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.

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

A wide range of benefits can result from using cost centres.

Your answer is correct.

A wide range of benefits can result from using cost centres. These benefits include motivation.Try again.

A wide range of benefits can result from using cost centres. These benefits include motivation and awareness of overheads.Try again.

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

This is the simplest method of allocatingoverheads. Just divide overheads by the number of cost centres. Try again

This is the simplest method of allocatingoverheads. Just divide overheads by the number of cost centres. Try again

Correct. Simply divide overheads, by the number of cost centres.

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 B’s, share of total overheads of £7,100?

A. £3,500

B. £2,367

C. £4,370

Wrong. You must first calculate the proportion ofoverheads that must be allocated to each costcentre. Then find this proportion of the total overheads.In this question the method of apportionment was total sales value.

Correct. You have apportioned overheads according to sales value.

Wrong. You must first calculate the proportion ofoverheads that must be allocated to each costcentre. Then find this proportion of the total overheads.In this question the method of apportionment was total sales value.

Question 4.

Incorrect allocation of overheads can?

A. Increase overall profitability

B. Decrease overall profitability.

C. Underestimate profitability of a cost centre.

Wrong. Overall profitability will not be affected,unless the wrong allocation of overheadsleads to a decision to alter production quantities

Wrong. Overall profitability will not be affected,unless the wrong allocation of overheadsleads to a decision to alter production quantities

Correct, if overheads are incorrectlyallocated, then each cost centre will give misleading profit figures.

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

Wrong, this definition refers to a profitcentre.

Correct.

Question 6.

Cost centres allow for?

A. Easier identification of where spending occurs

B. Exact figures of profitability to be produced

C. Prevention of budget variances.

Correct.

The figures produced will add accuracy toprofit figures for each cost centre. But theywill never be exact.

There will be greater understanding of budgets through the allocation of overheads, but cost centers do not prevent variances occuring.

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.

Wrong. This is a definition of direct costs or variable costs

Correct.

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

Wrong. You must calculate the difference in costs.The change is from 25% to 30%.

Correct. You have calculated the difference in costs.The change from 25% to 30%.

Wrong. You must calculate the difference in costs.The change is from 25% to 30%.

Question 9.

Discontinuing production of a ‘loss making’ cost centre will in the short term?

A. Increase variable costs

B. Decrease overheads

C. Leave overheads unchanged

Variable Costs will fall, as outputhas decreased.

Overheads will remain unchanged, but theywill have to be allocated to fewer costscentres.

Correct.

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.

Wrong. If the cost centre is making a contributionthen it is contributing to overall profits.

Wrong. This will just increase the amount ofspare capacity

Correct. The cost centre is reducing profitsor adding to the firms losses. No contributionis being made by this cost centre.

You have now completed the test.