Costing and Cost centres Test

1
Costing and Cost centres Test

• This test consists of 10 questions designed to
  test your understanding of and the use of cost
  centres.
• The links provide you with a choice of answer,
  along with explanations and solutions.
• You will need a calculator to complete this test.

2
Question 1.

• Advantages of using costs centres include which
  of the following?
• a. Creation of an internal market
• b. Increased awareness of overheads
• c. Increased motivation of workers
• 1. All three
• 2. A and B
• 3. A only

3
A wide range of benefits can result from using
cost centres. Your answer is correct.
4
A wide range of benefits can result from using
cost centres. These benefits include
motivation.Try again.
5
A wide range of benefits can result from using
cost centres. These benefits include motivation
and awareness of overheads.Try again.
6
Question 2.

• A firm has total marketing overheads of 93,000.
  It allocates these overheads to 3 products, on
  the basis of equal proportions. What will be each
  products share of these overheads?
• A. 93,000
• B. nil
• C. 31,000

7
This is the simplest method of allocating overhead
s. Just divide overheads by the number of cost
centres. Try again
8
This is the simplest method of allocating overhead
s. Just divide overheads by the number of cost
centres. Try again
9
Correct. Simply divide overheads, by the number
of cost centres.
10
Question 3.

• A firm has sells three products A, B and C. The
  sales prices are A - 50p, B - 70p and
• C-90p. Sales are 10,000 units of each.
  Allocating overheads based on total sales value,
  what will be product Bs, share of total
  overheads of 7,100?
• A. 3,500
• B. 2,367
• C. 4,370

11
Wrong. You must first calculate the proportion
of overheads that must be allocated to each
cost centre. Then find this proportion of the
total overheads. In this question the method of
apportionment was total sales value.
12
Correct. You have apportioned overheads
according to sales value.
13
Wrong. You must first calculate the proportion
of overheads that must be allocated to each
cost centre. Then find this proportion of the
total overheads. In this question the method of
apportionment was total sales value.
14
Question 4.

• Incorrect allocation of overheads can?
• A. Increase overall profitability
• B. Decrease overall profitability.
• C. Underestimate profitability of a cost centre.

15
Wrong. Overall profitability will not be
affected, unless the wrong allocation of
overheads leads to a decision to alter production
quantities
16
Wrong. Overall profitability will not be
affected, unless the wrong allocation of
overheads leads to a decision to alter production
quantities
17
Correct, if overheads are incorrectly allocated,
then each cost centre will give misleading
profit figures.
18
Question 5.

• Profit Centres operate as?
• A. An integral part of an organisation, but with
  overhead costs allocated to it
• B. A separate part of an organisation, with its
  own profit and loss account

19
Wrong, this definition refers to a profit centre.
20
Correct.
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Question 6.

• Cost centre allow?
• A. Easier identification of where spending occurs
• B. Exact figures of profitability to be produced
• C. Greater central control.

22
Correct.
23
The figures produced will add accuracy to profit
figures for each cost centre. But they will never
be exact.
24
There will be greater central control through the
allocation of overheads, but cost centres do
imply responsibility moving from the centre.
25
Question 7.

• Which of the following most closely defines an
  overhead?
• A. A cost to a firm that varies in direct
  proportion to output.
• B. A cost not directly created by production of a
  good.

26
Wrong. This is a definition of direct costs or
variable costs
27
Correct.
28
Question 8.

• A firm has in the past allocated overheads in
  equal proportions. The new method will allocate
  costs according to labour inputs. Overheads total
  210,000, 4 products are produced, and product
  XX, uses 30 of labour. By how much will
  profitability of product XX alter?
• A. 63,000
• B. 10,500
• C. Nil

29
Wrong. You must calculate the difference in
costs. The change is from 25 to 30.
30
Correct. You have calculated the difference in
costs. The change from 25 to 30.
31
Wrong. You must calculate the difference in
costs. The change is from 25 to 30.
32
Question 9.

• Discontinuing production of a loss making cost
  centre will in the short term?
• A. Increase variable costs
• B. Increase overheads
• C. Leave overheads unchanged

33
Variable Costs will fall, as output has decreased.
34
Overheads will remain unchanged, but they will
have to be allocated to fewer costs centres.
35
Correct.
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Question 10.

• Firms should potentially cease production from a
  cost centre if?
• A. The cost centre contributes to overhead costs
• B. The firm has spare capacity
• C. The costs centres revenue is less than its
  direct costs.

37
Wrong. If the cost centre is making a
contribution then it is contributing to overall
profits.
38
Wrong. This will just increase the amount
of spare capacity
39
Correct. The cost centre is reducing profits or
adding to the firms losses. No contribution is
being made by this cost centre.
40
You have now completed the test. For further
more detailed revision please use the case
studies on the ALoA wb site. www.aloa.co.uk