Our only savior is our will power. Will is the switch that controls everything in this universe. If you don't exercise your will power, you will be a weakling, easily influenced by your environment. Development of the will is the secret of magnetism. Men of success are men of great will power. When you develop will, no matter how you are pounded down by life, you rise again and say, "I am successful. I can win." Regards from Prof Mahaley Head Gmsisuccess Your Career Mentor Gmsisuccess...

Tuesday, January 20, 2026

Essaybased & MCQ Question on Job order costing and Activitybased costing

SCENARIO-BASED ILLUSTRATIONS & EXAM-STYLE QUESTIONS on Job Order Costing (JOC) and Activity-Based Costing (ABC) aligned with US CMA Part 1 and ACCA Foundations (MA/FMA).

Each scenario mirrors how these topics are tested—context, data, decision, and interpretation.

🔹 PART A: JOB ORDER COSTING – SCENARIO-BASED ILLUSTRATIONS

Scenario 1: Custom Manufacturing (CMA-Style)

Facts
Apex Furnitures manufactures customized office desks. During March:

Direct materials issued to Job A101: ₹48,000
Direct labor for Job A101: 1,200 hours @ ₹200/hour
Factory overhead is applied at 150% of direct labor cost

Required

Compute total manufacturing cost of Job A101
Compute cost per unit if 20 desks were produced

Solution

Direct labor cost =
Factory overhead =

Total Job Cost
=

Cost per unit
=

👉 Exam Focus: Predetermined OH rate, cost sheet logic

Scenario 2: Over- or Under-Applied Overhead (CMA Favorite)

Facts
Predetermined OH rate = ₹120 per DLH
Actual DLH = 8,000
Actual OH incurred = ₹9,20,000

Required

Calculate applied overhead
Determine under/over-applied overhead

Solution
Applied OH =
Actual OH =

👉 Over-applied OH =

Exam Interpretation

Over-applied → close to COGS or prorate

Scenario 3: Service Industry (ACCA-Style Twist)

Facts
A law firm uses job costing for each client.

Lawyer hours: 120 @ ₹1,500/hour
Support staff cost allocated at 40% of lawyer cost

Required
Compute total job cost.

Solution
Lawyer cost =
Support cost =

Total Job Cost =

👉 Exam Insight: Job costing applies to services also

🔹 PART B: ACTIVITY-BASED COSTING (ABC) – SCENARIO ILLUSTRATIONS

Scenario 4: Traditional vs ABC (VERY IMPORTANT – CMA)

Facts
Omega Ltd produces two products:

Particulars	Product X	Product Y
Units	10,000	2,000
Machine hours/unit	2	8

Total overhead = ₹12,00,000
Traditional system uses machine hours

Step 1: Traditional Costing

Total MH

OH rate = ******** ÷ *****=***per MH

X OH/unit =
Y OH/unit =

👉 Distortion likely → move to ABC

Scenario 5: ABC Cost Allocation (CMA Core)

Activities & Cost Pools

Activity	Cost (₹)	Cost Driver	Total Driver Units
Setups	4,00,000	No. of setups	200
Machining	6,00,000	Machine hours	30,000
Inspections	2,00,000	Inspections	400

Usage by Product A

Setups: 50
Machine hours: 5,000
Inspections: 100

Required
Compute overhead assigned to Product A.

Solution

1️⃣ Setup rate = ******per setup
→ 50 × ***** = *******

2️⃣ Machining rate = ******per MH
→ 5,000 × **** = ******

3️⃣ Inspection rate = **** per inspection
→ 100 × *** =******

Total ABC Overhead =*******

Scenario 6: Decision-Making (CMA Exam Angle)

Question
After implementing ABC, Product B shows higher cost than selling price.

Required
Which is the BEST management action?

A. Eliminate product immediately
B. Increase selling price
C. Analyze cost drivers and process efficiency
D. Revert to traditional costing

✅ Correct Answer:

👉 ABC supports better decisions, not automatic elimination

🔹 PART C: JOB COSTING vs ABC – INTEGRATED SCENARIO

Scenario 7: When ABC is Better (ACCA + CMA)

Facts
A company produces low-volume customized products and high-volume standard products. Overheads are driven by setups and inspections.

Requirement
Which costing system provides more accurate product cost?

✅ Answer:***********

Reason

*************************
**************************

🔹 EXAM TRIGGERS TO REMEMBER 🧠

Keyword in Question	System
Custom order	Job costing
Service contract	Job costing
Overhead distortion	ABC
Multiple activities	ABC
Setup / inspection	ABC
Predetermined OH	Job costing

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Below are exam-oriented MCQs on Job Order Costing (JOC) and Activity-Based Costing (ABC) designed strictly in US CMA exam style (conceptual traps, calculations, and interpretation-based questions).

PART A: Job Order Costing – Challenging MCQs

1.

Under a job order costing system, which cost is NOT directly traceable to a specific job?

A. Direct materials
B. Direct labor
C. Factory supervisor salary
D. Special components purchased for a job

Answer:

2.

If manufacturing overhead is underapplied at year-end and immaterial, the best treatment is to:

A. Allocate to WIP, FG, and COGS
B. Close to Cost of Goods Sold
C. Adjust WIP only
D. Carry forward to next period

Answer:

3.

A company applies overhead based on direct labor hours. Budgeted overhead is ₹900,000 and budgeted DLH are 30,000 hours. Actual DLH worked were 32,000 hours. Overhead applied equals:

A. ₹900,000
B. ₹960,000
C. ₹1,020,000
D. ₹840,000

Calculation:
Predetermined OH rate = *****/****= **per DLH
Applied OH = 32,000 × **= *******

Answer:

4.

Which journal entry records direct labor cost in job order costing?

A. WIP Dr / Wages Payable Cr
B. MOH Dr / Wages Payable Cr
C. COGS Dr / Wages Payable Cr
D. FG Dr / Wages Payable Cr

Answer:

5.

Which situation would most likely cause overapplied overhead?

A. Actual overhead > applied overhead
B. Actual activity > estimated activity
C. Actual overhead < applied overhead
D. Underestimated DLH

Answer:

6.

In job order costing, scrap from a specific job should be:

A. Charged to MOH
B. Written off to COGS
C. Credited to the job cost
D. Treated as period expense

Answer:

7.

Which account is debited when indirect materials are issued?

A. Work in Process
B. Manufacturing Overhead
C. Cost of Goods Sold
D. Finished Goods

Answer:

8.

Which statement is TRUE about job order costing?

A. Costs are accumulated by department
B. Costs are averaged over units
C. Each job has a separate cost sheet
D. Suitable only for homogeneous products

Answer:

PART B: Activity-Based Costing – Challenging MCQs

9.

The primary purpose of ABC is to:

A. Reduce product costs
B. Allocate costs based on volume
C. Improve cost accuracy by using multiple drivers
D. Eliminate fixed costs

Answer:

10.

Which of the following is NOT a level of activity in ABC?

A. Unit-level
B. Batch-level
C. Product-level
D. Profit-level

Answer:

11.

Which cost driver is most appropriate for machine setup costs?

A. Machine hours
B. Number of setups
C. Units produced
D. Direct labor hours

Answer:

12.

ABC differs from traditional costing because ABC:

A. Uses a single overhead rate
B. Allocates overhead based on activity consumption
C. Ignores non-manufacturing costs
D. Allocates only variable costs

Answer:

13.

Which cost is least likely to be product-level?

A. Product design
B. Engineering changes
C. Quality inspection per batch
D. Advertising a product line

Answer:

14.

A product consumes more setup hours but fewer machine hours. Compared to traditional costing, ABC will most likely:

A. Reduce product cost
B. Increase product cost
C. Have no effect
D. Eliminate overhead

Answer:

15.

Which cost will NOT change under ABC?

A. Total manufacturing overhead
B. Cost assigned to each product
C. Overhead allocation accuracy
D. Cost distortion

Answer:

16.

Which is a facility-level cost?

A. Machine setups
B. Product testing
C. Plant security
D. Material handling

Answer:

17.

ABC is most beneficial when:

A. Products are homogeneous
B. Overhead is insignificant
C. Overhead is high and products are diverse
D. Labor is the main cost

Answer:

18.

Which statement is TRUE about ABC in CMA exams?

A. ABC always lowers product cost
B. ABC replaces GAAP costing
C. ABC improves decision-making
D. ABC eliminates fixed costs

Answer:

PART C: CMA-Style Scenario Based MCQs

19.

A low-volume, complex product is undercosted under traditional costing. Implementing ABC will most likely:

A. Reduce its cost
B. Increase its cost
C. No impact
D. Eliminate overhead

Answer:

20.

Which costing system is preferred for customized products?

A. Process costing
B. ABC
C. Job order costing
D. Standard costing

Answer:

21.

Which system provides better cost control for overhead?

A. Job order costing
B. Process costing
C. ABC
D. Absorption costing

Answer:

22.

If batch-level costs are allocated using unit-level drivers, the result will be:

A. Accurate costing
B. Overcosting high-volume products
C. Undercosting low-volume products
D. Both B and C

Answer:

Exam Tip – US CMA Perspective

Job Order Costing → journal entries + OH application traps
ABC → cost hierarchy + driver logic + distortion analysis
CMA loves: “Which cost increases/decreases after ABC?”

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Integrity objectivity and independence of internal auditors

Here are high-yield, exam-oriented revision points on Integrity, Objectivity & Independence of Internal Audit Activities from CIA Part 1 (as per IIA Code of Ethics & IPPF). These points are frequently tested directly and indirectly in MCQs.

🔹 INTEGRITY (Foundation of Trust)

Meaning

Integrity establishes trust and confidence in internal audit judgment.

Very Important Exam Points

Internal auditors perform work with honesty, diligence, and responsibility
Must observe law and make disclosures expected by law and profession
Shall not knowingly engage in illegal acts or discredit the profession
Must not be a party to misrepresentation of facts
Personal interests must not override ethical principles

CIA Exam Traps

❌ Accepting gifts → violation of integrity & objectivity
❌ Concealing material facts from audit report
✔ Reporting unfavorable findings = integrity upheld

🔹 OBJECTIVITY (Unbiased Mental Attitude)

Meaning

Internal auditors must have an impartial and unbiased mindset.

Key CIA Part 1 Points

Objectivity is an individual auditor’s responsibility
Auditors must avoid conflicts of interest
Must not subordinate professional judgment to others
Auditors should disclose impairments to objectivity
Objectivity applies to:
- Engagement planning
- Evidence evaluation
- Reporting

Very Important Rule (Frequently Tested)

❗ Auditors should not audit areas for which they were responsible in the past 12 months

Exam Scenarios

Auditor designing controls → later auditing them = objectivity impaired
Auditor pressured by management → must resist pressure

🔹 INDEPENDENCE (Organizational Positioning)

Meaning

Independence allows internal audit activity to carry out responsibilities freely.

🔸 Independence vs Objectivity

Aspect	Independence	Objectivity
Level	Organizational	Individual
Responsibility	Internal Audit Activity	Internal Auditor
Nature	Structural	Mental attitude

🔹 Organizational Independence (Highly Tested)

Key Requirements

CAE must report functionally to the Board / Audit Committee
CAE reports administratively to senior management
Board must:
- Approve audit charter
- Approve audit plan
- Approve budget & resources
- Appoint / remove CAE

Functional Reporting Includes

Approval of audit plan
Evaluation of CAE performance
Remuneration decisions
Acceptance of risk by management

🔹 Impairments to Independence

Independence is impaired when:

Management restricts:
- Scope
- Access to records
- Reporting of results
CAE reports only to CFO / CEO (without board access)

Required Action

Impairment must be disclosed to appropriate parties (Board)

🔹 Assurance vs Consulting (Exam Favorite)

Engagement Type	Allowed?	Condition
Assurance	✔	Must be independent & objective
Consulting	✔	Objectivity must not be impaired
Management responsibility	❌	Strictly prohibited

Key Rule

Internal auditors may provide consulting but cannot assume management responsibility

🔹 Ethical Threats (Common MCQ Areas)

Self-interest threat
Familiarity threat
Self-review threat
Intimidation threat

👉 Safeguards must be applied or auditor should withdraw.

🔹 CIA Part 1 MCQ Keywords (Remember)

“Functional reporting” → Board
“Administrative reporting” → Management
“12-month cooling-off period”
“Disclosure of impairment”
“No management responsibility”

🔹 One-Line Exam Gold Statements

✔ Integrity = honesty + compliance + transparency
✔ Objectivity = unbiased judgment
✔ Independence = organizational freedom
✔ CAE’s independence is ensured through board reporting
✔ Impairments must be disclosed, not ignored

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EXAM-ORIENTED, LENGTHY ESSAY-BASED QUESTIONS WITH MODEL ANSWERS on Integrity & Objectivity of Internal Auditors from CIA Part 1, written exactly in the style expected by the IIA / CIA examiner.

You can use these directly in descriptive exams, interviews, or case-study answers.

ESSAY QUESTION 1

Explain the principle of Integrity as per the IIA Code of Ethics. Discuss its importance in the internal audit function and consequences of its violation.

Answer:

Integrity is a fundamental principle of the IIA Code of Ethics and forms the foundation upon which internal audit credibility and stakeholder confidence are built. Integrity requires internal auditors to perform their work with honesty, diligence, responsibility, and adherence to ethical principles.

Internal auditors are expected to observe the law, make disclosures required by professional standards, and avoid knowingly engaging in illegal or unethical activities. Integrity also requires auditors to present facts accurately and completely, without distortion, omission, or misrepresentation. Internal auditors must not allow personal interests, pressures, or incentives to influence professional judgment.

The importance of integrity lies in the fact that internal audit conclusions are relied upon by senior management and the board for decision-making, governance, and risk management. Without integrity, audit reports lose their reliability and value, thereby undermining the entire assurance process.

Violations of integrity may include suppressing unfavorable findings, falsifying audit evidence, accepting improper inducements, or knowingly issuing misleading audit reports. Such violations can lead to loss of professional credibility, disciplinary action by the IIA, reputational damage to the organization, and legal consequences. Therefore, integrity is not optional but essential for sustaining trust in the internal audit profession.

ESSAY QUESTION 2

Define Objectivity in internal auditing. How can objectivity be impaired, and what safeguards should be applied to protect it?

Answer:

Objectivity in internal auditing refers to an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and do not compromise quality. Objectivity is an individual auditor’s responsibility and requires freedom from conflicts of interest and undue influence.

Objectivity may be impaired in several ways. Common impairments include self-review threats (auditing one’s own work), familiarity threats (close relationships with auditees), self-interest threats (financial or career incentives), and intimidation threats (pressure from management). Additionally, objectivity is impaired when auditors are assigned to audit activities for which they had responsibility within the previous 12 months.

To safeguard objectivity, internal auditors must avoid conflicts of interest, disclose any potential impairments, and recuse themselves from engagements where impartiality cannot be maintained. Audit management should ensure appropriate staff rotation, independent supervision, and adherence to the cooling-off period. Where safeguards are insufficient, the impairment must be communicated to appropriate parties, typically senior management or the board.

Maintaining objectivity ensures that audit conclusions are credible, reliable, and based solely on sufficient and appropriate evidence.

ESSAY QUESTION 3

Distinguish between Integrity and Objectivity of internal auditors. Explain why both are necessary for effective internal auditing.

Answer:

Integrity and objectivity are closely related but distinct ethical principles under the IIA Code of Ethics.

Integrity refers to the moral character of the internal auditor and emphasizes honesty, ethical behavior, and adherence to laws and professional standards. It focuses on doing what is right, even when faced with pressure or personal disadvantage.

Objectivity, on the other hand, refers to the state of mind that allows internal auditors to make judgments without bias, conflict of interest, or undue influence. It focuses on thinking impartially and ensuring judgments are not subordinated to others.

Both principles are necessary for effective internal auditing. An auditor may be honest (integrity) but still biased due to familiarity or self-interest (lack of objectivity). Conversely, an auditor may appear impartial but knowingly misrepresent facts, indicating a lack of integrity. Therefore, integrity ensures truthfulness, while objectivity ensures neutrality in judgment.

Together, they ensure that internal audit work is trustworthy, reliable, and valuable to the organization’s governance and risk management processes.

ESSAY QUESTION 4

Discuss the role of internal auditors in managing ethical threats related to integrity and objectivity.

Answer:

Internal auditors face various ethical threats that may compromise integrity and objectivity. These threats include self-interest, self-review, familiarity, intimidation, and advocacy threats. Managing these threats is a critical responsibility of both individual auditors and the internal audit activity.

Internal auditors must remain vigilant in identifying potential threats and evaluating whether safeguards are adequate. When threats arise, auditors should apply safeguards such as independent review, disclosure of conflicts, reassignment of duties, and enhanced supervision. If safeguards cannot adequately reduce the threat, auditors must withdraw from the engagement.

The CAE plays a crucial role by establishing policies, promoting ethical culture, ensuring independence in reporting, and facilitating open communication with the board. The internal audit charter and adherence to the IIA Code of Ethics further reinforce ethical behavior.

By proactively managing ethical threats, internal auditors protect the integrity and objectivity of audit engagements and uphold the credibility of the internal audit function.

ESSAY QUESTION 5

“Objectivity without integrity is meaningless, and integrity without objectivity is ineffective.” Discuss this statement in the context of internal auditing.

Answer:

The statement highlights the interdependent nature of integrity and objectivity in internal auditing. Objectivity without integrity is meaningless because unbiased judgment has no value if the auditor deliberately misrepresents facts or conceals material information. Similarly, integrity without objectivity is ineffective because honesty alone cannot ensure reliable audit conclusions if judgments are influenced by bias or conflicts of interest.

In practice, internal auditors must both act ethically (integrity) and think impartially (objectivity). Effective internal auditing requires truthful reporting based on unbiased evaluation of evidence. The absence of either principle undermines audit quality, stakeholder confidence, and governance effectiveness.

Therefore, integrity and objectivity together form the ethical backbone of the internal audit profession and are essential for delivering credible assurance and value-added services.

✅ EXAM TIP (CIA Part 1)

Use IIA Code of Ethics language
Link concepts to governance, risk & assurance
Use keywords: unbiased, disclosure, conflicts, safeguards, credibility

📌

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Below are 50 EXAM-LEVEL MCQs clearly LINKED TO THE ESSAY TOPICS on Integrity & Objectivity of Internal Auditors (CIA Part 1).
Questions are conceptual, confusing, and theory-oriented, exactly matching essay logic + MCQ traps.

🔹 ESSAY 1: INTEGRITY (MCQs 1–10)

MCQ 1
Integrity primarily requires internal auditors to:
A. Avoid conflicts of interest
B. Perform work with honesty and diligence
C. Report to the board
D. Remain independent of management

✅ Answer: B

MCQ 2
Which action MOST clearly violates integrity?
A. Disclosing audit limitations
B. Withholding unfavorable findings intentionally
C. Declining an engagement
D. Requesting more evidence

✅ Answer: B

MCQ 3
Integrity is BEST described as:
A. Structural positioning
B. Mental attitude
C. Moral character
D. Professional skepticism

✅ Answer: C

MCQ 4
An internal auditor knowingly issues a misleading report due to pressure. This violates:
A. Objectivity only
B. Independence only
C. Integrity primarily
D. Confidentiality

✅ Answer: C

MCQ 5
Which is NOT a requirement under integrity?
A. Honesty
B. Compliance with law
C. Avoiding bias
D. Accurate representation of facts

✅ Answer: C

MCQ 6
Accepting bribes in exchange for favorable audit results violates:
A. Integrity
B. Objectivity
C. Independence
D. All of the above

✅ Answer: D

MCQ 7
Integrity ensures audit reports are:
A. Independent
B. Unbiased
C. Reliable
D. Confidential

✅ Answer: C

MCQ 8
Failure to disclose material information MOST directly affects:
A. Objectivity
B. Integrity
C. Independence
D. Due care

✅ Answer: B

MCQ 9
Integrity is MOST critical because internal audit reports are relied upon by:
A. External auditors only
B. Management only
C. Board and senior management
D. Regulators only

✅ Answer: C

MCQ 10
Which behavior supports integrity?
A. Altering conclusions to maintain relationships
B. Full and fair disclosure of findings
C. Avoiding difficult audits
D. Delegating responsibility

✅ Answer: B

🔹 ESSAY 2: OBJECTIVITY (MCQs 11–20)

MCQ 11
Objectivity refers to:
A. Organizational freedom
B. Impartial mental attitude
C. Reporting structure
D. Professional competence

✅ Answer: B

MCQ 12
Objectivity is the responsibility of:
A. The board
B. CAE
C. Internal audit activity
D. Individual auditor

✅ Answer: D

MCQ 13
Which is an objectivity impairment?
A. Functional reporting to the board
B. Auditing one’s own previous work
C. Audit charter approval
D. External audit reliance

✅ Answer: B

MCQ 14
An auditor previously managed an area 8 months ago. Assignment should be:
A. Accepted
B. Accepted with disclosure
C. Declined
D. Supervised

✅ Answer: C

MCQ 15
The required cooling-off period is:
A. 6 months
B. 9 months
C. 12 months
D. 18 months

✅ Answer: C

MCQ 16
Which threat MOST affects objectivity?
A. Advocacy
B. Familiarity
C. Structural reporting
D. Budget control

✅ Answer: B

MCQ 17
Accepting gifts from auditees primarily impairs:
A. Integrity
B. Independence
C. Objectivity
D. Confidentiality

✅ Answer: C

MCQ 18
Objectivity applies MOST during:
A. Planning only
B. Fieldwork only
C. Reporting only
D. Entire engagement

✅ Answer: D

MCQ 19
If objectivity is impaired and safeguards are insufficient, the auditor should:
A. Continue silently
B. Modify conclusions
C. Disclose and withdraw
D. Ignore the threat

✅ Answer: C

MCQ 20
Objectivity ensures audit judgments are:
A. Honest
B. Independent
C. Unbiased
D. Confidential

✅ Answer: C

🔹 ESSAY 3: INTEGRITY vs OBJECTIVITY (MCQs 21–30)

MCQ 21
Integrity focuses on:
A. Thinking impartially
B. Organizational positioning
C. Ethical conduct
D. Reporting structure

✅ Answer: C

MCQ 22
Objectivity focuses on:
A. Moral courage
B. Truthfulness
C. Neutral judgment
D. Legal compliance

✅ Answer: C

MCQ 23
An auditor is unbiased but knowingly hides facts. This reflects:
A. Integrity without objectivity
B. Objectivity without integrity
C. Independence impairment
D. No ethical issue

✅ Answer: B

MCQ 24
Which combination produces credible audit results?
A. Integrity only
B. Objectivity only
C. Both integrity and objectivity
D. Independence only

✅ Answer: C

MCQ 25
Integrity without objectivity results in:
A. Bias
B. Dishonesty
C. Ineffective audits
D. Scope limitation

✅ Answer: C

MCQ 26
Objectivity without integrity leads to:
A. Biased reporting
B. Meaningless conclusions
C. Management interference
D. Poor planning

✅ Answer: B

MCQ 27
Which statement is TRUE?
A. Integrity is structural
B. Objectivity is organizational
C. Integrity relates to honesty
D. Objectivity relates to reporting lines

✅ Answer: C

MCQ 28
Both integrity and objectivity contribute MOST to:
A. Audit independence
B. Governance effectiveness
C. Audit credibility
D. Regulatory compliance

✅ Answer: C

MCQ 29
Which principle ensures facts are not distorted?
A. Independence
B. Objectivity
C. Integrity
D. Due care

✅ Answer: C

MCQ 30
Which principle ensures judgments are unbiased?
A. Integrity
B. Objectivity
C. Independence
D. Confidentiality

✅ Answer: B

🔹 ESSAY 4 & 5: ETHICAL THREATS & INTER-RELATIONSHIP (MCQs 31–50)

MCQ 31
Self-interest threat primarily affects:
A. Integrity
B. Objectivity
C. Independence
D. Confidentiality

✅ Answer: B

MCQ 32
Familiarity threat arises due to:
A. Prior employment
B. Long association
C. Financial interest
D. Legal pressure

✅ Answer: B

MCQ 33
Intimidation threat occurs when:
A. Auditor lacks skill
B. Management pressures auditor
C. Auditor audits own work
D. Auditor accepts gifts

✅ Answer: B

MCQ 34
Safeguards against objectivity threats include:
A. Ignoring the issue
B. Independent review
C. Accepting limitations
D. Reporting to management only

✅ Answer: B

MCQ 35
If safeguards fail, auditor should:
A. Continue
B. Modify findings
C. Withdraw
D. Escalate to auditee

✅ Answer: C

MCQ 36
Who is responsible for promoting ethical culture?
A. Individual auditor only
B. CAE
C. External auditor
D. Regulators

✅ Answer: B

MCQ 37
Which document reinforces integrity and objectivity?
A. Audit plan
B. Audit charter
C. Engagement letter
D. Risk register

✅ Answer: B

MCQ 38
Consulting engagements are allowed IF:
A. Management responsibility is assumed
B. Objectivity is maintained
C. Board approval is absent
D. Results are confidential

✅ Answer: B

MCQ 39
Approving risk responses violates:
A. Objectivity
B. Integrity
C. Independence
D. All of the above

✅ Answer: D

MCQ 40
Which principle is MOST threatened when auditors advocate management decisions?
A. Integrity
B. Objectivity
C. Independence
D. Confidentiality

✅ Answer: B

MCQ 41
Ethical threats should be:
A. Ignored if minor
B. Disclosed and managed
C. Accepted
D. Delegated

✅ Answer: B

MCQ 42
Which principle ensures stakeholders trust audit outcomes?
A. Confidentiality
B. Objectivity
C. Integrity
D. Independence

✅ Answer: C

MCQ 43
Objectivity is impaired when judgments are:
A. Honest
B. Transparent
C. Influenced
D. Documented

✅ Answer: C

MCQ 44
Integrity requires auditors to:
A. Avoid consulting
B. Report truthfully
C. Avoid management
D. Maintain structure

✅ Answer: B

MCQ 45
Which is NOT an ethical threat?
A. Familiarity
B. Self-review
C. Advocacy
D. Competence

✅ Answer: D

MCQ 46
Ethical principles mainly support:
A. Audit efficiency
B. Audit profitability
C. Audit credibility
D. Audit automation

✅ Answer: C

MCQ 47
Objectivity is BEST protected by:
A. Independence only
B. Disclosure and safeguards
C. Professional skepticism only
D. Audit tools

✅ Answer: B

MCQ 48
Integrity violations result in:
A. Better relationships
B. Reduced trust
C. Improved governance
D. Higher assurance

✅ Answer: B

MCQ 49
The CAE ensures ethical compliance by:
A. Issuing audit reports
B. Establishing policies
C. Performing audits
D. Approving controls

✅ Answer: B

MCQ 50
Integrity and objectivity together ensure:
A. Structural independence
B. Professional competence
C. Credible assurance
D. Cost efficiency

✅ Answer: C

🎯 CIA PART 1 FINAL TIP

Integrity = Truth
Objectivity = Neutral judgment
Both = Credibility

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Below are CONFUSING, EXAM-LEVEL MCQs from CIA Part 1 on Integrity, Objectivity & Independence.
These are trap-based questions exactly like the CIA exam. Read carefully 👀

🔹 MCQ 1

An internal auditor knowingly omits an unfavorable finding from the audit report because management promised future promotion.
Which principle is MOST directly violated?

A. Objectivity
B. Independence
C. Integrity
D. Due Professional Care

✅ Answer: C – Integrity
Why? Deliberate misrepresentation of facts = integrity violation.

🔹 MCQ 2

The CAE reports administratively and functionally to the CFO.
What is the best CIA conclusion?

A. Acceptable if CFO is independent
B. Objectivity is impaired, not independence
C. Independence is impaired
D. No impairment exists

✅ Answer: C – Independence is impaired
Why? Functional reporting must be to the board/audit committee, not management.

🔹 MCQ 3

An internal auditor is assigned to audit a department where she worked 10 months ago.
What should the auditor do?

A. Accept the engagement
B. Accept after disclosure only
C. Decline due to objectivity impairment
D. Proceed under supervision

✅ Answer: C – Decline
Why? CIA requires 12-month cooling-off period.

🔹 MCQ 4

Which situation represents an objectivity impairment but NOT an independence impairment?

A. CAE denied access to records
B. Auditor auditing own work
C. Audit plan approved by CFO
D. CAE removed without board approval

✅ Answer: B – Auditor auditing own work
Why? Individual bias = objectivity issue, not structural independence.

🔹 MCQ 5

Internal auditors accept modest gifts from auditees during festive season.
Which principle is MOST threatened?

A. Independence
B. Confidentiality
C. Objectivity
D. Integrity

✅ Answer: C – Objectivity
Why? Gifts create bias; integrity may be affected but objectivity is primary.

🔹 MCQ 6

Which action by internal audit is STRICTLY PROHIBITED?

A. Recommending controls
B. Facilitating risk workshops
C. Providing consulting services
D. Approving risk responses

✅ Answer: D – Approving risk responses
Why? This is management responsibility.

🔹 MCQ 7

Management restricts internal audit from reviewing certain contracts.
What is the BEST action by CAE?

A. Accept restriction to maintain relationship
B. Modify audit scope silently
C. Disclose impairment to the board
D. Resign immediately

✅ Answer: C – Disclose impairment
Why? Scope limitation = independence impairment → disclose.

🔹 MCQ 8

Which reporting relationship BEST supports internal audit independence?

A. Administrative → Board, Functional → CEO
B. Administrative → CEO, Functional → Board
C. Administrative → CFO, Functional → CEO
D. Administrative → Audit Committee, Functional → CFO

✅ Answer: B – Admin to CEO, Functional to Board
Why? CIA exam favorite structure.

🔹 MCQ 9

An internal auditor feels pressured by management to change audit conclusions but refuses.
Which principle is being UPHELD?

A. Independence
B. Objectivity
C. Integrity
D. All of the above

✅ Answer: D – All of the above
Why? Resistance preserves integrity, objectivity, and independence.

🔹 MCQ 10

Which impairment MUST ALWAYS be disclosed?

A. Minor familiarity threat
B. Perceived impairment
C. Organizational independence impairment
D. Confidentiality breach

✅ Answer: C – Organizational independence impairment
Why? Mandatory disclosure to board.

🔹 MCQ 11

An auditor provides consulting services and later performs assurance on the same area after 14 months.
Is this acceptable?

A. No, always prohibited
B. Yes, objectivity restored
C. Only with CEO approval
D. Only under supervision

✅ Answer: B – Yes
Why? Cooling-off period satisfied.

🔹 MCQ 12

Which phrase BEST describes objectivity?

A. Freedom from interference
B. Organizational positioning
C. Unbiased mental attitude
D. Authority granted by board

✅ Answer: C – Unbiased mental attitude

🔹 CIA EXAM MEMORY TRICK 🧠

Integrity → Honesty & truth
Objectivity → Bias & conflicts
Independence → Reporting & structure

www.gmsisuccess.in

Friday, January 16, 2026

Answers Mocktest Activity Based costing

Activity-Based Costing (ABC) – 50 MCQs

1. Activity-Based Costing assigns overhead costs based on:

A. Direct labor hours
B. Machine hours
C. Cost drivers related to activities
D. Units produced

Answer: C

2. Which of the following best describes a cost driver?

A. A fixed overhead cost
B. A factor that causes a change in activity cost
C. A department cost
D. A product cost

Answer: B

3. ABC is most useful when:

A. Overheads are insignificant
B. Products are homogeneous
C. Overhead costs are high and products are diverse
D. Only direct costs are relevant

Answer: C

4. Which is a unit-level activity?

A. Machine setup
B. Quality inspection
C. Processing each unit
D. Product design

Answer: C

5. Which is a batch-level activity?

A. Machine operation
B. Setup of machines
C. Factory supervision
D. Product advertising

Answer: B

6. Which activity is product-level?

A. Customer order processing
B. Product design
C. Machine operation
D. Material handling

Answer: B

7. Facility-level activities include:

A. Setup costs
B. Quality inspection
C. Factory rent
D. Material movement

Answer: C

8. In ABC, overheads are first allocated to:

A. Products
B. Departments
C. Cost pools
D. Cost centers

Answer: C

9. Which is a correct cost driver for machine setups?

A. Units produced
B. Machine hours
C. Number of setups
D. Direct labor hours

Answer: C

10. Traditional costing differs from ABC because traditional costing:

A. Uses multiple cost drivers
B. Uses activity cost pools
C. Uses volume-based allocation
D. Is more accurate

Answer: C

11. Which industry benefits MOST from ABC?

A. Single-product manufacturing
B. Highly automated manufacturing
C. Service industry with diverse services
D. Pure trading business

Answer: C

12. Which of the following is NOT a benefit of ABC?

A. Improved cost accuracy
B. Better pricing decisions
C. Reduced accounting effort
D. Identification of non-value activities

Answer: C

13. ABC helps management to:

A. Reduce direct material cost
B. Identify cost reduction opportunities
C. Eliminate fixed costs
D. Increase depreciation

Answer: B

14. Which cost is usually excluded from ABC product costing?

A. Machine depreciation
B. Direct labor
C. Factory rent
D. Product-specific setup costs

Answer: C

15. A cost pool is:

A. A group of products
B. A collection of similar activities
C. A department
D. A cost driver

Answer: B

16. Which of the following is a non-value-added activity?

A. Assembly
B. Rework due to defects
C. Product design
D. Packaging

Answer: B

17. ABC supports which type of decision?

A. Make or buy
B. Product mix
C. Pricing
D. All of the above

Answer: D

18. Which costing method is more suitable when overheads are low?

A. ABC
B. Marginal costing
C. Traditional costing
D. Target costing

Answer: C

19. In ABC, costs are traced from activities to products using:

A. Cost pools
B. Cost drivers
C. Departments
D. Labor hours

Answer: B

20. Which of the following is a transaction driver?

A. Machine hours
B. Number of purchase orders
C. Time spent
D. Direct labor cost

Answer: B

21. Which is a duration cost driver?

A. Number of inspections
B. Inspection hours
C. Units produced
D. Orders received

Answer: B

22. ABC is LEAST suitable when:

A. Many products exist
B. Overhead costs are significant
C. Products consume resources uniformly
D. Activities differ significantly

Answer: C

23. Which statement is TRUE?

A. ABC increases cost distortion
B. ABC ignores overheads
C. ABC reduces cross-subsidization
D. ABC is simpler than traditional costing

Answer: C

24. Cross-subsidization means:

A. Profitable products subsidize loss-making ones
B. Costs are equally distributed
C. Fixed costs are eliminated
D. Costs are ignored

Answer: A

25. ABC was developed mainly to address problems of:

A. Marginal costing
B. Absorption costing
C. Traditional overhead allocation
D. Budgeting

Answer: C

26. Which cost driver is suitable for material handling?

A. Number of units
B. Number of material moves
C. Machine hours
D. Labor cost

Answer: B

27. Which is a limitation of ABC?

A. More accurate costing
B. High implementation cost
C. Better performance measurement
D. Improved decision-making

Answer: B

28. ABC treats most overhead costs as:

A. Fixed
B. Variable with respect to activities
C. Period costs
D. Sunk costs

Answer: B

29. ABC can be applied in:

A. Manufacturing only
B. Service sector only
C. Non-profit organizations only
D. Both manufacturing and service sectors

Answer: D

30. Which activity adds NO value to customers?

A. Inspection
B. Assembly
C. Packaging
D. Design

Answer: A

31. ABC improves cost accuracy by:

A. Using fewer cost drivers
B. Using a single overhead rate
C. Using multiple relevant cost drivers
D. Ignoring indirect costs

Answer: C

32. Which of the following is a resource cost driver?

A. Machine hours
B. Number of orders
C. Time spent by employees
D. Units produced

Answer: C

33. In ABC, activities consume:

A. Products
B. Resources
C. Customers
D. Departments

Answer: B

34. Products in ABC consume:

A. Resources directly
B. Activities
C. Departments
D. Labor hours only

Answer: B

35. Which costing system is preferred for complex operations?

A. Marginal costing
B. Standard costing
C. ABC
D. Process costing

Answer: C

36. ABC is especially helpful for identifying:

A. Fixed costs
B. Variable costs
C. High-cost activities
D. Direct costs

Answer: C

37. Which of the following is NOT an activity hierarchy level?

A. Unit-level
B. Batch-level
C. Customer-level
D. Facility-level

Answer: C

38. ABC focuses on:

A. Departments
B. Activities
C. Profit centers
D. Cost centers

Answer: B

39. Which costing method may overcost high-volume products?

A. ABC
B. Marginal costing
C. Traditional absorption costing
D. Variable costing

Answer: C

40. ABC helps in eliminating:

A. Direct labor
B. Wasteful activities
C. Fixed costs
D. Product costs

Answer: B

41. Which statement about ABC is correct?

A. It is mandatory under GAAP
B. It is mainly for internal management
C. It replaces financial accounting
D. It ignores overheads

Answer: B

42. Which is a value-added activity?

A. Rework
B. Inspection
C. Assembly
D. Storage

Answer: C

43. ABC can improve profitability by:

A. Increasing production
B. Better pricing and cost control
C. Increasing fixed costs
D. Ignoring overheads

Answer: B

44. The first step in ABC implementation is:

A. Assign costs to products
B. Identify activities
C. Select cost drivers
D. Compute overhead rates

Answer: B

45. Which costing system emphasizes cause-and-effect relationships?

A. Traditional costing
B. Marginal costing
C. ABC
D. Standard costing

Answer: C

46. ABC is less effective when:

A. Overhead is high
B. Products are customized
C. Production is simple and repetitive
D. Costs are activity-driven

Answer: C

47. Which of the following is an example of service-industry ABC?

A. Machine setup
B. Patient admission process
C. Assembly line operation
D. Material movement

Answer: B

48. ABC supports strategic decisions like:

A. Market entry
B. Product discontinuation
C. Process improvement
D. All of the above

Answer: D

49. Compared to traditional costing, ABC provides:

A. Less information
B. More accurate product costs
C. Lower data requirement
D. Less complexity

Answer: B

50. ABC is primarily designed to improve:

A. Financial reporting
B. Tax compliance
C. Internal cost management
D. External audit

Answer: C

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Numerical MCQs – Activity-Based Costing (ABC)

1. Setup Cost Allocation

A company has total setup cost of ₹240,000. Total setups = 120.
Product A requires 30 setups.
What setup cost is allocated to Product A?

A. ₹48,000
B. ₹60,000
C. ₹72,000
D. ₹80,000

Answer: B
Working: 240,000 ÷ 120 = 2,000 per setup × 30 = ₹60,000

2. Machine Cost Allocation

Machine-related overhead = ₹300,000
Total machine hours = 15,000
Product X uses 2,000 machine hours.

Allocated overhead?

A. ₹30,000
B. ₹35,000
C. ₹40,000
D. ₹50,000

Answer: C
Working: 300,000 ÷ 15,000 = 20 per MH × 2,000 = ₹40,000

3. Order Processing Cost

Total order processing cost = ₹180,000
Total orders = 900
Product B placed 120 orders.

Allocated cost?

A. ₹18,000
B. ₹21,600
C. ₹24,000
D. ₹30,000

Answer: C
Working: 180,000 ÷ 900 = 200 per order × 120 = ₹24,000

4. Inspection Cost (Duration Driver)

Inspection cost = ₹90,000
Total inspection hours = 3,000
Product C uses 450 inspection hours.

Allocated cost?

A. ₹12,000
B. ₹13,500
C. ₹15,000
D. ₹18,000

Answer: B
Working: 90,000 ÷ 3,000 = 30 per hour × 450 = ₹13,500

5. Material Handling Cost

Material handling cost = ₹150,000
Total material moves = 600
Product D requires 90 moves.

Allocated cost?

A. ₹18,000
B. ₹20,000
C. ₹22,500
D. ₹25,000

Answer: C
Working: 150,000 ÷ 600 = 250 per move × 90 = ₹22,500

6. Total ABC Overhead

Product E incurs:

Setup cost: ₹40,000
Machine cost: ₹60,000
Inspection cost: ₹20,000

Total ABC overhead?

A. ₹100,000
B. ₹110,000
C. ₹120,000
D. ₹130,000

Answer: C

7. Cost per Unit under ABC

Total ABC overhead for Product F = ₹180,000
Units produced = 6,000

Overhead per unit?

A. ₹25
B. ₹28
C. ₹30
D. ₹35

Answer: C
Working: 180,000 ÷ 6,000 = ₹30

8. Activity Rate Calculation

Total quality inspection cost = ₹96,000
Total inspections = 800

Inspection cost per inspection?

A. ₹100
B. ₹110
C. ₹120
D. ₹150

Answer: C

9. Batch-Level Cost

Setup cost = ₹200,000
Number of batches = 100
Product G produced in 25 batches.

Allocated cost?

A. ₹40,000
B. ₹45,000
C. ₹50,000
D. ₹55,000

Answer: C

10. ABC vs Traditional Costing

Traditional overhead per unit = ₹80
ABC overhead per unit = ₹65
Units produced = 4,000

Overcosting under traditional costing?

A. ₹40,000
B. ₹50,000
C. ₹60,000
D. ₹65,000

Answer: C
Working: (80 − 65) × 4,000 = ₹60,000

11. Customer Order Cost

Customer support cost = ₹120,000
Total customer calls = 2,000
Product H related calls = 300

Allocated cost?

A. ₹15,000
B. ₹18,000
C. ₹20,000
D. ₹22,000

Answer: B

12. Multiple Activity Allocation

Product J uses:

40 setups @ ₹2,000
1,500 machine hours @ ₹25
200 inspections @ ₹100

Total ABC overhead?

A. ₹125,000
B. ₹135,000
C. ₹145,000
D. ₹155,000

Answer: C
Working:
Setups: 80,000
Machine: 37,500
Inspection: 20,000
Total = ₹145,500 (≈ ₹145,000)

13. Low Volume Product

ABC overhead = ₹90,000
Units produced = 1,000

Overhead per unit?

A. ₹60
B. ₹70
C. ₹80
D. ₹90

Answer: D

14. Cost Driver Rate

Purchase ordering cost = ₹150,000
Total purchase orders = 750

Cost per purchase order?

A. ₹150
B. ₹175
C. ₹200
D. ₹225

Answer: C

15. Product Discontinuation Decision

Product K selling price/unit = ₹400
ABC cost/unit = ₹360

Contribution per unit?

A. ₹20
B. ₹30
C. ₹40
D. ₹50

Answer: C

16. Inspection Avoidance Savings

Inspection hours reduced by 500
Cost per inspection hour = ₹40

Cost savings?

A. ₹15,000
B. ₹18,000
C. ₹20,000
D. ₹22,000

Answer: C

17. Total Cost per Unit

Direct material = ₹120
Direct labor = ₹80
ABC overhead per unit = ₹100

Total cost per unit?

A. ₹280
B. ₹290
C. ₹300
D. ₹320

Answer: C

18. Cross-Subsidization Effect

Traditional overhead/unit = ₹90
ABC overhead/unit = ₹70
Units = 3,000

Amount of cost distortion?

A. ₹40,000
B. ₹50,000
C. ₹60,000
D. ₹70,000

Answer: C

19. Service Industry ABC

Patient admission cost = ₹200,000
Total patients = 4,000
Patients in Cardiology = 600

Allocated cost?

A. ₹25,000
B. ₹30,000
C. ₹35,000
D. ₹40,000

Answer: D

20. Profit under ABC

Sales revenue = ₹900,000
Total ABC cost = ₹720,000

Profit?

A. ₹150,000
B. ₹160,000
C. ₹170,000
D. ₹180,000

Answer: D

Exam Tips (CMA & ACCA)

✔ Always calculate activity rate first
✔ Identify correct cost driver
✔ ABC often shows lower cost for high-volume products
✔ Numerical questions are easy marks if steps are followed

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MCQ questions on Activity Based Costing

Activity-Based Costing (ABC) – 50 MCQs

1. Activity-Based Costing assigns overhead costs based on:

A. Direct labor hours
B. Machine hours
C. Cost drivers related to activities
D. Units produced

Answer:

2. Which of the following best describes a cost driver?

A. A fixed overhead cost
B. A factor that causes a change in activity cost
C. A department cost
D. A product cost

Answer:

3. ABC is most useful when:

A. Overheads are insignificant
B. Products are homogeneous
C. Overhead costs are high and products are diverse
D. Only direct costs are relevant

Answer:

4. Which is a unit-level activity?

A. Machine setup
B. Quality inspection
C. Processing each unit
D. Product design

Answer:

5. Which is a batch-level activity?

A. Machine operation
B. Setup of machines
C. Factory supervision
D. Product advertising

Answer:

6. Which activity is product-level?

A. Customer order processing
B. Product design
C. Machine operation
D. Material handling

Answer:

7. Facility-level activities include:

A. Setup costs
B. Quality inspection
C. Factory rent
D. Material movement

Answer:

8. In ABC, overheads are first allocated to:

A. Products
B. Departments
C. Cost pools
D. Cost centers

Answer:

9. Which is a correct cost driver for machine setups?

A. Units produced
B. Machine hours
C. Number of setups
D. Direct labor hours

Answer:

10. Traditional costing differs from ABC because traditional costing:

A. Uses multiple cost drivers
B. Uses activity cost pools
C. Uses volume-based allocation
D. Is more accurate

Answer:

11. Which industry benefits MOST from ABC?

A. Single-product manufacturing
B. Highly automated manufacturing
C. Service industry with diverse services
D. Pure trading business

Answer:

12. Which of the following is NOT a benefit of ABC?

A. Improved cost accuracy
B. Better pricing decisions
C. Reduced accounting effort
D. Identification of non-value activities

Answer:

13. ABC helps management to:

A. Reduce direct material cost
B. Identify cost reduction opportunities
C. Eliminate fixed costs
D. Increase depreciation

Answer:

14. Which cost is usually excluded from ABC product costing?

A. Machine depreciation
B. Direct labor
C. Factory rent
D. Product-specific setup costs

Answer:

15. A cost pool is:

A. A group of products
B. A collection of similar activities
C. A department
D. A cost driver

Answer:

16. Which of the following is a non-value-added activity?

A. Assembly
B. Rework due to defects
C. Product design
D. Packaging

Answer:

17. ABC supports which type of decision?

A. Make or buy
B. Product mix
C. Pricing
D. All of the above

Answer:

18. Which costing method is more suitable when overheads are low?

A. ABC
B. Marginal costing
C. Traditional costing
D. Target costing

Answer:

19. In ABC, costs are traced from activities to products using:

A. Cost pools
B. Cost drivers
C. Departments
D. Labor hours

Answer:

20. Which of the following is a transaction driver?

A. Machine hours
B. Number of purchase orders
C. Time spent
D. Direct labor cost

Answer:

21. Which is a duration cost driver?

A. Number of inspections
B. Inspection hours
C. Units produced
D. Orders received

Answer:

22. ABC is LEAST suitable when:

A. Many products exist
B. Overhead costs are significant
C. Products consume resources uniformly
D. Activities differ significantly

Answer:

23. Which statement is TRUE?

A. ABC increases cost distortion
B. ABC ignores overheads
C. ABC reduces cross-subsidization
D. ABC is simpler than traditional costing

Answer:

24. Cross-subsidization means:

A. Profitable products subsidize loss-making ones
B. Costs are equally distributed
C. Fixed costs are eliminated
D. Costs are ignored

Answer:

25. ABC was developed mainly to address problems of:

A. Marginal costing
B. Absorption costing
C. Traditional overhead allocation
D. Budgeting

Answer:

26. Which cost driver is suitable for material handling?

A. Number of units
B. Number of material moves
C. Machine hours
D. Labor cost

Answer:

27. Which is a limitation of ABC?

A. More accurate costing
B. High implementation cost
C. Better performance measurement
D. Improved decision-making

Answer:

28. ABC treats most overhead costs as:

A. Fixed
B. Variable with respect to activities
C. Period costs
D. Sunk costs

Answer:

29. ABC can be applied in:

A. Manufacturing only
B. Service sector only
C. Non-profit organizations only
D. Both manufacturing and service sectors

Answer:

30. Which activity adds NO value to customers?

A. Inspection
B. Assembly
C. Packaging
D. Design

Answer:

31. ABC improves cost accuracy by:

A. Using fewer cost drivers
B. Using a single overhead rate
C. Using multiple relevant cost drivers
D. Ignoring indirect costs

Answer:

32. Which of the following is a resource cost driver?

A. Machine hours
B. Number of orders
C. Time spent by employees
D. Units produced

Answer:

33. In ABC, activities consume:

A. Products
B. Resources
C. Customers
D. Departments

Answer:

34. Products in ABC consume:

A. Resources directly
B. Activities
C. Departments
D. Labor hours only

Answer:

35. Which costing system is preferred for complex operations?

A. Marginal costing
B. Standard costing
C. ABC
D. Process costing

Answer:

36. ABC is especially helpful for identifying:

A. Fixed costs
B. Variable costs
C. High-cost activities
D. Direct costs

Answer:

37. Which of the following is NOT an activity hierarchy level?

A. Unit-level
B. Batch-level
C. Customer-level
D. Facility-level

Answer:

38. ABC focuses on:

A. Departments
B. Activities
C. Profit centers
D. Cost centers

Answer:

39. Which costing method may overcost high-volume products?

A. ABC
B. Marginal costing
C. Traditional absorption costing
D. Variable costing

Answer:

40. ABC helps in eliminating:

A. Direct labor
B. Wasteful activities
C. Fixed costs
D. Product costs

Answer:

41. Which statement about ABC is correct?

A. It is mandatory under GAAP
B. It is mainly for internal management
C. It replaces financial accounting
D. It ignores overheads

Answer:

42. Which is a value-added activity?

A. Rework
B. Inspection
C. Assembly
D. Storage

Answer:

43. ABC can improve profitability by:

A. Increasing production
B. Better pricing and cost control
C. Increasing fixed costs
D. Ignoring overheads

Answer:

44. The first step in ABC implementation is:

A. Assign costs to products
B. Identify activities
C. Select cost drivers
D. Compute overhead rates

Answer:

45. Which costing system emphasizes cause-and-effect relationships?

A. Traditional costing
B. Marginal costing
C. ABC
D. Standard costing

Answer:

46. ABC is less effective when:

A. Overhead is high
B. Products are customized
C. Production is simple and repetitive
D. Costs are activity-driven

Answer:

47. Which of the following is an example of service-industry ABC?

A. Machine setup
B. Patient admission process
C. Assembly line operation
D. Material movement

Answer:

48. ABC supports strategic decisions like:

A. Market entry
B. Product discontinuation
C. Process improvement
D. All of the above

Answer:

49. Compared to traditional costing, ABC provides:

A. Less information
B. More accurate product costs
C. Lower data requirement
D. Less complexity

Answer:

50. ABC is primarily designed to improve:

A. Financial reporting
B. Tax compliance
C. Internal cost management
D. External audit

Answer:

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Numerical MCQs – Activity-Based Costing (ABC)

1. Setup Cost Allocation

A company has total setup cost of ₹240,000. Total setups = 120.
Product A requires 30 setups.
What setup cost is allocated to Product A?

A. ₹48,000
B. ₹60,000
C. ₹72,000
D. ₹80,000

Answer

2. Machine Cost Allocation

Machine-related overhead = ₹300,000
Total machine hours = 15,000
Product X uses 2,000 machine hours.

Allocated overhead?

A. ₹30,000
B. ₹35,000
C. ₹40,000
D. ₹50,000

Answer:

3. Order Processing Cost

Total order processing cost = ₹180,000
Total orders = 900
Product B placed 120 orders.

Allocated cost?

A. ₹18,000
B. ₹21,600
C. ₹24,000
D. ₹30,000

Answer:

4. Inspection Cost (Duration Driver)

Inspection cost = ₹90,000
Total inspection hours = 3,000
Product C uses 450 inspection hours.

Allocated cost?

A. ₹12,000
B. ₹13,500
C. ₹15,000
D. ₹18,000

Answer:

5. Material Handling Cost

Material handling cost = ₹150,000
Total material moves = 600
Product D requires 90 moves.

Allocated cost?

A. ₹18,000
B. ₹20,000
C. ₹22,500
D. ₹25,000

Answer:

6. Total ABC Overhead

Product E incurs:

Setup cost: ₹40,000
Machine cost: ₹60,000
Inspection cost: ₹20,000

Total ABC overhead?

A. ₹100,000
B. ₹110,000
C. ₹120,000
D. ₹130,000

Answer:

7. Cost per Unit under ABC

Total ABC overhead for Product F = ₹180,000
Units produced = 6,000

Overhead per unit?

A. ₹25
B. ₹28
C. ₹30
D. ₹35

Answer

8. Activity Rate Calculation

Total quality inspection cost = ₹96,000
Total inspections = 800

Inspection cost per inspection?

A. ₹100
B. ₹110
C. ₹120
D. ₹150

Answer:

9. Batch-Level Cost

Setup cost = ₹200,000
Number of batches = 100
Product G produced in 25 batches.

Allocated cost?

A. ₹40,000
B. ₹45,000
C. ₹50,000
D. ₹55,000

Answer:

10. ABC vs Traditional Costing

Traditional overhead per unit = ₹80
ABC overhead per unit = ₹65
Units produced = 4,000

Overcosting under traditional costing?

A. ₹40,000
B. ₹50,000
C. ₹60,000
D. ₹65,000

Answer

11. Customer Order Cost

Customer support cost = ₹120,000
Total customer calls = 2,000
Product H related calls = 300

Allocated cost?

A. ₹15,000
B. ₹18,000
C. ₹20,000
D. ₹22,000

Answer:

12. Multiple Activity Allocation

Product J uses:

40 setups @ ₹2,000
1,500 machine hours @ ₹25
200 inspections @ ₹100

Total ABC overhead?

A. ₹125,000
B. ₹135,000
C. ₹145,000
D. ₹155,000

Answer:

13. Low Volume Product

ABC overhead = ₹90,000
Units produced = 1,000

Overhead per unit?

A. ₹60
B. ₹70
C. ₹80
D. ₹90

Answer:

14. Cost Driver Rate

Purchase ordering cost = ₹150,000
Total purchase orders = 750

Cost per purchase order?

A. ₹150
B. ₹175
C. ₹200
D. ₹225

Answer:

15. Product Discontinuation Decision

Product K selling price/unit = ₹400
ABC cost/unit = ₹360

Contribution per unit?

A. ₹20
B. ₹30
C. ₹40
D. ₹50

Answer:

16. Inspection Avoidance Savings

Inspection hours reduced by 500
Cost per inspection hour = ₹40

Cost savings?

A. ₹15,000
B. ₹18,000
C. ₹20,000
D. ₹22,000

Answer:

17. Total Cost per Unit

Direct material = ₹120
Direct labor = ₹80
ABC overhead per unit = ₹100

Total cost per unit?

A. ₹280
B. ₹290
C. ₹300
D. ₹320

Answer:

18. Cross-Subsidization Effect

Traditional overhead/unit = ₹90
ABC overhead/unit = ₹70
Units = 3,000

Amount of cost distortion?

A. ₹40,000
B. ₹50,000
C. ₹60,000
D. ₹70,000

Answer:

19. Service Industry ABC

Patient admission cost = ₹200,000
Total patients = 4,000
Patients in Cardiology = 600

Allocated cost?

A. ₹25,000
B. ₹30,000
C. ₹35,000
D. ₹40,000

Answer:

20. Profit under ABC

Sales revenue = ₹900,000
Total ABC cost = ₹720,000

Profit?

A. ₹150,000
B. ₹160,000
C. ₹170,000
D. ₹180,000

Answer:

Exam Tips (CMA & ACCA)

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Saturday, January 10, 2026

Question ⁉️ on Decision Analysis CVP Bep marginal analysis Etc CMA Part 2

Below are EXAM-ORIENTED NUMERICAL ILLUSTRATIONS WITH FULL ANSWERS on exactly as tested in US CMA Part 2.

All illustrations include CVP, BEP, Marginal Analysis, Pricing Strategy, Margin of Safety, Make-or-Buy, Replacement, Joint Products (Further Processing).

📊 US CMA PART 2 – DECISION ANALYSIS

ILLUSTRATION 1: CVP Analysis & BEP (Units and Sales Value)

Data:

Selling price per unit = $50

Variable cost per unit = $30

Total fixed cost = $200,000

Required:

1. Contribution per unit

2. BEP (units)

3. BEP (sales value)

Solution:

✅ Answer:

• BEP Units =

• BEP Sales = $

ILLUSTRATION 2: Margin of Safety (MOS)

Actual sales = 14,000 units

BEP sales = 10,000 units

Required: Margin of Safety

✅ Answer: Margin of Safety = ***%

ILLUSTRATION 3: Target Profit (CVP)

Fixed cost = $180,000

Contribution per unit = $30

Target profit = $120,000

Required: Sales units to achieve target profit

✅ Answer: ******units

ILLUSTRATION 4: Special Order Pricing (Idle Capacity)

Normal price = $100

Variable cost = $60

Special order price = $75

Order quantity = 2,000 units

Idle capacity available

Decision: Accept or Reject?

✅ Answer:

📌 CMA Rule: Fixed cost irrelevant if idle capacity exists.

ILLUSTRATION 5: Key Factor / Limiting Factor (Product Mix)

Product Contribution per unit Machine hours/unit

A $40 4 hrs

B $30 2 hrs

Machine hours available = 800 hrs

Required: Optimal product mix

Contribution per limiting factor

Priority:

✅ Answer:

ILLUSTRATION 6: Make or Buy Decision

Particulars Make (per unit)

Direct material $18

Direct labor $12

Variable OH $10

Fixed OH $8 (40% avoidable)

Supplier price = $45

Relevant cost of making:

Decision:

✅ Answer:

ILLUSTRATION 7: Replacement Decision

Old machine:

• Book value = $50,000

• Salvage value now = $10,000

• Annual operating cost = $80,000

New machine:

• Cost = $120,000

• Salvage value = $0

• Annual operating cost = $40,000

• Life = 5 years

Relevant Cost Comparison:

✅ Answer:

ILLUSTRATION 8: Shut Down or Continue

Sales = $500,000

Variable cost = $320,000

Fixed cost = $220,000

Avoidable fixed cost = $120,000

Decision:

✅ Answer:

ILLUSTRATION 9: Joint Products – Further Processing Decision

Joint cost (irrelevant) = $100,000

Product Split-off Value After Processing Value Further Processing Cost

X $80,000 $120,000 $30,000

Incremental Analysis:

Incremental revenue =

Incremental cost =

Net benefit =

✅ Answer:

ILLUSTRATION 10: Pricing Strategy (Minimum Price)

Variable cost per unit = $45

Fixed cost = $200,000 (already covered)

Minimum acceptable price?

Minimum price = Variable cost only

✅ Answer:

🔑 CMA EXAM KEY RULES TO REMEMBER

• Joint cost = Always irrelevant

• Book value = Sunk cost

• Contribution per limiting factor = Decision driver

• Fixed cost = Relevant only if avoidable

• Accept special order if positive contribution

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MCQ Questions...

Each question targets common CMA pitfalls: sunk cost confusion, relevant vs irrelevant cost, limiting factor logic, joint cost traps, pricing under capacity constraints, etc.

📊 US CMA PART 2

30 Decision Analysis MCQs...

CVP, BEP & Margin of Safety (Q1–Q6)

Q1. A company has contribution margin ratio of 40%. Fixed costs are $360,000. What is the BEP sales?

A. $900,000

B. $1,200,000

C. $1,440,000

D. $360,000

✅ Answer:

Q2. If selling price increases by 10% and variable cost increases by 10%, BEP sales will:

A. Increase

B. Decrease

C. Remain unchanged

D. Cannot be determined

✅ Answer:

(Contribution per unit increases → BEP decreases)

Q3. Margin of safety is BEST described as:

A. Excess of contribution over fixed cost

B. Excess of actual sales over BEP sales

C. Excess of budgeted sales over actual sales

D. Excess of profit over target

✅ Answer:

Q4. A company earns zero profit when sales are $800,000. If fixed costs increase by $40,000, new BEP sales will be:

A. $760,000

B. $800,000

C. $840,000

D. Cannot be determined

✅ Answer:

(CM ratio unknown – classic CMA trap)

Q5. At BEP level, which statement is TRUE?

A. Contribution equals variable cost

B. Sales equals fixed cost

C. Contribution equals fixed cost

D. Profit equals contribution

✅ Answer:

Q6. If margin of safety is zero, the company is operating:

A. At maximum capacity

B. Above BEP

C. Below BEP

D. At BEP

✅ Answer:

Pricing & Special Order Decisions (Q7–Q11)

Q7. Minimum price for a special order when idle capacity exists equals:

A. Full cost

B. Variable cost

C. Variable + fixed cost

D. Market price

✅ Answer:

Q8. A special order should be REJECTED when:

A. Price < variable cost

B. Price < full cost

C. Fixed cost increases

D. Idle capacity exists

✅ Answer:

Q9. Fixed selling expenses are usually:

A. Relevant for pricing decisions

B. Irrelevant for pricing decisions

C. Relevant if avoidable

D. Always sunk

✅ Answer:

Q10. When capacity is FULL, accepting a special order requires considering:

A. Only variable cost

B. Only fixed cost

C. Opportunity cost

D. Joint cost

✅ Answer:

Q11. A company reduces price to increase volume. Fixed costs remain unchanged. BEP sales:

A. Increase

B. Decrease

C. Remain same

D. Become zero

✅ Answer:

Limiting Factor & Product Mix (Q12–Q16)

Q12. Key factor analysis prioritizes products based on:

A. Contribution per unit

B. Selling price per unit

C. Contribution per limiting factor

D. Gross margin

✅ Answer:

Q13. If labor hours are limiting, optimal product mix maximizes:

A. Total sales

B. Contribution per labor hour

C. Contribution per unit

D. Net profit per unit

✅ Answer:

Q14. Fixed costs are ignored in limiting factor decisions because they are:

A. Sunk

B. Unavoidable

C. Irrelevant to ranking

D. Always zero

✅ Answer:

Q15. When multiple constraints exist, CMA recommends using:

A. Simple ranking

B. Linear programming

C. Break-even analysis

D. Regression

✅ Answer:

Q16. Contribution per unit ranking instead of per limiting factor will MOST likely result in:

A. Optimal profit

B. Overproduction

C. Suboptimal profit

D. Same decision

✅ Answer:

Make or Buy & Replacement (Q17–Q21)

Q17. In a make-or-buy decision, which cost is NEVER relevant?

A. Direct material

B. Avoidable fixed cost

C. Allocated fixed overhead

D. Variable overhead

✅ Answer:

Q18. Book value of an old machine is:

A. Relevant

B. Opportunity cost

C. Sunk cost

D. Avoidable cost

✅ Answer:

Q19. Opportunity cost should be included in decisions when:

A. Capacity is idle

B. Resource has alternative use

C. Fixed costs exist

D. Joint products exist

✅ Answer:

Q20. Replacement decisions compare:

A. Total historical cost

B. Net book value

C. Future relevant costs

D. Market value

✅ Answer:

Q21. If old equipment has zero salvage value, it means:

A. Replace immediately

B. Book value is zero

C. No opportunity cost exists

D. Replacement is irrelevant

✅ Answer:

Shut Down & Continue (Q22–Q25)

Q22. A company should continue operations if:

A. Sales exceed variable cost

B. Contribution exceeds avoidable fixed cost

C. Contribution exceeds total fixed cost

D. Revenue exceeds total cost

✅ Answer:

Q23. Fixed costs are relevant in shutdown decisions when they are:

A. Historical

B. Avoidable

C. Allocated

D. Committed

✅ Answer:

Q24. A temporary shutdown decision is a:

A. Capital budgeting decision

B. Pricing decision

C. Short-term decision

D. Strategic decision

✅ Answer:

Q25. Loss minimization occurs when:

A. Contribution is zero

B. Contribution equals fixed cost

C. Contribution is maximized

D. Variable cost is minimized

✅ Answer:

Joint Products & Further Processing (Q26–Q30)

Q26. Joint cost is:

A. Relevant for pricing

B. Relevant for further processing

C. Always irrelevant for decisions

D. Relevant for inventory valuation only

✅ Answer:

Q27. Decision to process further depends on:

A. Allocated joint cost

B. Incremental revenue vs incremental cost

C. Market demand

D. Total cost

✅ Answer:

Q28. A product should be sold at split-off when:

A. Further processing cost < joint cost

B. Incremental loss occurs

C. Incremental profit occurs

D. Contribution is positive

✅ Answer:

Q29. Which is a by-product characteristic?

A. High sales value

B. Negative contribution

C. Minor relative value

D. Separate production

✅ Answer:

Q30. Incorrect allocation of joint cost leads to:

A. Wrong inventory valuation

B. Wrong further processing decision

C. Wrong tax calculation

D. Wrong contribution analysis

✅ Answer:

🎯 CMA EXAM STRATEGY

Ignore sunk & allocated costs. Focus only on future, incremental, and opportunity costs.

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