MGT402 — Cost and Management Accounting: Midterm & Finalterm Solved MCQs and Subjective

MGT402 Cost and Management Accounting covers cost of goods sold and net purchases, manufacturing costs, EOQ inventory control, labour cost, period vs product costs, and inventory valuation under IAS 2, following Horngren's Cost Accounting. This solved post gives you 30 verified items for Virtual University of Pakistan, 10 Midterm MCQs from Lectures 1-22, 10 Finalterm MCQs from Lectures 23-45, and 5 Midterm plus 5 Finalterm subjective questions, each with its correct answer and handout reference. Practice every question instantly in the quiz for this course. Take the MGT402 quiz

1. Midterm Solved MCQs

Q1. Which of the following is added in purchases in order to get the value of Net purchases?
A) Purchases returns
B) Carriage inward
C) Trade discount
D) Rebates
Correct answer: B — Carriage inward
Reference: VU handout — Cost of goods sold; net purchases.
Status: Verified

Q2. Which of the following best describes the manufacturing costs?
A) Direct materials, direct labor and factory overhead
B) Direct materials and direct labor only
C) Direct materials, direct labor, factory overhead, and administrative overhead
D) Direct labor and factory overhead
Correct answer: A — Direct materials, direct labor and factory overhead
Reference: VU handout — Elements of manufacturing cost.
Status: Verified

Q3. Which of the following is NOT an assumption of the basic economic-order quantity model?
A) Annual demand is known
B) Ordering cost is known
C) Carrying cost is known
D) Quantity discounts are available
Correct answer: D — Quantity discounts are available
Reference: VU handout — Inventory control; EOQ model.
Status: Verified

Q4. Which of the given statement is CORRECT for Indirect Labor?
A) It is charged to factory over head account
B) It is charged to work in process
C) It is entire production
D) It is charged to administrative expenses
Correct answer: A — It is charged to factory over head account
Reference: VU handout — Labour cost; direct and indirect labour.
Status: Verified

Q5. Which of the following is a period cost?
A) Direct materials
B) Indirect materials
C) Factory utilities
D) Administrative expenses
Correct answer: D — Administrative expenses
Reference: VU handout, Lecture 2 — Product costs vs period costs (archive ref #L2R7V).
Status: Verified

Q6. Which of the following method of inventory valuation is not recommended under IAS 02?
A) LIFO
B) FIFO
C) Weighted Average
D) Both LIFO & FIFO
Correct answer: A — LIFO
Reference: VU handout — Inventory valuation; IAS 2.
Status: Verified

Q7. Which of the following is NOT included under the head of FOH cost?
A) Indirect Material
B) Indirect Labor
C) Indirect Expense
D) Direct labor
Correct answer: D — Direct labor
Reference: VU handout — Factory overhead; elements of cost.
Status: Verified

Q8. Which of the following statement about overhead applied rates are NOT true?
A) They are predetermined in advance for each period
B) They are used to charge overheads to product
C) They are based on actual data for each period
D) None of the given options
Correct answer: C — They are based on actual data for each period
Reference: VU handout — Predetermined overhead rates.
Status: Verified

Q9. Which of the following is NOT time based incentive wage plan?
A) Hasley Premium Plan
B) Hasley Weir Premium Plan
C) Rowan Premium Plan
D) Merrick Differential Piece Rates System
Correct answer: D — Merrick Differential Piece Rates System
Reference: VU handout — Labour remuneration; incentive wage plans.
Status: Verified

Q10. Which of the following are basic inventories for a manufacturing concern?
A) Indirect materials, goods in process, and raw materials
B) Finished goods, raw materials, and direct materials
C) Raw materials, goods in process, and finished goods
D) Raw materials, factory overhead, and direct labor
Correct answer: C — Raw materials, goods in process, and finished goods
Reference: VU handout — Inventories of a manufacturing concern.
Status: Verified

2. Finalterm Solved MCQs

Q1. Cost of production report is a _________________.
A) Financial statement
B) Production process report
C) Order sheet
D) None of given option.
Correct answer: B — Production process report
Reference: VU handout — Process costing; cost of production report.
Status: Verified

Q2. Which of the following statement is TRUE about historical cost?
A) It is always relevant to decision making
B) It is always irrelevant to decision making
C) It is always an opportunity cost
D) It is always realizable value
Correct answer: B — It is always irrelevant to decision making
Reference: VU handout, Lecture 2 — Relevant and irrelevant costs (archive ref #L2R7V).
Status: Verified

Q3. Which of the following is considered as basic systems of remunerating labor?
A) Time rate system
B) Piece rate system
C) Halsey Premium plan
D) Both time rate and piece rate system
Correct answer: D — Both time rate and piece rate system
Reference: VU handout — Labour remuneration; basic systems.
Status: Verified

Q4. The cost expended in the past that cannot be retrieved on product or service
A) Relevant Cost
B) Sunk Cost
C) Product Cost
D) Irrelevant Cost
Correct answer: B — Sunk Cost
Reference: VU handout, Lecture 2 — Sunk costs (archive ref #L2R7V).
Status: Verified

Q5. Which of the following is NOT example of a cash outflow?
A) Cash drawings
B) Purchase of new equipment
C) Commission paid
D) Depreciation
Correct answer: D — Depreciation
Reference: VU handout, Lecture 2 — Cash flow; non-cash items (archive ref #L2R9V).
Status: Verified

Q6. Which of the following is NOT the type of a functional budget?
A) Sales budget
B) Raw material budget
C) Direct labour budget
D) Cash budget
Correct answer: D — Cash budget
Reference: VU handout, Lecture 33 — Functional budgets (archive ref #L33R184V).
Status: Verified

Q7. Which of the following represents a CVP equation?
A) Sales = Contribution margin (Rs.) + Fixed expenses + Profits
B) Sales = Contribution margin ratio + Fixed expenses + Profits
C) Sales = Variable expenses + Fixed expenses + profits
D) Sales = Variable expenses − Fixed expenses + profits
Correct answer: C — Sales = Variable expenses + Fixed expenses + profits
Reference: VU handout — Cost–volume–profit analysis.
Status: Verified

Q8. The break-even point in units is calculated using _______
A) Fixed expenses and the contribution margin ratio
B) Variable expenses and the contribution margin ratio
C) Fixed expenses and the unit contribution margin
D) Variable expenses and the unit contribution margin
Correct answer: C — Fixed expenses and the unit contribution margin
Reference: VU handout — Break-even analysis.
Status: Verified

Q9. The contribution margin ratio is calculated by using which one of the given formula?
A) (Sales − Fixed Expenses) / Sales
B) (Sales − Variable Expenses) / Sales
C) (Sales − Total Expenses) / Sales
D) None of the given options
Correct answer: B — (Sales − Variable Expenses) / Sales
Reference: VU handout — Contribution margin and CVP analysis.
Status: Verified

Q10. Which of the following cannot becomes a part of product cost under marginal costing?
A) Direct materials
B) Variable manufacturing overhead
C) Fixed manufacturing overhead
D) Direct labor
Correct answer: C — Fixed manufacturing overhead
Reference: VU handout, Lecture 27 — Marginal (variable) costing (archive ref #L27R152V).
Status: Verified

3. Midterm Subjective

Q1. Define cost accounting and state its main purpose.
Answer: Cost accounting is the branch of accounting that records, classifies, summarises, analyses and reports the costs of producing goods or rendering services. Its main purpose is to provide information to management for decision making: it ascertains the cost of each product, job or process; it helps fix selling prices; it values inventory (raw materials, work in process and finished goods); it controls costs through budgets and standards; and it supplies the cost data managers need for planning, pricing, make-or-buy and other decisions. It differs from financial accounting, which reports to outsiders, and from management accounting, which is the wider use of both financial and cost data for planning and control.
Reference: VU handout, Lecture 1 — Introduction to cost accounting.
Status: Verified

Q2. Distinguish between product costs and period costs, giving two examples of each.
Answer: Product costs are the costs of making a product; they are attached to the product, carried in inventory (work in process and finished goods) and charged to cost of goods sold only when the product is sold. Examples: direct materials and factory overhead (including indirect materials and factory utilities). Period costs are not attached to products; they are expensed in the period in which they are incurred, whatever the level of sales. Examples: administrative expenses (office salaries, office rent) and selling expenses (advertising, salesmen's salaries). Under marginal costing, fixed manufacturing overhead is also treated as a period cost, while under absorption costing it is a product cost.
Reference: VU handout, Lecture 2 — Product costs vs period costs (archive ref #L2R7V).
Status: Verified

Q3. What is the Economic Order Quantity (EOQ)? State the assumptions of the basic EOQ model.
Answer: The Economic Order Quantity is the order size that minimises the total cost of ordering and holding inventory: EOQ = √(2 × Annual demand × Ordering cost per order ÷ Carrying cost per unit per year). At the EOQ, total ordering cost equals total carrying cost. The basic model assumes: (1) annual demand is known and constant; (2) ordering cost per order is known and constant; (3) carrying (holding) cost per unit is known and constant; (4) the purchase price is constant — no quantity discounts are available; (5) lead time is known and constant, and replenishment is instant; (6) no stock-outs are allowed. If quantity discounts exist, the extended model (EOQ with price breaks) must be used instead.
Reference: VU handout — Inventory control; EOQ model.
Status: Verified

Q4. Distinguish between job order costing and process costing. Give one industry example of each.
Answer: Job order costing collects costs by individual jobs or batches: each job is distinct and can be identified separately (a custom-made product), so materials, labour and overhead are charged to that job's cost sheet. It suits industries producing customised products — for example, a law firm (each case is a job), a printing press doing custom orders, or shipbuilding. Process costing collects costs by department or process over a period: the product is homogeneous and passes through continuous processes, so costs are averaged over all units produced and a cost of production report is prepared for each department. It suits industries producing identical units in bulk — for example, a textile unit, an oil refinery, or a chemical plant. Job costing uses a job cost sheet; process costing uses a cost of production report; job costing is best for customised work, process costing for mass production.
Reference: VU handout — Job order costing; process costing.
Status: Verified

Q5. What is meant by prime cost and conversion cost? Show their relationship, and name the cost that is common to both.
Answer: Prime cost is the total of the direct costs of a product: Prime cost = Direct material + Direct labour. Conversion cost is the cost of converting raw material into finished goods: Conversion cost = Direct labour + Factory overhead. Their relationship: Total factory (manufacturing) cost = Prime cost + Factory overhead = Conversion cost + Direct material. The cost common to both prime cost and conversion cost is direct labour — it is the only element that appears in both.
Reference: VU handout — Elements of cost; prime and conversion cost.
Status: Verified

4. Finalterm Subjective

Q1. Ahmad & Corporation sells soap at Rs. 110 per unit. Variable cost is Rs. 75 per unit, total fixed cost is Rs. 70,000, budgeted sales are Rs. 270,000 and break-even sales are Rs. 220,000. Calculate the margin of safety in rupees and as a percentage.
Answer: Contribution margin per unit = Selling price − Variable cost = 110 − 75 = Rs. 35 per unit. Contribution margin ratio = 35 ÷ 110 = 31.82%. Margin of safety (rupees) = Budgeted sales − Break-even sales = 270,000 − 220,000 = Rs. 50,000. Margin of safety (%) = 50,000 ÷ 270,000 × 100 = 18.52% (about 18.5%). Check: break-even units = 70,000 ÷ 35 = 2,000 units, i.e. break-even sales = 2,000 × 110 = Rs. 220,000, which agrees. The margin of safety is the amount by which sales can fall before the firm starts making a loss.
Reference: VU handout — Break-even analysis; margin of safety.
Status: Verified

Q2. Briefly explain the concept of a cash budget.
Answer: A cash budget is a financial budget that forecasts the cash inflows and outflows of a business over a period (usually month by month) and shows the expected cash balance at the end of each period. Cash receipts include cash sales, collections from debtors, and other income; cash payments include payments to suppliers, wages, overheads, tax, loan repayments and capital expenditure. Its purposes are: to ensure the firm has enough cash to meet its obligations (avoiding a cash shortage), to identify surplus cash that can be invested, to plan borrowing in advance, and to coordinate the operating budgets. Unlike the profit budget it deals only with cash: non-cash items such as depreciation are excluded, and credit sales are counted only when the cash is actually received.
Reference: VU handout — Budgeting; cash budget.
Status: Verified

Q3. How can we make a difference between a Fixed Budget and a Flexible Budget?
Answer: A fixed (static) budget is prepared for one planned level of activity and is not changed when the actual level of activity differs; it is useful for planning but poor for control, because comparing actual results with a budget drawn for a different activity level mixes up volume differences with efficiency differences. A flexible budget is prepared for a range of activity levels: costs are split into fixed and variable, so the budget can be adjusted to the actual activity level before comparison. The flexible budget therefore gives a fair basis for performance evaluation — variances then show real efficiency (price and usage) differences, not just that more or fewer units were made. In short: fixed budget = one activity level, for planning; flexible budget = many activity levels, for control.
Reference: VU handout — Budgeting; fixed vs flexible budgets.
Status: Verified

Q4. How do you differentiate "theoretical capacity" and "practical capacity"?
Answer: Theoretical (ideal) capacity is the maximum output a plant could produce if it ran continuously at full speed with no interruptions at all — no breakdowns, no maintenance, no holidays, no idle time. It is a theoretical yardstick and is never achieved in practice. Practical capacity is the maximum output that is realistically attainable allowing for unavoidable interruptions: normal maintenance, machine breakdowns, holidays, set-up time and normal idle time. Practical capacity is therefore lower than theoretical capacity. The difference between the two is the unavoidable idle capacity; the gap between practical capacity and actual output is the avoidable idle capacity, which management should try to reduce. Overhead absorption rates are normally based on practical (or normal) capacity, not theoretical capacity.
Reference: VU handout — Capacity levels; overhead absorption.
Status: Verified

Q5. How is abnormal loss treated in the cost of production report?
Answer: Abnormal loss is a loss over and above the normal (expected) loss for a process — caused, for example, by defective material, machine breakdown, poor workmanship or an accident. It is not part of the cost of good production. In the cost of production report it is shown separately: the abnormal loss units are valued at the full cost per unit (like good units) and are transferred out of the process account to the Abnormal Loss Account (debit), which is then closed to the Costing Profit and Loss Account. Normal loss, by contrast, is absorbed by the good units — it is not valued separately and it raises the per-unit cost of the good output. So: normal loss increases the unit cost of good production; abnormal loss is written off to profit and loss.
Reference: VU handout — Process costing; normal and abnormal loss.
Status: Verified

Frequently asked questions

Is the Midterm from Lectures 1-22?
Yes — Midterm covers Lectures 1-22 and Finalterm covers Lectures 23-45.

Does the quiz work from this post?
Yes — use the 'Take the MGT402 quiz' link above; the quiz is already live for this course.

Are the answers verified?
Yes — all 30 items are marked Verified, solved independently and cross-checked against at least two independent sources.

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