Idle Capacity Costing and Overhead Allocation: Cost and Management Accounting (Commerce) Quiz

Question 1

What does idle capacity represent in a manufacturing setup?

Accepted Answer

The unused portion of production capability, reflecting the difference between potential output and actual production

Answer

The additional units produced over and above the normal operating capacity

Answer

The variable costs incurred when machines are shut down for maintenance

Answer

The total maximum production capability achievable without any interruptions

Question 2

Which of the following costs are included in product costs under absorption costing?

Accepted Answer

Both variable and fixed manufacturing costs

Answer

Direct materials and direct labor only

Answer

Variable manufacturing costs only

Answer

Selling and distribution overheads only

Question 3

How are normal idle capacity costs generally treated in cost accounting?

Accepted Answer

They are considered a regular cost of doing business and factored into standard overhead rates

Answer

They are capitalized into the carrying value of fixed assets

Answer

They are deducted from the direct material cost

Answer

They are charged directly to the Profit and Loss account as an abnormal loss

Question 4

How is product cost per unit calculated under absorption costing?

Accepted Answer

(Direct labor + Direct materials + Variable manufacturing overhead + Fixed manufacturing overhead) / Number of units produced

Answer

(Total Fixed Overhead + Total Selling Expenses) / Number of units produced

Answer

(Direct labor + Direct materials) / Number of units produced

Answer

(Direct labor + Direct materials + Variable manufacturing overhead) / Number of units produced

Question 5

Which category of costs directly changes in direct proportion to changes in production volume?

Accepted Answer

Variable manufacturing overheads

Answer

Fixed manufacturing overheads

Answer

Period fixed costs

Answer

Sunk costs

Question 6

Which of the following is considered a fixed manufacturing overhead cost?

Accepted Answer

Depreciation of factory buildings and machinery

Answer

Sales commissions paid to agents

Answer

Indirect materials used in production

Answer

Direct worker piece-rate wages

Question 7

Key metrics like capacity utilization are primary tools used for which purpose in an enterprise?

Accepted Answer

Assessing how effectively a company is using its production resources

Answer

Determining statutory audit fees

Answer

Computing trade discounts for customers

Answer

Calculating the exact income tax liability of the firm

Question 8

In absorption costing, what is the key allocation basis used for fixed production overheads under standard accounting guidelines?

Accepted Answer

Normal capacity of the production facilities

Answer

Theoretical maximum capacity

Answer

Actual units sold during the financial period

Answer

Budgeted selling price per unit

Question 9

What impact does unabsorbed idle capacity cost have on the financial profit and loss statement?

Accepted Answer

It acts as a direct expense, reducing reported profit for the period

Answer

It has zero impact on reported net profit

Answer

It increases reported gross profit by inflating inventory values

Answer

It is credited to reserves and surplus on the balance sheet

Question 10

What overall financial risk can unmanaged idle capacity introduce to a business?

Accepted Answer

Significant financial losses due to unutilized resources and increased unit costs

Answer

Guaranteed increase in market share

Answer

Immediate exemption from statutory reporting compliance

Answer

Automatic reduction in fixed facility rent costs

Idle Capacity Costing and Overhead Allocation: Cost and Management Accounting (Commerce) Quiz

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