CAF-5 · Chapter 5
Cost Flow in Production MCQs with Answers
10 multiple-choice questions on Cost Flow in Production for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to the study text, what is the fundamental definition of "Accounting"?
- A) The physical tracking and valuation of a company's raw material inventory.
- B) A process strictly limited to calculating the tax liability and statutory obligations of an organization.
- C) A systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information to provide insights into an organisation's financial performance.
- D) The mathematical method of calculating economic order quantities and safety stocks.
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Answer: C) A systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information to provide insights into an organisation's financial performance.
The study text explicitly defines accounting as a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information to provide insights into an organisation's financial performance and position for various stakeholders.
Question 2
In an accounting system where a business maintains separate records that are kept in agreement or are readily reconcilable, which ledger is maintained by the head office specifically to generate external reports?
- A) The Cost Ledger
- B) The General Ledger
- C) The Factory Ledger
- D) The Work-in-Process Ledger
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Answer: B) The General Ledger
Under a system where records are kept separate, it is convenient to think of the business split into two entities. The head office maintains the general ledger, which is used to generate external financial reports.
Question 3
When a business operates with a separate general ledger at the head office and a separate cost ledger at the factory, this system of cost bookkeeping is known as:
- A) An Integrated Accounting System
- B) A Single-entry System
- C) An Interlocking Accounting System
- D) A Just-in-Time System
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Answer: C) An Interlocking Accounting System
A system that maintains separate records (a general ledger at head office for financial accounting and a cost/factory ledger at the factory for management accounting) which are kept in agreement or reconciled is known as an Interlocking Accounting system.
Question 4
Based on the cost flow of production, what is the initial journal entry to record the payment of wages to factory workers before the costs are allocated to production?
- A) Debit: Work in Process Control / Credit: Cash
- B) Debit: Production Overheads Control / Credit: Cash
- C) Debit: Salaries & Wages Control / Credit: Cash
- D) Debit: Cost of Sales / Credit: Salaries & Wages Control
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Answer: C) Debit: Salaries & Wages Control / Credit: Cash
When wages are initially paid, the cost is captured in a control account. The entry is to Debit the Salaries & Wages Control account and Credit Cash/Bank.
Question 5
A factory incurs a total payroll cost of Rs. 96,000. Out of this, Rs. 90,000 relates to direct labour working directly on the products, and Rs. 6,000 relates to indirect labour (e.g., factory supervisors). What is the correct journal entry to allocate these costs into the production flow?
- A) Debit: Work in Process Control 96,000 / Credit: Salaries & Wages Control 96,000
- B) Debit: Work in Process Control 90,000, Debit: Production Overheads Control 6,000 / Credit: Salaries & Wages Control 96,000
- C) Debit: Salaries & Wages Control 96,000 / Credit: Work in Process Control 90,000, Credit: Production Overheads Control 6,000
- D) Debit: Production Overheads Control 96,000 / Credit: Cash 96,000
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Answer: B) Debit: Work in Process Control 90,000, Debit: Production Overheads Control 6,000 / Credit: Salaries & Wages Control 96,000
Direct labour costs (Rs. 90,000) are charged directly to production (WIP Control). Indirect labour costs (Rs. 6,000) cannot be traced to specific units and are therefore charged to the Production Overheads Control account. The total is credited out of the Salaries & Wages Control account.
Question 6
When direct raw materials are issued from the warehouse to the factory floor for manufacturing a specific product, which account is debited in the cost ledger?
- A) Cost of Sales Account
- B) Production Overheads Control Account
- C) Finished Goods Control Account
- D) Work in Process (WIP) Control Account
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Answer: D) Work in Process (WIP) Control Account
Direct materials issued to the factory floor become part of the ongoing production process. Therefore, their cost is debited to the Work in Process (WIP) Control account.
Question 7
If raw materials are issued from the store but are to be used as general factory supplies (indirect materials) rather than for a specific product, which account should be debited?
- A) Work in Process (WIP) Control
- B) Production Overheads Control
- C) Administrative Overheads Control
- D) Cost of Goods Sold
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Answer: B) Production Overheads Control
Indirect materials (like lubricants or cleaning supplies) cannot be traced directly to a specific product. Therefore, when they are issued from the store, they are debited to the Production Overheads Control account instead of WIP.
Question 8
When factory overheads are applied (absorbed) into the cost of production based on a predetermined overhead absorption rate, what is the corresponding double entry?
- A) Debit: Work in Process (WIP) Control / Credit: Production Overheads Control
- B) Debit: Production Overheads Control / Credit: Work in Process (WIP) Control
- C) Debit: Finished Goods Control / Credit: Production Overheads Control
- D) Debit: Cost of Sales / Credit: Production Overheads Control
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Answer: A) Debit: Work in Process (WIP) Control / Credit: Production Overheads Control
Absorbed factory overheads are added to the cost of production. The entry transfers the cost out of the Production Overheads pool (Credit) and charges it to the active production account (Debit WIP Control).
Question 9
When the production of a batch of goods is fully completed on the factory floor, the total cost of these completed units must be transferred out of the production account. What is the correct journal entry for this transfer?
- A) Debit: Cost of Sales / Credit: Finished Goods Control
- B) Debit: Work in Process (WIP) Control / Credit: Finished Goods Control
- C) Debit: Finished Goods Control / Credit: Work in Process (WIP) Control
- D) Debit: Sales / Credit: Work in Process (WIP) Control
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Answer: C) Debit: Finished Goods Control / Credit: Work in Process (WIP) Control
When goods are finished, they physically move from the factory floor to the finished goods warehouse. In accounting, this is reflected by transferring the accumulated cost out of WIP Control (Credit) and into the Finished Goods Control inventory account (Debit).
Question 10
In an interlocking accounting system, the cost ledger does not maintain cash or bank accounts. Therefore, whenever a financial transaction occurs (like purchasing raw materials on credit), which account is used in the cost ledger to complete the double entry?
- A) Cost of Sales Account
- B) General Ledger Adjustment Account (or Cost Ledger Control Account)
- C) Suspense Account
- D) Payables Control Account
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Answer: B) General Ledger Adjustment Account (or Cost Ledger Control Account)
In an interlocking system, the cost ledger only tracks cost flows (materials, labour, overheads). It does not have personal accounts (debtors/creditors) or real accounts (cash/bank). To make the cost ledger self-balancing when an external financial transaction occurs, a "General Ledger Adjustment Account" is used to complete the double entry.