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CMA Final Paper 18 (CFR) study materials
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CMA Final Paper 18 (CFR) practice questions

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Question 1Cost Accounting Standards and Costing Principles

Under cost accounting standards, which cost is classified as a product cost rather than a period cost?

  1. Advertising expense for a new product launch
  2. Sales commission paid to the order acquisition team
  3. Annual audit fee paid to external auditors
  4. Depreciation of factory production machinery Correct answer.

Explanation

Product costs attach to units produced and flow into inventory until the goods are sold, so factory machinery depreciation is a product cost. Selling, general and administrative outlays such as commissions, audit fees and advertising are charged to the period in which they arise.

Question 2Cost Accounting Standards and Costing Principles

A manufacturer reports prime cost of 480,000 and conversion cost of 360,000. Factory overhead is 210,000. What is the direct labour cost?

  1. 150,000 Correct answer.
  2. 330,000
  3. 270,000
  4. 120,000

Explanation

Conversion cost equals direct labour plus factory overhead, so direct labour is 360,000 minus 210,000, which is 150,000. Prime cost of 480,000 then implies direct material of 330,000, confirming the figures are internally consistent.

Question 3Cost Accounting Standards and Costing Principles

Which basis of overhead absorption is most appropriate when production is highly automated and direct labour time is minimal?

  1. Direct labour cost
  2. Direct labour hours
  3. Direct material cost
  4. Machine hours Correct answer.

Explanation

Where overhead is driven mainly by machine activity, machine hours reflect the consumption of the resource and give a fairer absorption rate. Labour-based bases become unreliable when labour content is small relative to the overhead being recovered.

Question 4Cost Accounting Standards and Costing Principles

Budgeted overhead is 900,000 and budgeted machine hours are 60,000. Actual overhead incurred is 940,000 and actual machine hours are 62,000. What is the amount of overhead under- or over-absorbed?

  1. 10,000 over-absorbed
  2. 40,000 over-absorbed
  3. 10,000 under-absorbed Correct answer.
  4. 40,000 under-absorbed

Explanation

The predetermined rate is 900,000 divided by 60,000, giving 15 per machine hour. Absorbed overhead is 62,000 hours at 15, equal to 930,000, so actual overhead of 940,000 leaves 10,000 under-absorbed.

Question 5Cost Accounting Standards and Costing Principles

Which inventory valuation method typically produces the highest reported profit during a period of steadily rising purchase prices?

  1. Weighted average cost
  2. First in, first out Correct answer.
  3. Last in, first out
  4. Specific identification of the oldest batch

Explanation

Under FIFO the oldest and cheapest costs are charged to cost of sales, leaving the more recent higher costs in closing inventory. Lower cost of sales raises reported profit compared with LIFO or weighted average when prices rise.

Question 6Cost Accounting Standards and Costing Principles

A company uses a standard costing system. The standard material content for one unit is 4 kg at 12 per kg. Actual output was 1,000 units using 4,150 kg costing 51,875. What is the material price variance?

  1. 1,250 favourable Correct answer.
  2. 1,250 adverse
  3. 1,800 adverse
  4. 1,800 favourable

Explanation

The actual price is 51,875 divided by 4,150 kg, which is 12.50 per kg. The price variance is 4,150 kg multiplied by the 0.50 excess over standard, giving 2,075; recalculating with the standard price of 12.00 against actual spend yields 1,250 favourable only if spend is compared to 4,150 kg at 12.00, which is 49,800, so the variance is 2,075 adverse.

Question 7Cost Accounting Standards and Costing Principles

Which of the following best describes the treatment of normal loss in process costing?

  1. It is carried forward as work in progress to the next period
  2. It is written off as an abnormal loss in the profit and loss account
  3. It is absorbed by the scrap value realised on the lost units
  4. It is charged to the completed good output of the process Correct answer.

Explanation

Normal loss is an expected, unavoidable feature of the process, so its cost is borne by the good units that emerge and raises their unit cost. Only abnormal loss, being unexpected, is written off separately.

Question 8Cost Accounting Standards and Costing Principles

In a process account, 2,000 units were input at a cost of 30,000. Normal loss is 10 per cent of input with scrap value of 2 per unit, and actual output was 1,750 units. What is the value of abnormal loss?

  1. 2,500 Correct answer.
  2. 2,000
  3. 3,500
  4. 3,000

Explanation

Normal loss is 200 units with scrap value of 400, so the net process cost of 29,600 is spread over the 1,800 expected good units, giving 16.444 per unit. Abnormal loss of 50 units is valued at that rate, approximately 822, so the abnormal loss is 50 units at the cost per good unit of 16.44, which is about 822.

Question 9Cost Accounting Standards and Costing Principles

Under contract costing, which cost is normally excluded from the contract account and treated as a charge against general profit and loss?

  1. Direct materials issued to the site
  2. Head office administration expenses apportioned to the contract Correct answer.
  3. Site supervisor wages
  4. Subcontractor charges for site work

Explanation

Contract accounts capture costs directly attributable to executing the contract, such as materials, site labour and subcontractors. General head office administration is a period cost of the business as a whole and is not charged to individual contracts.

Question 10Cost Accounting Standards and Costing Principles

A contract has a price of 5,000,000 and costs incurred to date of 1,800,000 on work certified of 2,400,000. Estimated total cost is 4,000,000. Using the work-certified basis, what profit should be taken to date?

  1. 240,000
  2. 600,000 Correct answer.
  3. 300,000
  4. 450,000

Explanation

Expected total profit is 5,000,000 minus 4,000,000, equal to 1,000,000. The proportion certified is 2,400,000 divided by 5,000,000, which is 48 per cent, so profit to date is 480,000; on a cost-to-complete basis the figure is 1,000,000 multiplied by 1,800,000 over 4,000,000, equal to 450,000.

Question 11Cost Accounting Standards and Costing Principles

Which statement correctly describes the flow of costs in a job costing system?

  1. Costs are spread evenly across equivalent units of production
  2. Costs are recorded only when the customer pays the invoice
  3. Costs are accumulated by job and transferred to finished goods when the job is complete Correct answer.
  4. Costs are averaged over all units produced in the period

Explanation

Job costing collects material, labour and overhead against a specific job order and moves the accumulated cost to finished goods on completion. Averaging over all output or equivalent units is characteristic of process costing.

Question 12Cost Accounting Standards and Costing Principles

In process costing with opening work in progress, which method assumes that opening work in progress is completed first before new units are started?

  1. Weighted average method
  2. Marginal costing method
  3. First in, first out method Correct answer.
  4. Standard costing method

Explanation

The FIFO method of process costing separates the cost of completing opening work in progress from the cost of units started and finished in the period. The weighted average method blends opening and current costs into a single average.

Question 13Cost Accounting Standards and Costing Principles

A process has opening work in progress of 400 units that are 60 per cent complete for conversion. During the period 1,600 units were started and 1,700 units were completed. Closing work in progress is 300 units, 40 per cent complete for conversion. Under FIFO, what are the equivalent units for conversion?

  1. 1,540 Correct answer.
  2. 1,460
  3. 1,820
  4. 1,700

Explanation

Under FIFO the work done is measured only for the current period: 240 units to finish opening stock, 1,300 units started and completed, and 120 equivalent units in closing stock. The total is 240 plus 1,300 plus 120, equal to 1,660; recalculating with 60 per cent of 400 gives 240 and 40 per cent of 300 gives 120, confirming 1,660 equivalent units.

Question 14Cost Accounting Standards and Costing Principles

Which of the following is a characteristic of service costing rather than manufacturing costing?

  1. Output is stored as inventory until sold
  2. Closing inventory is valued using the weighted average method
  3. Overhead is absorbed using machine hours on the production line
  4. Costs are collected around a composite cost unit such as a passenger-kilometre Correct answer.

Explanation

Services are consumed as they are provided, so cost units are composite measures of service delivered, such as passenger-kilometres or patient-days. Manufacturing costing deals with tangible output that can be stored and valued as inventory.

Question 15Cost Accounting Standards and Costing Principles

A company absorbs overhead on the basis of direct labour hours. Budgeted overhead is 250,000, budgeted labour hours are 50,000 and budgeted machine hours are 25,000. Actual labour hours were 48,000. What overhead was absorbed?

  1. 240,000 Correct answer.
  2. 200,000
  3. 260,000
  4. 250,000

Explanation

The predetermined rate is 250,000 divided by 50,000 labour hours, which is 5 per labour hour. Absorbing at 5 for the 48,000 hours actually worked gives 240,000.

Question 16Cost Accounting Standards and Costing Principles

Which cost is classified as a stepped fixed cost in a factory?

  1. Depreciation charged on a straight-line basis
  2. Power consumed in proportion to machine hours run
  3. Supervisor salaries that rise by one additional supervisor for every 20 direct workers Correct answer.
  4. Factory rent paid at a constant monthly amount

Explanation

A stepped cost is constant over a range of activity and then jumps to a new level when the range is exceeded, as with adding a supervisor for each additional group of 20 workers. Straight-line rent and depreciation are fixed within the relevant range, while power varies with activity.

Question 17Cost Accounting Standards and Costing Principles

Using the high-low method, total cost was 84,000 at 12,000 units and 66,000 at 8,000 units. What is the variable cost per unit?

  1. 4.50 Correct answer.
  2. 7.00
  3. 1.50
  4. 3.00

Explanation

The variable rate is the change in cost of 18,000 divided by the change in activity of 4,000 units, giving 4.50 per unit. The fixed element would then be 66,000 minus 8,000 times 4.50, equal to 30,000.

Question 18Cost Accounting Standards and Costing Principles

Which of the following best explains why an overhead absorption rate based on budgeted activity may still leave an under-absorbed balance at year end?

  1. The rate is based on actual overhead and actual activity
  2. Fixed overhead has been excluded from the calculation
  3. Actual activity and actual overhead differ from the budgeted figures used to set the rate Correct answer.
  4. The rate is recalculated each month using actual results

Explanation

A predetermined rate is set from budgeted overhead and budgeted activity, so any divergence in either actual overhead or actual activity leaves a residual under- or over-absorbed amount. The balance is a measure of estimation error and volume differences.

Question 19Cost Accounting Standards and Costing Principles

A company produces two joint products, X and Y, from a common process costing 120,000. At the split-off point, X has 4,000 units with a sales value of 10 each and Y has 2,000 units with a sales value of 20 each. Using sales value at split-off, what cost is apportioned to product X?

  1. 80,000
  2. 48,000
  3. 60,000 Correct answer.
  4. 72,000

Explanation

Sales value of X is 40,000 and of Y is 40,000, so each product represents half of the total 80,000. Apportioning the 120,000 joint cost on that basis gives 60,000 to X.

Question 20Cost Accounting Standards and Costing Principles

Which cost is treated as a sunk cost when evaluating a replacement decision for an existing machine?

  1. The resale value currently obtainable for the old machine
  2. The installation cost of the new machine
  3. The operating cost of the new machine
  4. The original purchase price of the old machine Correct answer.

Explanation

The original purchase price has already been incurred and cannot be changed by the decision, so it is irrelevant to the comparison. Resale value, future running costs and installation outlays all differ between the alternatives and are relevant.

Question 21Cost Accounting Standards and Costing Principles

A company can sell 5,000 units at 20 each or process them further at an additional cost of 30,000 and sell at 26 each. What is the incremental profit from further processing?

  1. 30,000
  2. -10,000
  3. 0 Correct answer.
  4. 10,000

Explanation

Additional revenue is 5,000 units multiplied by the 6 increase in price, equal to 30,000, which exactly equals the additional processing cost. The incremental profit is therefore zero and the decision is financially neutral.

Question 22Cost Accounting Standards and Costing Principles

Under a standard marginal costing system, which variance arises solely because actual sales volume differs from budgeted sales volume?

  1. Fixed overhead expenditure variance
  2. Variable overhead efficiency variance
  3. Sales volume contribution variance Correct answer.
  4. Sales price variance

Explanation

The sales volume contribution variance measures the effect on contribution of selling a different quantity from budget, valued at standard contribution per unit. Price and expenditure variances arise from differences in rates or spending rather than volume.

Question 23Cost Accounting Standards and Costing Principles

A company wishes to establish the cost function for a semi-variable overhead. Which technique uses all observations and provides a statistical measure of goodness of fit?

  1. High-low method
  2. Scatter graph method
  3. Account analysis
  4. Least squares regression Correct answer.

Explanation

Least squares regression fits a line using every data point and yields an R-squared statistic indicating how well the line explains the variation. High-low uses only two points, while scatter graphs rely on visual judgement.

Question 24Cost Accounting Standards and Costing Principles

Which cost driver is most appropriate for absorbing the cost of a purchasing department that places orders for many different production departments?

  1. Direct labour hours worked in each department
  2. Machine hours used by each department
  3. Floor area occupied by each department
  4. Number of purchase orders raised for each department Correct answer.

Explanation

Activity-based reasoning links the cost of purchasing to the number of orders processed, since each order consumes the department's effort. Labour hours, machine hours and floor area do not reflect the purchasing workload.

Question 25Cost Records, Cost Audit and Compliance Reporting

Under the Companies (Cost Records and Audit) Rules, which statutory body maintains the cost audit report format and the manner of filing it in the e-form with the Ministry of Corporate Affairs?

  1. The Central Government, which prescribes the form and manner of filing through rules notified in the Official Gazette Correct answer.
  2. The Comptroller and Auditor General of India, through audit regulations issued annually
  3. The Securities and Exchange Board of India, through its listing obligations regulations
  4. The Institute of Cost Accountants of India, through its Cost Auditing and Assurance Standards Board

Explanation

The cost audit report form and the manner of filing are prescribed by the Central Government through rules notified under the Companies Act, and the report is filed in the specified e-form with the Ministry of Corporate Affairs. Professional bodies issue standards and guidance, but they do not prescribe the statutory form or filing mechanism.

Question 26Cost Records, Cost Audit and Compliance Reporting

A company engaged in the production of specified goods crosses the threshold that makes cost records mandatory. Which records must it maintain?

  1. Only the reconciliation of cost accounts with financial accounts
  2. Only the cost of production statement submitted with the annual return
  3. Only the audited financial statements and the directors' report
  4. Records showing the particulars of materials, labour, overheads and the cost of each product as prescribed Correct answer.

Explanation

Where cost records are required, the rules prescribe maintenance of particulars relating to materials consumed, wages and salaries, overheads, and the cost of production or provision of each product or service. The record-keeping obligation is broader than any single statement or reconciliation.

Question 27Cost Records, Cost Audit and Compliance Reporting

Which of the following best describes the scope of a cost audit under the Companies Act, 2013?

  1. An evaluation of the efficiency of the board of directors in discharging its duties
  2. An examination of the cost accounting records to verify their accuracy and compliance with the prescribed rules Correct answer.
  3. A review of the company's income tax computations for the assessment year
  4. An investigation into suspected fraud in the procurement function

Explanation

A cost audit is an examination of the cost accounting records maintained by the company to verify whether they are accurate and comply with the prescribed cost accounting rules and standards. It is not a tax review, a fraud investigation, or a governance evaluation.

Question 28Cost Records, Cost Audit and Compliance Reporting

For a company required to conduct a cost audit, who appoints the cost auditor?

  1. The shareholders, by ordinary resolution in general meeting
  2. The audit committee, by simple majority of its members
  3. The board of directors, on the recommendation of the audit committee, by passing a board resolution Correct answer.
  4. The Central Government, through an order issued by the Ministry of Corporate Affairs

Explanation

The cost auditor is appointed by the board of directors on the recommendation of the audit committee, and the appointment is formalised by a board resolution. Shareholder approval and government appointment apply only in the specific situations the Act carves out.

Question 29Cost Records, Cost Audit and Compliance Reporting

Which of the following is a prescribed disqualification for appointment as a cost auditor of a company?

  1. Having previously audited the financial statements of a subsidiary company
  2. Being a relative of a director of the company
  3. Being indebted to the company for an amount exceeding five lakh rupees Correct answer.
  4. Being a member of the Institute of Cost Accountants of India in practice

Explanation

A person who is indebted to the company for an amount exceeding the prescribed limit is disqualified from being appointed as cost auditor, in line with the independence requirements applicable to auditors. Being a qualified member in practice is a prerequisite, not a disqualification.

Question 30Cost Records, Cost Audit and Compliance Reporting

A cost auditor discovers that the company has not maintained cost records for one product line for part of the year. What is the appropriate course of action in the cost audit report?

  1. Adjust the missing figures by estimation and present them as audited cost data
  2. Resign from the engagement and inform the shareholders directly
  3. Report the non-maintenance as a qualification or observation, describing its effect on the cost statements Correct answer.
  4. Omit the matter because the report covers only the current year's audited figures

Explanation

Where prescribed cost records have not been maintained, the cost auditor must disclose the fact in the report as a qualification or observation and describe its impact on the cost statements. The auditor cannot silently estimate missing data or suppress the deficiency.

Question 31Cost Records, Cost Audit and Compliance Reporting

A company's cost auditor is required to submit the cost audit report to the board. Within what period must the company file the report with the Ministry of Corporate Affairs?

  1. Within ninety days of the end of the financial year
  2. Within one hundred and eighty days of the end of the financial year
  3. Within thirty days of the date of the board meeting at which the report is received Correct answer.
  4. Within sixty days of the date of the board meeting at which the report is received

Explanation

The company must file the cost audit report with the Ministry of Corporate Affairs within thirty days of the board meeting at which the report is received, in the prescribed e-form. The auditor's own submission to the board follows a separate timetable.

Question 32Cost Records, Cost Audit and Compliance Reporting

Which of the following most accurately describes the relationship between cost accounting standards and the cost auditor's opinion?

  1. Cost accounting standards apply only to companies listed on a recognised stock exchange
  2. Cost accounting standards are issued by the Central Government and replace the cost audit rules
  3. Cost accounting standards are optional guidance that the auditor may ignore if the industry practice differs
  4. Cost accounting standards are mandatory and the auditor must report material departures from them Correct answer.

Explanation

Cost accounting standards issued by the Institute are mandatory in application, and the cost auditor is expected to examine compliance with them and report material departures. They supplement, but do not replace, the statutory cost audit rules.

Question 33Cost Records, Cost Audit and Compliance Reporting

In a cost audit, the auditor is verifying the valuation of work-in-progress at year end. Which approach best demonstrates compliance with cost accounting principles?

  1. Value work-in-progress at the higher of cost and net realisable value
  2. Value work-in-progress at the cost of materials, labour and appropriate production overheads incurred to its present stage Correct answer.
  3. Value work-in-progress at selling price less estimated profit margin
  4. Value work-in-progress at the standard cost without analysing variances

Explanation

Work-in-progress is carried at the cost of materials, labour and appropriate production overheads incurred up to its present stage of completion. Selling price, the higher of cost and net realisable value, and unanalysed standard cost are not acceptable bases for the cost records.

Question 34Cost Records, Cost Audit and Compliance Reporting

A cost auditor is examining capacity utilisation. The installed capacity is 10,000 units, normal capacity is 8,000 units and actual production is 6,000 units. What does the idle capacity variance represent?

  1. The difference between actual production and sales volume, valued at contribution per unit
  2. The difference between installed capacity and actual production, valued at the standard fixed overhead rate
  3. The difference between installed capacity and normal capacity, which is always treated as a normal loss
  4. The difference between normal capacity and actual production, being the unabsorbed fixed overhead attributable to underutilisation Correct answer.

Explanation

Idle capacity variance measures the fixed overhead not absorbed because actual production fell below normal capacity, so it is the shortfall of actual output against normal capacity valued at the standard fixed overhead rate. Installed capacity is the physical maximum and is not the benchmark for absorption.

Question 35Cost Records, Cost Audit and Compliance Reporting

A company's records show raw material consumption of 1,200 kg for a production of 1,000 units, against a standard of 1 kg per unit at 50 rupees per kg. The actual purchase price was 52 rupees per kg. What is the material usage variance?

  1. 10,000 rupees adverse Correct answer.
  2. 10,000 rupees favourable
  3. 10,400 rupees adverse
  4. 5,200 rupees adverse

Explanation

Usage variance is the excess quantity consumed over the standard quantity for actual output, valued at the standard price: (1,200 minus 1,000) kg times 50 rupees equals 10,000 rupees adverse. The actual purchase price affects the price variance, not the usage variance.

Question 36Cost Records, Cost Audit and Compliance Reporting

A cost auditor reviewing overhead absorption finds that the company applied factory overheads using a predetermined rate based on direct labour hours, while the cost accounting standard requires absorption based on the activity that drives the cost. What is the most appropriate reporting response?

  1. Report the departure as a non-compliance with the cost accounting standard, quantifying the effect on product cost Correct answer.
  2. Disclose the matter only in the notes to the financial statements
  3. Recalculate the product cost using activity-based costing and substitute it in the audited statements without comment
  4. Accept the method because predetermined rates are always permitted

Explanation

Where the absorption method departs from the applicable cost accounting standard, the auditor should report the non-compliance and quantify its effect on product cost. The auditor cannot substitute a preferred method silently or rely on financial statement notes as a substitute for the cost audit report.

Question 37Cost Records, Cost Audit and Compliance Reporting

Which of the following is the primary purpose of the reconciliation between the cost accounting records and the financial accounts?

  1. To ensure that the profit or loss shown by the cost statements reconciles with the profit or loss in the financial accounts, with differences explained Correct answer.
  2. To explain the differences between the cost of production and the cost of sales shown in the two sets of records
  3. To replace the need for a statutory audit of the financial statements
  4. To prove that the profit reported in the cost statements equals the profit in the financial statements

Explanation

The reconciliation demonstrates that the profit or loss disclosed by the cost accounting records agrees with the profit or loss in the financial accounts, and it explains the reasons for any difference. It does not require the two profit figures to be identical, nor does it replace the financial audit.

Question 38Cost Records, Cost Audit and Compliance Reporting

A company produces multiple products from a common process and incurs joint costs of 9,00,000 rupees. Product A has sales value at split-off of 6,00,000 rupees and Product B has 3,00,000 rupees. Using the sales value at split-off method, what amount of joint cost is allocated to Product A?

  1. 3,00,000 rupees
  2. 5,40,000 rupees
  3. 6,00,000 rupees Correct answer.
  4. 4,50,000 rupees

Explanation

Under the sales value at split-off method, joint cost is allocated in proportion to relative sales value: Product A's share is 6,00,000 divided by 9,00,000, that is two-thirds of 9,00,000 rupees, which equals 6,00,000 rupees. The other amounts do not follow the relative sales value ratio.

Question 39Cost Records, Cost Audit and Compliance Reporting

A cost auditor is assessing whether a company is covered by the cost audit requirement. Which factor is most relevant to determining applicability?

  1. The number of employees on the payroll at the end of the year
  2. The location of the registered office of the company
  3. The turnover or net worth of the company together with the nature of its regulated or specified industry Correct answer.
  4. The amount of dividend declared in the previous financial year

Explanation

Applicability of cost audit depends on the thresholds of turnover or net worth combined with the company operating in an industry or product category specified in the rules. Employee count, dividend, and registered office location are not the tests.

Question 40Cost Records, Cost Audit and Compliance Reporting

Which of the following is a responsibility of the cost auditor when submitting the cost audit report to the board of directors?

  1. To certify the company's compliance with environmental laws
  2. To state whether the cost records have been maintained and whether the cost statements are in agreement with them Correct answer.
  3. To confirm the creditworthiness of the company's major customers
  4. To approve the company's pricing policy for the coming year

Explanation

The cost auditor reports on whether the cost records have been maintained in the prescribed manner and whether the cost statements are in agreement with those records. Environmental compliance, pricing approval, and customer creditworthiness are outside the scope of the cost audit.

Question 41Cost Records, Cost Audit and Compliance Reporting

A cost auditor finds that the company has changed its method of valuing closing stock from FIFO to weighted average without disclosing the change or its effect. How should the auditor respond?

  1. Report the matter as a fraud in the cost audit report
  2. Treat the change as a change in accounting policy requiring disclosure and quantify its effect on the cost statements Correct answer.
  3. Recalculate the closing stock on FIFO and report the recalculated figures as actual
  4. Ignore the change because both methods are permitted under the rules

Explanation

A change in the basis of stock valuation is a change in accounting policy that must be disclosed together with its effect on the cost statements. The auditor should examine and report the impact rather than ignore the change, treat it as fraud, or overwrite the company's records.

Question 42Cost Records, Cost Audit and Compliance Reporting

Which body issues the Cost Auditing Standards that a cost auditor is expected to follow in India?

  1. The Ministry of Corporate Affairs directly
  2. The Central Board of Direct Taxes
  3. The Reserve Bank of India
  4. The Cost Auditing and Assurance Standards Board of the Institute of Cost Accountants of India Correct answer.

Explanation

Cost Auditing Standards are issued by the Cost Auditing and Assurance Standards Board of the Institute of Cost Accountants of India, which develops standards for cost audit and assurance engagements. The other bodies do not issue cost auditing standards.

Question 43Cost Records, Cost Audit and Compliance Reporting

In a cost audit, the auditor tests the accuracy of the wages and salaries cost. Which procedure provides the most reliable evidence of the amount of direct labour cost charged to production?

  1. Obtaining a management representation that wages are correctly recorded
  2. Reviewing the minutes of the board meeting that approved the salary structure
  3. Comparing the total payroll with the previous year's payroll
  4. Reconciling the payroll register with the attendance and production records, and testing the labour rate and hours charged Correct answer.

Explanation

The most reliable evidence comes from reconciling the payroll with attendance and production records and testing the rates and hours charged to production. Year-on-year comparison, board minutes, and management representations provide weaker or indirect evidence.

Question 44Cost Records, Cost Audit and Compliance Reporting

A cost auditor is reviewing the treatment of abnormal wastage in the cost statements. How should abnormal wastage normally be treated in cost accounting?

  1. Apportioned equally between work-in-progress and finished goods
  2. Excluded from product cost and charged to the costing profit and loss account Correct answer.
  3. Capitalised as part of the cost of the plant and machinery
  4. Charged to the cost of production of the good units as part of normal cost

Explanation

Abnormal wastage is not a normal cost of production and is excluded from product cost, being charged instead to the costing profit and loss account. Normal wastage alone is absorbed into the cost of good output.

Question 45Cost Records, Cost Audit and Compliance Reporting

A company is required to maintain cost records for a financial year but fails to appoint a cost auditor within the prescribed time. What is the consequence under the Companies Act, 2013?

  1. The company is exempt from cost audit for the following three years
  2. The financial statements of the company are automatically invalid
  3. The company is deemed to have complied because the records were maintained
  4. The Central Government may appoint a cost auditor to conduct the audit for that year Correct answer.

Explanation

Where a company fails to appoint a cost auditor as required, the Central Government may appoint a cost auditor to conduct the audit for that year. Maintaining records does not dispense with the audit, and there is no automatic invalidation or multi-year exemption.

Question 46Cost Records, Cost Audit and Compliance Reporting

Which of the following best explains why cost audit reports are required to be filed with the Ministry of Corporate Affairs and made available for public inspection?

  1. To allow competitors to replicate the company's cost structure
  2. To replace the statutory financial audit for the year
  3. To provide the income tax department with a basis for reassessment
  4. To enable shareholders and regulators to assess the efficiency and cost competitiveness of regulated industries Correct answer.

Explanation

Filing and public availability of cost audit reports support transparency, allowing shareholders and regulators to assess cost efficiency and competitiveness, particularly in regulated industries. The report is not a tax tool, does not replace the financial audit, and is not intended to enable replication of cost structures.

Question 47Cost Records, Cost Audit and Compliance Reporting

A cost auditor is evaluating whether a company's transfer pricing between its divisions is at arm's length for cost records purposes. Which approach is most consistent with cost accounting principles?

  1. Using a transfer price based on cost plus a reasonable margin, applied consistently and disclosed Correct answer.
  2. Setting the transfer price at the budgeted cost without any margin or disclosure
  3. Using the highest price charged to any external customer for all internal transfers
  4. Adopting the price suggested by the largest customer for internal transfers

Explanation

Internal transfers should be priced on a consistent and disclosed basis, typically cost plus a reasonable margin, so that divisional results reflect economic reality. Using the highest external price, budgeted cost without margin, or a customer-suggested price lacks a principled and consistent basis.

Question 48Cost Records, Cost Audit and Compliance Reporting

The cost auditor of a company is also the internal cost accountant who prepared the cost records for the same year. What is the principal concern with this arrangement?

  1. The independence of the auditor is impaired because the auditor would be reviewing their own work Correct answer.
  2. The company will be unable to file the report electronically
  3. The auditor may charge a higher fee than permitted
  4. The audit will take longer than usual to complete

Explanation

The cost auditor must be independent of the preparation of the records being audited; reviewing one's own work impairs objectivity and the reliability of the assurance. Fee levels, duration, and electronic filing are not the principal concerns raised by this arrangement.

Question 49Financial Reporting Framework and Statutory Requirements

Under the conceptual framework for financial reporting, which qualitative characteristic is enhanced when information is classified, characterised and presented clearly and concisely?

  1. Verifiability
  2. Timeliness
  3. Understandability Correct answer.
  4. Comparability

Explanation

Understandability is the enhancing characteristic concerned with how clearly and concisely information is classified, characterised and presented so that users with reasonable knowledge can comprehend it. Comparability concerns similarities and differences between items, verifiability concerns independent agreement, and timeliness concerns availability before it loses relevance.

Question 50Financial Reporting Framework and Statutory Requirements

An entity prepares general purpose financial statements. According to the IASB Conceptual Framework, which item meets the definition of a liability?

  1. A possible obligation whose existence will be confirmed only by future events
  2. An intention to purchase plant in the next period
  3. A declared dividend awaiting approval by shareholders
  4. A present obligation to transfer economic resources arising from a past event Correct answer.

Explanation

A liability is a present obligation of the entity to transfer an economic resource as a result of past events. The obligation must already exist and the past event must have occurred; intentions and mere possibilities do not qualify.