Introduction to Cost and Management Accounting Q&A
Accounting Q&A · Cost and Management Accounting · Topic 1
Try each question, then compare your reasoning with the answer.
25 short-answer questions. Try each question before revealing its answer.
Worked example
A bakery sells a loaf for 5 and incurs 3 of variable costs per loaf. Contribution is 2 per loaf. At 600 loaves, total contribution is 1,200 before fixed costs.
Download the original question set (PDF).
Core concepts
1. What is cost accounting?
Measuring and analysing costs of products, services, activities or other cost objects.
2. What is management accounting?
Providing financial and non-financial information to help managers plan, control and decide.
3. How does financial accounting differ?
It produces general-purpose reports for external users under an applicable framework.
4. Who uses management accounts?
Managers and others inside the organisation responsible for operations or decisions.
5. What is a cost object?
Anything whose cost is measured, such as a service, order or customer.
6. What is a cost centre?
A unit or activity for which costs are collected and monitored.
7. What is a profit centre?
A responsibility centre whose manager is accountable for revenues and costs within their authority.
8. What is a cost driver?
A factor that helps explain changes in a cost, such as the number of setups.
9. How do direct costs differ from indirect costs?
Direct costs can be economically traced to the chosen object. Indirect costs need an allocation if assigned to it.
Worked applications
10. What is a variable cost?
A cost that changes in total with activity within the assumed range.
11. What is a fixed cost?
A cost whose total stays unchanged within a specified period and activity range.
12. What is contribution?
Sales less variable costs.
13. A product sells for 12 and variable cost is 7. What is contribution?
5 per unit.
14. At 300 units, what is total contribution in that example?
1,500, assuming the same price and variable cost per unit.
15. If fixed costs are 1,100, what is profit in the same example?
400, assuming no other items.
16. What is a budget?
A quantified plan for a future period.
17. What is a variance?
A difference between an actual amount and a relevant benchmark, such as a budget or standard.
18. Why investigate a favourable variance?
It can reflect a genuine improvement or a trade-off such as lower quality or deferred spending.
Review and exam practice
19. What is a relevant cost?
A future cost that changes between the options being considered.
20. What is a sunk cost?
A cost already incurred that the current decision cannot change.
21. What is an opportunity cost?
The benefit given up by choosing one option over the next best available option.
22. Give an example of a non-financial measure.
On-time delivery rate, defect rate or customer waiting time.
23. Why use both financial and non-financial measures?
They show different aspects of performance and help reveal trade-offs.
24. What can make an allocation misleading?
An allocation base that does not reflect how the cost object consumes the shared resources.
25. How do you approach a management accounting decision?
Define the decision, compare relevant costs and benefits, and check capacity, risk and quality effects.
