Costing and Cost centres Costing and Cost centres TestTest

This test consists of 10 questions This test consists of 10 questions designed to test your understanding designed to test your understanding of and the use of cost centres.of and the use of cost centres.

The links provide you with a choice of The links provide you with a choice of answer, along with explanations answer, along with explanations and solutions.and solutions.

You will need a calculator to complete You will need a calculator to complete this test.this test.

Question 1.Question 1.

Advantages of using costs centres include which Advantages of using costs centres include which of the following?of the following?

a. Creation of an internal marketa. Creation of an internal market

b. Increased awareness of overheadsb. Increased awareness of overheads

c. Increased motivation of workersc. Increased motivation of workers

1. All three1. All three

2. A and B2. A and B

3. A only3. 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.Question 2.

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

A. £93,000A. £93,000

B. nilB. nil

C. £31,000C. £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.Question 3.A firm has sells three products A, B and C. The sales A firm has sells three products A, B and C. The sales

prices are A - 50p, B - 70p and prices are A - 50p, B - 70p and

C-90p. Sales are 10,000 units of each. Allocating C-90p. Sales are 10,000 units of each. Allocating overheads based on total sales value, what will be overheads based on total sales value, what will be product B’s, share of total overheads of £7,100?product B’s, share of total overheads of £7,100?

A. £3,500A. £3,500

B. £2,367B. £2,367

C. £4,370C. £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.Question 4.

Incorrect allocation of overheads can?Incorrect allocation of overheads can?

A. Increase overall profitabilityA. Increase overall profitability

B. Decrease overall profitability.B. Decrease overall profitability.

C. Underestimate profitability of a cost centre. 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.Question 5.

Profit Centres operate as?Profit Centres operate as?

A. An integral part of an organisation, but A. An integral part of an organisation, but with overhead costs allocated to itwith overhead costs allocated to it

B. A separate part of an organisation, with its B. A separate part of an organisation, with its own profit and loss accountown profit and loss account

Wrong, this definition refers to a profitcentre.

Correct.

Question 6.Question 6.

Cost centre allow?Cost centre allow?

A. Easier identification of where spending A. Easier identification of where spending occursoccurs

B. Exact figures of profitability to be B. Exact figures of profitability to be producedproduced

C. Greater central control.C. Greater central control.

Correct.

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

There will be greater central control throughthe allocation of overheads, but cost centres do imply responsibility moving from the centre.

Question 7.Question 7.

Which of the following most closely defines Which of the following most closely defines an overhead?an overhead?

A. A cost to a firm that varies in direct A. A cost to a firm that varies in direct proportion to output.proportion to output.

B. A cost not directly created by production B. A cost not directly created by production of a good.of a good.

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

Correct.

Question 8.Question 8.A firm has in the past allocated overheads in equal A firm has in the past allocated overheads in equal

proportions. The new method will allocate costs proportions. The new method will allocate costs according to labour inputs. Overheads total according to labour inputs. Overheads total £210,000, 4 products are produced, and product £210,000, 4 products are produced, and product XX, uses 30% of labour. By how much will XX, uses 30% of labour. By how much will profitability of product XX alter?profitability of product XX alter?

A. £63,000A. £63,000

B. £10,500B. £10,500

C. NilC. 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.Question 9.

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

A. Increase variable costsA. Increase variable costs

B. Increase overheadsB. Increase overheads

C. Leave overheads unchangedC. 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.Question 10.Firms should potentially cease production Firms should potentially cease production

from a cost centre if?from a cost centre if?

A. The cost centre contributes to overhead A. The cost centre contributes to overhead costscosts

B. The firm has spare capacityB. The firm has spare capacity

C. The costs centres revenue is less than its C. The costs centres revenue is less than its direct costs.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. For further more detailed revision please use the case studies on

the ALoA wb site.www.aloa.co.uk