CAF-5 · Chapter 2
Overheads MCQs with Answers
10 multiple-choice questions on Overheads for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
In cost accounting, which of the following equations correctly defines 'Conversion Costs'?
- A) Direct Material + Direct Labour
- B) Direct Labour + Manufacturing Overheads
- C) Prime Cost + Factory Overheads
- D) Direct Material + Factory Overheads
Show answer & explanation
Answer: B) Direct Labour + Manufacturing Overheads
Manufacturing expenses generally comprise direct materials, direct labour, and production overheads. Material + Labour equals 'Prime Costs', while Labour + Overhead equals 'Conversion Costs' (the cost to convert raw materials into finished goods).
Question 2
As production volume changes, a specific cost remains constant in total but fluctuates on a per-unit basis. This cost behavior classifies the expense as a:
- A) Step-fixed cost
- B) Semi-variable cost
- C) Variable cost
- D) Fixed cost
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Answer: D) Fixed cost
Fixed costs remain constant in total regardless of activity levels. However, because the total cost is spread over an increasing or decreasing number of units, the fixed cost per unit fluctuates (decreases as volume rises).
Question 3
When apportioning production overheads across different departments, which of the following bases is the most appropriate for distributing 'Factory Rent'?
- A) Number of employees
- B) Equipment cost / Book value of machinery
- C) Floor area occupied
- D) Direct labour hours
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Answer: C) Floor area occupied
Overhead apportionment requires a logical basis linking the cost to the department. Factory rent is apportioned based on the physical space (floor area) occupied by each department.
Question 4
The process of distributing the accumulated costs of service departments to the production departments based on the services provided is known as:
- A) Primary allocation
- B) Secondary apportionment (Re-apportionment)
- C) Blanket absorption
- D) Direct expense tracing
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Answer: B) Secondary apportionment (Re-apportionment)
The initial distribution of overheads to all departments (production and service) is primary apportionment. The subsequent transfer of service department costs to production departments is termed secondary apportionment or re-apportionment.
Question 5
Which method of overhead re-apportionment fully recognizes the mutual services provided by two service departments to each other by utilizing algebraic formulas?
- A) Direct Allocation Method
- B) Step-down Method
- C) Simultaneous Equation Method
- D) Repeated Distribution Method
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Answer: C) Simultaneous Equation Method
When service departments provide services to production departments and also to each other, the simultaneous equation method (or algebraic method) is used to mutually allocate costs before charging them to production.
Question 6
Total factory depreciation for the year is budgeted at Rs. 150,000. The total equipment cost for Department A, B, and C is Rs. 200,000, Rs. 500,000, and Rs. 300,000 respectively. What amount of depreciation should be apportioned to Department B?
- A) Rs. 30,000
- B) Rs. 50,000
- C) Rs. 75,000
- D) Rs. 150,000
Show answer & explanation
Answer: C) Rs. 75,000
Depreciation is apportioned based on the book value or equipment cost of the machines in each department. Total equipment cost = 200k + 500k + 300k = Rs. 1,000,000. Department B's share = (500,000 / 1,000,000) × Rs. 150,000 = Rs. 75,000.
Question 7
When a single overhead absorption rate is calculated for the entire factory by summing all overhead costs and dividing by the total factory base (e.g., total labour hours), regardless of departmental boundaries, this rate is known as a:
- A) Departmental rate
- B) Simultaneous rate
- C) Blanket rate
- D) Predetermined specific rate
Show answer & explanation
Answer: C) Blanket rate
A blanket rate sums up the overhead costs and labour/machine hours of all departments and evenly distributes the overheads factory-wide, ignoring the individual usage intensities of separate departments.
Question 8
A production department has budgeted factory overheads of Rs. 360,000 and expects to work 8,000 direct labour hours. What is the overhead absorption rate (OAR) per direct labour hour?
- A) Rs. 45.00
- B) Rs. 36.00
- C) Rs. 40.00
- D) Rs. 28.80
Show answer & explanation
Answer: A) Rs. 45.00
The Overhead Absorption Rate (OAR) is calculated as Budgeted Factory Overheads divided by Budgeted Base (Direct Labour Hours). Calculation: Rs. 360,000 / 8,000 hours = Rs. 45.00 per hour.
Question 9
A company absorbs overheads at a predetermined rate of Rs. 25 per machine hour. During the period, actual machine hours worked were 4,000 hours and actual factory overheads incurred were Rs. 105,000. What is the under or over-absorbed overhead for the period?
- A) Rs. 5,000 Over-absorbed
- B) Rs. 5,000 Under-absorbed
- C) Rs. 100,000 Applied
- D) Rs. 15,000 Under-absorbed
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Answer: B) Rs. 5,000 Under-absorbed
Applied Overheads = Actual Hours × Pre-determined Rate = 4,000 hours × Rs. 25 = Rs. 100,000. Since Actual Overheads (Rs. 105,000) are greater than Applied Overheads (Rs. 100,000), the overheads are Under-absorbed by Rs. 5,000.
Question 10
Service Department X's total costs (x) are Rs. 16,500 plus 20% of Service Department Y's costs. Department Y's total costs (y) are Rs. 10,600 plus 10% of Department X's costs. Which of the following correctly represents the equation setup to find Department X's total costs under the simultaneous equation method?
- A) x = 16,500 + 0.1(10,600 + 0.2x)
- B) x = 16,500 + 0.2(10,600 + 0.1x)
- C) y = 10,600 + 0.2(16,500 + 0.1y)
- D) x = 16,500 + 10,600
Show answer & explanation
Answer: B) x = 16,500 + 0.2(10,600 + 0.1x)
The equations are: x = 16,500 + 0.2y y = 10,600 + 0.1x To solve for x, you substitute 'y' into the first equation: x = 16,500 + 0.2(10,600 + 0.1x).