CA Cost Accounting 3 — Questions and Answers
Question 1: Joint costs are BEST described as:
- Costs incurred after the split-off point for each product
- Costs shared by two or more products produced simultaneously up to the split-off point (Correct answer)
- Overhead costs allocated to production departments
- Variable costs that change with each additional batch produced
Correct answer: Costs shared by two or more products produced simultaneously up to the split-off point
Joint costs are incurred before the split-off point where two or more products emerge from a common production process and cannot be separately identified.
Question 2: Which joint cost allocation method uses the revenue at the split-off point as the allocation base?
- Net realizable value method
- Physical quantity method
- Sales value at split-off method (Correct answer)
- Constant gross margin percentage method
Correct answer: Sales value at split-off method
The sales value at split-off method allocates joint costs based on each product's relative market value at the exact point where they separate.
Question 3: A by-product is BEST characterized as:
- A primary output with significant sales value
- A secondary output with relatively minor sales value (Correct answer)
- A product that incurs the majority of joint costs
- A defective main product sold at a reduced price
Correct answer: A secondary output with relatively minor sales value
By-products are incidental outputs of a production process that have minor sales value compared to the main product(s).
Question 4: Which of the following costs is ALWAYS irrelevant in a make-or-buy decision?
- Variable manufacturing cost of making the part
- Opportunity cost of idle capacity used for the part
- Sunk costs already incurred on equipment (Correct answer)
- Avoidable fixed costs if production ceases
Correct answer: Sunk costs already incurred on equipment
Sunk costs are past expenditures that cannot be recovered and do not affect future cash flows, making them always irrelevant in any decision.
Question 5: In the net realizable value (NRV) method of joint cost allocation, NRV is calculated as:
- Final selling price only
- Final selling price minus separable costs after split-off (Correct answer)
- Joint cost allocated plus separable costs
- Sales value at split-off minus joint costs
Correct answer: Final selling price minus separable costs after split-off
NRV = Final selling price − Separable (additional) processing costs incurred after the split-off point for each product.
Question 6: A company should accept a special order at a price below normal selling price ONLY if:
- The order price exceeds total fixed cost per unit
- The incremental revenue from the order exceeds the incremental cost to fill it (Correct answer)
- The order eliminates the need for any variable costs
- The regular customers are unaware of the discounted price
Correct answer: The incremental revenue from the order exceeds the incremental cost to fill it
A special order is profitable whenever incremental revenue exceeds incremental (relevant) costs; fixed costs are usually irrelevant if capacity exists.
Question 7: What is the effect on contribution margin per unit when variable costs increase but selling price remains unchanged?
- Contribution margin per unit increases
- Contribution margin per unit decreases (Correct answer)
- Contribution margin per unit remains the same
- Break-even point decreases
Correct answer: Contribution margin per unit decreases
Contribution margin per unit = Selling price − Variable cost per unit; if variable cost rises with price fixed, contribution margin falls.
CA Cost Accounting 3
Joint costs are BEST described as: