Cost Accounting - Interview Questions

Interview Questions
Interview Questions for Cost Accounting

Interview
By Tayyab Saleem
By Tayyab Saleem Page 1

Interview Questions
1. What is cost accounting?
Answer: Cost accounting is the process of tracking, recording, and analyzing costs associated with the
products or activities of an organization. It helps management make better financial decisions by
understanding the costs involved in production and operations.
2. What are the objectives of cost accounting?
Answer: The main objectives include determining the cost of products/services, controlling costs,
providing information for decision-making, and assisting in cost reduction strategies.
3. What is the difference between cost accounting and financial accounting?
Answer: Cost accounting focuses on internal cost control and efficiency, while financial accounting is
concerned with reporting financial data to external stakeholders, like investors.
4. What is marginal cost?
Answer: Marginal cost is the cost of producing one additional unit of a product. It helps in determining
the optimal level of production.
5. What is a cost center?
Answer: A cost center is a department or a function within an organization where costs are incurred
but that does not directly generate revenue.
6. What are fixed costs?
Answer: Fixed costs are expenses that remain constant regardless of the level of production or sales,
such as rent and salaries.
7. What are variable costs?
Answer: Variable costs change in proportion to the production volume, such as raw material costs and
direct labor.

Interview Questions
8. What is break-even analysis?
Answer: Break-even analysis determines the point where total revenues equal total costs, meaning the
company neither makes a profit nor a loss.
9. What is absorption costing?
Answer: Absorption costing is a method where all costs, both fixed and variable, are allocated to
products.
10. What is activity-based costing (ABC)?
Answer: ABC allocates overhead to specific activities that drive costs, providing a more accurate
representation of product or service costs.
11. What are overhead costs?
Answer: Overhead costs are indirect costs that cannot be directly attributed to a specific product, such
as utilities, rent, or administrative expenses.
12. What is a cost driver?
Answer: A cost driver is a factor that directly influences the cost of an activity, such as machine hours
or labor hours.
13. What is a job costing system?
Answer: Job costing tracks costs associated with a specific job or batch of products, typically used in
industries like construction or custom manufacturing.
14. What is process costing?
Answer: Process costing is used where products are homogenous, and costs are averaged over units
produced, typically used in industries like chemicals or food processing.

Interview Questions
15. What is standard costing?
Answer: Standard costing assigns expected costs to products, and any variances between actual and
standard costs are analyzed.
16. What is a variance?
Answer: A variance is the difference between a planned cost and the actual cost, which helps identify
areas of inefficiency.
17. What is direct labor cost?
Answer: Direct labor cost is the expense related to the employees who are directly involved in the
production of goods or services.
18. What is a direct material cost?
Answer: Direct material cost refers to the raw materials that are directly used in the production of a
product.
19. What is inventory valuation?
Answer: Inventory valuation is the method used to assign a monetary value to a company’s inventory,
commonly using methods like FIFO, LIFO, or weighted average cost.
20. What is the FIFO method?
Answer: FIFO (First In, First Out) is an inventory valuation method where the first items purchased are
the first to be used or sold.
21. What is the LIFO method?
Answer: LIFO (Last In, First Out) is an inventory valuation method where the last items purchased are
the first to be used or sold.

Interview Questions
22. What is weighted average cost?
Answer: Weighted average cost is a method of inventory valuation where the cost of goods available
for sale is divided by the number of units available, providing an average cost per unit.
23. What are indirect costs?
Answer: Indirect costs cannot be directly traced to a specific product or job and include items like
utilities, rent, and administrative salaries.
24. What is the purpose of cost allocation?
Answer: Cost allocation helps distribute indirect costs to different departments, products, or cost
centers to ensure accurate cost tracking and pricing.
25. What is contribution margin?
Answer: Contribution margin is the difference between sales revenue and variable costs. It is used to
cover fixed costs and generate profit.
26. What is the difference between gross margin and contribution margin?
Answer: Gross margin considers only direct costs (COGS) when calculating the difference between
sales and costs, while contribution margin considers variable costs.
27. What is cost-volume-profit (CVP) analysis?
Answer: CVP analysis examines how changes in costs and volume affect a company's profit. It helps in
understanding the relationship between fixed costs, variable costs, volume, and profit.
28. What is a budget?
Answer: A budget is a financial plan that estimates revenue and expenses over a specific period. It is
used for financial control and planning.

Interview Questions
29. What is a flexible budget?
Answer: A flexible budget adjusts for changes in activity levels, allowing for more accurate tracking of
costs as production volume changes.
30. What is a master budget?
Answer: A master budget is a comprehensive financial plan that includes various smaller budgets, such
as sales, production, and cash budgets, to create an overall financial plan.
31. What is a variance analysis?
Answer: Variance analysis is the process of comparing actual costs to budgeted or standard costs to
identify discrepancies and areas for improvement.
32. What is the high-low method?
Answer: The high-low method is used to estimate fixed and variable costs by analyzing the highest and
lowest levels of activity and the costs associated with them.
33. What are semi-variable costs?
Answer: Semi-variable costs, or mixed costs, contain both fixed and variable components. For
example, a utility bill may have a fixed base charge plus variable charges based on usage.
34. What is target costing?
Answer: Target costing is the process of determining the desired profit margin and then calculating the
maximum cost that can be incurred to achieve that target profit.
35. What is a sunk cost?
Answer: A sunk cost is a past cost that has already been incurred and cannot be recovered. Sunk costs
should not influence current decisions.

Interview Questions
36. What is differential costing?
Answer: Differential costing focuses on the costs that change between alternatives. It helps in
decision-making by analyzing only the costs that differ between choices.
37. What is an opportunity cost?
Answer: Opportunity cost is the potential benefit lost when one option is chosen over another. It
represents the value of the best alternative that is not selected.
38. What is a cost-benefit analysis?
Answer: Cost-benefit analysis involves comparing the costs and benefits of different options to
determine which provides the most value or return.
39. What is a direct expense?
Answer: Direct expenses are costs that can be directly attributed to a specific job, department, or
product, such as raw materials or direct labor.
40. What is throughput costing?
Answer: Throughput costing focuses on the contribution of each unit to profit by emphasizing the
revenue generated from production minus direct material costs.
41. What is EOQ (Economic Order Quantity)?
Answer: EOQ is a formula used to determine the optimal order quantity that minimizes the total cost
of inventory, including holding costs and ordering costs.
42. What is a cost sheet?
Answer: A cost sheet is a statement that provides detailed information about the cost structure of a
product, including direct and indirect costs, and helps in determining the product's total cost.

Interview Questions
43. What is meant by labor efficiency variance?
Answer: Labor efficiency variance measures the difference between the actual labor hours used and
the standard labor hours expected for the production level, multiplied by the standard labor rate.
44. What is meant by labor rate variance?
Answer: Labor rate variance is the difference between the actual labor rate paid and the standard
labor rate, multiplied by the actual hours worked.
45. What is meant by material price variance?
Answer: Material price variance measures the difference between the actual cost of materials and the
standard cost, multiplied by the quantity purchased.
46. What is meant by material usage variance?
Answer: Material usage variance calculates the difference between the actual material used and the
standard material required for production, multiplied by the standard cost.
47. What is a fixed overhead variance?
Answer: Fixed overhead variance is the difference between the actual fixed overhead incurred and the
budgeted fixed overhead for the level of production.
48. What is a variable overhead variance?
Answer: Variable overhead variance is the difference between the actual variable overhead incurred
and the standard overhead based on actual production levels.
49. What is job order costing?
Answer: Job order costing is a method used for customized production, where costs are assigned to
specific jobs or batches.

Interview Questions
50. What is standard costing variance?
Answer: Standard costing variance occurs when there is a difference between actual costs and
standard costs for materials, labor, or overhead.
51. What is meant by incremental cost?
Answer: Incremental cost is the additional cost incurred by producing an extra unit of output or
undertaking an additional activity.
52. What is kaizen costing?
Answer: Kaizen costing is the practice of continuously reducing costs through small, incremental
improvements during the production process.
53. What is backflush costing?
Answer: Backflush costing is a simplified cost accounting system used in Just-In-Time (JIT) production
environments where costs are assigned at the end of the process, bypassing detailed tracking of costs
during production.
54. What is life cycle costing?
Answer: Life cycle costing involves tracking and analyzing all costs associated with a product over its
entire life, from development to disposal, to understand its profitability over time.
55. What is marginal costing?
Answer: Marginal costing refers to the accounting method where only variable costs are considered
when calculating the cost of a product, while fixed costs are treated as period costs.
56. What is normal loss in cost accounting?
Answer: Normal loss refers to the expected or standard amount of loss that occurs during production
under normal operating conditions.

Interview Questions
57. What is abnormal loss?
Answer: Abnormal loss is any loss that exceeds the normal or expected level of loss in production,
indicating inefficiencies or problems in the process.
58. What is a production budget?
Answer: A production budget estimates the number of units that need to be produced to meet sales
demand while accounting for beginning and ending inventory.
59. What is a cost of goods sold (COGS)?
Answer: COGS refers to the direct costs of producing goods sold by a company, including materials and
direct labor. It excludes indirect costs such as overhead.
60. What is a balanced scorecard?
Answer: A balanced scorecard is a strategic management tool that tracks organizational performance
against goals across four key perspectives: financial, customer, internal processes, and learning and
growth.
61. What is operating leverage?
Answer: Operating leverage measures the degree to which a company’s operating income can change
with a change in sales volume. It shows the impact of fixed costs on profitability.
62. What is financial leverage?
Answer: Financial leverage refers to the use of debt to finance a company’s operations. It indicates the
degree to which a company is using borrowed money to increase its return on equity.
63. What is meant by cost object?
Answer: A cost object is any item, such as a product, department, or project, for which a cost is
measured and assigned.

Interview Questions
64. What is absorption costing variance?
Answer: Absorption costing variance occurs when there is a difference between the overhead costs
allocated to products under absorption costing and the actual overhead costs incurred.
65. What are controllable costs?
Answer: Controllable costs are costs that can be directly influenced by management decisions and
actions, such as variable costs or certain overheads.
66. What are uncontrollable costs?
Answer: Uncontrollable costs are costs that cannot be easily influenced or controlled by management,
such as rent, which may be fixed for a contract period.
67. What is budgetary control?
Answer: Budgetary control involves comparing actual performance with budgeted figures to manage
and regulate expenditures and ensure efficient operations.
68. What is a cash budget?
Answer: A cash budget is an estimation of a company’s cash inflows and outflows over a specific
period, used to ensure the company has enough cash to meet obligations.
69. What is a capital budget?
Answer: A capital budget focuses on long-term investments and expenditures, such as purchasing
equipment, expanding facilities, or launching new projects.
70. What is cost reconciliation?
Answer: Cost reconciliation compares actual costs with budgeted or estimated costs to ensure all costs
have been accounted for correctly and identify any variances.

Interview Questions
71. What is the principle of consistency in cost accounting?
Answer: The principle of consistency ensures that the same cost accounting methods are used from
one period to the next, allowing for comparability of financial data.
72. What is the relevant range?
Answer: The relevant range is the level of activity within which the fixed and variable costs remain
consistent. Costs may change if the production goes beyond or below this range.
73. What is the break-even point in units?
Answer: The break-even point in units is the level of sales where total revenue equals total
{Break-even point (units)} text{Fixed Costs}}{ {Selling price per unit} {Variable cost per unit}}
74. What is cost allocation base?
Answer: A cost allocation base is a factor, such as labor hours or machine hours, used to allocate
indirect costs to cost objects.
75. What is the difference between absorption costing and variable costing?
Answer: In absorption costing, all manufacturing costs (fixed and variable) are included in product
costs, while in variable costing, only variable manufacturing costs are included, and fixed costs are
treated as period costs.
76. What is a contribution margin ratio?
Answer: The contribution margin ratio shows the percentage of sales revenue that exceeds variable
costs, contributing to covering fixed costs and generating profit. It’s calculated as:
{Contribution Margin Ratio} = {\text{Contribution Margin}}{{Sales Revenue}}

Interview Questions
77. What is the learning curve in cost accounting?
Answer: The learning curve refers to the phenomenon where the time taken to produce a product
decreases as workers gain experience, leading to cost reductions over time.
78. What is make-or-buy decision analysis?
Answer: Make-or-buy analysis helps management decide whether to produce a product in-house or
purchase it from an external supplier, considering cost, quality, and capacity.
79. What is the theory of constraints?
Answer: The theory of constraints focuses on identifying and managing the bottleneck or constraint in
a process that limits overall output or performance.
80. What is cost-plus pricing?
Answer: Cost-plus pricing sets the selling price by adding a fixed markup or margin to the cost of
production. It ensures the company covers its costs and earns a profit.
81. What is a cost pool?
Answer: A cost pool is a grouping of individual costs, typically by department or service, from which
costs can be allocated to cost objects.
82. What is a rolling budget?
Answer: A rolling budget is a continuously updated budget that adds a new period (e.g., month,
quarter) as the current period ends, providing a constantly updated financial plan.
83. What is a performance report?
Answer: A performance report compares actual results with budgeted or planned outcomes,
highlighting variances and areas where performance exceeded or fell short of expectations.

Interview Questions
84. What is cost leadership?
Answer: Cost leadership is a competitive strategy where a company aims to become the lowest-cost
producer in its industry, often achieved through economies of scale, cost control, and operational
efficiency.
85. What are batch-level costs?
Answer: Batch-level costs are costs incurred every time a batch of products is produced, regardless of
the number of units in the batch. Examples include setup costs or inspection costs.
86. What is a cost ledger?
Answer: A cost ledger is a detailed account that tracks all the costs associated with the production of
goods or services, including materials, labor, and overhead.
87. What is equivalent units of production?
Answer: Equivalent units of production (EUP) represent the amount of work done during a period,
expressed in fully completed units, allowing for the calculation of costs in process costing.
88. What is value engineering?
Answer: Value engineering is the systematic process of improving the value of a product or service by
analyzing its functions and reducing costs without affecting quality.
89. What is the purpose of a cost audit?
Answer: A cost audit examines cost records and verifies their accuracy, ensuring compliance with cost
accounting standards and helping management improve cost control.
90. What is job order costing vs. process costing?
Answer: Job order costing tracks costs for specific jobs or orders, used in customized production.
Process costing assigns costs to batches of identical products, used in continuous production processes.

Interview Questions
91. What are equivalent costs?
Answer: Equivalent costs refer to assigning costs based on the level of completion of products in
progress, used in process costing to determine the value of partially completed items.
92. What is transfer pricing?
Answer: Transfer pricing is the price charged for transactions between divisions of the same company,
often used in multinational companies to allocate costs and profits.
93. What is cost absorption?
Answer: Cost absorption refers to the process of including all manufacturing costs, both fixed and
variable, in the cost of a product.
94. What is capital rationing?
Answer: Capital rationing is the process of limiting investments due to budget constraints, forcing a
company to prioritize projects based on returns or strategic importance.
95. What is a cost-benefit ratio?
Answer: A cost-benefit ratio compares the costs of an action to its benefits, helping to determine
whether an investment or decision is financially worthwhile.
96. What is meant by "normal capacity"?
Answer: Normal capacity refers to the expected production level based on standard working
conditions and demand over a long period.
97. What is operating margin?
Answer: Operating margin measures a company's operational efficiency and profitability, calculated as
operating income divided by sales revenue.

Interview Questions
98. What is prime cost?
Answer: Prime cost is the sum of direct materials and direct labor costs involved in the production of
goods.
99. What is inventory turnover ratio?
Answer: Inventory turnover ratio measures how many times a company’s inventory is sold and
replaced over a specific period. It’s calculated as:
{Inventory Turnover} {Cost of Goods Sold}}{ {Average Inventory}}
100. What is the difference between fixed and variable overheads?
Answer: Fixed overheads remain constant regardless of production levels (e.g., rent, salaries), while
variable overheads fluctuate with production volume (e.g., utilities, indirect labor).

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Interview Questions

Interview Questions for Cost Accounting

By Tayyab Saleem Page 1

1. What is cost accounting?

2. What are the objectives of cost accounting?

3. What is the difference between cost accounting and financial accounting?

4. What is marginal cost?

5. What is a cost center?

6. What are fixed costs?

7. What are variable costs?

By Tayyab Saleem Page 2

8. What is break-even analysis?

9. What is absorption costing?

10. What is activity-based costing (ABC)?

11. What are overhead costs?

12. What is a cost driver?

13. What is a job costing system?

14. What is process costing?

By Tayyab Saleem Page 3

15. What is standard costing?

16. What is a variance?

17. What is direct labor cost?

18. What is a direct material cost?

19. What is inventory valuation?

20. What is the FIFO method?

21. What is the LIFO method?

By Tayyab Saleem Page 4

22. What is weighted average cost?

23. What are indirect costs?

24. What is the purpose of cost allocation?

25. What is contribution margin?

27. What is cost-volume-profit (CVP) analysis?

28. What is a budget?

By Tayyab Saleem Page 5

29. What is a flexible budget?

30. What is a master budget?

31. What is a variance analysis?

32. What is the high-low method?

33. What are semi-variable costs?

34. What is target costing?

35. What is a sunk cost?

By Tayyab Saleem Page 6

36. What is differential costing?

37. What is an opportunity cost?

38. What is a cost-benefit analysis?

39. What is a direct expense?

40. What is throughput costing?

41. What is EOQ (Economic Order Quantity)?

42. What is a cost sheet?

By Tayyab Saleem Page 7

43. What is meant by labor efficiency variance?

44. What is meant by labor rate variance?

45. What is meant by material price variance?

46. What is meant by material usage variance?

47. What is a fixed overhead variance?

48. What is a variable overhead variance?

49. What is job order costing?

By Tayyab Saleem Page 8

50. What is standard costing variance?