Marginal cost and Absorption costing MCQs

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The objective of absorption costing is to include in the total cost of a product an appropriate share of the organization’s total overhead.
Marginal cost and Absorption costing MCQs

Marginal cost and Absorption costing MCQs

The objective of absorption costing is to include in the total cost of a product an appropriate share of the organization’s total overhead. Whereas, in marginal costing, fixed production overheads are not absorbed into product costs. Here on MCQs.club we have designed Multiple-Choice Questions on Marginal costing and Absorption costing that cover the meaning/method/definition/techniques/accounting with formula and examples. Our MCQs are for accounting and competitive exams.

  1. The objective of absorption costing is to include in the total cost of a product an appropriate share of the organisation’s total overhead. An appropriate share is generally taken to mean an amount which reflects the amount of time and effort that has gone into producing a unit or completing a job.
    1. The above statement is correct
    2. The above statement is incorrect
  2. Absorption costing measures cost of a product or a service as:
    1. Its direct costs (direct materials, direct labour and sometimes direct expenses and variable production overheads)
    2. Share of fixed production overhead costs
    3. Both A&B
    4. None
  3. Absorption costing is a system of costing in which a share of fixed overhead costs is added to direct costs and variable production overheads, to obtain a full cost. This might be:
    1. A full production cost
    2. A full cost of sale
    3. A or B
    4. None
  4. The main reasons for using absorption costing are for:
    1. Inventory valuations
    2. Pricing decisions
    3. Establishing the profitability of different products
    4. All of the above
  5. The valuation of inventory will affect profitability during a period because of the way in which the cost of sales is calculated.
    • The cost of goods produced
    • + The value of opening inventories
    • – The value of closing inventories
    • = The cost of goods sold
      1. The above is correct
      2. The above is incorrect
  6. Absorption costing is also known as:
    1. Overhead costing
    2. Job costing
    3. Full costing
    4. None
  7. Marginal cost is the variable cost of one unit of product or service.
    1. False
    2. True
  8. In marginal costing, fixed production overheads are not absorbed into product costs.
    1. True
    2. False
  9. Reasons for using marginal costing include:
    1. To measure profit (or loss), as an alternative to absorption costing
    2. To forecast what future profits will be
    3. To calculate what the minimum sales volume must be in order to make a profit
    4. All of the above
  10. The main uses of marginal costing are for planning (for example, budgeting), forecasting and decision making as it deals with costs that can be directly changed in the short term.
    1. Correct
    2. Incorrect
  11. Which of the following statement is correct for marginal costing?
    1. Every additional unit of output or sale, or every additional unit of activity, has the same variable cost as every other unit. In other words, the variable cost per unit is a constant value.
    2. Fixed costs are costs that remain the same in total in each period, regardless of how many units are produced and sold.
    3. Costs are either fixed or variable, or a mixture of fixed and variable costs. Mixed costs can be separated into a variable cost per unit and a fixed cost per period.
    4. The marginal cost of an item is therefore the extra cost that would be incurred by making and selling one extra unit of the item.
      1. All of the above are correct
      2. (I) (II) and (III) only
      3. (I) and (II) only
      4. None
  12. Contribution means: ‘contribution towards covering fixed costs and making a profit’. If total contribution fails to cover fixed costs, there is a loss in what is sometimes referred to as the shutdown point.
    1. The above statement is incorrect
    2. The above statement is correct
  13. In marginal costing the cost per unit includes:
    1. The Full costs of production (direct materials + direct labour + direct expenses + variable production overhead + fixed production overheads).
    2. The variable costs of production (direct materials + direct labour + direct expenses + variable production overhead).
    3. Either A or B
    4. None
  14. When marginal costing is used, inventory is valued at its marginal cost of production (variable production cost), without any absorbed fixed production overheads.
    1. True
    2. False
  15. In marginal costing what happen by selling an extra item of product or service?
    1. Revenue will increase by the sales value of the item sold.
    2. Costs will increase by the variable cost per unit.
    3. Profit will increase by the amount of contribution earned from the extra item.
    4. All of the above
  16. In marginal costing, if the volume of sales falls by one item, the profit will fall by the amount of contribution earned from the item.
    1. Correct
    2. Incorrect
  17. Marginal costing is more useful for decision making than Absorption costing.
    1. True
    2. False
  18. In marginal costing, it is necessary to identify:
    1. Variable costs
    2. Fixed costs
    3. Contribution
    4. Option A&C only
    5. All of the above
  19. The profit for an accounting period calculated with marginal costing would be different from the profit calculated with absorption costing.
    1. True
    2. Same profit would be reported
  20. The difference in profit (between absorption and marginal costing) is entirely due to the differences in inventory valuation as fixed overheads are treated as period cost in marginal costing and as product cost in absorption costing.
    1. The above statement is incorrect
    2. The above statement is correct
  21. The main difference between absorption costing and marginal costing is that in absorption costing, inventory cost includes a share of fixed production overhead costs.
    1. True
    2. No, there are other reasons
  22. When there is no change in the opening or closing inventory, exactly the same profit will be reported using marginal costing and absorption costing.
    1. False
    2. True
  23. If inventory increases in the period (closing inventory is greater than opening inventory), the fixed production overhead brought forward from last period will be less than share of production overhead carried forward to next period, thus the absorption costing profit would be:
    1. Lower than marginal costing profit
    2. Higher than marginal costing profit
    3. Remains Constant
    4. None
  24. To calculate the difference between the reported profit using marginal costing and the reported profit using absorption costing what steps would be taken?
    1. Calculate the increase or decrease in inventory during the period, in units
    2. Calculate the fixed production overhead cost per unit
    3. Only option A
    4. Both A&B
  25. Which of the following statement is correct regarding the difference between the reported profit using marginal costing and the reported profit using absorption costing?
    1. The difference in profit is the increase or decrease in inventory quantity multiplied by the fixed production overhead cost per unit.
    2. If there has been an increase in inventory, the absorption costing profit is higher. If there has been a reduction in inventory, the absorption costing profit is lower.
    3. Fixed selling overhead or fixed administration overhead are written off in full as a period cost in both absorption costing and marginal costing, and only fixed production overheads are included in inventory values.
    4. All of the above are correct
  26. Advantages of absorption costing includes:
    1. Inventory values include an element of fixed production overheads. This is consistent with the requirement in financial accounting that (for the purpose of financial reporting) inventory should include production overhead costs.
    2. Calculating under/over absorption of overheads may be useful in controlling fixed overhead expenditure.
    3. By calculating the full cost of sale for a product and comparing it with the selling price, it should be possible to identify which products are profitable and which are being sold at a loss.
    4. All of the above
  27. Disadvantages of absorption costing Includes:
    1. Absorption costing is a more complex costing system than marginal costing.
    2. Absorption costing does not provide information that is useful for decision making (like marginal costing does).
    3. Assigning of Production overheads always include an element of discretion
    4. It might led to sub-optimal decision-making as a product might be discontinued due to loss which might be caused by fixed production overhead.
    5. All of the above
  28. Advantages of marginal costing include:
    1. It is easy to account for fixed overheads using marginal costing. Instead of being apportioned they are treated as period costs and written off in full as an expense the income statement for the period when they occur.
    2. There is no under/over-absorption of overheads with marginal costing, and therefore no adjustment necessary in the income statement at the end of an accounting period.
    3. Marginal costing provides useful information for decision making.
    4. Contribution per unit is constant, unlike profit per unit which varies as the volume of activity varies.
    5. All of the above

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