CIMA BA2 · Chapter 2
Cost classification and cost behaviour MCQs with Answers
8 multiple-choice questions on Cost classification and cost behaviour for CIMA BA2 Fundamentals of Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A furniture manufacturer makes dining tables. Which of the following is a DIRECT cost of a table?
- A) The timber used to make the table top and legs
- B) Depreciation of the factory building
- C) The salary of the factory supervisor
- D) Lubricating oil for the cutting machines
Show answer & explanation
Answer: A) The timber used to make the table top and legs
A direct cost can be traced specifically to a cost unit. Timber used in each table is direct material. Factory depreciation, supervision and machine oil are incurred for production as a whole and are indirect production costs (production overheads).
Question 2
A business rents one warehouse for $30,000 a year, which can hold up to 5,000 pallets. If more space is needed, a second identical warehouse must be rented. How would the warehouse rent be classified?
- A) A variable cost
- B) A stepped fixed cost
- C) A semi-variable cost
- D) A purely fixed cost at all levels of activity
Show answer & explanation
Answer: B) A stepped fixed cost
The rent is fixed within a range of activity (up to 5,000 pallets) but jumps by $30,000 when activity exceeds that range. This is a stepped fixed cost. A semi-variable cost has a fixed element plus a variable element that rises continuously with activity.
Question 3
A company's production costs for its lowest and highest activity months were: Lowest: 12,000 units, total cost $74,600 Highest: 20,000 units, total cost $102,200 Using the high-low method, what is the estimated total cost for a month in which 17,000 units are produced?
- A) $86,870
- B) $58,650
- C) $105,683
- D) $91,850
Show answer & explanation
Answer: D) $91,850
Variable cost per unit = ($102,200 - $74,600) / (20,000 - 12,000) = $27,600 / 8,000 = $3.45. Fixed cost = $74,600 - (12,000 x $3.45) = $33,200. Estimated cost at 17,000 units = $33,200 + (17,000 x $3.45) = $33,200 + $58,650 = $91,850.
Question 4
Total production costs were $62,000 when 10,000 units were made and $120,400 when 22,000 units were made. Fixed costs increase by $8,000 when output exceeds 15,000 units. Variable cost per unit is constant. What is the expected total cost of producing 18,000 units?
- A) $100,933
- B) $95,600
- C) $98,509
- D) $103,600
Show answer & explanation
Answer: D) $103,600
Remove the step from the higher-level cost so that both totals contain the same fixed cost: $120,400 - $8,000 = $112,400. Variable cost per unit = ($112,400 - $62,000) / (22,000 - 10,000) = $50,400 / 12,000 = $4.20. Fixed cost above 15,000 units = $120,400 - (22,000 x $4.20) = $28,000. Cost of 18,000 units = $28,000 + (18,000 x $4.20) = $103,600.
Question 5
As the level of activity increases within the relevant range, what happens to FIXED cost per unit?
- A) It increases
- B) It stays the same
- C) It decreases
- D) It first falls and then rises
Show answer & explanation
Answer: C) It decreases
Total fixed cost does not change within the relevant range, so the same total is spread over more units as activity rises. Fixed cost per unit therefore falls as output increases.
Question 6
In a company that uses absorption costing, which of the following would be treated as a PERIOD cost rather than a product cost?
- A) Wages of machine operators
- B) Depreciation of production machinery
- C) Electricity used in the factory
- D) Salaries of the delivery van drivers
Show answer & explanation
Answer: D) Salaries of the delivery van drivers
Product costs are those included in inventory valuation, which under absorption costing means all production costs (direct and production overhead). Delivery costs are distribution costs and are charged against profit in the period in which they are incurred, so they are period costs.
Question 7
Which of the following is the main limitation of the high-low method of estimating fixed and variable costs?
- A) It uses only two observations, which may not be representative of normal cost behaviour
- B) It requires complex statistical software
- C) It cannot be used when a cost has both fixed and variable elements
- D) It always overstates the variable cost per unit
Show answer & explanation
Answer: A) It uses only two observations, which may not be representative of normal cost behaviour
The high-low method relies only on the highest and lowest activity observations. If either is unusual, the estimates of variable and fixed cost may be distorted, and all other data is ignored. It is simple to apply and is designed specifically for semi-variable costs. It does not systematically overstate variable cost.
Question 8
The average cost per unit of a service was $9.00 when 5,000 units were provided and $7.50 when 8,000 units were provided. Assuming linear cost behaviour, what is the fixed cost per period?
- A) $20,000
- B) $45,000
- C) $15,000
- D) $60,000
Show answer & explanation
Answer: A) $20,000
Convert the unit costs into totals: 5,000 x $9.00 = $45,000 and 8,000 x $7.50 = $60,000. Variable cost per unit = ($60,000 - $45,000) / (8,000 - 5,000) = $5.00. Fixed cost = $45,000 - (5,000 x $5.00) = $20,000. The cost is semi-variable.