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ICAG Paper 1.4 Cost & Management Accounting study materials
ICAG Paper 1.4 Cost & Management Accounting study resources

ICAG Paper 1.4 Cost & Management Accounting practice questions

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Question 1Cost accounting fundamentals and cost classification

A company pays a fixed annual rent of GH¢120,000 for a factory building and also pays GH¢8 per unit for direct material. Which classification of these two costs is correct?

  1. Both rent and direct material are variable costs
  2. Both rent and direct material are fixed costs
  3. Rent is a fixed cost; direct material is a variable cost Correct answer.
  4. Rent is a variable cost; direct material is a fixed cost

Explanation

A fixed cost stays constant in total over a relevant range regardless of output, so factory rent of GH¢120,000 behaves as a fixed cost. Direct material rises in direct proportion to units produced, so it is a variable cost. The distinction depends on total cost behaviour, not on the size of the amount.

Question 2Cost accounting fundamentals and cost classification

Which cost is best described as a prime cost?

  1. Direct labour plus factory overhead absorbed
  2. Factory supervisor salary plus depreciation of plant
  3. Selling and distribution expenses plus administration costs
  4. Direct material plus direct labour plus direct expenses Correct answer.

Explanation

Prime cost is the total of all direct costs of production, namely direct material, direct labour and direct expenses. It excludes production overhead, which is added to prime cost to arrive at factory cost. Selling, distribution and administration costs are period costs outside production cost.

Question 3Cost accounting fundamentals and cost classification

A manufacturer uses machine hours as the basis for absorbing production overhead. Budgeted overhead is GH¢450,000 and budgeted machine hours are 15,000. What is the predetermined overhead absorption rate per machine hour?

  1. GH¢3.00
  2. GH¢30.00 Correct answer.
  3. GH¢15.00
  4. GH¢45.00

Explanation

The predetermined absorption rate equals budgeted overhead divided by budgeted activity, so GH¢450,000 ÷ 15,000 machine hours = GH¢30 per machine hour. Using budgeted rather than actual figures allows overhead to be absorbed into unit costs as production occurs. The rate is then applied to actual machine hours used.

Question 4Cost accounting fundamentals and cost classification

Which of the following is a period cost rather than a product cost?

  1. Annual audit fee of the company Correct answer.
  2. Wages of assembly line workers
  3. Direct material used in production
  4. Depreciation of factory machinery

Explanation

Period costs are charged to the income statement in the period incurred and are not carried in inventory, and the audit fee is a classic administration period cost. Product costs such as direct material, direct labour and production overhead attach to units and flow through inventory until the goods are sold.

Question 5Cost accounting fundamentals and cost classification

A cost that contains both a fixed element and a variable element is described as which type of cost?

  1. Semi-variable cost Correct answer.
  2. Opportunity cost
  3. Committed fixed cost
  4. Sunk cost

Explanation

A semi-variable or mixed cost has a fixed component incurred regardless of activity plus a variable component that changes with activity, such as a utility bill with a standing charge. Sunk costs are past costs that cannot be recovered, and opportunity costs measure the benefit forgone. Committed fixed costs are fixed costs tied to long-term capacity decisions.

Question 6Cost accounting fundamentals and cost classification

Which of the following best describes an opportunity cost in management accounting?

  1. The additional cost incurred when output rises by one unit
  2. A cost that has been recorded in the ledger but not yet paid
  3. The cost of a resource already purchased and now unusable
  4. The benefit forgone by choosing one alternative over the next best alternative Correct answer.

Explanation

Opportunity cost measures the value of the next best alternative sacrificed when a decision is taken, and it is relevant to decision making even though no cash may change hands. It is not recorded in the accounting ledger, which distinguishes it from outlay costs. Sunk costs and incremental costs describe different concepts.

Question 7Cost accounting fundamentals and cost classification

In a manufacturing account, which formula gives the cost of goods completed (factory cost of production)?

  1. Prime cost plus administration overhead plus selling overhead
  2. Prime cost plus production overhead plus opening work in progress less closing work in progress Correct answer.
  3. Prime cost less production overhead plus closing work in progress
  4. Direct material plus direct labour less opening work in progress

Explanation

Factory cost of production is prime cost plus absorbed production overhead, adjusted for work in progress so that opening WIP is added and closing WIP deducted. This converts total production cost incurred into the cost of units actually finished. Administration and selling overheads are not part of production cost.

Question 8Cost accounting fundamentals and cost classification

Which of the following costs is classified as a production overhead?

  1. Direct material issued to the assembly line
  2. Factory canteen running costs for production staff Correct answer.
  3. Commission paid to the sales team
  4. Royalty paid per unit produced to the patent holder

Explanation

Production overheads are indirect costs of operating the factory that cannot be traced directly to a unit, and factory canteen costs for production staff fall in this category. Direct material and per-unit royalties are direct costs traceable to output. Sales commission is a selling and distribution cost outside production.

Question 9Cost accounting fundamentals and cost classification

A company produces 4,000 units and incurs total direct material cost of GH¢60,000 and total direct labour cost of GH¢40,000. Production overhead is absorbed at GH¢12 per unit. What is the total production cost of the 4,000 units?

  1. GH¢148,000 Correct answer.
  2. GH¢160,000
  3. GH¢112,000
  4. GH¢100,000

Explanation

Total production cost is direct material GH¢60,000 plus direct labour GH¢40,000 plus absorbed overhead of 4,000 units × GH¢12 = GH¢48,000, giving GH¢148,000. Absorbed overhead must be added to prime cost to reach total production cost. The per-unit rate is applied to actual output.

Question 10Cost accounting fundamentals and cost classification

Using the high-low method, total cost was GH¢90,000 at 10,000 units and GH¢130,000 at 18,000 units. What is the variable cost per unit?

  1. GH¢8.00
  2. GH¢7.22
  3. GH¢5.00 Correct answer.
  4. GH¢9.00

Explanation

The high-low method divides the change in total cost by the change in activity: (GH¢130,000 − GH¢90,000) ÷ (18,000 − 10,000) = GH¢40,000 ÷ 8,000 = GH¢5 per unit. This isolates the variable element, and the fixed element is then found by substitution. Only the highest and lowest activity levels are used.

Question 11Cost accounting fundamentals and cost classification

A company absorbs overhead on direct labour hours. Budgeted overhead is GH¢240,000, budgeted labour hours are 20,000, and actual labour hours worked were 21,000. What is the amount of overhead absorbed?

  1. GH¢240,000
  2. GH¢21,000
  3. GH¢252,000 Correct answer.
  4. GH¢228,571

Explanation

The absorption rate is GH¢240,000 ÷ 20,000 = GH¢12 per labour hour, and absorbed overhead is the rate multiplied by actual hours: GH¢12 × 21,000 = GH¢252,000. Absorbed overhead uses actual activity with the predetermined rate. Comparing this with actual overhead incurred reveals over- or under-absorption.

Question 12Cost accounting fundamentals and cost classification

Actual production overhead incurred was GH¢310,000 while overhead absorbed was GH¢295,000. How is this reported?

  1. Under-absorption of GH¢15,000, deducted from cost of sales
  2. Over-absorption of GH¢15,000, deducted from cost of sales
  3. Under-absorption of GH¢15,000, added to cost of sales Correct answer.
  4. Over-absorption of GH¢15,000, added to cost of sales

Explanation

When actual overhead exceeds absorbed overhead the difference is under-absorption, because too little overhead has been charged to production. Under-absorbed overhead is added to cost of sales to ensure the full cost is borne by the period. The GH¢15,000 shortfall arises because actual exceeded absorbed.

Question 13Cost accounting fundamentals and cost classification

Which basis of apportioning factory rent between departments is most appropriate?

  1. Number of employees in each department
  2. Machine value of each department
  3. Direct labour hours worked in each department
  4. Floor area occupied by each department Correct answer.

Explanation

Rent relates to the space occupied, so floor area is the most equitable apportionment basis. The chosen basis should reflect how the cost is driven by each department's activity. Number of employees suits canteen or welfare costs, and machine value suits insurance or depreciation.

Question 14Cost accounting fundamentals and cost classification

A company has fixed costs of GH¢80,000, a selling price of GH¢50 per unit and variable cost of GH¢30 per unit. What is the break-even point in units?

  1. 4,000 units Correct answer.
  2. 1,600 units
  3. 2,667 units
  4. 16,000 units

Explanation

Contribution per unit is GH¢50 − GH¢30 = GH¢20, and break-even units equal fixed costs divided by contribution per unit: GH¢80,000 ÷ GH¢20 = 4,000 units. At this volume total contribution exactly covers fixed costs and profit is zero. Break-even is expressed in units or in revenue.

Question 15Cost accounting fundamentals and cost classification

In process costing, normal loss is typically valued at which amount?

  1. Full process cost per unit
  2. The selling price of the finished good
  3. Scrap value only, with no share of process cost Correct answer.
  4. Prime cost per unit including overhead

Explanation

Normal loss is an expected, unavoidable loss and is valued at its scrap or realisable value only, so it carries no share of process cost. The process cost is therefore spread over expected good output, which raises the cost per good unit. Abnormal loss, by contrast, is valued at full process cost.

Question 16Cost accounting fundamentals and cost classification

A company uses a predetermined overhead rate of GH¢15 per direct labour hour. Job 204 used 300 direct labour hours and incurred direct material of GH¢4,000 and direct labour of GH¢6,000. What is the total cost of Job 204?

  1. GH¢12,500
  2. GH¢15,000
  3. GH¢10,000
  4. GH¢14,500 Correct answer.

Explanation

Overhead absorbed is 300 hours × GH¢15 = GH¢4,500, so total job cost is material GH¢4,000 plus labour GH¢6,000 plus absorbed overhead GH¢4,500 = GH¢14,500. Job costing accumulates direct costs and applies overhead using the predetermined rate. The rate is applied to the actual hours recorded on the job.

Question 17Cost accounting fundamentals and cost classification

Which statement about the classification of labour cost is correct?

  1. Idle time of direct workers is charged directly to the job worked on
  2. Direct labour is excluded from prime cost
  3. Idle time of direct workers is usually treated as production overhead Correct answer.
  4. Overtime premium paid for a specific customer request is always an overhead

Explanation

Idle time is a cost of having labour available but unproductive, so it is normally treated as production overhead and spread across all production. Overtime premium is charged to the specific job only when it arises at a customer's request. Direct labour is a component of prime cost.

Question 18Cost accounting fundamentals and cost classification

A company earned a contribution of GH¢120,000 and reported a profit of GH¢30,000. What is the margin of safety in contribution terms?

  1. GH¢120,000
  2. GH¢150,000
  3. GH¢30,000
  4. GH¢90,000 Correct answer.

Explanation

Margin of safety in contribution terms is the excess of contribution over fixed costs, and fixed costs equal contribution minus profit: GH¢120,000 − GH¢30,000 = GH¢90,000. This cushion shows how much contribution can fall before a loss arises. It can also be expressed as a percentage of budgeted activity.

Question 19Cost accounting fundamentals and cost classification

Which of the following is the most appropriate basis for absorbing production overhead in a highly automated factory?

  1. Machine hours Correct answer.
  2. Direct material cost
  3. Number of production orders
  4. Direct labour hours

Explanation

In a highly automated factory most overhead is driven by machine activity, so machine hours give the most equitable absorption basis. Direct labour hours become a poor measure when labour is a small part of the process. Material cost and order numbers reflect different cost drivers.

Question 20Cost accounting fundamentals and cost classification

A company uses weighted average process costing. Opening work in progress was 2,000 units, 100% complete for material and 40% complete for conversion. Units started were 10,000 and completed were 9,000. What are the equivalent units for conversion under the weighted average method?

  1. 10,600
  2. 10,200 Correct answer.
  3. 11,000
  4. 9,000

Explanation

Closing WIP is 2,000 + 10,000 − 9,000 = 3,000 units, which are 40% complete for conversion, giving 1,200 equivalent units. Adding the 9,000 completed units gives 10,200 equivalent units. The weighted average method averages opening WIP with current costs, so opening WIP is not treated separately.

Question 21Cost accounting fundamentals and cost classification

A company absorbs overhead on direct labour hours. Budgeted overhead was GH¢180,000 and budgeted hours 12,000. Actual overhead was GH¢175,000 and actual hours were 11,000. What is the over- or under-absorption?

  1. Under-absorption of GH¢10,000 Correct answer.
  2. Under-absorption of GH¢5,000
  3. Over-absorption of GH¢5,000
  4. Over-absorption of GH¢10,000

Explanation

The rate is GH¢180,000 ÷ 12,000 = GH¢15 per hour, so absorbed overhead is GH¢15 × 11,000 = GH¢165,000. Actual overhead of GH¢175,000 exceeds absorbed overhead by GH¢10,000, which is under-absorption. The shortfall is added to cost of sales.

Question 22Cost accounting fundamentals and cost classification

A company has fixed costs of GH¢60,000, a contribution to sales ratio of 40% and a target profit of GH¢20,000. What sales revenue is required to achieve the target profit?

  1. GH¢80,000
  2. GH¢200,000 Correct answer.
  3. GH¢50,000
  4. GH¢150,000

Explanation

Required contribution equals fixed costs plus target profit, GH¢60,000 + GH¢20,000 = GH¢80,000. Dividing by the contribution to sales ratio of 0.40 gives required sales of GH¢200,000. This approach works in revenue terms when the ratio is known.

Question 23Cost accounting fundamentals and cost classification

In process costing, an abnormal gain is valued at which amount?

  1. The same as normal loss, at scrap value
  2. Full process cost per unit, credited to the process account Correct answer.
  3. Scrap value only, debited to the process account
  4. Prime cost per unit, with overhead excluded

Explanation

Abnormal gain arises when actual loss is less than expected, so it is valued at the full process cost per unit and credited to the process account. This removes the benefit of the unexpected efficiency from the cost of good output. Normal loss, by contrast, is valued at scrap value only.

Question 24Cost accounting fundamentals and cost classification

A company produces two joint products, A and B, from a common process costing GH¢90,000. At the split-off point, A has 6,000 units with a sales value of GH¢10 per unit and B has 4,000 units with a sales value of GH¢5 per unit. Using the sales value method, what cost is apportioned to product A?

  1. GH¢60,000
  2. GH¢54,000
  3. GH¢45,000
  4. GH¢67,500 Correct answer.

Explanation

Total sales value at split-off is (6,000 × GH¢10) + (4,000 × GH¢5) = GH¢60,000 + GH¢20,000 = GH¢80,000. Product A's share is GH¢60,000 ÷ GH¢80,000 = 75%, so its apportioned cost is 75% × GH¢90,000 = GH¢67,500. The sales value method allocates joint cost in proportion to relative sales value.

Question 25Cost accounting fundamentals and cost classification

Which statement best explains why predetermined overhead absorption rates are preferred to actual overhead rates?

  1. They are based on actual activity levels and therefore always accurate
  2. They remove the need to apportion overhead between departments
  3. They eliminate the possibility of any over- or under-absorbed overhead
  4. They allow overhead to be charged to units as production occurs, before actual overhead is known Correct answer.

Explanation

Actual overhead is not known until the period ends, but unit costs are needed during production for pricing and job costing, so predetermined rates based on budgets allow timely absorption. Differences between absorbed and actual overhead still arise and are reported as over- or under-absorption. Apportionment between departments is still required.

Question 26Cost accounting fundamentals and cost classification

Which of the following costs is classified as a direct expense in a cost accounting system?

  1. Insurance of the factory machinery
  2. Depreciation of the factory building
  3. Salary of the factory supervisor
  4. Royalty paid per unit of production to the holder of a patent Correct answer.

Explanation

A direct expense is a cost that can be identified specifically with a cost unit and is not classified as direct material or direct labour. Royalties paid per unit of output are a classic example because the amount varies directly with production volume and is traceable to the product. Factory supervision, building depreciation and machinery insurance cannot be traced to individual units and are therefore production overheads.

Question 27Cost accounting fundamentals and cost classification

A company pays a sales representative a fixed salary of GH¢4,000 per month plus a commission of GH¢5 per unit sold. Which classification best describes the total remuneration?

  1. A variable cost
  2. A semi-variable cost Correct answer.
  3. A fixed cost
  4. A stepped cost

Explanation

A semi-variable cost contains both a fixed element and a variable element. The GH¢4,000 salary is incurred regardless of sales volume, while the GH¢5 commission changes in direct proportion to units sold. Combined, the total cost therefore has both a fixed and a variable component, which is the definition of a semi-variable (or mixed) cost.

Question 28Cost accounting fundamentals and cost classification

Which of the following best describes the cost object in a costing system?

  1. The rate used to absorb overhead into production
  2. The difference between budgeted and actual expenditure
  3. The total of all indirect costs incurred in a period
  4. Any activity for which a separate measurement of cost is desired Correct answer.

Explanation

A cost object is anything for which a separate measurement of cost is required, such as a product, a department, a customer or a project. It defines the focus of the costing exercise and determines which costs are collected and assigned to it. Indirect cost totals, variances and absorption rates are costing concepts but are not cost objects.

Question 29Cost accounting fundamentals and cost classification

Which of the following is an example of a sunk cost in a decision to replace an existing machine?

  1. The trade-in value currently offered for the existing machine
  2. The additional maintenance cost expected on the existing machine next year
  3. The cost of installing the replacement machine
  4. The original purchase price of the existing machine Correct answer.

Explanation

A sunk cost is a past cost that has already been incurred and cannot be changed by any current or future decision. The original purchase price of the existing machine has already been paid and is therefore irrelevant to the replacement decision. Trade-in value, installation cost and future maintenance are all future or opportunity costs that should influence the decision.

Question 30Cost accounting fundamentals and cost classification

Which of the following best describes the purpose of a cost centre in a responsibility accounting system?

  1. A summary of the total costs incurred by the entire organisation
  2. A unit of the organisation to which costs are accumulated and for which a manager is accountable Correct answer.
  3. A unit of product used as the basis for absorbing overhead
  4. A statement reconciling financial accounting profit with costing profit

Explanation

A cost centre is a section of an organisation, such as a department or production line, to which costs are charged and whose manager is held responsible for those costs. It supports responsibility accounting by linking costs to the person accountable for controlling them. It is not a product unit, an organisation-wide total or a reconciliation statement.

Question 31Cost accounting fundamentals and cost classification

A company produces 8,000 units and incurs direct material cost of GH¢48,000, direct labour cost of GH¢32,000 and production overhead of GH¢40,000. What is the prime cost per unit?

  1. GH¢6.00
  2. GH¢10.00 Correct answer.
  3. GH¢4.00
  4. GH¢15.00

Explanation

Prime cost is the total of direct material cost plus direct labour cost plus direct expenses. Here prime cost is GH¢48,000 + GH¢32,000 = GH¢80,000, and dividing by 8,000 units gives GH¢10.00 per unit. Production overhead is excluded from prime cost and is added later to arrive at production cost.

Question 32Cost accounting fundamentals and cost classification

Which of the following costs would normally be classified as a distribution cost rather than a production cost?

  1. Depreciation of factory plant and machinery
  2. Cost of raw materials used in the factory
  3. Cost of delivering finished goods to customers Correct answer.
  4. Wages of machine operators in the factory

Explanation

Distribution costs are the costs incurred in moving finished goods from the factory to customers, including packing, transport and warehousing of finished goods. Raw materials, machine operators' wages and factory plant depreciation are all incurred inside the production function and are therefore production costs. The distinction matters when preparing a cost statement that separates production cost from distribution and administration costs.

Question 33Cost accounting fundamentals and cost classification

A company uses a predetermined overhead absorption rate of GH¢12 per machine hour. A job uses 250 machine hours. What amount of overhead should be absorbed by the job?

  1. GH¢2,500
  2. GH¢250
  3. GH¢1,200
  4. GH¢3,000 Correct answer.

Explanation

Overhead absorbed is calculated by multiplying the predetermined absorption rate by the actual activity level achieved by the cost object. Here GH¢12 per machine hour × 250 machine hours = GH¢3,000. This absorbed amount is then compared with actual overhead incurred to determine over- or under-absorption.

Question 34Cost accounting fundamentals and cost classification

Which of the following best describes the difference between cost allocation and cost apportionment?

  1. Allocation divides a cost over several cost centres, while apportionment charges a whole cost to one cost centre
  2. Allocation is used for fixed costs, while apportionment is used for variable costs
  3. Allocation charges a whole cost to one cost centre, while apportionment divides a cost over several cost centres Correct answer.
  4. Allocation relates only to direct costs, while apportionment relates only to direct expenses

Explanation

Cost allocation assigns an entire cost item to a single cost centre because that centre caused the cost and can be identified with it. Cost apportionment is used when a cost is shared by several cost centres and must be divided on an equitable basis such as floor area or machine hours. The distinction is the number of cost centres to which the cost is charged, not the behaviour or type of cost.

Question 35Cost accounting fundamentals and cost classification

A company has the following data for two activity levels: at 6,000 units total cost is GH¢72,000 and at 10,000 units total cost is GH¢96,000. Using the high-low method, what is the estimated total cost at 8,000 units?

  1. GH¢84,000 Correct answer.
  2. GH¢90,000
  3. GH¢78,000
  4. GH¢96,000

Explanation

The high-low method first finds the variable cost per unit as the change in total cost divided by the change in activity: (GH¢96,000 − GH¢72,000) ÷ (10,000 − 6,000) = GH¢24,000 ÷ 4,000 = GH¢6 per unit. Fixed cost is then GH¢72,000 − (6,000 × GH¢6) = GH¢36,000. At 8,000 units total cost = GH¢36,000 + (8,000 × GH¢6) = GH¢84,000.

Question 36Cost accounting fundamentals and cost classification

A company uses a predetermined overhead absorption rate based on direct labour hours. Budgeted overhead is GH¢150,000 and budgeted direct labour hours are 10,000. Actual overhead incurred is GH¢158,000 and actual direct labour hours are 10,400. What is the amount of overhead over- or under-absorbed?

  1. GH¢8,000 over-absorbed
  2. GH¢8,000 under-absorbed
  3. GH¢2,000 under-absorbed
  4. GH¢2,000 over-absorbed Correct answer.

Explanation

The predetermined rate is GH¢150,000 ÷ 10,000 = GH¢15 per direct labour hour. Overhead absorbed is 10,400 × GH¢15 = GH¢156,000, compared with actual overhead of GH¢158,000. Since absorbed overhead is less than actual overhead by GH¢2,000, overhead is under-absorbed, not over-absorbed; the correct answer is therefore GH¢2,000 under-absorbed.

Question 37Cost accounting fundamentals and cost classification

Which of the following bases is most appropriate for apportioning the cost of factory canteen services between production departments?

  1. Direct labour hours worked in each department
  2. Value of machinery in each department
  3. Number of employees in each department Correct answer.
  4. Floor area occupied by each department

Explanation

Canteen costs are driven by the number of people who use the canteen, so the number of employees in each department is the most equitable basis for apportionment. Floor area, machinery value and labour hours do not reflect canteen usage and are better suited to other costs such as rent, depreciation and supervision. Choosing a basis that reflects the cause of the cost improves the accuracy of departmental overhead rates.

Question 38Cost accounting fundamentals and cost classification

A company uses the first-in, first-out (FIFO) method of process costing. Opening work in progress is 1,000 units (60% complete for conversion) and closing work in progress is 2,000 units (40% complete for conversion). During the period, 5,000 units were completed and transferred out. What are the equivalent units of production for conversion cost?

  1. 5,600 units
  2. 5,000 units
  3. 4,400 units Correct answer.
  4. 4,000 units

Explanation

Under FIFO, equivalent units are the work done in the current period only. The 1,000 opening units needed 40% more work (400 equivalent units); the 4,000 units started and completed in the period count fully (4,000 equivalent units); and the 2,000 closing units are 40% complete (800 equivalent units). Total equivalent units = 400 + 4,000 + 800 = 4,400.

Question 39Cost accounting fundamentals and cost classification

In process costing, how is abnormal loss valued?

  1. At the same unit value as normal loss
  2. At the full cost of the good units produced, including the relevant share of normal loss Correct answer.
  3. At scrap value only, with no further charge to the process account
  4. At the cost of the normal output, excluding any share of normal loss

Explanation

Abnormal loss is valued at the full cost of the good units produced because it represents an unexpected loss that should not be allowed to inflate the cost of good output. Its value therefore includes the cost per unit of good production, which already absorbs the cost of normal loss. Normal loss, by contrast, is valued at its scrap or disposal value.

Question 40Cost accounting fundamentals and cost classification

A company has a contribution to sales ratio of 40% and fixed costs of GH¢90,000. What is the break-even sales revenue?

  1. GH¢150,000
  2. GH¢36,000
  3. GH¢225,000 Correct answer.
  4. GH¢360,000

Explanation

Break-even sales revenue is fixed costs divided by the contribution to sales (C/S) ratio. Here GH¢90,000 ÷ 0.40 = GH¢225,000. At this level of sales, contribution equals fixed costs and profit is zero, which is the definition of break-even.

Question 41Cost accounting fundamentals and cost classification

A company produces three joint products from a common process. Which method of apportioning joint costs is most appropriate when the products have significantly different selling prices per unit at the split-off point?

  1. The average unit cost method
  2. The physical units method
  3. The relative sales value at split-off method Correct answer.
  4. The net realisable value method applied after further processing

Explanation

When joint products have different selling prices, apportioning joint costs on relative sales value at the split-off point recognises that the cost of the common process is better matched to the revenue each product can generate. The physical units method ignores price differences and can distort product costs. Net realisable value is used where products require further processing after split-off, which is not stated here.

Question 42Cost accounting fundamentals and cost classification

Which of the following is the most appropriate basis for absorbing production overhead in a factory where production is highly automated and direct labour is a small part of total cost?

  1. Direct labour hours
  2. Number of employees
  3. Direct labour cost
  4. Machine hours Correct answer.

Explanation

In a highly automated factory, overhead costs such as depreciation, power and maintenance are driven by machine usage rather than by labour. Machine hours therefore provide a fairer measure of the overhead consumed by each product. Direct labour hours and direct labour cost are small and unrepresentative in such an environment, and employee numbers reflect headcount rather than production activity.

Question 43Cost accounting fundamentals and cost classification

A company has opening finished goods inventory of 500 units valued at GH¢20 each, produces 2,000 units at GH¢22 each and sells 2,200 units. Using FIFO, what is the value of closing finished goods inventory?

  1. GH¢6,400
  2. GH¢6,000
  3. GH¢7,200
  4. GH¢6,600 Correct answer.

Explanation

Under FIFO, the 2,200 units sold are taken first from the 500 opening units and then from 1,700 of the 2,000 units produced. Closing inventory is therefore 300 units from current production, valued at GH¢22 each = GH¢6,600. FIFO values closing inventory at the most recent cost.

Question 44Cost accounting fundamentals and cost classification

Which of the following best explains why the classification of a cost as direct or indirect may change between organisations?

  1. Direct costs are always variable while indirect costs are always fixed
  2. Cost classification depends only on whether the cost is paid in cash
  3. The same cost may be traceable to a cost unit in one organisation but shared across many units in another Correct answer.
  4. Indirect costs are recorded only in financial accounting, not in cost accounting

Explanation

Direct and indirect classification depends on whether a cost can be traced specifically to a cost unit in the particular organisation. A cost such as a supervisor's salary may be directly attributable to a single contract in a construction firm but be an overhead in a factory making many products. The classification is therefore context-specific rather than an inherent property of the cost item.

Question 45Cost accounting fundamentals and cost classification

A company has the following costs: direct materials GH¢30,000, direct labour GH¢20,000, direct expenses GH¢5,000 and production overhead GH¢15,000. What is the production cost?

  1. GH¢70,000 Correct answer.
  2. GH¢50,000
  3. GH¢65,000
  4. GH¢55,000

Explanation

Production cost is prime cost plus production overhead. Prime cost here is GH¢30,000 + GH¢20,000 + GH¢5,000 = GH¢55,000, and adding production overhead of GH¢15,000 gives GH¢70,000. This total represents the cost of goods manufactured before distribution and administration costs are added.

Question 46Cost accounting fundamentals and cost classification

Which of the following best describes the difference between a cost unit and a cost centre?

  1. A cost unit is a unit of product or service to which costs are related, while a cost centre is a location or function to which costs are charged Correct answer.
  2. A cost unit is a department of the organisation, while a cost centre is a unit of product
  3. A cost unit is a predetermined rate, while a cost centre is an actual cost incurred
  4. A cost unit is used only in service organisations, while a cost centre is used only in manufacturing

Explanation

A cost unit is the unit of product or service for which costs are ascertained, such as one chair, one patient-day or one tonne of cement. A cost centre is a location, function or item of equipment to which costs are charged and accumulated, such as a machining department. The two concepts work together, with costs collected in cost centres and then related to cost units.

Question 47Cost accounting fundamentals and cost classification

A company has a margin of safety of 25% and current sales of GH¢400,000. What is the break-even sales revenue?

  1. GH¢100,000
  2. GH¢320,000
  3. GH¢300,000 Correct answer.
  4. GH¢500,000

Explanation

The margin of safety is the excess of budgeted or actual sales over break-even sales, expressed as a percentage of sales. Here the margin of safety in revenue is 25% × GH¢400,000 = GH¢100,000, so break-even sales = GH¢400,000 − GH¢100,000 = GH¢300,000. At GH¢300,000 of sales, contribution equals fixed costs and profit is zero.

Question 48Cost accounting fundamentals and cost classification

Which of the following best explains why indirect costs are apportioned to cost centres before being absorbed into products?

  1. To convert all indirect costs into direct costs
  2. To ensure that total overhead absorbed always equals total overhead incurred
  3. To build up a realistic overhead cost for each centre so that a fair absorption rate can be calculated Correct answer.
  4. To eliminate the need to record actual overhead expenditure

Explanation

Indirect costs are first apportioned to cost centres so that each centre carries a fair share of the overhead it has helped to cause. This builds up a realistic overhead total for each centre from which a meaningful predetermined absorption rate can be calculated. Apportionment does not remove the need to record actual expenditure, nor does it convert indirect costs into direct costs.

Question 49Cost accounting fundamentals and cost classification

A company uses the weighted average method of process costing. Opening work in progress is 2,000 units (100% complete for material and 40% complete for conversion). During the period, 8,000 units were started and 7,000 units were completed. Closing work in progress is 3,000 units (100% complete for material and 50% complete for conversion). What are the equivalent units for conversion cost?

  1. 8,500 units Correct answer.
  2. 9,000 units
  3. 7,000 units
  4. 8,200 units

Explanation

Under the weighted average method, equivalent units include the work done to date on all units completed plus the work done on closing work in progress; the opening work in progress is not treated separately. Completed units of 7,000 are 100% complete for conversion, giving 7,000 equivalent units, and closing work in progress of 3,000 at 50% gives 1,500 equivalent units. Total conversion equivalent units = 7,000 + 1,500 = 8,500.

Question 50Cost accounting fundamentals and cost classification

A company has a step-fixed cost that is GH¢50,000 for activity up to 10,000 units and GH¢70,000 for activity above 10,000 units. At an activity level of 12,000 units, what is the total step-fixed cost and the fixed cost per unit?

  1. GH¢70,000 total and GH¢7.00 per unit
  2. GH¢50,000 total and GH¢4.17 per unit
  3. GH¢70,000 total and GH¢5.83 per unit Correct answer.
  4. GH¢50,000 total and GH¢5.00 per unit

Explanation

A step-fixed cost remains constant within a relevant range and then jumps to a new level once activity exceeds that range. At 12,000 units the company is above the 10,000-unit step, so the total cost is GH¢70,000. Dividing GH¢70,000 by 12,000 units gives GH¢5.83 per unit, showing that fixed cost per unit falls as activity rises within a step.