A Level Accounting (A2) chapter 2: Cost and management accounting MCQs with answers
By Team Megalecture · Updated 4 Nov 2026
89 exam-style questions on Cost and management accounting, each with the answer and a short explanation. Ten of them are below to try. The chapter test draws ten fresh questions each time and is marked the moment you finish, with your score by topic.
Ten Cost and management accounting questions with answers
Try each one, then open the answer. These ten stay the same; the test draws new ones every time.
1. Why is $1000 received in three years’ time worth less than $1000 received today?
A
money received today can be invested to earn a return before then
B
money received in the future will be taxed at a higher rate
C
future cash flows are always smaller than current cash flows
D
money received today cannot be affected by any risk
Show answer
Answer: A. This is the time value of money: cash available now can be reinvested to earn interest, and there is also the effect of inflation and risk on future receipts. Discounting converts future cash into present value terms.
2. Which is an advantage of a standard costing system?
A
managers can focus on significant variances (management by exception)
B
standards never need to be revised once they have been agreed and set
C
it removes the need for the business to prepare any budgets
D
it guarantees that actual costs will be equal to standard costs
Show answer
Answer: A. Comparing actual results with standards highlights where things differ from plan, so managers can investigate the significant variances and leave the rest. Standards must be kept up to date and they are used alongside budgets.
3. What is meant by the payback period of an investment project?
A
the time taken for total profits to equal the initial investment
B
the number of years over which the asset is depreciated
C
the time taken for the net present value to become positive
D
the time taken for net cash inflows to equal the initial investment
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Answer: D. Payback measures how quickly the cash invested is recovered from the project’s net cash inflows. It uses cash flows, not profits, and it ignores the timing of flows within the payback period and all flows after it.
4. A project has a positive net present value when discounted at the company’s cost of capital. What does this indicate?
A
the project will pay back its cost within the first year
B
the project earns a return greater than the cost of capital
C
the project’s accounting rate of return must be above 50%
D
the project earns exactly the cost of capital
Show answer
Answer: B. A positive NPV means the discounted inflows exceed the initial investment, so the project earns more than the rate used to discount it and increases the value of the business. It should be accepted on financial grounds.
5. What is meant by the internal rate of return (IRR) of a project?
A
the discount rate that the company uses as its cost of capital
B
the average annual profit as a percentage of the average investment
C
the discount rate at which the net present value of the project is zero
D
the rate of interest charged on a loan to finance the project
Show answer
Answer: C. The IRR is the discount rate that makes the present value of the inflows equal to the initial investment. A project is acceptable if its IRR is higher than the cost of capital. Average profit over average investment is the ARR.
6. A project requires an investment of $90 000 in equipment with no residual value. Expected profits after depreciation are $8000, $12 000 and $13 000 in years 1 to 3. What is the accounting rate of return, based on average investment?
A
12.2%
B
24.4%
C
91.1%
D
36.7%
Show answer
Answer: B. Average profit = ($8000 + $12 000 + $13 000) ÷ 3 = $11 000. Average investment = $90 000 ÷ 2 = $45 000. ARR = $11 000 ÷ $45 000 × 100 = 24.4%. Adding depreciation back turns profit into cash flow, which is not used in ARR.
7. A machine costing $120 000 is expected to generate net cash inflows of $40 000, $45 000, $50 000 and $35 000 in years 1 to 4. It will have no residual value. What is the payback period?
A
2.7 years
B
2.3 years
C
2.8 years
D
3.0 years
Show answer
Answer: A. After two years $85 000 has been recovered, leaving $35 000. This is $35 000 ÷ $50 000 = 0.7 of year 3, so payback is 2.7 years (about 2 years 8 months). Using the average annual inflow gives 2.8 years.
8. Which is a disadvantage of budgetary control that arises from the behaviour of managers?
A
managers may overstate costs to make targets easier (budgetary slack)
B
budgets help managers to plan the use of resources in advance
C
actual results can be compared with the budget to identify variances
D
budgets give managers clear targets for their departments
Show answer
Answer: A. Managers who are judged against their budgets may build in slack, overstating costs or understating revenue, so that targets are easy to meet. This wastes resources and weakens control. The other options are benefits of budgeting.
9. A business expects to start the month with a bank overdraft of $2400. Budgeted receipts from customers are $38 500. Budgeted payments are: suppliers $21 300, wages $9800 and general expenses $6100. The general expenses figure includes depreciation of $900. What is the budgeted bank position at the end of the month?
A
overdraft of $1100
B
balance of $4600
C
overdraft of $200
D
balance of $3700
Show answer
Answer: C. Depreciation is not a cash payment, so cash expenses are $6100 − $900 = $5200. Closing position = −$2400 + $38 500 − $21 300 − $9800 − $5200 = −$200, an overdraft of $200.
10. Which is a limitation of activity based costing?
A
it cannot be used to calculate a selling price for a product
B
it can only be used by businesses that provide services
C
identifying activities, cost pools and drivers is costly and slow
D
it absorbs all overheads using one rate for the whole factory
Show answer
Answer: C. Setting up and maintaining an ABC system needs detailed analysis of activities and continuous collection of driver data, which can cost more than the benefit for some businesses. ABC can be used by manufacturers and service businesses, and it uses many rates, not one.
Cost and management accounting: questions students ask
How many Cost and management accounting MCQs are there?
89, each with the answer and a short explanation, across 4 topics: Activity based costing (ABC), Standard costing, Budgeting and budgetary control, Investment appraisal. Every chapter test draws ten of them, so you can take it many times.
Is the A Level Accounting (A2) chapter 2 test free?
Yes. The test, the answers and the explanations are free and need no sign-up. Sign in only if you want your scores kept across devices.
How is the chapter test marked?
The moment you press Finish: your score, the right answer and an explanation for every question, and the ones you got wrong saved in My mistakes to retry.
