CA Inter P4 · Chapter 1
Introduction to Cost and Management Accounting MCQs with Answers
8 multiple-choice questions on Introduction to Cost and Management Accounting for CA Inter P4 Cost and Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is the most appropriate cost unit for a brick manufacturing unit?
- A) Per tonne-kilometre
- B) Per kilowatt-hour
- C) Per patient-day
- D) Per 1,000 bricks
Show answer & explanation
Answer: D) Per 1,000 bricks
A cost unit is the unit of product or service in relation to which costs are ascertained. Bricks are cheap, homogeneous and produced in very large numbers, so costs are expressed per 1,000 bricks. Tonne-km relates to goods transport, kWh to electricity supply and patient-day to hospitals.
Question 2
A department such as the maintenance shop, which does not work on products directly but renders services to production departments, is best described as a:
- A) Production cost centre
- B) Service cost centre
- C) Profit centre
- D) Investment centre
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Answer: B) Service cost centre
A service cost centre provides services to other cost centres (for example maintenance, stores or tool room) rather than working directly on the product. Its costs are later re-apportioned to production cost centres. Profit and investment centres are responsibility centres judged on revenue and, for investment centres, capital employed as well.
Question 3
A divisional manager who is accountable for revenues, costs and the capital employed in the division is in charge of a(n):
- A) Profit centre
- B) Revenue centre
- C) Investment centre
- D) Cost centre
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Answer: C) Investment centre
An investment centre is a responsibility centre where the manager controls revenues, costs and the investment (capital employed), so performance can be measured with return on investment or residual income. A profit centre manager controls revenues and costs but not investment decisions.
Question 4
A cost that has already been incurred and cannot be recovered by any future decision is known as a:
- A) Sunk cost
- B) Opportunity cost
- C) Imputed cost
- D) Out-of-pocket cost
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Answer: A) Sunk cost
A sunk cost is a historical cost that has been incurred and cannot be changed by any present or future decision, so it is irrelevant for decision making. Opportunity cost is the benefit forgone from the next best alternative, imputed cost is a notional cost not involving cash outlay, and out-of-pocket cost involves a current cash payment.
Question 5
Saral Ltd owns a vacant godown that could be let out for ₹45,000 per month. The company decides to use the godown itself for a special order lasting 4 months. What is the opportunity cost of the godown for the special order?
- A) ₹1,80,000
- B) ₹45,000
- C) ₹5,40,000
- D) ₹0
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Answer: A) ₹1,80,000
Opportunity cost is the value of the benefit sacrificed by choosing one alternative over the next best one. By using the godown, the company gives up rent of ₹45,000 per month for 4 months = ₹1,80,000. It is a relevant cost even though no cash is paid. The annual rent is not relevant because the godown is used only for 4 months.
Question 6
The power cost of a factory is semi-variable. At an output of 6,000 units the total power cost was ₹1,38,000 and at 9,500 units it was ₹1,87,000. Using the high and low points method, the fixed component of power cost is:
- A) ₹19,894.74
- B) ₹84,000.00
- C) ₹49,000.00
- D) ₹54,000.00
Show answer & explanation
Answer: D) ₹54,000.00
Variable cost per unit = change in cost / change in output = (₹1,87,000 - ₹1,38,000) / (9,500 - 6,000) = ₹49,000 / 3,500 = ₹14. Fixed cost = ₹1,38,000 - (6,000 x ₹14) = ₹1,38,000 - ₹84,000 = ₹54,000. Check at the high level: ₹1,87,000 - (9,500 x ₹14) = ₹54,000.
Question 7
Which of the following is NOT an objective of cost accounting?
- A) Preparing financial statements in the form prescribed by company law
- B) Ascertaining the cost of each product, job or service
- C) Providing information for cost control and cost reduction
- D) Supplying data to management for decisions such as pricing
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Answer: A) Preparing financial statements in the form prescribed by company law
Cost accounting aims to ascertain costs, help in controlling and reducing costs, and provide information for managerial decisions such as fixing prices. Preparation of statutory financial statements in the prescribed format is the function of financial accounting, not cost accounting.
Question 8
Interest on the proprietor's own capital, which is charged in cost accounts to compare the results of alternative proposals but involves no actual payment, is an example of:
- A) Sunk cost
- B) Imputed (notional) cost
- C) Out-of-pocket cost
- D) Discretionary cost
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Answer: B) Imputed (notional) cost
Imputed or notional costs are hypothetical costs that do not involve any cash outlay, such as interest on own capital or rent on owned premises. They are considered for decision making and comparison, and are an item of difference when reconciling cost and financial profits.