Cost Accounting Concepts Questions and Answers

Q: Which of the following industries does not use the process costing ?

The industry that does not use process costing is aircraft manufacturing.Process costing suits continuous, mass production of identical units passing through successive processes, where cost is averaged over output. Oil refining, distilling and sugar manufacture are classic examples.Aircraft are built to individual orders over long periods, each one a distinct cost unit, so their makers use job or contract costing instead.

Q: Which of the following denotes a target cost ?

Target cost is Market price - Desired profit margin.Target costing starts from the price customers are willing to pay, the market or target price, and subtracts the profit the company wants to earn. What is left is the maximum cost at which the product must be designed and produced:\[ \begin{aligned} &\text{Target cost} \\ &= \text{Market price} - \text{Desired profit} \end{aligned} \]Options B and C start from a standard selling price set internally rather than from the market, which is the reverse of target costing's logic, and option D subtracts a return on investment instead of the profit margin.

Q: Activity-based costing .................

Activity-based costing tends to increase the number of cost pools.Instead of one or a few plant-wide overhead pools, ABC creates a separate cost pool for each significant activity, such as machine set-ups, purchasing, inspection and material handling, each with its own cost driver. The result is many more cost pools and more accurate product costs.ABC can be used in both job order and process costing, so options A and B are wrong, and reducing the number of pools is the opposite of what it does.

Q: Activity Based Costing brings accuracy and reliability in product cost determination by focussing on ....................... in the cost incurrence.

Activity Based Costing focuses on the Cause and effect relationship in cost incurrence.ABC first identifies the activities that consume resources (setting up machines, inspecting, handling orders) and the cost drivers that cause the cost of each activity to change. Overheads are then charged to products according to how much of each driver they use. Because costs are traced through what actually causes them, product costs are more accurate than under a single blanket rate.Absorption, allocation and apportionment are the steps of the traditional method, where overheads are spread over departments and products on arbitrary bases such as labour hours. ABC was developed precisely to replace those arbitrary bases with causal ones.

Q: In ................. system, costs are first traced not to activities but to an organisational unit such as department or plant and then to product.

This describes traditional costing.In traditional absorption costing, overheads are first allotted and apportioned to organisational units such as departments, plants or cost centres, and then absorbed into products at a departmental rate, often per labour hour or machine hour.Activity based costing does the opposite of what the stem says: it traces costs first to activities (set-ups, inspections, orders) and then to products by cost drivers. Target costing starts from a market price less a required margin, and Kaizen costing seeks continuous small cost reductions during production; neither is a tracing system of this kind.

Q: Activity Based Management aims at :

Activity based management aims at eliminating non-value adding activities.Activity based management uses the information from activity based costing to manage activities themselves: it analyses which activities add value for the customer and seeks to reduce or eliminate those that do not, so as to lower cost and improve performance.Identifying costs with cost drivers is what activity based costing does, which is the trap. Managing normal loss is a process costing matter, and improving general management is too vague to describe ABM.

In relation to Cost accounting, which of the following statement is incorrect

A.It provides information to the management for proper planning, operation, control and decision making
B.It records the expenditure in an objective manner, i.e. according to the purpose for which the costs are incurred.
C.It reports operating results and financial position usually at the end of the year
D.The cost reports and statements are prepared as and when required by the management

Exam Year(s)

DSSSB - 2023,

Answer: C

The incorrect statement is that cost accounting reports operating results and financial position usually at the end of the year. That is a feature of financial accounting, which reports at the end of the accounting year. Cost accounting provides information for planning, control and decision-making, records expenditure objectively according to the purpose for which it is incurred, and prepares its reports and statements as and when management needs them, so the other three statements are correct.

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Which of the following statement/s is/are correct?
Statement-1: Contract Costing is a type of costing used in constructional activities such as construction of buildings, roads, bridges etc.
Statement-2: The person who takes contract for a price is called the Contractee and the person from whom it is taken is called the Contractor

A.Only statement-1 is correct
B.Only statement-2 is correct
C.Both statement-1 and statement-2 are correct
D.Both statement-1 and statement-2 are incorrect

Exam Year(s)

DSSSB - 2023,

Answer: A

Only statement-1 is correct. Contract costing is the costing method used for construction work such as buildings, roads and bridges, where each contract is a separate job. Statement-2 reverses the two parties: the person who gives the contract for a price is the contractee, and the person who undertakes and executes it is the contractor. Because statement-2 states it the wrong way round, it is incorrect.

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In a statements of reconciliation between cost and financial accounts, expenses shown only in financial accounts are

A.added to financial profit
B.added to costing profit
C.ignored
D.deducted from financial profit

Exam Year(s)

DSSSB - 2023,

Answer: A

Expenses shown only in the financial accounts are added to the financial profit. A reconciliation statement usually starts from the profit shown by the financial accounts to arrive at the profit in the cost accounts. Items that are charged in the financial accounts but not in the cost accounts, such as losses on sale of assets or interest paid, have reduced the financial profit, so adding them back gives the higher costing profit. Deducting them, or ignoring them, would not reconcile the two figures.

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Which of the following industries does not use the process costing ?

A.Oil refineries
B.Distilleries
C.Sugar
D.Aircraft manufacturing

Exam Year(s)

MH SET - 2019, SET Exam - 2019,

Answer: D

The industry that does not use process costing is aircraft manufacturing.

Process costing suits continuous, mass production of identical units passing through successive processes, where cost is averaged over output. Oil refining, distilling and sugar manufacture are classic examples.

Aircraft are built to individual orders over long periods, each one a distinct cost unit, so their makers use job or contract costing instead.

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Which of the following denotes a target cost ?

A.Market price - Desired profit margin
B.Standard selling price - Standard profit margin
C.Standard selling price - Target profit margin
D.Market price - Return on invesment

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: A

Target cost is Market price - Desired profit margin.

Target costing starts from the price customers are willing to pay, the market or target price, and subtracts the profit the company wants to earn. What is left is the maximum cost at which the product must be designed and produced:

\[ \begin{aligned} &\text{Target cost} \\ &= \text{Market price} - \text{Desired profit} \end{aligned} \]

Options B and C start from a standard selling price set internally rather than from the market, which is the reverse of target costing's logic, and option D subtracts a return on investment instead of the profit margin.

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Activity-based costing .................

A.may be used with job order but not process costing
B.may be used with process but not job order costing
C.trends to increase the number of cost pools
D.trends to decrease the number of cost pools

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

Activity-based costing tends to increase the number of cost pools.

Instead of one or a few plant-wide overhead pools, ABC creates a separate cost pool for each significant activity, such as machine set-ups, purchasing, inspection and material handling, each with its own cost driver. The result is many more cost pools and more accurate product costs.

ABC can be used in both job order and process costing, so options A and B are wrong, and reducing the number of pools is the opposite of what it does.

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Activity Based Costing brings accuracy and reliability in product cost determination by focussing on ....................... in the cost incurrence.

A.Cause and effect relationship
B.Cost absorption
C.Cost allocation
D.Cost apportionment

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: A

Activity Based Costing focuses on the Cause and effect relationship in cost incurrence.

ABC first identifies the activities that consume resources (setting up machines, inspecting, handling orders) and the cost drivers that cause the cost of each activity to change. Overheads are then charged to products according to how much of each driver they use. Because costs are traced through what actually causes them, product costs are more accurate than under a single blanket rate.

Absorption, allocation and apportionment are the steps of the traditional method, where overheads are spread over departments and products on arbitrary bases such as labour hours. ABC was developed precisely to replace those arbitrary bases with causal ones.

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In ................. system, costs are first traced not to activities but to an organisational unit such as department or plant and then to product.

A.Traditional Costing
B.Activity Based Costing
C.Target Costing
D.Kaizen Costing

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: A

This describes traditional costing.

In traditional absorption costing, overheads are first allotted and apportioned to organisational units such as departments, plants or cost centres, and then absorbed into products at a departmental rate, often per labour hour or machine hour.

Activity based costing does the opposite of what the stem says: it traces costs first to activities (set-ups, inspections, orders) and then to products by cost drivers. Target costing starts from a market price less a required margin, and Kaizen costing seeks continuous small cost reductions during production; neither is a tracing system of this kind.

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Activity Based Management aims at :

A.Improving general management
B.Eliminating non-value adding activities
C.Identifying costs with cost drivers
D.Managing the normal loss

Exam Year(s)

MH SET - 2024, SET Exam - 2024,

Answer: B

Activity based management aims at eliminating non-value adding activities.

Activity based management uses the information from activity based costing to manage activities themselves: it analyses which activities add value for the customer and seeks to reduce or eliminate those that do not, so as to lower cost and improve performance.

Identifying costs with cost drivers is what activity based costing does, which is the trap. Managing normal loss is a process costing matter, and improving general management is too vague to describe ABM.

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