CAF-5 · Chapter 3
Activity Based Costing MCQs with Answers
10 multiple-choice questions on Activity Based Costing for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under Activity-Based Costing (ABC), which of the following is the most appropriate cost driver for apportioning "Materials handling / Materials Management cost"?
- A) Number of production runs
- B) Machine hours
- C) Number of material requisitions or weight/volume of materials consumed
- D) Number of customer orders
Show answer & explanation
Answer: C) Number of material requisitions or weight/volume of materials consumed
According to the ABC guidelines in the text, material handling and management costs are driven by the frequency of moving materials (number of requisitions) or the physical characteristics of the materials (weight/volume).
Question 2
Which of the following best describes the primary difference between Activity-Based Costing (ABC) and traditional overhead absorption?
- A) ABC uses a single blanket overhead rate based on direct labour hours for the entire factory.
- B) ABC assigns overheads to products using multiple cost pools and their specific cost drivers, rather than relying solely on production volume bases.
- C) ABC only allocates variable overheads to products and treats fixed overheads as period costs.
- D) ABC is only used for non-production administrative overheads.
Show answer & explanation
Answer: B) ABC assigns overheads to products using multiple cost pools and their specific cost drivers, rather than relying solely on production volume bases.
Traditional costing often uses a single volume-based rate (like labour hours) which can distort product costs. ABC identifies multiple specific activities (cost pools) and assigns costs based on the actual consumption of those activities (cost drivers).
Question 3
According to the study text, what is the most appropriate cost driver for allocating "Quality Control / Quality Inspection cost"?
- A) Total number of machine hours
- B) Total number of batches
- C) Total number of inspection hours or number of quality inspections
- D) Total number of orders dispatched
Show answer & explanation
Answer: C) Total number of inspection hours or number of quality inspections
The text explicitly links Quality Control / Quality Inspection costs to the "Total Number of inspection hours" or "Number of quality inspections" as the driving factor.
Question 4
A manufacturing company incurs a total "Machining cost pool" of Rs. 36,000. If the total machine hours utilized during the period are 22,500, what is the ABC overhead absorption rate per cost driver?
- A) Rs. 1.60 per machine hour
- B) Rs. 0.625 per machine hour
- C) Rs. 16.00 per machine hour
- D) Rs. 1.50 per machine hour
Show answer & explanation
Answer: A) Rs. 1.60 per machine hour
The rate per cost driver is calculated by dividing the total cost pool by the total cost driver volume. Rs. 36,000 / 22,500 machine hours = Rs. 1.60 per machine hour.
Question 5
Which of the following is the correct cost driver to allocate "Production scheduling cost"?
- A) Total number of batches
- B) Total number of production runs
- C) Total number of orders dispatched
- D) Total machine hours
Show answer & explanation
Answer: B) Total number of production runs
According to the study text's mapping of activity cost pools to cost drivers, production scheduling costs are driven by the "Total Number of production runs".
Question 6
Giga Incorporations incurs a total "Paint stirring and quality control" overhead of Rs. 50,000. This cost is driven by the number of batches. Product G-101 requires 10 batches, Product G-102 requires 8 batches, and Product G-103 requires 6 batches. How much of this overhead should be allocated to Product G-101?
- A) Rs. 16,667
- B) Rs. 12,500
- C) Rs. 20,833
- D) Rs. 50,000
Show answer & explanation
Answer: C) Rs. 20,833
Total batches = 10 + 8 + 6 = 24 batches. Product G-101's share of the batches is 10/24. Allocation = (10 / 24) × Rs. 50,000 = Rs. 20,833.
Question 7
Continuing from the previous scenario, if Product G-101 is allocated Rs. 20,833 for paint stirring and the company produces exactly 500 units of G-101, what is the unit cost for this specific activity?
- A) Rs. 20.83
- B) Rs. 41.67
- C) Rs. 83.33
- D) Rs. 52.08
Show answer & explanation
Answer: B) Rs. 41.67
The unit cost is calculated by dividing the total activity cost allocated to the product by the number of units produced. Rs. 20,833 / 500 units = Rs. 41.666 (rounded to Rs. 41.67).
Question 8
When applying Activity-Based Costing, which cost driver should logically be used to assign "Machine set-up costs" to various products?
- A) Number of machine hours
- B) Number of direct labour hours
- C) Number of units produced
- D) Total number of batches or set-ups
Show answer & explanation
Answer: D) Total number of batches or set-ups
Machine set-up costs are incurred every time a machine is prepared for a new batch of production, regardless of how many units are in that batch. Therefore, the "Total number of batches" or "set-ups" is the correct driver.
Question 9
A factory has total set-up costs of Rs. 24,000. The factory manufactures three products: X, Y, and Z. The number of set-ups required during the period were 20 for Product X, 40 for Product Y, and 20 for Product Z. What amount of set-up cost should be charged to Product Y?
- A) Rs. 6,000
- B) Rs. 12,000
- C) Rs. 8,000
- D) Rs. 24,000
Show answer & explanation
Answer: B) Rs. 12,000
Total number of set-ups for the factory = 20 + 40 + 20 = 80 set-ups. Product Y requires 40 set-ups. Product Y's allocation = (40 / 80) × Rs. 24,000 = Rs. 12,000.
Question 10
What is the recommended cost driver for assigning "Ordering costs"?
- A) Total number of customer's orders
- B) Total number of orders dispatched
- C) Total number of production runs
- D) Weight or volume of materials consumed
Show answer & explanation
Answer: A) Total number of customer's orders
Based on the cost driver table in the study text, ordering costs are strictly driven by the "Total Number of customer's orders".