CAF-5 · Chapter 10
Standard Costing MCQs with Answers
10 multiple-choice questions on Standard Costing for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
How is a "Standard Cost" fundamentally defined in management accounting?
- A) The actual historical cost incurred in the previous financial period.
- B) A pre-determined cost of producing a single cost unit or rendering a service.
- C) The total budgeted manufacturing cost for the entire factory.
- D) The estimated selling price minus the target profit margin.
Show answer & explanation
Answer: B) A pre-determined cost of producing a single cost unit or rendering a service.
The study text explicitly defines a standard cost as a pre-determined cost of producing a cost unit. It is usually expressed as a standard cost per unit of production or per unit of service rendered.
Question 2
Which type of performance standard assumes perfect operating conditions with absolutely no allowance for wastage, inefficiencies, or machine breakdowns?
- A) Attainable standard
- B) Current standard
- C) Basic standard
- D) Ideal standard
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Answer: D) Ideal standard
Ideal standards assume perfect working conditions, meaning no allowances are made for normal waste, spoilage, machine breakdowns, or idle time. They are rarely used in practice because they are practically unattainable.
Question 3
Which type of performance standard is most widely used because it is most likely to motivate employees by setting challenging but achievable targets?
- A) Basic standard
- B) Ideal standard
- C) Attainable standard
- D) Current standard
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Answer: C) Attainable standard
Attainable standards are based on challenging but achievable targets. They include allowances for normal waste and idle time. They are the most likely to motivate employees to improve performance.
Question 4
A company's finished product requires a net weight of 4.5 kg of direct material. However, the production process normally suffers a 10% material loss during processing. What is the standard quantity of raw material input required per unit?
- A) 4.05 kg
- B) 4.50 kg
- C) 4.95 kg
- D) 5.00 kg
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Answer: D) 5.00 kg
To find the input quantity when there is a normal loss, you divide the net output required by the yield percentage. Since normal loss is 10%, the yield is 90% (or 0.90). Standard Input = 4.5 kg / 0.90 = 5.00 kg.
Question 5
When establishing the standard direct labour time required to manufacture a new product, which of the following techniques is commonly used by management?
- A) Time and motion studies
- B) Simultaneous equation method
- C) Economic Order Quantity (EOQ) modeling
- D) Repeated distribution method
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Answer: A) Time and motion studies
Standard labour hours for a task are usually established through direct observation and measurement of workers performing the task, a technique known as time and motion studies.
Question 6
A worker takes 4 hours of active production time to complete one unit of a product. If normal idle time (for breaks and setup) is expected to be 20% of the total hours paid, what is the standard labour hours that should be charged for one unit?
- A) 4.80 hours
- B) 3.20 hours
- C) 5.00 hours
- D) 4.20 hours
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Answer: C) 5.00 hours
The active production time represents the productive hours. If idle time is 20% of total time paid, then productive time is 80% of total time paid. 4 hours = 80% of total hours. Total standard hours = 4 hours / 0.80 = 5.00 hours.
Question 7
Which of the following best describes a "Basic Standard" in standard costing?
- A) A standard based on current conditions that is updated every single month.
- B) A standard that is kept unchanged over a long period of time, primarily used to show long-term trends in prices and efficiency.
- C) A standard that reflects short-term temporary expectations due to a crisis.
- D) A standard used strictly for purchasing indirect materials.
Show answer & explanation
Answer: B) A standard that is kept unchanged over a long period of time, primarily used to show long-term trends in prices and efficiency.
Basic standards are long-term standards that remain unaltered over a period of years. Their primary purpose is to help management track long-term trends in efficiency and price changes over time.
Question 8
How is the standard fixed overhead absorption rate calculated when deriving the standard cost card of a product?
- A) Actual fixed overheads divided by actual activity level
- B) Budgeted fixed overheads divided by actual activity level
- C) Budgeted fixed overheads divided by budgeted level of activity
- D) Actual fixed overheads divided by budgeted level of activity
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Answer: C) Budgeted fixed overheads divided by budgeted level of activity
In standard costing, fixed overheads are incorporated into the unit cost using a predetermined overhead absorption rate. This rate is calculated by dividing the budgeted fixed production overheads by the budgeted level of activity (e.g., budgeted labour hours or machine hours).
Question 9
When setting a standard cost for direct materials, which of the following factors should the purchasing department normally incorporate into the standard price?
- A) Only the highest quality material available in the market, regardless of cost.
- B) The most competitive expected price at the required quality, incorporating expected bulk purchase discounts.
- C) The historical price paid when the company first opened.
- D) The expected selling price of the final product.
Show answer & explanation
Answer: B) The most competitive expected price at the required quality, incorporating expected bulk purchase discounts.
Standard price information is derived assuming the procurement department has made a reasonable search for suppliers. The standard price should reflect the most competitive price at the required quality, taking into account expected purchase volumes and available trade/bulk discounts.
Question 10
If a company introduces a new complex product and expects a 90% learning curve to apply to the workforce, how should this effect be incorporated into standard costing?
- A) By reducing the standard material price for future batches.
- B) By increasing the standard fixed overhead absorption rate over time.
- C) By adjusting the standard labour efficiency (hours required) for successive batches until a steady state is reached.
- D) By steadily reducing the standard hourly wage rate paid to the workers.
Show answer & explanation
Answer: C) By adjusting the standard labour efficiency (hours required) for successive batches until a steady state is reached.
The learning curve theory dictates that as workers repeat a new and complex task, they become faster, reducing the average time required per unit. Therefore, standard labour efficiency (hours) cannot be static at the beginning; it must be adjusted downwards for successive batches until the learning effect ceases (steady state).