CA Cost Accounting & Management 3 — Questions and Answers
Question 1: A budget that automatically adjusts to reflect the actual level of activity achieved is called a:
- Zero-based budget
- Rolling budget
- Flexible budget (Correct answer)
- Master budget
Correct answer: Flexible budget
A flexible budget recalculates budgeted costs at the actual output level, enabling meaningful variance analysis by comparing like-for-like activity.
Question 2: Which statement about throughput accounting is CORRECT?
- It treats direct labor as a variable cost
- It maximizes the rate at which inventory is converted to sales above material cost (Correct answer)
- It allocates all overheads to products using multiple cost drivers
- It classifies all costs except direct materials as fixed
Correct answer: It maximizes the rate at which inventory is converted to sales above material cost
Throughput accounting (Theory of Constraints) focuses on maximizing throughput (sales minus direct material costs) while treating most costs as fixed.
Question 3: The overhead volume variance measures the difference between:
- Actual overhead incurred and absorbed overhead
- Budgeted fixed overhead and absorbed fixed overhead (Correct answer)
- Standard variable overhead and actual variable overhead
- Budgeted overhead expenditure and actual overhead expenditure
Correct answer: Budgeted fixed overhead and absorbed fixed overhead
The volume variance arises because actual production volume differs from budgeted volume, causing under- or over-absorption of fixed overhead.
Question 4: In joint product costing, the 'net realizable value method' allocates joint costs based on:
- Physical weight or volume of each product at the split-off point
- Expected selling price less further processing costs after split-off (Correct answer)
- Market price at the split-off point
- Relative contribution margins of each product
Correct answer: Expected selling price less further processing costs after split-off
The NRV method deducts post-split-off costs from final selling prices to estimate value at the split-off point, then uses those NRVs to allocate joint costs.
Question 5: A company's break-even point in units will DECREASE if:
- Variable cost per unit increases
- Fixed costs increase
- Selling price per unit decreases
- Fixed costs decrease (Correct answer)
Correct answer: Fixed costs decrease
Fewer units are needed to break even when fixed costs fall, since each unit still contributes the same margin toward a smaller fixed cost burden.
Question 6: Target costing differs from traditional cost-plus pricing in that it:
- Starts with customer-acceptable price and works backward to determine allowable cost (Correct answer)
- Adds a standard markup to total production cost
- Uses variable costs only to set prices
- Applies only to service industries
Correct answer: Starts with customer-acceptable price and works backward to determine allowable cost
Target costing begins with the market price customers will pay, subtracts desired profit to derive a target cost, then engineers the product to meet that cost.
Question 7: Which costing system is MOST appropriate for a law firm tracking time spent on individual client cases?
- Process costing
- Joint product costing
- Job order costing (Correct answer)
- Backflush costing
Correct answer: Job order costing
Job order costing assigns costs to specific jobs or clients, making it ideal for professional service firms where each engagement has distinct costs.
CA Cost Accounting & Management 3
A budget that automatically adjusts to reflect the actual level of activity achieved is called a: