CA Inter P4 · Chapter 5
Activity Based Costing MCQs with Answers
8 multiple-choice questions on Activity Based Costing for CA Inter P4 Cost and Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
In activity based costing, the most appropriate cost driver for the purchasing activity is:
- A) Number of direct labour hours
- B) Number of purchase orders placed
- C) Number of units produced
- D) Value of finished goods sold
Show answer & explanation
Answer: B) Number of purchase orders placed
A cost driver is the factor that causes the cost of an activity. The cost of the purchasing department (raising orders, following up suppliers) varies with the number of purchase orders, not with production volume or labour hours.
Question 2
Machine set-up costs, which are incurred each time a new batch is started regardless of the number of units in the batch, are classified in the ABC cost hierarchy as:
- A) Unit-level activities
- B) Batch-level activities
- C) Product-sustaining activities
- D) Facility-sustaining activities
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Answer: B) Batch-level activities
Batch-level activities are performed for each batch, so their cost depends on the number of batches rather than units. Unit-level activities (such as machine power) vary with each unit; product-sustaining activities support a product line (such as product design); facility-sustaining activities support the plant as a whole.
Question 3
Which of the following is an example of a facility-sustaining activity?
- A) Security and general management of the factory
- B) Inspection of each batch produced
- C) Engineering changes to a specific product
- D) Power consumed by machines per unit produced
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Answer: A) Security and general management of the factory
Facility-sustaining activities support the organisation as a whole and cannot be traced to individual units, batches or products, such as plant security, factory management and building insurance. Batch inspection is batch-level, engineering changes are product-sustaining and machine power is unit-level.
Question 4
Total set-up costs are ₹2,40,000 for 120 set-ups during the period. Product M is produced in 18 set-ups and its output is 9,000 units. The set-up cost per unit of Product M under ABC is:
- A) ₹4.00
- B) ₹26.67
- C) ₹22.22
- D) ₹111.11
Show answer & explanation
Answer: A) ₹4.00
Cost driver rate = ₹2,40,000 / 120 set-ups = ₹2,000 per set-up. Set-up cost charged to M = 18 x ₹2,000 = ₹36,000. Per unit = ₹36,000 / 9,000 = ₹4.
Question 5
A company identifies three activities: Machining ₹6,00,000 (driver: 30,000 machine hours), Set-ups ₹1,50,000 (driver: 60 set-ups) and Inspection ₹90,000 (driver: 450 inspections). Product K has an output of 5,000 units and uses 4,000 machine hours, 12 set-ups and 75 inspections. The overhead cost per unit of Product K under ABC is:
- A) ₹22.40
- B) ₹25.00
- C) ₹16.00
- D) ₹28.00
Show answer & explanation
Answer: B) ₹25.00
Driver rates: machining ₹6,00,000/30,000 = ₹20 per hour; set-ups ₹1,50,000/60 = ₹2,500 per set-up; inspection ₹90,000/450 = ₹200 per inspection. Overheads of K = 4,000 x 20 + 12 x 2,500 + 75 x 200 = ₹80,000 + ₹30,000 + ₹15,000 = ₹1,25,000. Per unit = ₹1,25,000 / 5,000 = ₹25. A traditional machine-hour rate would give only ₹22.40 per unit.
Question 6
Activity based costing is likely to give the greatest improvement in product cost accuracy over traditional absorption costing where:
- A) Direct material forms most of the total cost and only one product is made
- B) Overheads are a large part of total cost and products differ in their use of support activities
- C) All products are made in batches of the same size using the same processes
- D) Overheads are small and vary only with direct labour hours
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Answer: B) Overheads are a large part of total cost and products differ in their use of support activities
ABC traces overheads through activities and their cost drivers. Its benefit is greatest where overheads are significant and products consume activities in different proportions (for example low-volume products needing many set-ups). Where there is a single product or uniform production, a traditional volume-based rate gives similar results.
Question 7
Using ABC information to identify and eliminate non-value-added activities, so as to reduce cost without reducing value to the customer, is known as:
- A) Activity based management
- B) Activity based budgeting
- C) Target costing
- D) Marginal costing
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Answer: A) Activity based management
Activity based management (ABM) uses activity cost information for cost reduction and process improvement, including eliminating or reducing non-value-added activities. Activity based budgeting uses activities and drivers to prepare budgets.
Question 8
Material handling costs of ₹3,60,000 are driven by 1,200 material movements. Product Z requires 85 movements during the period. The material handling cost assigned to Product Z is:
- A) ₹25,500.00
- B) ₹4,235.29
- C) ₹30,600.00
- D) ₹300.00
Show answer & explanation
Answer: A) ₹25,500.00
Cost driver rate = ₹3,60,000 / 1,200 = ₹300 per movement. Cost assigned to Z = 85 x ₹300 = ₹25,500.