answer: A

FACTORS OF PRODUCTION & SHORT RUN (61-70)

61. Factors of production include:
A. Land
B. Labor
C. Capital
D. All of these

Answer: D

62. Human effort in production is:
A. Capital
B. Labor
C. Land
D. Entrepreneurship

Answer: B

63. Machinery is an example of:
A. Labor
B. Capital
C. Land
D. Revenue

Answer: B

64. Entrepreneur earns:
A. Rent  B. Interest  C. Profit  D. Wages

Answer: C

65. In short run at least one factor is:
A. Variable  B. Fixed
C. Revenue  D. Profit

Answer: B

66. Factory building in short run is generally:
A. Fixed input
B. Variable input
C. Revenue
D. Expense

Answer: A

67. Labor is often considered:
A. Fixed input
B. Variable input
C. Asset
D. Liability

Answer: B

68. Short run period means:
A. One month
B. One year
C. At least one fixed input
D. No fixed input

Answer: C

69. Long run means:
A. All inputs variable
B. All inputs fixed
C. One fixed input
D. No production

Answer: A

70. Marginal product refers to:
A. Additional output from additional input
B. Revenue
C. Cost
D. Profit

Answer: A

---

HIGH-LOW METHOD, COST DRIVER, COST POOL, ABC (71-100)

71. High-low method estimates:
A. Fixed and variable costs
B. Profit
C. Revenue
D. Assets

Answer: A

72. High-low method uses:
A. Highest and lowest activity levels
B. Highest costs only
C. Lowest costs only
D. Average costs

Answer: A

73. Variable cost per unit =
A. Cost difference ÷ Activity difference
B. Revenue difference
C. Profit difference
D. Fixed cost

Answer: A

74. Cost driver causes:
A. Revenue
B. Cost to occur
C. Profit
D. Assets

Answer: B

75. Machine hours are often a:
A. Cost driver
B. Revenue driver
C. Liability
D. Asset

Answer: A

76. Number of setups may be a:
A. Cost driver
B. Product cost
C. Sunk cost
D. Opportunity cost

Answer: A

77. Cost pool is:
A. Collection of related costs
B. Revenue account
C. Profit center
D. Asset account

Answer: A

78. ABC stands for:
A. Activity Based Costing
B. Annual Budget Costing
C. Accounting Budget Control
D. None

79. ABC allocates overhead using:
A. Cost drivers
B. Sales
C. Profit
D. Assets

Answer: A

80. ABC improves:
A. Cost accuracy
B. Inflation
C. Revenue
D. Tax

Answer: A

81. Unit-level activity occurs for:
A. Each unit produced
B. Each factory
C. Each company
D. Each year

Answer: A

82. Batch-level activity example:
A. Machine setup
B. Direct material
C. Factory rent
D. CEO salary

Answer: A

83. Product-level activity example:
A. Product design
B. Direct labor
C. Materials
D. Packaging

Answer: A

84. Facility-level activity example:
A. Factory security
B. Direct labor
C. Direct material
D. Packaging

Answer: A

86. Direct labor hours may be used as:
A. Cost driver
B. Revenue driver
C. Asset
D. Liability

Answer: A

87. Traditional costing often uses:
A. One cost driver
B. Many drivers
C. No driver
D. Revenue

Answer: A

88. ABC generally uses:
A. Multiple drivers  B. One driver
C. No drivers  D. Profit

Answer: A

89. Overhead allocation aims to:
A. Assign indirect costs  B. Increase profit
C. Reduce assets  D. Increase sales

Answer: A

90. Cost driver rate =
A. Cost pool ÷ Driver units
B. Revenue ÷ Units
C. Profit ÷ Units
D. Sales ÷ Units

Answer: A

Types of Cost…..

1.

Direct materials are:
A. Indirect costs
B. Prime costs
C. Period costs
D. Selling costs

Answer: B

---

2.

Prime cost consists of:
A. Direct materials + Direct labor
B. Direct labor + Overhead
C. Materials + Overhead
D. Fixed + Variable costs

Answer: A

---

3.

Conversion cost consists of:
A. Direct materials + Direct labor
B. Direct labor + Manufacturing overhead
C. Direct materials + Overhead
D. Selling + Administrative costs

Answer: B

---

4.

Factory supervisor salary is:
A. Direct labor
B. Manufacturing overhead
C. Selling expense
D. Direct material

Answer: B

---

5.

Which is a direct cost?
A. Factory rent
B. Lubricating oil
C. Direct material
D. Security salary

Answer: C

---

6.

Indirect materials are classified as:
A. Prime costs
B. Manufacturing overhead
C. Selling expenses
D. Administrative expenses

Answer: B

---

7.

The depreciation of factory equipment is:
A. Direct labor
B. Product cost
C. Selling expense
D. Administrative expense

Answer: B

---

8.

Product costs include:
A. Manufacturing costs
B. Selling costs
C. Interest costs
D. Marketing costs

Answer: A

---

9.

Period costs are expensed:
A. When incurred
B. When produced
C. When purchased
D. When materials are used

Answer: A

---

10.

Which is a period cost?
A. Direct materials
B. Factory insurance
C. Sales commission
D. Direct labor

Answer: C

---

11.

A variable cost:
A. Remains constant in total
B. Changes in total with activity
C. Never changes
D. Is always indirect

Answer: B

---

12.

An example of variable cost is:
A. Direct material
B. Factory rent
C. Property tax
D. Factory manager salary

Answer: A

---

13.

Total fixed cost:
A. Changes with production volume
B. Remains constant within relevant range
C. Is always zero
D. Is variable per unit

Answer: B

---

14.

Fixed cost per unit:
A. Remains constant
B. Increases with output
C. Decreases as output increases
D. Is irrelevant

Answer: C

---

15.

A mixed cost contains:
A. Only fixed cost
B. Only variable cost
C. Fixed and variable components
D. Product and period costs

Answer: C

---

16.

An example of mixed cost is:
A. Electricity bill
B. Direct materials
C. Factory rent
D. Property tax

Answer: A

---

17.

A step cost:
A. Changes continuously
B. Remains fixed over a range then jumps
C. Is variable per unit
D. Is irrelevant

Answer: B

---

18.

Which cost is relevant to decision making?
A. Sunk cost
B. Historical cost
C. Future cost differing between alternatives
D. Book value

Answer: C

---

19.

A sunk cost is:
A. Future cost
B. Cost already incurred
C. Opportunity cost
D. Avoidable cost

Answer: B

---

20.

Sunk costs are:
A. Relevant
B. Avoidable
C. Irrelevant for decisions
D. Variable

Answer: C

---

21.

Opportunity cost is:
A. Actual cash paid
B. Cost of forgone alternative
C. Fixed cost
D. Product cost

Answer: B

---

22.

Differential cost means:
A. Historical cost
B. Difference in cost between alternatives
C. Sunk cost
D. Fixed cost

Answer: B

---

23.

Incremental cost is:
A. Additional cost from a decision
B. Sunk cost
C. Fixed cost
D. Product cost

Answer: A

---

24.

Avoidable costs:
A. Cannot be eliminated
B. Can be eliminated by a decision
C. Are sunk costs
D. Are historical costs

Answer: B

---

25.

Unavoidable costs:
A. Can be eliminated
B. Continue regardless of decision
C. Are opportunity costs
D. Are variable costs

Answer: B

---

26.

Direct labor cost is:
A. Prime cost
B. Period cost
C. Selling cost
D. Administrative cost

Answer: A

---

27.

Factory insurance is:
A. Direct material
B. Manufacturing overhead
C. Selling expense
D. Opportunity cost

Answer: B

---

28.

Sales manager salary is:
A. Product cost
B. Selling expense
C. Direct labor
D. Manufacturing overhead

Answer: B

---

29.

Office rent is generally:
A. Administrative expense
B. Direct material
C. Manufacturing overhead
D. Prime cost

Answer: A

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30.

Research and development cost is usually:
A. Period cost
B. Direct cost
C. Prime cost
D. Conversion cost

Answer: A

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31.

Marginal cost generally refers to:
A. Fixed cost
B. Additional variable cost of one unit
C. Sunk cost
D. Opportunity cost

Answer: B

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32.

Controllable costs are:
A. Managed by a responsible manager
B. Always fixed
C. Always variable
D. Never relevant

Answer: A

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33.

Non-controllable costs:
A. Can be directly influenced
B. Cannot be significantly influenced
C. Are always sunk
D. Are always avoidable

Answer: B

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34.

Committed fixed costs include:
A. Advertising
B. Factory building depreciation
C. Training costs
D. Promotion costs

Answer: B

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35.

Discretionary fixed costs include:
A. Factory lease
B. Property tax
C. Advertising
D. Insurance

Answer: C

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36.

The cost of idle capacity is generally:
A. Direct material
B. Fixed cost
C. Selling cost
D. Prime cost

Answer: B

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37.Joint costs arise:
A. After split-off point
B. Before split-off point
C. During selling process
D. During marketing

Answer: B

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38.

Further processing costs incurred after split-off are:
A. Joint costs
B. Sunk costs
C. Separable costs
D. Fixed costs

Answer: C

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39.

By-product revenue is often:
A. Ignored completely
B. Treated as reduction of production cost
C. Treated as direct material
D. Treated as overhead

Answer: B

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40.

Which is NOT a product cost?
A. Direct materials
B. Direct labor
C. Manufacturing overhead
D. Sales commission

Answer: D

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41.

Which cost is most likely variable?
A. Factory rent
B. Direct materials
C. Property taxes
D. Factory insurance

Answer: B

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42.

Which cost is most likely fixed?
A. Direct materials
B. Direct labor paid per unit
C. Factory rent
D. Sales commission

Answer: C

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43.

Opportunity costs are:
A. Recorded in accounting records
B. Not recorded in accounting records
C. Historical costs
D. Product costs

Answer: B

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44.

Relevant costs must be:
A. Past and unavoidable
B. Future and different between alternatives
C. Historical and fixed
D. Sunk and variable

Answer: B

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45.

The salary of factory maintenance staff is:
A. Direct labor
B. Manufacturing overhead
C. Selling expense
D. Administrative expense

Answer: B

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46.

Freight paid on raw materials purchased is generally:
A. Product cost
B. Selling cost
C. Administrative cost
D. Opportunity cost

Answer: A

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47.

Advertising expense is:
A. Product cost
B. Prime cost
C. Selling expense
D. Conversion cost

Answer: C

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48.

A cost traceable to a cost object is:
A. Direct cost
B. Indirect cost
C. Opportunity cost
D. Sunk cost

Answer: A

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49.

Cost that cannot be conveniently traced is:
A. Prime cost
B. Direct cost
C. Indirect cost
D. Marginal cost

Answer: C

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50.

Which cost is most relevant in a special order decision?
A. Sunk cost
B. Historical cost
C. Incremental cost
D. Book value

Answer: C

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