CIMA Fundamentals Of Management Accounting (BA2) Practice Exam

Which statement about standard cost is true?

It represents the actual costs incurred It is prepared in advance based on management expectations of efficiency levels, prices, overhead costs and activity levels It ignores overhead costs It is only used for service industries

Correct Answer:

It is prepared in advance based on management expectations of efficiency levels, prices, overhead costs and activity levels

Explanation:

Standard cost is a planned cost per unit used for budgeting and control. It is set before production based on management expectations of how efficient operations will be, the standard prices for inputs, the overhead absorption rate, and the anticipated level of activity. This creates a benchmark to compare against actual costs, with variances revealing where performance differs from the plan. Since overhead is included through the allocation rate, it isn’t ignored, and standard costing isn’t restricted to manufacturing; it can be used in service settings as well. So the true statement is that standard cost is prepared in advance based on management expectations of efficiency levels, prices, overhead costs and activity levels.

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