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

The correct answer is option 1

Key PointsKaizen System:

• Kaizen is a Japanese phrase that means "constant improvement" or "transformation for the best."
• It is a Japanese business philosophy that focuses on processes that enhance operations over time and incorporate all personnel.
• Kaizen views productivity development as a thorough and steady process.
• Kaizen is a broad concept that incorporates a variety of principles.
• It includes building a team attitude, refining daily operations, assuring employee involvement, and making a job more satisfying, less stressful, and safer.

Important Points Kaizen & PDCA Cycle:

P - Plan - Recognize an opportunity and plan a change.

D - Do - Test the change. Carry out a small-scale study.

C - Check: Review the test, analyse the results, and identify what you've learned.

A - Act: Take action based on what you learned in the study step.

The correct answer is Availability * Performance * Quality

Key Points

Overall Equipment Effectiveness (OEE): All losses are factored into the OEE. An OEE of 100 percent indicates that you are producing only Good Parts as quickly as possible, with no Stop Time.

1. Availability: Unplanned and Planned Stops are factored into availability. The procedure is always running during Planned Production Time if the Availability score is 100 percent.

2. Performance: Slow Cycles and Small Stops are taken into account when calculating performance. A 100 percent Performance score indicates that the procedure is going as quickly as feasible.

3. Quality: Defects are taken into account when determining quality (including parts that need rework). A perfect quality score indicates that there are no flaws (only Good Parts are being produced).

Formula for OEE

The incorrect Answer is option 2
Key Points

5 S system:

• The 5S acronym stands for five Japanese terms that denote the processes in the workplace organisation process.
• The 5S represents Seiri (Sort), Seiton (Straighten), Seiso (Shine, Sweep), Seiketsu (Standardize), Shitsuke (Sustain).
• The five S methodology assists a workplace in removing items that are no longer needed (sort), organising items to maximise efficiency and flow (straighten), cleaning the area to make it easier to spot problems (shine), implementing colour coding and labels to stay consistent with other areas (standardise), and developing behaviours that keep the workplace organized over time (sustain).

Six Sigma:

• Six Sigma provides tools and procedures that assist firms minimise variation, eliminate defects, and discover the fundamental causes of errors, allowing them to provide superior goods and services to their customers.
• The Six Sigma methodology asks for achieving a "six sigma" level of operation, which translates to 3.4 defects per million opportunities. The goal is to perfect processes through continual process improvement until they deliver stable and predictable results.

TPM: 

• Total Productive Maintenance (TPM) is an approach for incorporating equipment maintenance into the manufacturing process' standard operating procedures.
• A TPM program's purpose is to decrease or eliminate losses caused by unplanned downtime.

Important Points Analysis of Options:

Option 1: "5S is a system for organizing spaces so work can be performed efficiently, effectively and safety."

• 5S is a system for organising workspaces so that work may be done quickly, efficiently, and safely.
• This technique emphasises putting things back where they belong and keeping the workplace clean, making it easier for individuals to complete their tasks without wasting time or causing damage.
• Hence, Option 1 is correct.

Option 2: "Seiri is the last step of 5S system."

• The term 5S comes from five Japanese words:
  • Seiri          =    Sort 
  • Seiton       =    Startighten or Set in Order
  • Seiso        =     Shine
  • Seiketsu   =     Standardize
  • Shitsuke   =     Sustain
• Seiri is the first step of 5S system. The last step is Shitsuke. Hence, option 2 in incorrect. 

Option 3: "DMAIC and DMADV are the two main Six Sigma methodologies."

• The two most widely used Six Sigma methodologies are DMAIC and DMADV
• The DMAIC project approach is the most well-known and widely used LSS project method. DMAIC is a process improvement methodology that focuses on enhancing an existing process.
• DMADV focuses on the process of creating a new product, service, or process.
• Hence, option 3 is Correct

Option 4: "TPM system focuses on eight pillars of success."

• TPM system is focuses on following 8 pillars.
  • ​Pillar 1: Autonomous Maintenance
  • Pillar 2: Planned Maintenance
  • Pillar 3: Quality Maintenance
  • Pillar 4: Focused Improvement
  • Pillar 5: Early Equipment Maintenance
  • Pillar 6: Education and Training
  • Pillar 7: Health, Safety & Environment
  • Pillar 8: TPM in Office Functions
• Hence, option 4 is correct

The correct answer is Rs. 10,500

Key Points

Direct labour cost budget : 

• The direct labour budget is used to determine how many work hours will be required to create the items listed in the production budget.
• The direct labour budget is useful for forecasting the number of people required to staff the production area over the course of the budget year.

Important Points Solution:

 Budgeted production     =  200 units

 Labour hours per unit    =  6 hours    (productive hours)

 Labour Rate                  =  Rs. 7/hour

 Idle Time                       =  20%

 Let the total Hours = h 

 Total Hours = Idle Time + Productive Hours

 Therefore,  

                  h - 20% of h = 6 

                  h - 0.2h = 6

                  0.8 h = 6

                  h = 7.5 hours

      Total Hours = 7.5 Hours

 Direct labour cost budget = Budgeted production Total Hours x Labour Rate

 Direct labour cost budget = 200 x 7.5 x 7 

 Direct labour cost budget = 10500

The correct answer is 28,000 units

Important Points             Total sales =  Rs. 60,000

 Total variable costs = Rs. 30,000

 Contribution = total sales - total variable costs

 Contribution   = 60000 - 30000 = 30,000

 Contribution Per Unit = Contribution / Unit Sold

 Contribution Per Unit = 30000 / 20000

 Contribution Per Unit = 1.5 

Calculation of the volume of sales to earn a profit of Rs 24,000.

Sales = (Total Fixed Cost + Expected Profit) / Contribution per unit

Sales = (18000 + 24000) / 1.5

Sales = 28,000 Units

Volume of sales to earn a profit of Rs. 24,000 is 28000 units

Cost Of Goods Sold (COGS) includes all the costs and expenses related directly to the production of goods. It excludes indirect costs such as overhead and sales & marketing.

Given: 

• Opening inventory = Rs. 3,500,
• Closing inventory = Rs. 1,500, and
• Cost of goods sold (COGS) = Rs. 22,000

Solution:

• Formula of COGS:
  • COGS = Opening inventory + Purchases - Closing inventory
  • 22,000 = 3,500 + Purchases - 1,500
  • 22,000 = 2,000 + Purchases
  • Purchases = 22,000 - 2,000
  • Purchases = 20,000

Therefore, the amount of purchase is Rs. 20,000.

The correct statement is Opening Stock + Net Purchases + Direct Expenses - Closing Stock = Cost of Goods Sold.

Key Points

• Cost of goods sold (COGS) is the cost of merchandise that is sold to the customers.
• It includes the cost of raw materials purchased, direct expenses incurred, the value of opening stock, i.e., the value of the last year’s unsold stock and excludes closing stock if any, i.e., the value of the current year’s unsold stock.
• The formula to calculate COGS is:
  • Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock.

Statement (I): Accounting profit is a surplus of total revenue over and above all paid-out costs, including both manufacturing and overhead expenses.

Explanation:

In an accounting sense, profit is a surplus of revenue over and above all paid-out costs, including both manufacturing and overhead expenses. 

Accounting Profit = TR – (W + R + I + M)

• where TR = total revenue,
• W = wages and salaries,
• R = rent,
• I = interest, and
• M = cost of materials.

Obviously, while calculating accounting profit, only explicit or book costs, i.e., the cost recorded in the books of accounts, are considered.

Thus, the statement I is correct.

Statement (II): Economic or pure profit is a residual left after all contractual costs have been met, including the transfer costs of management, insurable risks, depreciation, and payments to shareholders sufficient to maintain investment at its current level.

Explanation: 

1. The concept of ‘economic profit’ differs from that of ‘accounting profit’.
2. Economic Profit takes into accounts also the implicit or imputed costs.
3. The implicit cost is the opportunity cost. Opportunity cost is defined as the payment that would be ‘necessary to draw forth the factors of production from their most remunerative alternative employment.’
4. Alternatively, the opportunity cost is the income foregone which a businessman could accept from the second bast alternative use of his resources. 
5. Accounting profit does not take into account the opportunity cost.
6. It should also be noted that the economic or pure profit makes provision also for
   • insurable risks,
   • depreciation, and
   • necessary minimum payment to shareholders to prevent them from withdrawing their capital.
7. Pure profit may thus is defined as a residual left after all contractual costs have been met, including the transfer cost of management, insurable risks, depreciation, and payment to shareholders sufficient to maintain investment at its current level.
8. Thus, Pure Profit = Total Revenue – (Explicit Cost + Implicit Costs). 

Thus, statement II is correct.

Therefore, Both statements are correct.

Earnings Per Share – EPS:

• Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding.
• EPS indicates how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value.
• A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.

Cost of Equity:

• The cost of equity capital may be defined as the minimum rate of return that a firm must earn on the equity-financed portion of an investment project in order to leave unchanged the market prices of its stock. 

Earning Price (E/P) Approach to calculate Cost of Equity.

1. ​Under this approach, earning per share will actually determine the market price per share.
2. In other words, the cost of equity capital is equivalent to the rate which must be earned on incremental issues of ordinary shares so as to maintain the present value of investment intact, i.e. the cost of equity capital is measured by the earning price ratio.

According to this approach, the cost of equity capital is:

Cost of Equity (Ke) = E1/P0

Where:

  E1     = Expected earnings per share for the next year

  P0     = current market price per share

  E1 can be calculated as (Current EPS) * (1 + growth rate of EPS)

Therefore, As per earning per share approach cost of equity can be calculated as (where g is growth rate) is EPS(I+g)/current market price.

Break-Even Point: 

• The break-even point is the point where a company’s revenues equal its costs.
• The calculation for the break-even point can be done one of two ways; one is to determine the number of units that need to be sold, or the second is the amount of sales, in rupees, that needs to happen.

Formula to calculate Overall BEP in units:

Overall BEP (in units) = Operating BEP(in units) + Financial BEP(in units)

Operating BEP in units = 2500

Fixed Cost = Rs. 20,000/-

Contribution per unit = 20,000/2500 = 8

Financial BEP = Rs. 4,000/-

Financial BEP in units = 4,000/8 = 500

Therefore, Overall BEP (in units) =2500+500 = 3000 units.

GIVEN FIXED COST = Rs. 20000/-, the operating BEP in units = 2500 and financial BEP = Rs. 4000, the overall BEP in units is 3000.

The correct Answer is Option 1

The realizable value of the scrap is deducted from the factory overheads while preparing the cost sheet.Key Points

• Scrap value is a relatively minor sum received by a company from the sale of manufacturing elements that remain after the creation of its goods in cost accounting.
• When a physical object is deemed no longer viable, scrap value is the value of its various components. Individual components, referred to as scrap, are worth anything if they can be repurposed.
• Scrap is made from various materials that are leftover over after manufacturing in cost accounting. Scrap is a commodity with a poor resale value.
• The realizable value of the scrap is deducted from the factory overheads while preparing the cost sheet
• Scrap value is present as follows in cost sheet:

The correct answer is Abnormal Loss.

Key Points Process Costing:

• Process costing is an accounting method typically used by manufacturing organizations that mass manufacture a huge volume of similar items or units of output that go through a series of processes in production,
• Instead of tracking costs for each individual item, organisations use process costing to establish item cost by tracking the cost of each stage in the manufacturing process.
• Process costing is widely used in industries such as oil refining, food production, chemical processing, textiles, glass, cement and paint manufacture

Important Points

Abnormal Loss:

• The meaning of abnormal loss is any accidental loss to the consigned goods or loss caused by carelessness.
• Examples of such losses are loss by theft or loss by fire, earthquake, flood, accidents, war, loss in transit, etc.
• Such losses are considered abnormal. Sometimes businessmen take an insurance policy for the goods sent or received. Such a policy can only be taken for the coverage of abnormal loss caused to goods.
• Abnormal Loss does not affect the cost of good units.

Hence, the type of loss that does not affect the cost of goods is known as Abnormal Loss.

Additional Information

Normal Loss- Normal loss is an inherited loss that cannot be avoided. It should be taken into account while valuing the closing stock. This loss affects the cost of good units. For instance, if a consignment of fruits is sent, some of them will be destroyed in loading and unloading while some fruits will not be in a state to be sold. No entry is recorded for normal loss in the books. Examples of Normal Loss are – Evaporation, Leakage, Breakage, Loss of goods in transit, Reduced Demand.

Standard Loss- The loss expected or anticipated prior to production is a normal process loss. It is thus called a standard loss.

Seasonal Loss- The loss that arises out of the seasonal sales in known as seasonal loss. 

Sunk cost is a cost that has already been incurred and that cannot be changed in any decision made now or in the future.

Key Points

• Cash which has already been expended and cannot be reclaimed is referred to as a sunk cost. For example, a manufacturing company may have a lot of sunk expenses, such as the cost of machinery and equipment, as well as the cost of the factory's lease.
• The concept that "you have to spend money to make money" is represented in the phenomena of sunk cost in business.
• A sunk cost is distinct from potential costs that a company may incur, such as inventory acquisition costs or product price decisions.
• Sunk costs are not included in future business choices, since the cost will stay constant regardless of the decision's outcome.

Additional Information

• Imputed Cost - Imputed costs are the expenses of committing resources to a certain plan of action while renouncing any potential advantages from using those same resources in another way. For example, if a person chose to attend a master's program instead of working, the imputed cost will be the income they would have earned while in school.
• Historical Cost - The original cost of an asset, as documented in an entity's books of accounts, is known as historical cost. Many transactions are listed at their historical cost in an organization's accounting records. A corporation's worth can only be calculated using the historical cost of its assets, rather than the current market price or sales value. The records preserved on the basis of historical cost are deemed consistent, comparable, verifiable, and dependable, which is a significant benefit.
• Marginal Cost - The cost of manufacturing one extra unit of an item is known as the marginal cost. All costs that fluctuate with the degree of output are included in the marginal cost. For instance, if a corporation wants to construct a new plant in order to manufacture more items, the cost of doing so is a marginal cost.

The correct answer is 

Key Points Profit Volume Ratio (P/V Ratio):

• The Profit Volume (P/V) Ratio is a measurement of the rate of change of profit as a function of sales volume.
• It's one of the most essential ratios for calculating profitability because it shows the contribution made in relation to sales.
• The PV ratio or P/V ratio is arrived by using following formula: 
  P/V ratio = contribution x100 / sales
• Contribution means the difference between sale price and variable cost

Important Points Solution;

     P/V ratio = contribution x100 / sales
     P/V ratio = 40000 x 100 / 2,00,000

     P/V ratio = 20 %

Cost Of Goods Sold (COGS) includes all the costs and expenses related directly to the production of goods. It excludes indirect costs such as overhead and sales & marketing.

Given: 

• Opening inventory = Rs. 3,500,
• Closing inventory = Rs. 1,500, and
• Cost of goods sold (COGS) = Rs. 22,000

Solution:

• Formula of COGS:
  • COGS = Opening inventory + Purchases - Closing inventory
  • 22,000 = 3,500 + Purchases - 1,500
  • 22,000 = 2,000 + Purchases
  • Purchases = 22,000 - 2,000
  • Purchases = 20,000

Therefore, the amount of purchase is Rs. 20,000.