Management Accounting : Practice Questions and Answers

Correct Answer: B (1 and 3)

Explanation:

Statement 1 is correct: The cost of purchasing or improving a non-current asset is classified as capital (asset) expenditure, not revenue expenditure.

Statement 3 is correct: Capital expenditure increases the value of non-current assets on the statement of financial position (balance sheet); it is not immediately expensed.

Statement 2 is incorrect: Asset (capital) expenditure does not appear as an expense in the statement of profit or loss. Only revenue expenditure is charged to profit or loss. Capital expenditure is depreciated over the useful life of the asset.

Statement 4 is incorrect: Purchasing inventory is classified as revenue expenditure, not asset (capital) expenditure, since inventory is a current asset consumed in the normal course of business.

Note: No Hindi translation provided in the original question.

Correct Answer: A

Explanation:

Target costing is a market-driven pricing strategy. A company starts with the price customers are willing to pay in a competitive market, then subtracts the desired profit margin to arrive at the maximum allowable (target) cost to produce the product. This is the reverse of cost-plus pricing (option B), which adds a margin to cost to determine price.

Target costing is especially useful in competitive markets where the selling price is largely determined externally, making internal cost management critical to profitability.

Correct Answer: D

Explanation:

Step 1 — Inventory value per unit (absorption costing):

33,000 / 4,000 = $8.25 per unit

This includes both variable and fixed costs.

Step 2 — Difference in profit between marginal and absorption costing:

Marginal costing profit - Absorption costing profit = $50,000 -$41,000 = $9,000

This difference arises because inventory decreased by 2,000 units (6,000 - 4,000), meaning more fixed cost was released under marginal costing.

Step 3 — Fixed cost per unit:

$9,000 / 2,000 units =$4.50 per unit

Step 4 — Variable cost per unit:

$8.25 -$4.50 = $3.75 per unit

Correct Answer: C

Explanation:

When production equals sales, there is no change in inventory levels (opening inventory equals closing inventory). The difference between marginal costing profit and absorption costing profit arises solely from the fixed overheads carried in inventory. Since inventory levels do not change, the fixed overhead expensed under marginal costing equals the fixed overhead absorbed under absorption costing. Therefore, both methods produce the same profit figure.

Correct Answer: D

Explanation:

Process costing is used when it is not feasible to identify individual units of production or specific jobs, typically due to the continuous and uniform nature of the production process. It applies to industries where goods are produced in a steady, uninterrupted flow and each unit is indistinguishable from the next.

The manufacture of liquid soap is a classic example: production is continuous, costs are accumulated across the entire process, and then averaged over a large number of identical units. Other costing methods such as job costing (used for unique, one-off jobs) or batch costing (used for discrete batches of identical items) are not suitable for this type of production.

Correct Answer: C

Explanation:

The fixed overhead volume variance represents the over- or under-absorption of overheads caused by a change in production volume. This variance cannot arise in a standard marginal costing system because marginal costing does not absorb fixed overheads into product costs — fixed overheads are treated as period costs and expensed in full. The fixed overhead volume variance only arises under absorption costing.

Therefore, variances (i), (ii) and (iii) are shown in a marginal costing operating statement, but (iv) is not.