CA Cost Accounting 2 — Questions and Answers
Question 1: Which costing method is most appropriate when products are manufactured in continuous, homogeneous batches?
- Job order costing
- Process costing (Correct answer)
- Activity-based costing
- Throughput costing
Correct answer: Process costing
Process costing accumulates costs by department or process and averages them across homogeneous units produced continuously.
Question 2: In a process costing system using the weighted-average method, equivalent units of production include:
- Only units completed and transferred out during the period
- Units completed plus work done on ending WIP only
- Units completed plus equivalent units in ending WIP, ignoring beginning WIP percentage (Correct answer)
- Units started minus ending WIP units
Correct answer: Units completed plus equivalent units in ending WIP, ignoring beginning WIP percentage
Under weighted-average, equivalent units = units transferred out + (ending WIP units × completion %). Beginning WIP's prior-period work is merged in without separate tracking.
Question 3: A company has a favorable material quantity variance. This MOST likely means:
- Materials were purchased at a lower price than standard
- Less material was used than the standard quantity allowed for actual output (Correct answer)
- More material was used than the standard quantity allowed for actual output
- The actual material price was higher than standard
Correct answer: Less material was used than the standard quantity allowed for actual output
A favorable quantity variance means actual usage was less than the standard quantity allowed for actual production, indicating efficient material use.
Question 4: Which of the following is an example of a committed fixed cost?
- Advertising expenditure
- Management training programs
- Depreciation on factory equipment (Correct answer)
- Charitable donations
Correct answer: Depreciation on factory equipment
Committed fixed costs arise from long-term investment decisions and cannot be easily changed in the short run; depreciation on factory equipment is a classic example.
Question 5: Under absorption costing, when production exceeds sales, net income compared to variable costing will be:
- Lower
- Equal
- Higher (Correct answer)
- It depends on the overhead rate
Correct answer: Higher
When production exceeds sales, fixed overhead is deferred in ending inventory under absorption costing, causing higher net income compared to variable costing.
Question 6: The margin of safety ratio is calculated as:
- (Actual sales − Break-even sales) ÷ Actual sales (Correct answer)
- Fixed costs ÷ Contribution margin ratio
- Contribution margin ÷ Net income
- (Break-even sales − Actual sales) ÷ Break-even sales
Correct answer: (Actual sales − Break-even sales) ÷ Actual sales
The margin of safety ratio = (Actual sales − Break-even sales) ÷ Actual sales, showing the percentage by which sales can drop before losses occur.
Question 7: What does a high degree of operating leverage (DOL) indicate?
- The company has low fixed costs relative to variable costs
- A small change in sales volume will produce a large change in net income (Correct answer)
- The company is near its break-even point and very profitable
- Variable costs are the dominant cost driver
Correct answer: A small change in sales volume will produce a large change in net income
A high DOL means fixed costs are a large proportion of total costs, so small sales changes create amplified swings in operating income.
CA Cost Accounting 2
Which costing method is most appropriate when products are manufactured in continuous, homogeneous batches?