ICAEW BIP · Chapter 1
Cost classification and cost behaviour MCQs with Answers
10 multiple-choice questions on Cost classification and cost behaviour for ICAEW BIP Business Insight and Performance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Oakleaf Ltd manufactures dining tables. Which of the following is a direct cost of a table?
- A) Depreciation of the sanding machines used on all products
- B) The rent of the factory building
- C) The hardwood used to make the table top
- D) The salary of the factory supervisor
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Answer: C) The hardwood used to make the table top
A direct cost can be traced specifically and economically to a single cost unit. The hardwood is identifiable in each table, so it is direct material. Factory rent, the supervisor's salary and machine depreciation are incurred for all output and are therefore indirect production costs (production overheads).
Question 2
Penrith Products incurred the following costs in a period: Direct materials £42,000 Direct labour £31,500 Direct expenses £6,300 Production overheads £18,900 What was the prime cost for the period?
- A) £98,700
- B) £92,400
- C) £73,500
- D) £79,800
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Answer: D) £79,800
Prime cost is the total of all direct costs: direct materials + direct labour + direct expenses. £42,000 + £31,500 + £6,300 = £79,800. Production overheads are indirect costs and are added only when calculating total production cost (£98,700).
Question 3
A company's electricity bill consists of a fixed quarterly standing charge plus a charge for each unit of electricity consumed. How would this cost be classified by behaviour?
- A) Fixed cost
- B) Semi-variable cost
- C) Variable cost
- D) Stepped fixed cost
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Answer: B) Semi-variable cost
A cost with a fixed element (the standing charge) and a variable element (the charge per unit consumed) is a semi-variable, or mixed, cost. On a graph it starts above zero on the cost axis and then rises in a straight line as activity increases.
Question 4
Each production supervisor at Harlow Fabrications can oversee a maximum of 12 operatives and is paid £34,000 a year. Next year the company plans to employ 40 operatives. What is the budgeted annual cost of supervision?
- A) £136,000
- B) £102,000
- C) £170,000
- D) £113,333
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Answer: A) £136,000
Supervision is a stepped fixed cost because supervisors must be employed in whole numbers. 40 / 12 = 3.33, so 4 supervisors are required (3 could only oversee 36 operatives). Cost = 4 x £34,000 = £136,000.
Question 5
Maintenance costs at a factory have been recorded as follows: Month 1: 4,100 machine hours, cost £25,000 Month 2: 3,200 machine hours, cost £21,840 Month 3: 5,600 machine hours, cost £30,240 Using the high-low method, what is the estimated maintenance cost for a month with 4,800 machine hours?
- A) £27,440
- B) £32,760
- C) £16,800
- D) £25,920
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Answer: A) £27,440
Variable cost per hour = (£30,240 - £21,840) / (5,600 - 3,200) = £8,400 / 2,400 = £3.50. Fixed cost = £21,840 - (3,200 x £3.50) = £10,640. Estimated cost at 4,800 hours = £10,640 + (4,800 x £3.50) = £27,440. Month 1 is ignored because the high-low method uses only the highest and lowest activity levels.
Question 6
A company's total production costs were £64,000 at an output of 3,000 units and £108,000 at an output of 7,000 units. Fixed costs rise by £8,000 once output exceeds 5,000 units. The variable cost per unit is constant. What is the variable cost per unit?
- A) £11.00
- B) £15.43
- C) £21.33
- D) £9.00
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Answer: D) £9.00
The step in fixed costs must be removed before applying the high-low method. Adjusted cost at 7,000 units = £108,000 - £8,000 = £100,000. Variable cost per unit = (£100,000 - £64,000) / (7,000 - 3,000) = £36,000 / 4,000 = £9.00. Ignoring the step gives £11.00, which overstates the variable cost.
Question 7
The manager of a division is responsible for its revenues and costs and also has authority to make decisions about capital expenditure on the division's non-current assets. What type of responsibility centre is the division?
- A) A revenue centre
- B) A cost centre
- C) An investment centre
- D) A profit centre
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Answer: C) An investment centre
An investment centre manager controls costs, revenues and the level of investment (assets) in the centre, so performance can be measured with ROI or residual income. A profit centre manager controls revenues and costs but not investment; a cost centre manager controls costs only; a revenue centre manager is responsible for revenue only.
Question 8
Which of the following costs of a manufacturing company would be classified by function as an administration cost?
- A) Wages of the machine maintenance team
- B) The salary of the company's finance director
- C) Delivery van running costs
- D) Commission paid to sales staff
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Answer: B) The salary of the company's finance director
Administration costs relate to the general management and running of the organisation, such as the finance director's salary. Sales commission and delivery costs are selling and distribution costs. Maintenance wages for production machines are production overheads.
Question 9
In a manufacturing business, which of the following costs would be included in the valuation of finished goods inventory under absorption costing principles?
- A) The salary of the production line supervisor
- B) The cost of delivering goods to customers
- C) Interest on the company's bank overdraft
- D) Advertising costs for the product
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Answer: A) The salary of the production line supervisor
Inventory is valued at production cost, which includes direct costs and production overheads such as the production supervisor's salary. Advertising and delivery are selling and distribution costs, and bank interest is a finance cost. These are period costs written off in the period in which they are incurred.
Question 10
Within the relevant range of activity, what happens to fixed cost per unit as output increases?
- A) It stays the same
- B) It decreases
- C) It increases
- D) It increases at first and then decreases
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Answer: B) It decreases
Total fixed cost stays the same within the relevant range. When the same total is spread over more units, the fixed cost per unit falls. Variable cost per unit is the cost that stays constant as output changes.