Q.1 What is the primary basis of marginal costing?
Total cost
Fixed cost
Variable cost
Sunk cost
Explanation - Marginal costing considers only variable costs for decision-making, treating fixed costs as period costs.
Correct answer is: Variable cost
Q.2 In marginal costing, which of the following is treated as a period cost?
Direct materials
Direct labor
Variable overheads
Fixed overheads
Explanation - Fixed overheads are not included in the cost of production under marginal costing; they are treated as period costs.
Correct answer is: Fixed overheads
Q.3 Contribution margin is calculated as:
Sales - Fixed Costs
Sales - Variable Costs
Sales - Total Costs
Sales - Direct Material Costs
Explanation - Contribution margin represents the amount available to cover fixed costs and generate profit.
Correct answer is: Sales - Variable Costs
Q.4 Break-even point occurs when:
Sales = Fixed costs
Contribution = Fixed costs
Profit = Variable costs
Total cost = Variable cost
Explanation - Break-even point is reached when the total contribution equals total fixed costs, resulting in zero profit.
Correct answer is: Contribution = Fixed costs
Q.5 Which decision is best analyzed using marginal costing?
Pricing decisions
Profit distribution
Financial accounting
Auditing
Explanation - Marginal costing helps in pricing decisions by analyzing variable costs and contribution margins.
Correct answer is: Pricing decisions
Q.6 If fixed costs increase, how does break-even point change?
Increases
Decreases
Remains unchanged
Becomes zero
Explanation - Higher fixed costs require more contribution to cover them, thus increasing the break-even point.
Correct answer is: Increases
Q.7 Margin of safety refers to:
Excess of sales over break-even sales
Excess of fixed costs over variable costs
Difference between total costs and sales
Profit earned during the period
Explanation - Margin of safety indicates how much sales can fall before the firm incurs a loss.
Correct answer is: Excess of sales over break-even sales
Q.8 Which of the following is a limitation of marginal costing?
Ignores fixed costs in decision-making
Requires complex calculations
Does not provide contribution margin
Cannot be used for short-term decisions
Explanation - Marginal costing ignores fixed costs for decision-making, which may be a limitation for long-term planning.
Correct answer is: Ignores fixed costs in decision-making
Q.9 In decision making, relevant cost is:
Cost incurred in the past
Future cost that differs between alternatives
Total cost of production
Fixed overhead cost
Explanation - Relevant costs are those that will be affected by a specific decision.
Correct answer is: Future cost that differs between alternatives
Q.10 Which costing method is most suitable for accepting a special order at a lower price?
Absorption costing
Marginal costing
Historical costing
Standard costing
Explanation - Marginal costing focuses on variable costs, which helps in evaluating special orders without affecting fixed costs.
Correct answer is: Marginal costing
Q.11 When sales increase, contribution margin:
Remains constant
Decreases
Increases proportionally
Becomes zero
Explanation - Contribution margin increases with sales since variable costs change proportionally, and the margin per unit remains constant.
Correct answer is: Increases proportionally
Q.12 A decision to make or buy a component should be based on:
Sunk costs
Fixed costs only
Relevant costs
Total historical costs
Explanation - Only costs that differ between alternatives should influence make-or-buy decisions.
Correct answer is: Relevant costs
Q.13 Under marginal costing, profit is affected by:
Change in fixed costs
Change in variable costs per unit
Change in production volume
All of the above
Explanation - Profit under marginal costing is influenced by fixed costs, variable costs per unit, and the number of units sold.
Correct answer is: All of the above
Q.14 Which of the following decisions is best suited for marginal costing analysis?
Replacement of machinery
Distribution of dividends
External audit planning
Budget approval
Explanation - Marginal costing helps in analyzing costs relevant to replacing machinery, focusing on variable costs and savings.
Correct answer is: Replacement of machinery
Q.15 Under marginal costing, closing stock is valued at:
Full production cost
Variable production cost
Selling price
Standard cost
Explanation - Only variable costs are included in inventory valuation under marginal costing; fixed costs are treated as period costs.
Correct answer is: Variable production cost
Q.16 A company is considering discontinuing a product line. Which concept helps in decision making?
Contribution per unit
Historical cost
Sunk cost
Total fixed cost
Explanation - Products with negative contribution should be considered for discontinuation to reduce losses.
Correct answer is: Contribution per unit
Q.17 If selling price per unit increases but variable cost remains same, break-even point will:
Increase
Decrease
Remain unchanged
Become zero
Explanation - Higher selling price increases contribution per unit, lowering the number of units required to cover fixed costs.
Correct answer is: Decrease
Q.18 Relevant costing ignores:
Future variable costs
Future fixed costs
Sunk costs
Opportunity costs
Explanation - Sunk costs are past costs and should not affect current decision-making.
Correct answer is: Sunk costs
Q.19 The ratio of contribution to sales is known as:
Profit margin ratio
Break-even ratio
Contribution to sales ratio
Gross margin ratio
Explanation - Contribution to sales ratio indicates the proportion of sales contributing to fixed costs and profit.
Correct answer is: Contribution to sales ratio
Q.20 Which of the following is a short-term decision under marginal costing?
Make or buy decision
Plant expansion
Product line discontinuation (long-term)
Capital budgeting
Explanation - Marginal costing is ideal for short-term decisions like make-or-buy since it focuses on relevant costs.
Correct answer is: Make or buy decision
Q.21 In marginal costing, fixed costs are:
Included in unit cost
Excluded from unit cost
Added to variable cost
Capitalized
Explanation - Marginal costing considers only variable costs for unit cost; fixed costs are treated as period expenses.
Correct answer is: Excluded from unit cost
Q.22 Decision making in marginal costing is based on:
Accounting profit
Contribution margin
Historical cost
Standard cost
Explanation - Contribution margin is the key factor for evaluating decisions like pricing, special orders, and discontinuation.
Correct answer is: Contribution margin
Q.23 If variable costs per unit increase, contribution per unit:
Increases
Decreases
Remains unchanged
Becomes zero
Explanation - Contribution per unit is selling price minus variable cost; an increase in variable cost reduces contribution.
Correct answer is: Decreases
Q.24 Opportunity cost is considered in marginal costing when:
Deciding between alternatives
Calculating break-even
Valuing closing stock
Recording historical cost
Explanation - Opportunity cost represents the benefit foregone and is relevant when evaluating alternative decisions.
Correct answer is: Deciding between alternatives
Q.25 Which of the following is NOT relevant in a marginal costing decision?
Variable costs
Fixed costs already incurred
Incremental revenue
Opportunity costs
Explanation - Fixed costs already incurred are sunk costs and should not affect marginal costing decisions.
Correct answer is: Fixed costs already incurred