Costing MCQs 3

1. The standard cost of a product is:

a. The planned unit cost of products produced during a particular period
b. The average unit cost of products produced in the previous period
c. The average unit cost of products produced during a particular period
d. The unit cost of products incurred at the start of a particular period
Ans. a
Solution:
The standard cost of a product is the planned unit cost of a product, i.e. an estimate made as carefully as
possible of what each product is likely to cost during a particular costing period.

2. The efficiency ratio can be defined as:

a. Actual hours worked / actual production based on standard hours
b. Standard hours produced / budgeted labour hours
c. Standard hours produced / actual labour hours worked
d. actual hours worked / budgeted labour hours
Ans. c
Solution:
The efficiency ratio shows the actual number of hours and compares this with the standard time that it
should have taken to make the products. The ratio can be written in the form:-
(Standard hours produced/ Actual labour hours worked) * 100

3. An adverse material usage variance together with a favourable materials price variance could suggest
that:
a. We are paying the same for our materials but we are using more than expected
b. We are paying less for our materials than expected but we are using more materials
c. We are using less material than expected but in total we are paying more than we should
d. We are paying higher prices for our materials than expected
Ans. b
Solution:
If we are experiencing an adverse material usage variance we will be using more materials than expected. If
we have a favourable material price variance we must actually be paying less per unit for the material. This
scenario could be due to us buying poor quality, lower price materials. By virtue of this we would have to
maybe use more of the materials to make the same level of output.

4. An adverse labour efficiency variance together with a favourable labour rate variance may mean that:
a. The business is paying a higher hourly rate than the standard
b. Less labour hours are needed to make the same amount of output
c. More products are being made per hour
d. Less skilled staff are being used in production
Ans. d
Solution:
An adverse labour efficiency variance would mean that the labour is taking longer to make the expected
level of output. The rate of pay however will be lower than standard as there is a favourable rate variance.
This scenario could occur if we were using less skilled staff in the production process, we could pay them
less but their output, in terms of standard hours produced, would be lower.
5. Marginal Costing is also known as _________.
a. Variable Costing
b. Differential Costing
c. Out-of-pocket Costing
d. All of the above
Ans. d
Solution: Marginal costing is defined as the “ascertainment of marginal costs and of the effect on profit of
changes in volume or type of output by differentiating between fixed costs and variable costs.” This
technique of costing is also known as “Variable costing”, “Differential costing” or “Out-of-pocket costing”.

6. If the total cost of 100 units is Rs 5000 and those of 101 units is Rs 5030 then increase of Rs 30 in total
cost is
a. Marginal cost
b. Prime cost
c. All variable overheads
d. None of the above
Ans. a
Solution:
Marginal cost is the cost of one unit of product which would be avoided if that unit is not produced.

7. Given production is 1,00,000 units; fixed costs are Rs 2,00,000; Selling price is Rs 10 per unit and
variable cost is Rs 6 per unit. Determine profit using the technique of marginal costing.
a. Rs 2,00,000
b. Rs 8,00,000
c. Rs 6,00,000
d. None of the above
Ans. a
Solution:
Profit = Sales cost - (fixed cost + variable cost)
Profit = 1,00,000*10 - (2,00,000 + 1,00,000*6)
= 10,00,000 - 8,00,000
= Rs. 2,00,000

8. __________ contains the picture of total plans during the budget period and it comprises information
relating to sales, profit, cost, production etc.
a. Master budget
b. Functional budget
c. Cost budget
d. None of the above
Ans. a
Solution:
Master budget is a consolidated summary of the various functional budgets. It is the culmination of the
preparation of all other budgets like the sales budget, production budget, purchase budget, etc.

9. ________ is the first step of the budgetary system and all other budgets depend on it.
a. Cost budget
b. Sales budget
c. Production budget
d. None of the above
Ans. b
Solution:
The sales budget is a forecast of total sales, expressed in terms of money and quantity. The sales budget is
regarded as the keystone of budgeting.

10. A flexible budget is:

a. A budget that comprises variable costs only
b. A budget that is constantly being changed
c. A budget that is adjusted to reflect different costs at different activity levels
d. A budget that will be changed at the end of every month in order to reflect the actual costs of a
department
Ans. c
Solution:
A flexible budget will be adjusted to reflect the actual level of output that is achieved. Costs will, therefore,
be adjusted to compensate for the fact that more or less has been produced than was expected.