1. What is the primary purpose of standard costing in banking operations?
A. To replace actual cost records entirely
B. To set fixed interest rates for all loans
C. To control costs and measure performance by comparing actual costs with standards
D. To calculate tax liabilities only
Standard costing helps banks and businesses control costs, analyze variances, and measure efficiency by comparing actual costs against pre-determined standard costs.
2. Which of the following best defines standard costing?
A. Recording costs only after the actual expenditure
B. Pre-determining the expected cost of products, services, or operations and comparing it with actual costs
C. A method to avoid taxation
D. Fixing selling prices permanently
Standard costing involves estimating the expected costs of operations or products and comparing them with actual costs to identify variances.
3. Which of the following is NOT a significance of standard costing?
A. Ensuring all loans are approved without credit assessment
B. Controlling costs effectively
C. Evaluating departmental performance
D. Identifying deviations from expected costs
Standard costing helps in cost control and performance evaluation. It does not relate to approving loans without proper assessment.
4. Which type of standard is set for the most efficient use of resources under ideal conditions?
A. Basic standard
B. Current standard
C. Average standard
D. Ideal standard
Ideal standards represent the most efficient use of resources under perfect conditions, often used to motivate performance.
5. Current standards are primarily designed to:
A. Reflect historical costs only
B. Reflect achievable performance under normal working conditions
C. Ignore variations in production efficiency
D. Replace budgetary controls completely
Current standards are set to represent realistic and attainable performance levels under normal operating conditions.
6. Which of the following is an example of a basic standard?
A. Standard based on last month’s costs only
B. Standard reflecting expected fluctuations
C. Standard set long ago for long-term comparison
D. Standard based on ideal conditions
Basic standards are historical standards set long ago and are used for long-term comparison, not for daily control.
7. Which of the following is the first step in installing a standard costing system for materials?
A. Recording actual purchase costs only
B. Setting standard cost per unit of material
C. Preparing financial statements
D. Calculating material variances without standards
Installing a standard costing system for materials begins with setting the standard cost per unit, which serves as the benchmark for controlling and comparing actual costs.
8. In a standard costing system, labour standards are set based on:
A. Actual wages paid last month only
B. Government-mandated minimum wages only
C. Time required per unit of output and standard rate per hour
D. Total payroll without analysis
Labour standards are determined by analyzing the time required to produce one unit and applying the standard wage rate per hour to ensure cost control and variance analysis.
9. Overhead standards in standard costing are usually classified into:
A. Direct materials and indirect materials
B. Fixed and variable costs only
C. Labour and materials only
D. Fixed overhead and variable overhead
Overheads are classified as fixed (unchanging with production volume) and variable (changing with production volume) to set appropriate standards and analyze variances.
10. Which of the following is essential for effective installation of a standard costing system for overheads?
A. Selection of appropriate cost drivers for allocating overheads
B. Ignoring indirect costs completely
C. Only recording actual overhead costs
D. Applying uniform overheads to all departments without analysis
Choosing appropriate cost drivers (like machine hours or labour hours) is crucial for allocating overheads accurately and setting meaningful standards.
11. Which of the following best describes the role of variance analysis after installing a standard costing system?
A. To avoid accounting for actual costs
B. To compare actual costs with standards and identify deviations
C. To fix selling prices permanently
D. To calculate taxes only
Variance analysis is used to identify deviations between actual and standard costs for materials, labour, and overheads, enabling corrective action and cost control.
12. In material cost control, which variance is analyzed first in a standard costing system?
A. Labour rate variance
B. Overhead efficiency variance
C. Material cost variance
D. Selling price variance
Material cost variance (difference between standard and actual material costs) is the primary focus for controlling material expenses.
13. Material cost variance is calculated as:
A. Standard cost × Actual quantity
B. Standard cost of material – Actual cost of material
C. Actual cost – Selling price
D. Standard cost + Actual cost
Material cost variance = Standard cost of material – Actual cost of material. It helps identify whether materials were purchased or used efficiently.
14. Which of the following is a component of material cost variance?
A. Labour rate variance
B. Overhead efficiency variance
C. Selling price variance
D. Material price variance and material usage variance
Material cost variance is split into material price variance (difference due to price) and material usage variance (difference due to quantity used).
15. Labour efficiency variance occurs when:
A. Actual hours worked differ from standard hours allowed for production
B. Actual wage rate differs from standard wage rate
C. Material quantity used differs from standard
D. Overhead costs remain constant
Labour efficiency variance arises when the actual hours worked differ from the standard hours allowed for the output, reflecting operational efficiency.
16. Overhead expenditure variance is calculated as:
A. Standard overhead – Material cost
B. Standard overhead × Labour hours
C. Actual overhead – Standard overhead applied
D. Selling price – Actual overhead
Overhead expenditure variance = Actual overhead – Standard overhead applied. It helps in controlling overhead spending.
17. Accounting treatment of a favourable material variance typically involves:
A. Ignoring it in financial statements
B. Recording it as a loss
C. Adjusting it against overheads
D. Crediting it to the cost of goods sold or separate variance account
Favourable variances indicate cost savings and are either credited to cost of goods sold or recorded in a separate variance account for analysis.
18. An adverse labour variance implies:
A. Labour cost is less than standard
B. Actual labour cost exceeds standard labour cost
C. Material cost is below standard
D. Overhead allocation is correct
An adverse variance occurs when actual costs exceed standard costs, indicating inefficiency or higher expenses than planned.
19. Which journal entry is correct for recording a favourable overhead variance?
A. Debit Overhead Control, Credit Cash
B. Debit Cash, Credit Overhead Control
C. Debit Overhead Applied, Credit Overhead Control
D. Debit Cost of Goods Sold, Credit Material Control
Favourable overhead variance is credited to the overhead control account or adjusted against overhead applied, reflecting cost efficiency.
20. Which of the following statements is true about variance analysis?
A. It helps management identify areas of inefficiency and take corrective actions
B. It replaces the need for standard costing
C. It is used only for taxation purposes
D. It ignores differences between standard and actual costs
Variance analysis is a key management tool to detect inefficiencies, monitor performance, and take corrective measures.
21. What is the main purpose of benchmarking when setting standards in standard costing?
A. To copy competitors’ products directly
B. To set arbitrary cost limits
C. To identify best practices and establish realistic and achievable standards
D. To eliminate the need for variance analysis
Benchmarking involves comparing processes and practices with industry best practices to set achievable and realistic standards for materials, labour, and overhead.
22. Which of the following is a key benefit of reporting variances to management?
A. Helps management identify problem areas and take corrective action
B. Eliminates the need for standard costing
C. Automatically reduces material and labour costs
D. Ensures all costs are fixed permanently
Variance reporting provides insights into deviations between actual and standard costs, enabling management to address inefficiencies promptly.
23. When preparing variance reports for management, which of the following should be highlighted first?
A. Standard costs only
B. Actual costs only
C. Selling price differences
D. Significant favourable and adverse variances
Management is primarily interested in significant favourable and adverse variances to prioritize corrective actions and strategic decisions.
24. Which of the following statements is true about benchmarking in a bank's cost control system?
A. Benchmarking sets only ideal standards that are often unattainable
B. Benchmarking helps in setting realistic standards based on industry or internal best practices
C. Benchmarking eliminates the need for variance analysis
D. Benchmarking focuses only on material costs
Benchmarking uses internal or industry best practices to set standards that are challenging yet achievable, improving efficiency and performance.
25. Effective variance reporting to management should ideally be:
A. Detailed and include all minor differences
B. Limited to only favourable variances
C. Summarized, highlighting significant adverse and favourable variances with reasons
D. Prepared only at year-end
Variance reports should focus on significant deviations and their causes, enabling management to take timely corrective or strategic actions.
26. Which type of benchmark is often used in banks to set labour standards?
A. Global product pricing benchmark
B. Time and motion study or best practice internally achieved hours
C. Historical material costs only
D. Random allocation of working hours
Labour benchmarks in banks are often based on internal best practices or time-and-motion studies to set realistic and achievable standards.
27. Which of the following is NOT a part of variance reporting to management?
A. Explanation of causes for variances
B. Recommendations for corrective actions
C. Summary of significant favourable and adverse variances
D. Ignoring deviations that affect costs significantly
Variance reports must focus on significant deviations. Ignoring important cost deviations defeats the purpose of effective management reporting.
28. A favourable material variance reported to management implies:
A. Actual material cost is less than standard cost
B. Material cost exceeded the standard
C. Labour hours exceeded the standard
D. Overhead was underapplied
A favourable material variance indicates cost savings as the actual material cost is lower than the pre-determined standard cost.
