Ultimate Quiz On Marginal Costing

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Ultimate Quiz On Marginal Costing - Quiz

Do you understand marginal costing well? Take this ultimate quiz on marginal costing, and see how well you understand the concept. The marginal cost actually is the change in the total cost that comes up when the quantity produced is increased, the cost of producing additional quantity. Here, you can test your knowledge with a few questions in this quiz. Even if you miss out on something, we are here with the correct answers. Do share the quiz with others.


Questions and Answers
  • 1. 

    Existing sales are Rs.1,00,000 (500 units), variable costs are Rs. 60000, fixed costs are Rs. 24000 . If the selling price is reduced by 10%which of the following is the break-even  sales quantity

    • A.

      450 units

    • B.

      500 units

    • C.

      400 units

    • D.

      334 units

    Correct Answer
    C. 400 units
    Explanation
    When the selling price is reduced by 10%, the new selling price per unit would be 90% of the original selling price. To calculate the break-even sales quantity, we need to find the quantity at which the total revenue equals the total cost.

    Total revenue = Selling price per unit * Quantity = 0.9 * Selling price per unit * Quantity = 0.9 * 500 * Quantity

    Total cost = Fixed costs + Variable costs = 24000 + 60000 = 84000

    Setting total revenue equal to total cost:

    0.9 * 500 * Quantity = 84000

    Simplifying the equation:

    Quantity = 84000 / (0.9 * 500) = 400 units

    Therefore, the break-even sales quantity is 400 units.

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  • 2. 

    An increase in fixed costs will result in which of the following?

    • A.

      A decrease in the contribution: sales ratio

    • B.

      A decrease in the contribution per units

    • C.

      An increase in the break-even point sales level

    • D.

      An increase in the margin of safety

    Correct Answer
    C. An increase in the break-even point sales level
    Explanation
    An increase in fixed costs will result in an increase in the break-even point sales level. This is because fixed costs are costs that do not change regardless of the level of sales. As fixed costs increase, more sales are needed to cover these costs and reach the break-even point. Therefore, the break-even point sales level will increase.

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  • 3. 

    Product A has a contribution: sales ratio of  0.50. Product B has a contribution: sales ratio of 0.40. At present, 100 units of each product are sold. If total sales units remain at the present level, but an extra 20 units of B are substituted for 20 units of A, which of the following is true of the overall position?

    • A.

      CS ratio remains unchanged

    • B.

      CS ratio rises from 0.45 to 0.50

    • C.

      CS ratio rises from 0.45 to 0.46

    • D.

      CS ratio fall from 0.45 to 0.44

    Correct Answer
    C. CS ratio rises from 0.45 to 0.46
    Explanation
    If 20 units of Product A are substituted for 20 units of Product B, the total sales units remain the same. Since Product A has a higher contribution: sales ratio than Product B, substituting 20 units of A for 20 units of B will increase the overall contribution: sales ratio. Therefore, the correct answer is that the CS ratio rises from 0.45 to 0.46.

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  • 4. 

    Which of the following statements summarizes the recommendation of  SSAP 9 as to the normal treatment of overhead cost for finished goods stock valuation?

    • A.

      Include only variable production overheads.

    • B.

      Include a share of all production overheads.

    • C.

      Include a share of variable overheads ( production and non-production )

    • D.

      Include a share of all production and non-production overheads

    Correct Answer
    B. Include a share of all production overheads.
    Explanation
    SSAP 9 recommends including a share of all production overheads for finished goods stock valuation. This means that not only variable production overheads should be included, but also fixed production overheads. Including a share of all production overheads provides a more accurate representation of the true cost of producing the finished goods and ensures that all costs are accounted for in the valuation.

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  • 5. 

    Which of the following statements may be used as the basis of the valuation of work-in-progress in order to conform with the recommendations of SSAP 9?

    • A.

      Include variable production and variable non-production overheads

    • B.

      Include expenditure incurred in bringing the stock to its present location and condition.

    • C.

      Include variable production overhead costs plus direct product costs only.

    • D.

      Include prime costs only.

    Correct Answer
    B. Include expenditure incurred in bringing the stock to its present location and condition.
    Explanation
    The correct answer is to include expenditure incurred in bringing the stock to its present location and condition. This is because SSAP 9 recommends valuing work-in-progress by including all costs that have been incurred in bringing the stock to its current state, including any expenses related to its location and condition. This approach ensures that the valuation accurately reflects the total costs involved in the production process.

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  • 6. 

    Adherents of marginal costing as the basis of stock valuation argue that it is relevant for which of the following reasons?

    • A.

      It enables the profit statement to focus on contributions earned from sales.

    • B.

      It includes variable administration, selling, and distribution costs in stock value.

    • C.

      It excludes non- production costs from stock value.

    • D.

      It includes fixed production overheads in stock value.

    Correct Answer
    A. It enables the profit statement to focus on contributions earned from sales.
    Explanation
    Adherents of marginal costing argue that it is relevant because it allows the profit statement to focus on the contributions earned from sales. This means that only the variable costs directly related to the production and sale of goods are included in the calculation of the cost of goods sold, while fixed costs are not allocated to individual units of production. By doing so, the profit statement can provide a clearer picture of the profitability of the company's operations and the impact of sales on its overall financial performance.

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  • 7. 

    Where sales and production are the same quantity, the profit reported where marginal costing is applied will be:

    • A.

      Greater than that where absorption costing is applied

    • B.

      Lower than that, where absorption costing is applied.

    • C.

      The same is where absorption costing is applied.

    • D.

      Greater, lower, or the same as that where absorption costing is applied

    Correct Answer
    C. The same is where absorption costing is applied.
    Explanation
    When sales and production are the same quantity, the profit reported under marginal costing will be the same as that reported under absorption costing. Marginal costing only considers variable costs in calculating profit, while absorption costing includes both variable and fixed costs. However, since sales and production are the same, there are no fixed costs to allocate, resulting in the same profit figure in both costing methods.

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  • 8. 

    Which of the following is true when sales units remain constant each month, but production units fluctuate?

    • A.

      Profit reported each month always fluctuates in proportion to units produced.

    • B.

      Absorption cost stock valuation will lead to a higher profit being reported where sales exceed production.

    • C.

      Marginal cost stock valuation will give a higher profit where sales exceed production.

    • D.

      Marginal cost stock valuation will result in the same profit being reported each month.

    Correct Answer
    D. Marginal cost stock valuation will result in the same profit being reported each month.
    Explanation
    When sales units remain constant each month but production units fluctuate, using marginal cost stock valuation will result in the same profit being reported each month. This is because marginal cost only considers the variable costs directly associated with production, such as direct materials and direct labor. Fixed costs, such as rent and salaries, are not included in the calculation. Therefore, regardless of the fluctuation in production units, the profit reported will remain the same.

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  • 9. 

    Selling price per unit and variable cost per unit is Rs.8 and Rs.5, respectively; fixed production overhead for June is Rs.900; units produced and sold are 600 units and 450 units, respectively; nil stock was held at the beginning of June. Which of the following is the difference in production margin reported for June under absorption costing as compared to that under marginal costing?

    • A.

      Rs.450 higher under absorption costing

    • B.

      Rs.150 higher under absorption costing

    • C.

      Rs.225 higher under absorption costing

    • D.

      Rs.300 higher under absorption costing

    Correct Answer
    C. Rs.225 higher under absorption costing
    Explanation
    The difference in production margin reported for June under absorption costing as compared to that under marginal costing is Rs.225 higher. This is because absorption costing includes fixed production overhead in the cost of each unit produced, while marginal costing only includes variable costs. Since the fixed production overhead is Rs.900 and 450 units were sold, the additional cost per unit under absorption costing is Rs.900/450 = Rs.2. Therefore, the production margin reported under absorption costing will be Rs.225 higher compared to marginal costing (450 units * Rs.2).

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  • 10. 

    Where the opening stock of 50 units of finished goods is valued at Rs.10 each and the average unit cost of 500 units produced during the period is Rs.8.90, which method of stock valuation gives a closing stock value of Rs.9 per unit?

    • A.

      FIFO

    • B.

      Weighted average

    • C.

      Absorption cost based on normal activity

    • D.

      Marginal cost

    Correct Answer
    B. Weighted average
    Explanation
    Weighted average method of stock valuation gives a closing stock value of Rs.9 per unit because it takes into account the average unit cost of the goods produced during the period. In this case, the average unit cost of the 500 units produced is Rs.8.90, which is closer to Rs.9 per unit compared to the opening stock value of Rs.10 per unit. Therefore, using the weighted average method will result in a closing stock value of Rs.9 per unit.

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  • 11. 

    An increase of Rs.1000 in fixed selling overheads will affect the net profit reported under the marginal and absorption cost method as follows.

    • A.

      Decrease net profit only where absorption costing is used

    • B.

      Decrease net profit only where marginal costing is used

    • C.

      Decrease net profit equally in both absorption and marginal costing

    • D.

      Leave net profit unchanged in both cases.

    Correct Answer
    C. Decrease net profit equally in both absorption and marginal costing
    Explanation
    An increase in fixed selling overheads will affect the net profit equally in both absorption and marginal costing. This is because fixed selling overheads are allocated to the cost of goods sold under absorption costing, resulting in a decrease in net profit. Similarly, under marginal costing, fixed selling overheads are treated as a period cost and are deducted from the total contribution, leading to a decrease in net profit. Therefore, the increase in fixed selling overheads will have the same impact on net profit in both costing methods.

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  • 12. 

    The total production cost for making 20,000 and Rs.21,000, and the total production cost of making 50,000 were Rs.34,000. Once production exceeds 25,000 units, an additional fixed cost of Rs.4,000 is incurred. The full production cost per unit for making 30,000 units is

    • A.

      Rs 0.30

    • B.

      Rs.0.68

    • C.

      Rs.0.84

    • D.

      Rs.0.93

    Correct Answer
    D. Rs.0.93
    Explanation
    To find the full production cost per unit for making 30,000 units, we need to calculate the total production cost for making 30,000 units.

    Given that the total production cost for making 20,000 units and 50,000 units is Rs.34,000, we can calculate the production cost for making 30,000 units by subtracting the production cost for making 20,000 units from the production cost for making 50,000 units.

    So, the production cost for making 30,000 units is Rs.34,000 - Rs.21,000 = Rs.13,000.

    Since an additional fixed cost of Rs.4,000 is incurred once production exceeds 25,000 units, we need to add this cost to the production cost for making 30,000 units.

    Therefore, the total production cost for making 30,000 units is Rs.13,000 + Rs.4,000 = Rs.17,000.

    Finally, we divide the total production cost by the number of units to find the full production cost per unit: Rs.17,000 / 30,000 = Rs.0.57.

    Hence, the correct answer is Rs.0.57.

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  • 13. 

    Net profit under absorption costing may differ from net profit determined under direct costing. Is the difference calculated as:

    • A.

      The quantity of all units in inventory times the relevant fixed cost per unit.

    • B.

      The quantity of all units in the inventory times relevant variable cost per unit.

    • C.

      The quantity of all units produced times the relevant fixed cost per units.

    • D.

      The quantity of all units produced times the relevant variable cost per units.

    Correct Answer
    A. The quantity of all units in inventory times the relevant fixed cost per unit.
    Explanation
    The difference between net profit under absorption costing and net profit under direct costing is calculated as the quantity of all units in inventory multiplied by the relevant fixed cost per unit. This is because under absorption costing, fixed manufacturing costs are allocated to each unit of production and included in the cost of inventory. In contrast, under direct costing, fixed manufacturing costs are treated as period expenses and are not included in the cost of inventory. Therefore, the difference in net profit between the two costing methods is based on the quantity of units in inventory multiplied by the relevant fixed cost per unit.

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  • 14. 

    Absorption costing is different from direct costing in the

    • A.

      Fact that standard cost can be used with absorption costing but not with direct costing.

    • B.

      Amount of cost assigned to the individual unit of product.

    • C.

      Kinds of activities for which each can use to report.

    • D.

      Amount of fixed cost that will be incurred.

    Correct Answer
    D. Amount of fixed cost that will be incurred.
    Explanation
    Absorption costing and direct costing differ in terms of the amount of fixed cost that will be incurred. Absorption costing allocates fixed costs to individual units of product, whereas direct costing only considers variable costs. This means that absorption costing includes fixed costs in the calculation of product costs, while direct costing does not. Therefore, the correct answer is that the difference between absorption costing and direct costing lies in the amount of fixed cost that will be incurred.

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  • 15. 

    Income computed by the absorption costing method will tend to exceed income computed by the direct costing method if

    • A.

      Units produced exceed units sold

    • B.

      Fixed manufacturing costs decrease

    • C.

      Variable manufacturing costs decrease

    • D.

      Units sold exceed units produced

    Correct Answer
    A. Units produced exceed units sold
    Explanation
    If units produced exceed units sold, it means that there is an increase in the inventory levels. Absorption costing method includes fixed manufacturing costs as part of the product cost and allocates them to the units produced. Therefore, if there is an increase in the inventory, more fixed manufacturing costs will be allocated to the units produced, resulting in higher income. On the other hand, direct costing method only includes variable manufacturing costs as part of the product cost, so it does not allocate fixed manufacturing costs to the units produced. Therefore, income computed by the absorption costing method will tend to exceed income computed by the direct costing method in this scenario.

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  • 16. 

    What is the term that means that all manufacturing costs (direct and indirect, variable and fixed) that contribute to the production of the product are traced to output and inventories?

    • A.

      Job order costing

    • B.

      Process costing

    • C.

      Full or absorption costing

    • D.

      Variable costing

    Correct Answer
    C. Full or absorption costing
    Explanation
    Full or absorption costing is the term that means that all manufacturing costs (direct and indirect, variable and fixed) that contribute to the production of the product are traced to output and inventories. This method includes both variable and fixed costs in the cost of production and assigns them to the units produced. It provides a more accurate reflection of the total cost of production and helps in determining the appropriate selling price for the product.

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  • 17. 

    A basic cost accounting method in which fixed factory overhead is added to inventory is

    • A.

      Absorption costing

    • B.

      Direct costing

    • C.

      Variable costing

    • D.

      Process costing

    Correct Answer
    A. Absorption costing
    Explanation
    Absorption costing is a basic cost accounting method that includes fixed factory overhead in the inventory cost. This method allocates all the production costs, including both variable and fixed overhead costs, to the units produced. By adding fixed factory overhead to the inventory cost, absorption costing ensures that all costs are accounted for and properly allocated to the products. This method is commonly used for financial reporting purposes as it provides a more accurate representation of the total cost of production.

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  • 18. 

    Reporting under the direct costing concept is accomplished by

    • A.

      Including only direct costs in the income statement

    • B.

      Eliminating the work-in-process inventory account

    • C.

      Matching variable cost against revenues and treating fixed cost as period cost

    • D.

      Treating all costs as period costs

    Correct Answer
    C. Matching variable cost against revenues and treating fixed cost as period cost
    Explanation
    Reporting under the direct costing concept means that only direct costs are included in the income statement. This means that only costs that can be directly attributed to the production of a specific product or service are included, such as direct materials and direct labor. Indirect costs, such as overhead costs, are not included in the income statement. Additionally, under direct costing, the work-in-process inventory account is eliminated, as this concept focuses on the costs that are directly related to the production of finished goods. Variable costs are matched against revenues, meaning that the costs that vary with the level of production or sales are matched against the corresponding revenues. Fixed costs are treated as period costs, meaning they are expensed in the period they are incurred rather than being allocated to specific products or services.

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  • 19. 

    Which of the following is a more descriptive term for the type of cost accounting often called direct costing?

    • A.

      Out-of-pocket costing

    • B.

      Variable costing

    • C.

      Relevant costing

    • D.

      Prime costing

    Correct Answer
    B. Variable costing
    Explanation
    Variable costing is a more descriptive term for the type of cost accounting often called direct costing because it focuses on the variable costs associated with producing a product or providing a service. Variable costing only includes direct materials, direct labor, and variable manufacturing overhead in the cost of a product, while fixed manufacturing overhead costs are treated as period expenses. This method provides a clearer picture of the costs directly related to production and helps in decision-making processes.

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  • 20. 

    Product cost under direct costing included

    • A.

      Prime costs only.

    • B.

      Prime costs and variable factory overheads.

    • C.

      Prime costs fixed factory overheads.

    • D.

      None of the above

    Correct Answer
    B. Prime costs and variable factory overheads.
    Explanation
    The correct answer is "Prime costs and variable factory overheads." Direct costing is a costing method that only includes the variable costs directly associated with the production of a product. Prime costs refer to the direct costs of materials and labor, while variable factory overheads are the indirect costs that vary with the level of production. This means that under direct costing, the product cost includes both the prime costs and the variable factory overheads. The other options, such as including fixed factory overheads or none of the above, are not consistent with the concept of direct costing.

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