CA Cost Accounting & Management 2 — Questions and Answers
Question 1: Which costing method treats fixed manufacturing overhead as a period cost rather than a product cost?
- Absorption costing
- Variable costing (Correct answer)
- Activity-based costing
- Job order costing
Correct answer: Variable costing
Variable (marginal) costing expenses fixed manufacturing overhead in the period incurred, unlike absorption costing which includes it in product cost.
Question 2: A company has a favorable materials price variance but an unfavorable materials usage variance. The MOST likely cause is:
- Workers used more material due to poor quality purchases at lower prices (Correct answer)
- Standard prices were set too high
- Actual output exceeded budgeted output
- The purchasing department negotiated better wages
Correct answer: Workers used more material due to poor quality purchases at lower prices
Purchasing cheaper, lower-quality materials creates a favorable price variance but often leads to more waste, causing an unfavorable usage variance.
Question 3: Under Activity-Based Costing, a cost pool for 'machine setups' would use which cost driver?
- Machine hours
- Direct labor hours
- Number of setups (Correct answer)
- Units produced
Correct answer: Number of setups
Number of setups is the most logical driver for a setup cost pool because setup costs are caused by each production run, not by volume.
Question 4: In a process costing system, equivalent units of production (EUP) are used to:
- Convert partially completed units to a whole-unit equivalent for cost assignment (Correct answer)
- Allocate joint costs to by-products
- Determine the overhead absorption rate
- Calculate the contribution margin per unit
Correct answer: Convert partially completed units to a whole-unit equivalent for cost assignment
EUP converts work-in-process units at various completion stages into the equivalent number of fully completed units for cost calculation.
Question 5: The 'contribution margin ratio' is best defined as:
- Net profit divided by sales revenue
- Fixed costs divided by selling price
- Contribution margin divided by sales revenue (Correct answer)
- Variable costs divided by total costs
Correct answer: Contribution margin divided by sales revenue
The contribution margin ratio (C/S ratio) shows the proportion of each sales dollar that contributes toward covering fixed costs and profit.
Question 6: Which of the following is a characteristic of a 'relevant cost' in decision-making?
- It is a sunk cost incurred in the past
- It is a future cost that differs between alternatives (Correct answer)
- It is always a fixed cost
- It is recorded in the general ledger
Correct answer: It is a future cost that differs between alternatives
Relevant costs must be future-oriented and differ between the options being evaluated; sunk costs are irrelevant regardless of the decision.
Question 7: When a company operates at full capacity and must choose between two products, the decision rule is to maximize:
- Total sales revenue
- Contribution margin per unit of limiting factor (Correct answer)
- Gross profit margin percentage
- Total fixed cost absorption
Correct answer: Contribution margin per unit of limiting factor
When a limiting factor (scarce resource) exists, ranking products by contribution margin per unit of that limiting factor maximizes total profit.
CA Cost Accounting & Management 2
Which costing method treats fixed manufacturing overhead as a period cost rather than a product cost?