Chapter 31 - Costs

What is the primary purpose of cost information in a business?

• To calculate profitability only
• To aid in budgeting and decision-making
• To assess liquidity status
• To improve product design

Answer explanation

Cost information is used for budgeting, pricing, and performance measurement.

Which of the following is an example of a direct cost?

• Factory rent
• Raw materials for production
• Office administration costs
• Utility bills for a factory

Answer explanation

Direct costs can be clearly identified with each unit of production and directly linked to a specific cost center

What is a variable cost?

• A cost that does not change with output
• A cost that increases with production
• A cost that is always indirect
• A cost that is partially fixed and partially variable

Answer explanation

Variable costs change directly with output levels.

Which type of cost remains constant regardless of output level?

• Variable cost
• Fixed cost
• Direct cost
• Indirect cost

Answer explanation

Fixed costs do not change with output levels in the short run.

Which of the following best describes a cost centre?

• A department where both costs and revenues are measured
• A unit where costs are tracked separately
• A section where both costs and profit are tracked
• A method to calculate profit margins

Answer explanation

Cost centres help track where costs are incurred.

How is average cost calculated?

• Total Revenue / Total Cost
• Total Cost / Number of Units
• Fixed Cost x Variable Cost
• Variable Cost / Total Revenue

Answer explanation

Average cost is total cost divided by the number of units produced.

What is a profit centre?

• A department only focused on expenses
• A unit where only direct costs are considered
• A section that deals with budgeting
• A division where both costs and revenues are analyzed

Answer explanation

Profit centres assess profitability by tracking costs and revenues.

Which costing method includes both direct and indirect costs?

• Direct costing
• Full costing
• Marginal costing
• Contribution costing

Answer explanation

Full costing includes all business costs, aiding accurate assessments.

Why is full costing beneficial for pricing decisions?

• It covers all costs including unexpected expenses
• It simplifies budget forecasting
• It helps in profit forecasting
• It ensures a consistent profit margin is applied

Answer explanation

Accurate profit forecasting aids in competitive pricing.

Which of the following is a disadvantage of full costing?

• It can lead to inaccurate allocation of overheads
• It is only useful for businesses with a single product
• It cannot be used in businesses with multiple products
• It may not match costs accurately to production areas

Answer explanation

Incorrect overhead allocation can distort financial decisions.