CIMA – Certificate Level

Paper C01
Fundamentals of
Management Accounting
Exam Practice Kit

Tutor contact details

Gary White
[email protected]
07870 147 380

1
Certificate Level - Paper C01 – Fundamentals of Management Accounting

Recommended study hours

Numerical papers require more study time than non-numerical papers. Based on a
duration of 3 to 4 months, we recommend the following study hours for each paper:

1 4 study sessions per week.

2 Each study session to last between 1.5 to 2 hours
3 Total hours per week between 6 to 8 hours

Study time per week should be a mixture of reading, memorising and question practice.
Once ALL chapters have all been completed you are to attempt the final mock exam
included within this exam practice kit to test your performance.

Assessment strategy

There will be a two hour computer based assessment, comprising 50 compulsory

questions, each with one or more parts. A variety of objective test question styles and
types will be used within the assessment.

The syllabus comprises:

A The context of management accounting 10%

B Cost identification and behaviour 25%
C Planning within organisations 30%
D Accounting control systems 20%
E Decision making 15%

2
 Contents

Chapter
Chapter Page Number
Number

Questions Answers

1 Classification of costs 4 114

2 The context of management accounting 20 126
3 Absorbing fixed production overhead 24 127
4 Absorption and marginal costing 33 138
5 Specific order costing 39 145
6 Service costing 44 150
7 Decision making 46 151
8 Manufacturing accounts 67 169
9 Budgeting 75 174
10 Standard costing and variance analysis 88 182
11 Process and cost ledger accounting 102 194

C01 Mock Exam 205 225

3
 Questions for chapter 1 – Classification of costs

1.1

Which of the following would best categorise sales commission expenses for an
organisation?

a) Fixed cost
b) Variable cost
c) Functional cost
d) Stepped cost

1.2

Which of the following would be more likely not to be classified as an indirect labour
cost within an organisation?

a) The supervision cost for a team of workers making bottles

b) The labour cost in connection with making the bottles
c) Overtime payments in connection with making the bottles
d) The salary for quality control workers inspecting bottles made

1.3

With the available data, use the high-low method to predict what the cost would be of
cleaning 70 bedrooms within a hotel?

Bedrooms cleaned 20 35 55 75

Total cleaning cost (£) 70 102 137 180

a) £150
b) £160
c) £165
d) £170

4
1.4
The following extract has been taken from the production budget of J Ltd:
Production (units) 2500 3500
Production cost (£) 17,625 19,875

The budgeted cost allowed for an activity of 2000 units would be

a) £16,500
b) £12,000
c) £13.450
d) £9,500

1.5

A Plc had the following average cost data for two activity levels:

Units Average cost (£)

4000 £6.00
6000 £5.17
Using the information above what would be the total cost forecast for 6500 units?

a) £31,000
b) £32,775
c) £24,000
d) £10,000

1.6
South Eastern Railway wants to develop a way of forecasting for the number of
passengers it handles on its railway system; it provides the following information
regarding total costs for two quarters of the year.

Number of passengers Total cost

(P) (TC)
Quarter 1 1,118,000 2,341,600
Quarter 2 982,000 2,178,500

The total cost model for South Eastern Railway for the number of passengers in a quarter
of a year would be?

a) TC = 1,200,000 + 1.2P
b) TC = 1,100,000 + 2.1P
c) TC = 1,000,000 + 1.2P
d) TC = 1,800,000 + 2.1P

5
1.7
Which of the following is the most likely definition for a variable cost?

a) A cost that varies with a measure of activity

b) Expenditure which cannot be economically identified with a specific
saleable cost unit
c) A cost containing both fixed and variable components and thus partly
affected by a change in the level of activity
d) A cost that remains constant within a certain range of production

1.8
A hotel pays cleaners £5 an hour and estimates that it should take 30 minutes to clean a
room but expected idle time would be 20%. Given that 45 rooms were cleaned in a given
day, what would be the estimated cost?

a) £112.50
b) £135.00
c) £140.63
d) £160.00

1.9
Y has set the current budget for operating costs for its delivery vehicles, using the
formula described below. Analysis has shown that the relationship between miles driven
and total monthly vehicle operating costs is described in the following formula:

y = £800 + £0.0002x²
where:
y is the total monthly operating cost of the vehicles, and
x is the number of miles driven each month

The budget for vehicle operating costs needs to be adjusted for expected inflation in
vehicle operating costs of 3%, which is not included in the relationship shown above.

The delivery mileage for September was 4,100 miles, and the total actual vehicle
operating costs for September were £5,000.

The total vehicle operating cost variance for September was closest to

A £713 Adverse
B £737 Adverse
C £777 Adverse
D £838 Adverse

6
1.10

The following extract is taken from the production cost budget of L plc:

Output 2,000 units 3,500 units

Total cost £12,000 £16,200

The budget cost allowance for an output of 4,000 units would be:

A £17,600
B £18,514
C £20,400
D £24,000

1.11

XYZ Ltd is preparing the production budget for the next period. The total costs of
production are a semi-variable cost. The following cost information has been collected in
connection with production:

Volume (units) Cost

4,500 £29,000
6,500 £33,000

The estimated total production costs for a production volume of 5,750 units is nearest to

A £29,200
B £30,000
C £31,500
D £32,500

7
1.12

RF Ltd is about to launch a new product in June 2007. The company has commissioned
some market research to assist in sales forecasting. The resulting research and analysis
established the following equation:

Y = Ax (to the power of 0.6)

Where:

· Y is the cumulative sales units

· A is the sales units in month 1
· x is the month number

June 2007 is Month 1.

Sales in June 2007 will be 1,500 units.

Calculate the forecast sales volume for each of the months June, July and August 2007
and for that three month period in total.

1.13

The budgeted total costs for two levels of output are as shown below:

Output 25,000 units 40,000 units

Total cost £143,500 £194,000

Within this range of output it is known that the variable cost per unit is constant but fixed
costs rise by £10,000 when output exceeds 35,000 units.

Calculate for a budgeted output of 36,000 units:

(i) the variable cost per unit?

(ii) the total fixed costs?

8
1.14

The data in the table below has been extracted from a company’s cost accounting records.
It shows the total costs and the inflation index for the periods in which the costs were
incurred. Cost behaviour patterns are the same in both periods.

Output level Total cost Inflation index

6,000 units $10,500 1.05
8,000 units $13,390 1.03

The variable cost per unit, to the nearest $0.01, at an inflation index of 1.06 is:

A $1.45
B $1.59
C $1.53
D $1.50

1.15

A cost unit is

a) A cost containing both fixed and variable components and thus partly affected by
a change in the level of activity
b) Expenditure which cannot be economically identified with a specific saleable cost
unit
c) Expenditure which can be economically identified with and specifically measured
in respect to a relevant cost object
d) A unit of product or service in relation to which costs are ascertained

1.16

A prime cost is

a) The total cost of making a product

b) The total direct cost of making a product
c) A unit of product or service in relation to which costs are ascertained
d) A cost containing both fixed and variable components and thus partly affected by
a change in the level of activity

9
1.17

Computerised accounting systems use codes for ledger accounting and recording business
transactions. A coding system is helps to:

A Makes reporting easier

B Eliminates the need for books of prime entry
C Allows easing uploading of transactions
D Combines the receivables and payables ledger

1.18

A friend of yours has recently started their own business and has come to you for advice
on their accounting system. They want a system that will help them keep proper
accounting records, be efficient and provide useful information.

Which of the following would you suggest they do to allow the above to happen?

A Use very expensive stationary

B Only deal with cash transactions
C Implement accounting codes in the accounting system
D Use one person to undertake all tasks

1.19

Computerised accounting systems use codes for ledger accounting and recording business
transactions. The most important attribute of accounting codes must be?

A Personal to the user

B It’s concise
C It’s easily understandable
D It’s unique

1.20

The best reason for using accounting codes in an accounting system is?

A To group transactions to generate useful information

B To ensure transactions are listed in a chronological order
C To ensure transactions are recorded accurately
D To group transactions with the same value

10
1.21

Roxy uses the following accounting codes:

Country Codes Products Code

Africa 0100 Hair dryers 0507
Asia 0200 Shampoo 0608
Europe 0300 Conditioner 0907
America 0400 Hair dye 0304

What is the code to use to produce a report showing hair dye sales in America?

A 04000507
B 04000304
C 04000608
D 04000907

1.22

Which one of the following would not be considered one of the roles of a financial
accountant?

A Preparation of the statement of financial position

B Comparing actual results against budget
C Reconciliation of bank accounts
D Recording of financial transactions

1.23

Which of the following would be a role of the financial accountant?

A Preparing forecast budgets for departments

B Monitoring actual results to expected results
C Applying accounting standards to transactions
D Producing reports for internal management

11
1.24

Individuals and organisations have different needs for financial information.

Which of the following users will have a need for the financial performance and worth of
an organisation?

A Customers
B Shareholders
C Suppliers
D Managers

1.25

Individuals and organisations have different needs for financial information.

Which of the following users will have a need for the ability of the company to repay its
debts on time?

A Customers
B Shareholders
C Suppliers
D Managers

1.26

Which one of the following is an external user of an organisation’s financial information?

A Directors
B Managers
C Shareholders
D Employees

1.27

Which one of the following is an internal user of an organisation’s financial information?

A Customer
B Bank
C Shareholders
D Employees

12
1.28

Which one of the following applies to the preparation of management accounts

A For external purposes only

B Prepared using external accounting conventions
C Prepared to assist in decision making for departments
D Prepared to comply with set formats stipulated by accounting standards

1.29

Which one of the following would not be the role of a financial accountant?

A Preparing budgets for the departments

B Reconciliation of the bank accounts
C Doing the payroll
D Preparing the statement of comprehensive income

1.30

The reasons for keeping accounting records are: (Tick 3 boxes only)

Shows how well the company has performed

To keep the bank satisfied
Shows how well the company is using its assets to generate revenue
To assist in financial statement preparation
To help the company buy more business for the future

1.31

Which of the following are characteristics of financial accounting: (Tick 3 boxes only)

Historical in nature
Forward looking
Show the profit or loss for the business
Used for decision making purposes
Prepared for external users

13
1.32

Which of the following are characteristics of management accounting: (Tick 3 boxes

only)

Historical in nature
Forward looking
Reports on variances against budget
Used for decision making purposes
Prepared for external users

1.33

Which one of the following is not an external user of financial statements?

A Shareholder
B Customer
C Director
D Auditor

1.34

Which of the following are characteristics of good information: (Tick 3 boxes only)

Timely
Accurate
Must be produced in PowerPoint
Easily understood
Must have graphs and drawings

14
1.35

The following information relates to an accountancy practice

Number of consultations by audit managers 1115 1345

Total cost of all consultations (£) 316,725 320,175

The variable cost per consultation would be?

a) £15.00
b) £223.05
c) £238.05
d) £284.06

1.36

The following budgeted Financial information exists for a company ;

Units Cost
500 $14000
800 $16400
1200 $19600

The budget cost allowance for the production of 1000 units would be?

1.37

Within a company one purchase ledger clerk needs to be recruited for every 50 supplier
accounts that need management and administration. Which one of the following types of
cost would this be?

a) Fixed cost
b) Step cost
c) Variable cost
d) Mixed cost

15
1.38

Which one of the following types of cost would be factory rent and rates?

a) Indirect labour cost

b) Indirect expenses
c) Direct expenses
d) Prime cost

1.39

Within a relevant range of output, the fixed cost per unit of a product will normally

a) Increase when total output increases

b) Decrease when total output increases
c) Remain constant when total output increases
d) Remain constant when total output decreases

1.40

The following information exists in a machining department;

Machine hours 44000 54000

Total overhead $186000 $206000

The variable overhead absorption rate would be?

1.41

The following information exists about a certain type of cost within a company;

Units 200 400 800

Cost per unit $50.00 $25.00 $12.50

Which one of the following types of cost would this be?

a) Fixed cost
b) Step cost
c) Variable cost
d) Mixed cost

16
1.42

Within a relevant range of output, as output increases which one of the following would
be correct?

a) Total cost would decrease

b) Total fixed costs will remain constant
c) Variable cost per unit would increase
d) Fixed cost per unit would increase

1.43

The wages of an assembly worker within a car factory would be best classified as?

a) A direct labour cost

b) A direct overhead expense
c) An indirect expense
d) An indirect labour expense

1.44

The following information exists about a car tyre garage

Number of tyre machines 6

Number of tyres used 700
Number of customers 594

Garage supervisor salary £2,400

Garage wages for tyre fitting staff £36,990
Depreciation (per tyre machine) £5,000
Other site costs £5,700

Average cost per tyre £25

The total garage cost per customer for the above period (to the nearest £0.01) was?

17
1.45

When output levels increase which one of the following would be more likely considered
false?

a) The total variable cost will rise

b) The variable cost per unit falls
c) The total fixed cost will remain the same
d) The fixed cost per unit falls

1.46

Assembly workers are paid an hourly wage and a bonus for each unit produced. What
type of cost would this be?

a) Variable cost
b) Fixed cost
c) Semi-variable cost
d) Stepped fixed cost

1.47

The following budgeted information exists about a company;

Output Costs
(units) (£)
1200 34,000
1800 46,000

It is forecast that fixed cost will increase by 20% and the variable cost will decrease by
10% in the next year.

The forecast budgeted cost next year for an output of 1500 units would be?

1.48

When output levels increase which one of the following is more likely considered true?

a) The variable cost per unit rises

b) The total variable cost will rise
c) The variable cost will become curvilinear
d) The total cost per unit will rise

18
1.49

Within a relevant range of output, as output increases which one of the following would
be correct about fixed cost?

a) Total fixed costs will rise

b) Total fixed costs will remain constant
c) Total fixed costs will fall
d) The fixed cost per unit would increase

1.50

What type of cost is best represented by the diagram above?

a) Economic cost
b) Fixed cost
c) Variable cost
d) Semi-variable cost

19
 Questions for chapter 2 – The context of management accounting

2.1

Which one of the following is not a main role of the management accountant?

a) Design, implement and manage integrated information systems

b) Design and implement corporate governance, including risk management
c) Ensuring delivery of optimum efficiency and effectiveness in the use of resources
d) To prepare statutory company accounts

2.2

Which one is a characteristic of strategic information?

a) Relevant to long-term decision making

b) Provided routinely to junior managers to keep them informed
c) Relevant to the short term
d) Generally based around quantitative measures

2.3 Which one of the following is an example of operational level information?

a) A variance analysis report

b) A business forecast
c) An investment appraisal report
d) A work schedule for the next day

2.4

Which of the following are characteristics of good information: (Tick 3 boxes only)

Timely
Accurate
Must be produced in PowerPoint
Easily understood
Must have graphs and drawings

20
2.5
Which one of the following is an external source of management information?

a) Production targets and records

b) Time records about production staff
c) Industry trends and statistics
d) Details about production supervisor bonus and salaries

2.6

Which one of the following is an internal source of management information?

a) Market share data about the industry

b) Day to day instructions for assembly workers
c) Supplier statements and delivery notes
d) Customer feedback surveys

2.7

Which one is a characteristic of tactical information?

a) Relevant to long-term decision making

b) Provided routinely to junior managers to keep them informed
c) Focus on planning and controlling internal activities
d) Relevant to the immediate to short-term

2.8

Which one of the following is not a main role of the management accountant?

a) Design, implement and manage (automated) integrated information systems

b) Work as an analyst; consultant; relationship, project and change manager in
support of the business
c) Producing business plans, forecasts and budgeting information as appropriate
d) Publish financial accounting information for external users

2.9 Which one of the following is an example of strategic level information?

a) A variance analysis report

b) A business forecast
c) An investment appraisal report
d) A work schedule for the next day

21
2.10 Which one of the following is an example of tactical level information?

a) Time sheets submitted by assembly staff

b) A business forecast
c) An investment appraisal report
d) A work schedule for the next day

2.11

Which one is a characteristic of operational information?

a) Concerned with day to day instructions

b) Relevant to long-term decision making

c) Highly complex in nature

d) Concerned with efficient and effective deployment of resources

2.12

Which one of the following is not a characteristic of good information?

a) Accurate

b) Complete

c) Relevant

d) Historical

2.13

Which one of the following is not a purpose of management information?

a) Planning
b) Decision making
c) Controlling
d) Researching

22
2.14

Which of the following is not a level of decision making within an organisation?

a) Strategic
b) Operational
c) Managers
d) Tactical

23
 Questions for chapter 3 – Absorbing fixed production overhead

3.1
Fixed production overhead is more likely to be under absorbed when?

a) The actual overhead incurred is lower than the amount of overhead absorbed
b) The actual overhead incurred is higher than the amount of overhead absorbed
c) Actual output is higher than budgeted output for a period
d) Budgeted overhead is lower than the actual overhead absorbed

3.2
Which of the following would be best apportioned to cost centres on the basis of the
number of employees?

a) Insurance of machinery
b) Rent and rates of the factory
c) Factory canteen
d) Supervision salary overhead within the assembly department

3.3
A plc operates an absorption costing system. Details about the budget cost, actual cost
and activity levels are as follows:

Budget Actual
Production (units) 12000 12300
Production overhead (£) 120,000 128,000

The under or over recovery of these costs for the above period was

a) Under absorption £8,000

b) Over absorption £8,000
c) Over absorption £5,000
d) Under absorption £5,000

3.4
When using absorption costing, under-absorption of overhead occurs when

a) Actual overhead is more than budgeted overhead for a period

b) Budgeted overhead is less than absorbed overhead for a period
c) Absorbed overhead is less than actual overhead for a period
d) Absorbed overhead is more than budgeted overhead for a period

24
3.5
The budgeted overhead absorption rate for variable production overhead in a department
was £4.50 per direct labour hour and for the fixed production overhead £2.50 per direct
labour hour. In the period actual direct labour hours worked were 1000 less than budget.
If actual production overhead were as expected for variable and fixed overhead, the total
under-absorbed production overhead for the period would have been:

a) £2,500
b) £7,000
c) £nil
d) £4,500

3.6

An accountancy practice recovers its fixed salaries of audit managers, by charging a fixed
amount to a client on the basis of the number of hours of consultation provided.
Budgeted salaries for the period were £300,000 and actual salaries and consulting hours
performed for the period were £320,000 and 16,000 hours respectively. There was an
over absorption of salary overhead for the period of £24,000.

The overhead absorption rate per consultancy hour would have been?

a) £15.00
b) £18.75
c) £20.00
d) £21.50

3.7
Overheads will always be over-absorbed when

a) actual output is higher than budgeted output.

b) actual overheads incurred are higher than the amount absorbed.
c) actual overheads incurred are lower than the amount absorbed.
d) budgeted overheads are lower than the overheads absorbed.

25
3.8

X Ltd has two production departments, Assembly and Finishing, and two service
departments, Stores and Maintenance.

Stores provides the following service to the production departments: 60% to Assembly
and 40% to Finishing.

Maintenance provides the following service to the production and service departments:
40% to Assembly, 45% to Finishing and 15% to Stores.

The budgeted information for the year is as follows:

Budgeted fixed production overheads

Assembly £100,000
Finishing £150,000
Stores £ 50,000
Maintenance £ 40,000
Budgeted output 100,000 units

At the end of the year after apportioning the service department overheads, the total fixed
production overheads debited to the Assembly department’s fixed production overhead
control account were £180,000.

The actual output achieved was 120,000 units.

Calculate the under/over absorption of fixed production overhead for the

Assembly department?

3.9

A company operates a standard absorption costing system. The budgeted fixed

production overheads for the company for the latest year were £330,000 and budgeted
output was 220,000 units. At the end of the company’s financial year the total of the fixed
production overheads debited to the Fixed Production Overhead Control Account was
£260,000 and the actual output achieved was 200,000 units.

The under / over absorption of overheads was

A £40,000 over absorbed

B £40,000 under absorbed
C £70,000 over absorbed
D £70,000 under absorbed

26
3.10

A company operates a standard absorption costing system. The following fixed

production overhead data are available for the latest period:

Budgeted Output 300,000 units

Budgeted Fixed Production Overhead £1,500,000
Actual Fixed Production Overhead £1,950,000
Fixed Production Overhead Total Variance £150,000 adverse

The actual level of production for the period was nearest to

A 277,000 units
B 324,000 units
C 360,000 units
D 420,000 units

3.11

T Ltd uses a standard labour hour rate to charge its overheads to its clients’ work.
Duringthe last annual reporting period production overheads were under-absorbed by
£19,250. The anticipated standard labour hours for the period were 38,000 hours while
the standard hours actually charged to clients were 38,500. The actual production
overheadsincurred in the period were £481,250.

The budgeted production overheads for the period were

A £456,000
B £462,000
C £475,000
D None of the above.

3.12

Overheads will always be over-absorbed when

A actual output is higher than budgeted output.

B actual overheads incurred are higher than the amount absorbed.
C actual overheads incurred are lower than the amount absorbed.
D budgeted overheads are lower than the overheads absorbed.

27
3.13

Fixed production overhead will always be under-absorbed when

A actual output is lower than budgeted output.

B actual overheads incurred are lower than budgeted overheads.
C overheads absorbed are lower than those budgeted.
D overheads absorbed are lower than those incurred.

3.14

A company uses a standard absorption costing system. The fixed overhead absorption
rate is based on labour hours.

Extracts from the company’s records for last year were as follows:

Budget Actual
Fixed production overhead $450,000 $475,000
Output 50,000 units 60,000 units
Labour hours 900,000 930,000

The under- or over-absorbed fixed production overheads for the year were

A $10,000 under-absorbed
B $10,000 over-absorbed
C $15,000 over-absorbed
D $65,000 over-absorbed

28
3.15

The following budgeted and actual financial information exits for an assembly
department.
Budget Actual

Production overhead $111,000 $116,897

Direct labour hours 18500 19353

The overhead absorption rate per direct labour hour would be?

3.16

The following detains exist for job number 897

$
Direct materials 4000
Direct labour:
Budgeted labour time (100 hours) 2000
Overtime incurred 900
Production overhead charged 5000
Total 11900

The budgeted direct labour hours for the period was 200000 hours and budgeted
production overhead $10 million, production overhead is currently absorbed on a direct
labour hour basis.

If production overhead had been charged based on the percentage of budgeted direct
labour cost, then the revised cost of the job would have been?

a) $5000
b) $11,900
c) $14,150
d) $17,250

29
3.17

The following budgeted information exists about four costs centres for a company;

Cost centre Assembly Machining Inspection Maintenance

Production overhead allocated ($) 250,000 350,000 80,000 40,000

The assembly and machining departments are production cost centres

The inspection and maintenance departments are service cost centres

Work completed for other cost centres

Cost centre Assembly Machining Inspection Maintenance

Inspection 50% 30% - 20%

Maintenance 40% 30% 30% -

When all budgeted production overhead has been reapportioned from service cost centres
to production cost centres, the amount of production overhead finally allocated to the
machining department (to the nearest $) would be?

a) 322,767
b) 350,000
c) 397,234
d) 470,000

3.18
Machining Assembly Finishing

Budgeted production overhead ($) 35784 28596 18123

Budgeted machine hours 17892
Budgeted labour hours 4473 19064 12082

To make one unit requires 5 hours of machine time in the machining department and 2
labour hours within each of the assembly and finishing departments.

The overhead absorption rate per unit is?

30
3.19
A company uses an absorption costing system and calculates its overhead absorption rate
based on machine hours.

Budgeted Actual

Production overhead (£) 245,000 249,000

Machine hours 122,500 119,200

Production overhead for the period above would have been?

a) Over absorbed by £10,600

b) Under absorbed by £10,600
c) Under absorbed by £4,000
d) Over absorbed by £4,000

3.20
When operating a costing system, which one of the following would best explain the
process of overhead allocation?

a) Sharing costs between employees

b) Sharing costs between cost centres
c) Sharing costs between cost units
d) Specifically attributing a cost to a particular cost centre

3.21
When common costs are shared amongst cost centres, this process is known as?

a) Overhead budgeting
b) Overhead absorption
c) Overhead allocation
d) Overhead apportionment

3.22
Which one of the following about overhead absorption rates is true?

a) They are predetermined in advance for a period of time

b) They are based on actual information for a period of time
c) They are calculated before the process of overhead allocation and apportionment
d) They always are an accurate reflection of actual performance for a period of time

31
3.23

A company uses an absorption costing system using labour hours as its basis of charging
production overhead for the period. Actual labour hours for the financial period were
11500 hours and this was 500 hours above budgeted labour hours for the period. Actual
production overhead for the period was £134,500 and there was an over absorption of
production overhead the period of £3,500.

What is budgeted level of production overhead for the period?

3.24

Which ONE of the following is less likely to lead to an over absorption of fixed
production overhead for a period?

a) The production activity was higher than budget and fixed production overhead
expenditure lower than budget.
b) The production activity was lower than budget and fixed production overhead
expenditure higher than budget.
c) The production activity was the same as the budget and fixed production overhead
expenditure lower than budget.
d) The production activity was higher than budget and fixed production overhead
expenditure the same as the budget.

3.25

Company Z has the following information for its budgeted fixed production overhead?

Machining Finishing Storage

Budgeted Fixed Production Overhead £13,600 £59,700 £44,800

Machine Hours 10000 - -

Labour Hours 2000 30000 40000

· 4 machine hours each cost unit are required for machining

· 3 labour hours each cost unit are required for finishing
· 3 labour hours each cost unit are required for storage

What would be the fixed overhead absorption rate per unit for this period?

32
 Questions for chapter 4 – Absorption and marginal costing

4.1

A company has budgeted to produce 5000 units of chemical X for a period. The budget
includes 400 units of opening inventory and 1000 units of closing inventory. The
following budgeted information is also provided.

Chemical X

Direct cost per unit £5.00

Variable overhead per unit £3.00
Fixed production overhead £30,000

The budgeted profit of chemical X for the period, using absorption costing would be?

a) £3,600 greater than it would be using marginal costing

b) £3,600 lower than it would be using marginal costing
c) £8,400 greater than it would be using marginal costing
d) £8,400 lower than it would be using marginal costing

4.2

During a financial period there was no opening inventory. Sales were 1750 units and the
level of production 2000 units. The following information is also provided for the
financial period.
£
Direct material £30,000
Direct labour £20,000
Variable production overhead £10,000
Fixed production overhead £50,000
Variable selling and distribution expenses £15,000
Fixed selling and distribution expenses £20,000

The valuation of closing inventory using a marginal costing approach would be?

a) £7,500
b) £9,500
c) £13,750
d) £18,250

33
The following information relates to MCQ 4.3 and 4.4 below;

Details for product A are as follows

Selling price 40.00

Direct material (7.50)
Direct labour (6.50)
Variable overhead (2.00)
Fixed overhead absorption rate (5.00)
Profit 19.00

Budgeted production for the month was 10000 units, but the company only produced
9200 units, incurring fixed overhead costs of £56,750. Sales for the period were 9000
units.

4.3
The marginal costing profit for the above period is

a) £159,250
b) £160,250
c) £170,250
d) £171,250
4.4
The absorption costing profit for the above period is

a) £159,250
b) £160,250
c) £170,250
d) £171,250

4.5

In a period a company had opening stock of 7000 units and closing stock of 13000 units.
Profits based on marginal costing were £567,000 and for absorption costing £627,000.

If budgeted fixed production overhead for the period was £100,000, the budgeted level of
activity in units would have been?

a) 8,000 units
b) 9,000 units
c) 10,000 units
d) 11,000 units

34
4.6

If the level of stock decreases during a period, assuming the overhead absorption rate
remains unchanged:

a) Absorption costing profits will be lower and closing stock valuation higher than
under marginal costing
b) Absorption costing profits will be higher and closing stock valuation lower than
under marginal costing
c) Absorption costing profits will be lower and closing stock valuation lower than
under marginal costing
d) Absorption costing profits will be higher and closing stock valuation higher than
under marginal costing

4.7

Summary results for Y Limited for March are shown below.

£000 Units
Sales revenue 820
Variable production costs 300
Variable selling costs 105
Fixed production costs 180
Fixed selling costs 110
Production in March 1,000
Opening inventory 0
Closing inventory 150

Using marginal costing, the profit for March was

A £170,000
B £185,750
C £197,000
D £229,250

35
4.8

The following data relates to a manufacturing company. At the beginning of August there
was no inventory. During August 2,000 units of product X were produced, but only 1,750
units were sold. The financial data for product X for August were as follow:

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Variable selling costs 6,000
Fixed selling costs 19,300
Total costs for X for August 109,800

The value of inventory of X at 31 August using a marginal costing approach is

A £6,575
B £7,750
C £8,500
D £10,562

4.9

A company has a budget to produce 5,000 units of product B in December. The budget
for December shows that for Product B the opening inventory will be 400 units and the
closing inventory will be 900 units. The monthly budgeted production cost data for
product B for December is as follows:

Variable direct costs per unit £6.00

Variable production overhead costs per unit £3.50
Total fixed production overhead costs £29,500

The company absorbs overheads on the basis of the budgeted number of units produced.

The budgeted profit for product B for December, using absorption costing, is

A £2,950 lower than it would be using marginal costing.

B £2,950 greater than it would be using marginal costing.
C £4,700 lower than it would be using marginal costing.
D £4,700 greater than it would be using marginal costing.

36
4.10

WTD Ltd produces a single product. The management currently uses marginal costing
but is considering using absorption costing in the future.

The budgeted fixed production overheads for the period are £500,000. The budgeted
output for the period is 2,000 units. There were 800 units of opening inventory at the
beginning of the period and 500 units of closing inventory at the end of the period.

If absorption costing principles were applied, the profit for the period compared to the
marginal costing profit would be

A £75,000 higher.
B £75,000 lower.
C £125,000 higher.
D £125,000 lower.

4.11

A manufacturing company recorded the following costs in October for Product X:

$
Direct materials 20,000
Direct labour 6,300
Variable production overhead 4,700
Fixed production overhead 19,750
Variable selling costs 4,500
Fixed distribution costs 16,800
Total costs incurred for Product X 72,050

During October 4,000 units of Product X were produced but only 3,600 units were sold.
At the beginning of October there was no inventory.

The value of the inventory of Product X at the end of October using marginal costing
was:

A $3,080
B $3,100
C $3,550
D $5,075

37
4.12

If inventory levels have increased during the period, the profit calculated using marginal
costing when compared with that calculated using absorption costing will be

A higher.
B lower.
C equal.
D impossible to answer without further information.

38
 Questions for chapter 5 – Specific order costing

5.1
Which of the following are characteristics of contract costing?

i Identical or homogenous products produced

ii Product made is unique or specific to the customer’s request
iii Production possible and normally complete within a single accounting period

a) i only
b) ii only
c) ii and iii only
d) All of the above

5.2
Which of the following are characteristics of batch costing?

i Identical or homogenous products produced

ii Product made is unique or specific to the customer’s request
iii Production possible and normally complete within a single accounting period

a) i only
b) ii only
c) ii and iii only
d) All of the above

5.3
Contract price £2.0m
Value of work certified to date £1.8m
Cash received £0.9m
Costs incurred to date £1.4m
Cost of work to complete the contract £0.1m

Using the value of work certified to date compared with the contract price, what would be
the amount of profit recognised if the contract was incomplete at the end of a financial
year?

a) £0.20m
b) £0.25m
c) £0.33m
d) £0.50m

39
5.4
The following information is available with regard to a contract for Z Plc

Contract price £2.0m

Costs incurred to date £1.0m
Cost of work to complete the contract £0.5m

The amount of profit recognised at the end of the financial year, if the contract were
incomplete would be?

a) £0.20m
b) £0.25m
c) £0.33m
d) £0.50m

5.5
The following information is available with regard to a contract for Y Plc

Contract price £2.0m

Value of work certified to date £1.5m
Costs incurred to date £1.0m
Cost of work to complete the contract £0.5m

The amount of profit recognised at the end of the financial year, if based on the
proportion of the contract price would be?

a) £0.200m
b) £0.375m
c) £0.330m
d) £0.500m

5.6
For a job which has a cost estimated of £400, a company needs to ensure they have a
selling price that will earn a profit of 20% of sales.

What would be the selling price charged for the job?

a) £400
b) £450
c) £480
d) £500

40
5.7

The following details exist about job number 123;

Assembly Packaging
Direct materials $1000 $400
Direct labour hours 20 hours 30 hours
Direct labour rate per hour $10 $7
Production overhead per direct labour hour $5 $5
Administration 20% of production cost
Profit margin 50% of selling price

The selling price of job 123 would be?

5.8

The total production cost for one unit is £20. To achieve a profit margin of 40% of sales,
the selling price would be?

a) £26.67
b) £28.00
c) £32.00
d) £33.33

5.9

A company runs a job costing system. Direct material and labour of $2,700 and $1,200
have been budgeted and charged to job number 349 respectively. Budgeted production
overhead for the period was $650,000 and actual production overhead $625,000.
Budgeted direct labour hours were 50,000 at budgeted total cost of $300,000.

The production overhead to be charged to job number 349 would be?

41
5.10

A company operates an absorption costing system whereby prices are charged based on
the full cost of a product made. Production overhead is absorbed using an overhead
absorption rate of £5 per machine hour. Product X uses 2 machine hours to make one unit
of product.

The direct cost of making product X is £25 per unit. The company adds 20% to total
production cost in order to cover non-production expenses. If the company needed to
earn a 25% sales margin from the sale of product X.

What would be the selling price for product A?

5.11

To achieve a profit margin of 50% of sales (profit as a percentage of sales).

The mark-up (profit as a percentage of cost) would be?

5.12
Division X target return on investment (ROI) is 12%. It also has fixed costs of £400,000
and a variable cost per unit of £5. The net assets of the division forecast for the following
period will be £1.5m and the number of units forecast to be sold is 30,000 units.

The price for each unit sold in the next period would be?

5.13

The following data relates to a manufacturing company. At the beginning of August there
was no inventory. During August 2,000 units of product X were produced, but only 1,750
units were sold. The financial data for product X for August were as follow:

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Total costs for X for August 84,500

To achieve a profit margin of 40% of sales (profit as a percentage of sales) and

using marginal cost pricing, the price for product X (to the nearest 2 decimals)
would be?

42
5.14

The following data relates to a manufacturing company. At the beginning of August there
was no inventory. During August 2,000 units of product X were produced, but only 1,750
units were sold. The financial data for product X for August were as follow:

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Total costs for X for August 84,500

To achieve a profit margin of 40% of sales (profit as a percentage of sales) and

using full cost pricing, the price for product X (to the nearest 2 decimals) would be?

5.15

The following details exist about job number 113;

· Direct Material £35,000

· Labour 3400 paid at £7.50 per hour
· Variable overhead £4,500
· Fixed production overhead absorption rate £5 per labour hour
· 20% of production cost is added for administration before applying a mark-up in
order to arrive at a price for the job.
· Profit on the job must be 50% of sales price

The selling price of job 113 would be?

43
 Questions for chapter 6 – Service costing

6.1

Which of the following are characteristics of service costing?

i Identical or homogenous product produced

ii The product cannot be stored
iii Production possible and normally complete within a single accounting period

a) i only
b) ii only
c) ii and iii only
d) All of the above

6.2

An accountancy practice recovers its fixed salaries of audit managers, by charging a fixed
amount to a client on the basis of the number of hours of consultation provided.
Budgeted salaries for the period were £300,000 and actual salaries and consulting hours
performed for the period were £320,000 and 16,000 hours respectively. There was an
over absorption of salary overhead for the period of £24,000.

The overhead absorption rate per consultancy hour would have been?

a) £15.00
b) £18.75
c) £20.00
d) £21.50

6.3
A college offers discounts of 10% to students who pay on enrolment and 50% of
customers pay on enrolment. The extra sales needed to increase cash receipts by £20,000
would be?

a) £20,000
b) £21,053
c) £22,000
d) £44,000

44
6.4

There are 400 beds in a hospital for in-patients, hospital wards are expected to be utilised
on average for 90% of the time. A hospital has budgeted a total overhead cost for in-
patient catering of £1.314 million within the next year.

Assuming a 365 day a year, what would be the overhead absorption rate for
catering cost per bed per overnight stay?

6.5

Which one of the following would be an appropriate composite cost unit for a road
transport business?

a) Cost per tonne per mile

b) Cost per tonne
c) Cost per delivery
d) Cost per driver

45
 Questions for chapter 7 – Decision making

7.1
A five year project has a net present value of $160,000 when it is discounted at 12%. The
project includes an annual cash outflow of $50,000 for each of the five years. No tax is
payable on projects of this type.

The percentage increase in the value of this annual cash outflow that would make the
project no longer financially viable is closest to

A 64%
B 89%
C 113%
D 156%

7.2
S plc produces and sells three products, X, Y and Z. It has contracts to supply products X
and Y, which will utilise all of the specific materials that are available to make these two
products during the next period. The revenue these contracts will generate and the
contribution to sales (c/s) ratios of products X and Y are as follows:

Product X Product Y
Revenue £10 million £20 million
C/S ratio 15% 10%

Product Z has a c/s ratio of 25%.

The total fixed costs of S plc are £5.5 million during the next period and management
have budgeted to earn a profit of £1 million.

Calculate the revenue that needs to be generated by Product Z for S plc to

achieve the budgeted profit.

7.3
A company has budgeted break-even sales revenue of £800,000 and fixed costs of
£320,000 for the next period.

The sales revenue needed to achieve a profit of £50,000 in the period would be

A £850,000
B £925,000
C £1,120,000
D £1,200,000

46
7.4
A company produces three products D, E and F. The statement below shows the selling
price and product costs per unit for each product, based on a traditional absorption
costing system.
Product D Product E Product F
$ $ $

Selling price per unit 32 28 22

Variable costs per unit

Direct material 10 8 6
Direct labour 6 4 4
Variable overhead 4 2 2
Fixed cost per unit 9 6 6
Total product cost 29 20 18
Profit per unit 3 8 4

Additional information:
Demand per period (units) 3,000 4,000 5,000
Time in Process A (minutes) 20 25 15

Each of the products is produced using Process A which has a maximum capacity of
2,500 hours per period. If a traditional contribution approach is used, the ranking of
products, in order of priority, for the profit maximising product mix will be:

A D, E, F
B E, D, F
C F, D, E
D D, F, E

47
7.5

The following details relate to three services provided by JHN.

Service: J H N
$ $ $
Fee charged to customers for each unit of service 84 122 145
Unit service costs
Direct materials 12 23 22
Direct labour 15 20 25
Variable overhead 12 16 20
Fixed overhead 20 42 40

All three services use the same type of direct labour which is paid at $30 per hour. In a
period when the availability of the direct labour is limited, the most and least profitable
use of the direct labour are:

Most profitable Least profitable

A H J
B H N
C N J
D N H

7.6

If the budgeted fixed costs increase, the gradient of the line plotted on the budgeted
Profit/Volume (P/V) chart will

A increase.
B decrease.
C not change.
D become curvi-linear.

48
7.7

The budgeted profit statement for a company, with all figures expressed as percentages of
revenue, is as follows:

%
Revenue 100
Variable costs 30
Fixed costs 22
Profit 48

After the formulation of the above budget it has now been realised that the sales volume
will only be 60% of that originally forecast. The revised profit, expressed as a percentage
of the revised revenue will be:

A 20%
B 33.3%
C 60%
D 80%

7.8

The following details relate to ready meals that are prepared by a food processing
company:
Ready meal K L M
$/meal $/meal $/meal
Selling price 5 3 4.40
Ingredients 2 1 1.30
Variable conversion costs 1.60 0.80 1.85
Fixed conversion costs 0·50 0·30 0·60
Profit 0·90 0·90 0·65

Oven time (minutes per ready meal) 10 4 8

Each of the meals is prepared using a series of processes, one of which involves cooking
the ingredients in a large oven. The availability of cooking time in the oven is limited
and, because each of the meals requires cooking at a different oven temperature, it is not
possible to cook more than one of the meals in the oven at the same time. The fixed
conversion costs are general fixed costs that are not specific to any type of ready meal.

Rank in terms of the profitability of the manufacture of these meals?

49
7.9

A bakery produces three different sized fruit pies for sale in its shops. The pies all use the
same basic ingredients. Details of the selling prices and unit costs of each pie are as
follows:

Small Medium Large

$ per pie $ per pie $ per pie
Selling price 3.00 5.00 9.00

Ingredients 1.80 2.40 4.60

Direct labour 0.40 0.50 0.60
Variable overhead 0.30 0.50 0.80

Weekly demand (pies) 200 500 300

Fruit (kgs per pie) 0.2 0.3 0.6

The fruit used in making the pies is imported and the bakery has been told that the
amount of fruit that they will be able to buy for next week is limited to 300 kgs. The
bakery has established its good name by baking its pies daily using fresh fruit, so it is not
possible to buy the fruit in advance.

Determine the mix of pies to be made and sold in order to maximise

the bakery’s contribution for next week?

7.10

A company provides a number of different services to its customers from a single office.
The fixed costs of the office, including staff costs, are absorbed into the company’s
service costs using an absorption rate of $25 per consulting hour based on a budgeted
activity level of 100,000 hours each period.

Fee income and variable costs are different depending on the services provided, but the
average contribution to sales ratio is 35%. The breakeven fee income each period is
closest to:

A $1,400,000
B $11,500,000
C $875,000
D $7,143,000

50
7.11

A company manufactures three products. Each of these products use the same type of
material but in different quantities. The unit selling prices, cost and profit details are as
follows:
Product X Y Z
$/unit $/unit $/unit

Selling price 23 26 28

Direct materials 6 8 6
Direct labour 8 6 8
Variable overhead 2 3 3
Fixed overhead 4 5 6

Profit 3 4 5

The direct material used on all three products costs $10 per kg. The material available is
expected to be limited to 600 kgs for the next accounting period. The maximum demand
for each of the products during the next accounting period is expected to be as follows:

X 240 units Y 600 units Z 400 units

No inventories of finished products are held.

Calculate the optimum product mix for the next accounting period?

51
7.12
A company manufactures three products: W, X and Y. The products use a series of
different machines, but there is a common machine that is a bottleneck.
The standard selling price and standard cost per unit for each product for the next period
are as follows:
W X Y
£ £ £
Selling price 180 150 150

Cost:
Direct material 41 20 30
Direct labour 30 20 50
Variable production overheads 24 16 20
Fixed production overheads 36 24 30
Profit 49 70 20
Time (minutes) on bottleneck machine 7 10 7

The company is trying to plan the best use of its resources.

Using a traditional limiting factor approach, the rank order (best first) of the products
would be?

A W, X, Y
B W, Y, X
C X, W, Y
D Y, X, W

7.13
A company’s summary budgeted operating statement is as follows:

$000
Revenue 400
Variable costs 240
Fixed costs 100
Profit 60

Assuming that the sales mix does not change, the percentage increase in sales volume
that would be needed to increase the profit to $100,000 is

A 10%
B 15%
C 25%
D 40%

52
7.14

X Ltd provides a single unit the ‘widget’ to its customers. Analysis for the year shows
that, when the budgeted level of activity was 6000 units with a sales value of £250 a unit,
the margin of safety was 25%. The budgeted contribution to sales ratio of the product
was 60%.

Budgeted fixed costs for the year were?

a) £675,000
b) £775,000
c) £825,000
d) £456,000

7.15

ABC Plc manufactures three products from the same type of material, which is in short
supply. The following budget relates to these products:

Product A Product B Product C

£/unit £/unit £/unit
Sales price 40.00 68.00 80.00
Materials (£5 per kg) 25.00 50.00 25.00
Conversion cost 5.00 1.50 15.00
Profit 10.00 16.50 40.00

Machine Hours
per unit 1.0 0.5 3.0

The conversion costs include general fixed overhead that have been absorbed on the basis
of £4.00 per machine hour. The most and the least profitable use of the raw material for
the above products would be

Most profitable Least Profitable

a) Product B Product A
b) Product A Product C
c) Product C Product A
d) Product C Product B

53
7.16
If both the selling price and variable cost per unit of a product rises by 20%, the
breakeven point would

a) Increase
b) Decrease
c) Remain constant
d) Would be impossible to calculate without further information

7.17
S Ltd sells a single product for £50 a unit. Fixed cost is £450,000 and variable cost is
90% of the selling price. If fixed cost rises by £50,000 and the contribution to sales ratio
changes to 20%, but the sales price remains the same, the breakeven number of units
would decrease by

a) 40000 units
b) 30000 units
c) 20000 units
d) 10000 units

7.18
Pringle Plc makes a single product, which sells for £50 a unit and has a contribution to
sales ratio of 60%. Given that fixed overhead is £400,000, the break even volume (to the
nearest unit) would be?

a) 13333
b) 8000
c) 20000
d) 11667

7.19
Pringle Plc makes a single product, which sells for £50 a unit and has a contribution to
sales ratio of 60%. Given that fixed overhead is £400,000, the volume (to the nearest
unit) to achieve a target profit of £200,000 would be?

a) 13333
b) 8000
c) 20000
d) 11667

54
7.20
Pringle Plc makes a single product, which sells for £50 a unit and has a contribution to
sales ratio of 60%. Given that budgeted fixed overhead is £400,000 and the budgeted
sales units are 25,000, what would be the margin of safety?

a) 13333
b) 8000
c) 20000
d) 11667

7.21
XYZ Plc manufactures three products from the same type of labour, which is in short
supply. The following budget relates to these products:

Product A Product B Product C

£/unit £/unit £/unit
Sales price 40.00 68.00 80.00
Labour (£10 per hr) 25.00 50.00 25.00
Fixed cost 5.00 1.50 15.00
Profit 10.00 16.50 40.00

Labour Hours
per unit 2.5 5.0 2.5

The fixed cost represents indirect production overhead apportioned to each product. The
most and the least profitable use of the labour time for the above products would be?

Most profitable Least Profitable

a) Product B Product A
b) Product A Product C
c) Product C Product A
d) Product C Product B

7.22
Maryland Plc sells units of production for £100, incurring a variable cost per unit of £30
and total fixed cost of £700,000. If the variable cost was to rise by 50% and the fixed
overhead reduced by £100,000, what would be the change in the number of break even
units sold (to the nearest unit)?

a) Break even units would rise by 3333 units

b) Break even units would fall by 3333 units
c) Break even units would rise by 909 units
d) Break even units would fall by 909 units

55
7.23

The following extract is taken from the production budget of J Ltd:

Production (units) 2,500 3,500

Production cost (£) 17,625 19,875

Given a selling price per unit of £5.00, the break even level of sales in units would be?

a) 4364 units
b) 5333 units
c) 7909 units
d) 9999 units

7.24
Which of the following are characteristics of break even charts?

i) The break even point can be identified where the sales line intersects the
fixed cost line
ii) The break even point can be identified where the sales line intersects the
variable cost line
iii) The fixed cost runs horizontal from the vertical axis
iv) The sales line starts from the origin
a) i and iii only
b) i, ii and iii only
c) iii and iv only
d) all of the above

7.25

A company has determined that the net present value of an investment project is $12,304
when using a 10% discount rate and $(3,216) when using a discount rate of 15%.

Calculate the Internal Rate of Return of the project to the nearest 1%.

7.26

A company has a nominal (money) cost of capital of 18% per annum. Inflation is 6%
each year.

Calculate the company’s real cost of capital to the nearest 0.01%.

56
 The following data is to be used when answering questions 7.27 to 7.29 below:

M plc is evaluating three possible investment projects and uses a 10% discount rate to
determine their net present values.

Investment A B C
£000 £000 £000
Initial Investment 400 450 350

Incremental cashflows
Year 1 100 130 50
Year 2 120 130 110
Year 3 140 130 130
Year 4 120 130 150
Year 5* 100 150 100

Net present value 39 55 48

*includes £20,000 residual value for each investment project.

7.27

Calculate the payback period of investment A?

7.28

Calculate the discounted payback period of investment B?

7.29

Calculate the Internal Rate of Return (IRR) of investment C?

7.30

A hospital is considering investing $80,000 in a new computer system that will reduce
the amount of time taken to process a patient’s records when making an appointment. It is
estimated that the cash benefit of the time saved will be $20,000 in the first year, $30,000
in the second year and $50,000 in each of the next three years. At the end of five years
the computer system will be obsolete and will need to be replaced. It is not expected to
have any residual value.

Calculate the payback period to one decimal place of one year?

57
7.31

An investment company is considering the purchase of a commercial building at a cost of

£0.85m. The property would be rented immediately to tenants at an annual rent of
£80,000 payable in arrears in perpetuity.

Calculate the net present value of the investment assuming that the investment
company’s cost of capital is 8% per annum?

The following data is given for sub-questions 7.32 and 7.33 below:

An investment project with no residual value has a net present value of $87,980 when it
is discounted using a cost of capital of 10%. The annual cash flows are as follows:

Year $
0 (200,000)
1 80,000
2 90,000
3 100,000
4 60,000
5 40,000
7.32

Calculate the Accounting Rate of Return of the project using the average
investment value basis.

7.33

Calculate the Internal Rate of Return of the project.

7.34

A company has an annual money cost of capital of 20% and inflation is 8% per annum.

Calculate the company’s annual real percentage cost of capital to 2 decimal places.

58
7.35

A company is considering an investment of $400,000 in new machinery. The machinery

is expected to yield incremental profits over the next five years as follows:

Year Profit ($)

1 175,000
2 225,000
3 340,000
4 165,000
5 125,000

Thereafter, no incremental profits are expected and the machinery will be sold. It is
company policy to depreciate machinery on a straight line basis over the life of the asset.
The machinery is expected to have a value of $50,000 at the end of year 5.

Calculate the payback period of the investment in this machinery to the nearest 0.1
years.

7.36

A company has a real cost of capital of 6.00% per annum and inflation is currently 4.00%
per annum.

The company’s annual money cost of capital is closest to

A 10.24%
B 10.00%
C 2.00%
D 1.92%

59
 The following data is to be used when answering questions 7.37 and 7.38 below:
A company is considering investing in a new machine. The machine will cost $15,000
and has an expected life of five years with a residual value of $3,000. The machine will
increase the operating cashflows of the company as follows:
Year Increase in operating cashflow
$
1 2,500
2 3,000
3 5,500
4 4,000
5 3,000
7.37
Calculate the payback period of the new machine to the nearest 0.1 years.

7.38
Calculate the average Annual Accounting Rate of Return over the lifetime of the
investment in the new machine.

7.39
XYZ Plc manufactures three products from the same type of machine, which is in short
supply. The following budget relates to these products:

Product X Product Y Product Z

£/unit £/unit £/unit
Sales price 20.00 60.00 30.00
Variable cost 15.00 25.00 20.00
Fixed cost 3.00 1.50 5.00
Profit 2.00 33.50 5.00

Machine Hours
per unit 3.0 5.0 4.0

The fixed cost represents indirect production overhead apportioned to each product. The
most and the least profitable use of the machine time for the above products would be?

Most profitable Least Profitable

a) Product Y Product X
b) Product X Product Z
c) Product Z Product X
d) Product Z Product Y

60
7.40
Which one of the following is not a relevant cost?

a) Incremental cost
b) Committed
c) Avoidable cost
d) Differential cost

7.41
Which one of the following is a relevant cost when making a decision in the short-term?

a) Sunk cost
b) Historical cost
c) Notional cost
d) Differential cost

7.42
Which one of the following would not be a characteristic of a relevant cost or revenue?

a) Cash
b) Future
c) Incremental
d) Notional

7.43
A company had sales for a period of £189,780 and fixed costs for the period of £28,324
Its profit/volume ratio was 40%.

The actual profit for the period was?

7.44
A company has $5m in fixed cost, its selling price is budgeted to be $120 and its
budgeted total cost per unit is expected to be $50. If 25% of total cost represents
variable cost.

How many units to earn a profit of $1,000,000 (to the nearest unit)?

61
7.45

When a limiting factor exists for an organisation then profit will be maximised when?

a) The organisation is producing products which earn the highest profit per unit
b) The organisation is producing products which use the least of the limiting factor
c) The organisation is producing products which earn the highest contribution per
unit
d) The organisation is producing products which earn the highest contribution per
limiting factor

7.46

When operating absorption costing systems, which one the following would be the least
likely method to apportion insurance expenses for production machinery between cost
centres?

a) The replacement cost of production machinery

b) Annual machine hours expected for production machinery
c) The historical cost of production machinery
d) The net book value of production machinery

7.47

When the cost of capital is increased which one of the following about NPV and payback
is true?

a) The NPV will increase and the payback period will increase
b) The NPV will decrease and the payback period will increase
c) The NPV will decrease and the payback period will decrease
d) The NPV will decrease and the payback period will remain constant

62
7.48

For investment appraisal decisions the calculation of payback period

a) Considers that all cash flows received over the projects life have equal value
b) Considers that all cash flows received in earlier years have more value
c) Considers that all cash flows received in later years have more value
d) Considers that all cash flows received in earlier years have less value

7.49
According to a profit volume (PV) chart, when fixed cost increases, the point at which
the profit line cuts the horizontal axis of the chart would?

a) Shift to the right

b) Shift to the left
c) Disappear off the chart
d) Remain constant

7.50
Which of the following costs are more relevant for decision making?

a) Historical costs
b) Current costs
c) Notional costs
d) Future costs

7.51

What type of chart is best represented by the diagram above?

a) A break-even chart
b) A profit-volume chart
c) A variable cost chart
d) A semi-variable cost chart

63
7.52
A company has a contribution to sales (C/S) ratio of 40%. Fixed cost estimated for the
period is $100,000.

For the company to earn a profit of $250,000, its sales revenue would be?

7.53
The following information exists about a project:

· NPV at 10% +$8,900

· NPV at 15% - $1,600

What would be the internal rate of return for the project (to 1 decimal place)?

7.54
A company in the next period needs to make 1000 units of products A and 3000 units of
product B and C. All three products are made using the same machines, machine
capacity next period will be a maximum of 20000 hours.

A B C
Internal if product made in house ($) 10 15 5
Machine hours if made in house 5 5 7
Market price if purchased from a supplier ($) 20 32 9
In order to minimise internal cost how many units of product C should be purchased from
an external supplier?

a) None
b) 1167 units
c) 2800 units
d) 3000 units

7.55
When the cost of capital is decreased which one of the following about NPV, IRR and
payback is true?

a) The NPV will increase, the payback period will increase and IRR will increase
b) The NPV will decrease, the payback period will increase and IRR will decrease
c) The NPV will increase, the payback period will decrease and IRR will increase
d) The NPV will increase, payback will remain constant and IRR will remain
constant

64
 7.56

X
What type of chart is best represented by the diagram above?
a) A break-even chart
b) A profit-volume chart
c) A variable cost chart
d) A semi-variable cost chart

7.57
According to a profit volume (PV) chart, when selling price per unit increases, the point
at which the profit line cuts the horizontal axis of the chart would?

a) Shift to the right

b) Shift to the left
c) Disappear off the chart
d) Remain constant on the same point

7.58
According to a profit volume (PV) chart, when selling price per unit increases, the point
at which the profit line intersects the vertical axis of the chart would?

a) Shift to the right

b) Shift to the left
c) Disappear off the chart
d) Remain on the same point

7.59
According to a profit volume (PV) chart, when fixed cost decreases, the point at which
the profit line intersects the vertical axis of the chart would?

a) Shift upwards
b) Shift downwards
c) Disappear off the chart
d) Remain on the same point

65
7.60

A company has the following budgeted profit for the period:

£ £

Sales revenue 250000

Less:

Direct Materials & Labour 30000

Variable Production Overhead 10000

Fixed Production Overhead 20000

60000

Gross Profit 190000

Less

Variable Sales and Distribution Costs 40000

Fixed Sales and Distribution Costs 50000

90000

Net Profit 100000

What is the margin of safety (in units) if budgeted output for the period is 85000 units?

66
 Questions for chapter 8 – Manufacturing accounts

8.1

The following information is relevant for a manufacturing company:

Inventory as 1 st April 20X5 £

Raw materials 20,000
Work in progress 25,000
Finished goods 22,000

Inventory as at 31st March 20X6

Raw materials 30,000
Work in progress 26,000
Finished goods 31,000

Wages costs
Direct factory labour 105,000
Factory supervisors 60,000

Returns inwards 2,000

Returns outwards 5,000
Carriage inwards 8,000
Direct expenses 10,000
Purchase of raw materials 203,000

What is the prime cost of goods manufactured for the period?

A £308,000
B £203,000
C £311,000
D £476,000

67
8.2

The following information is relevant for a manufacturing company:

Inventories as 1 st April 20X5 £

Raw materials 20,000
Work in progress 25,000
Finished goods 22,000

Inventories as at 31 st March 20X6

Raw materials 30,000
Work in progress 26,000
Finished goods 31,000

Wages costs
Direct factory labour 105,000
Factory supervisors 60,000

Returns inwards 2,000

Returns outwards 5,000
Carriage inwards 8,000
Direct expenses 10,000
Purchase of raw materials 203,000

What is the factory cost of goods completed?

A £370,000
B £371,000
C £311,000
D £476,000

68
8.3

The following information is relevant for a manufacturing company:

Prime cost £80,000

Opening WIP £ 9,000
Factory cost of goods completed £89,000
Production overheads £ 2,000

What is value of closing WIP?

A £9,000
B £2,000
C £18,000
D Zero

8.4

Which of the following describes “prime cost”?

A All the cost associated with manufacturing

B All factory production overheads
C All direct and indirect costs
D All direct costs

8.5

Derek owns a manufacturing company making widgets. The following information for
the month of January is available:

$’000
Factory cost of goods completed 350
Factory cost of goods produced 450
Opening work in progress 25

What is the closing work in progress?

69
8.6

Rodney owns a manufacturing company making wozits. The following information for
the month of April is available:

$’000
Factory cost of goods completed 750
Factory cost of goods produced 950
Closing work in progress 325

What is the opening work in progress?

8.7

Albert owns a manufacturing company making whoojaflips. The following information

for the month of July is available:

$’000
Factory cost of goods completed 950
Prime cost 1,020
Total indirect factory overheads 75
Closing work in progress 325

What is the opening work in progress?

8.8

Which one of the following statements is correct?

A An increase in prime cost will reduce closing work in progress

B An increase in prime cost will increase the factory overheads
C An increase in prime cost will increase closing working in progress
D An increase in prime cost will increase factory cost of goods produced

70
8.9

Which one of the following statements is correct?

A An increase in work in progress will reduce prime cost

B An increase in work in progress will increase the factory overheads
C An increase in work in progress will decrease factory cost of goods completed
D An increase in work in progress will increase prime cost

8.10

Which one of the following statements is correct?

A The prime cost consists of all direct material, direct labour and direct overheads
B The prime cost consists of direct material and direct labour costs only
C The prime cost consists of direct material, direct labour and indirect overheads
D The prime costs consists of direct factory overheads only

8.11

Factory cost of goods completed includes which of the following? (Choose 3)

Prime cost
Sales revenue
Administrative expenses
Finance cost
Indirect factory overheads
Direct labour costs

71
8.12

The following data is available for William for the year ending 31 st December 20X2:

Inventory as 1 st January 20X2 £

Raw materials 20,000
Work in progress 25,000
Finished goods 22,000

Inventory as at 31st December 20X2

Raw materials 30,000
Work in progress 26,000
Finished goods 31,000

Wages costs
Direct factory labour 105,000
Factory supervisors 60,000

Returns outwards 5,000

Carriage inwards 8,000
Purchase of raw materials 203,000

During the year total sales were $1.8 million. The closing inventory of finished goods
was valued at $35,000. There was no opening inventory of finished goods

The gross profit for the year is?

72
The following data relates to questions 8.13 to 8.18

The following information is available for Barack Manufacturing for year ending 31 st
March 20X3

$’000
Opening inventories of raw materials 12
Opening inventories of finished goods 15
Opening work in progress 6

Raw material purchases during the year 150

Direct manufacturing costs during the year 35
Indirect factory overheads 16
Closing inventories of raw materials 9
Closing inventories of finished goods 17
Closing work in progress 5

Sales for the year 205

Administration expenses 5
Distribution costs 3

8.13

What is the value raw materials used during the year?

8.14

What is the prime cost for the year?

8.15
What is the factory cost of goods completed for the year?

73
8.16

What is the value of the cost of goods sold for the year?

8.17

What is the gross profit for the year?

8.18

What is the net profit / loss for the year?

74
 Questions for chapter 9 – Budgeting
9.1
Q Plc is preparing a cash budget to July. The credit sales are
£
April 32,000
May 30,000
June 25,000
July 28,000
The recent experience in terms of how credit sales are collected is as follows:
Current months sales 10%
Prior months sales 60%
Sales two months prior 15%
Cash discounts given 10%
Bad debts 5%
How much do you expect to collect from debtors during July?

a) £19,200
b) £29,200
c) £22,300
d) £27,400

9.2
The following details have been extracted from the debtor collection records of S Plc
Invoice paid in the month after sale 60%
Invoice paid in the second month after sale 20%
Invoice paid in the third month after sale 10%
Bad debts 10%

Customers paying in the month after sale are entitled to receive a 15% discount.

Credit sales for January to April are budgeted as follows:

Jan Feb Mar Apr

£40,000 £45,000 £50,000 £60,000

The amount forecast to be received from debtors in April is

a) £38,500
b) £29,900
c) £32,400
d) £40,500

75
9.3
When preparing a production budget, the opening stock will be equivalent to

a) Closing Stock + Cost of Sales – Material Purchases

b) Closing Stock – Cost of Sales + Material Purchases
c) Closing Stock + Cost of Sales + Material Purchases
d) Closing Stock – Cost of Sales – Material Purchases

9.4
A flexible budget is?

a) A budget with variable production cost only

b) A budget which shows costs and revenues at different activity levels
c) A budget prepared using a spreadsheet package
d) A budget which shows fixed production cost only

9.5
A master budget would include

a) A budgeted profit and loss account

b) A budgeted profit and loss account and balance sheet
c) A budgeted profit and loss account, balance sheet and cash flow statement
d) A budgeted profit and loss account, balance sheet, cash flow statement and
functional budgets

9.6
A factor, which limits the activity of an organisation is known as?

a) Sales demand
b) Principle or key budget factor
c) Avoidable budget factor
d) Unavoidable budget factor

9.7
A fixed budget is?

a) A budget, which is produced at one single level of activity only

b) A budget, which shows costs and revenues at different activity levels
c) A budget prepared using a spreadsheet package
d) A budget, which shows fixed production cost only

76
9.8

A company has opening stock of 400Kg of material A. Planned production will be 1,000
units, requiring 3Kg of material A, after wastage, for every unit manufactured. Given
that 10% of material is normally wasted when it goes into production and the company
requires 500Kg of material in stock at the end of the period, what would be the material
purchases (to the nearest unit) planned for this period?

a) 1100 units
b) 1433 units
c) 3100 units
d) 3433 units

9.9

Which of the following types of expenditure would be included in a cash budget?

a) Depreciation
b) Bad debts
c) Discounts given to customers
d) Payments to suppliers

9.10

Zero based budgeting is best defined as?

a) A method of budgeting where every item of expenditure is justified before its

inclusion within the budget
b) A budget, which is produced at one single level of activity only
c) A budget, which shows costs and revenues at different activity levels
d) The setting of a budget using costs and revenues for the previous period,
adjusted for growth and inflation

77
9.11

Which of the following definitions best describes “Zero-Based Budgeting”?

A A method of budgeting where an attempt is made to make the expenditure under

each cost heading as close to zero as possible.

B A method of budgeting whereby all activities are re-evaluated each time a budget
is formulated.

C A method of budgeting that recognises the difference between the behaviour of

fixed and variable costs with respect to changes in output and the budget is
designed to change appropriately with such fluctuations.

D A method of budgeting where the sum of revenues and expenditures in each

budget centre must equal zero.

9.12

Which of the following statements are true?

(i) A flexible budget can be used to control operational efficiency.

(ii) Incremental budgeting can be defined as a system of budgetary planning and control
that measures the additional costs that are incurred when there are unplanned extra units
of activity.

(iii) Rolling budgets review and, if necessary, revise the budget for the next quarter to
ensure that budgets remain relevant for the remainder of the accounting period.

A (i) and (ii) only

B (ii) and (iii) only
C (iii) only
D (i) only

78
9.13

The CIMA definition of zero-based budgeting is set out below, with two blank sections.

“Zero-based budgeting: A method of budgeting which requires each cost element

___________, as though the activities to which the budget relates _______________.”

Which combination of two phrases correctly completes the definition?

Blank 1 Blank 2

A to be specifically justified could be out-sourced to an external supplier

B to be set at zero could be out-sourced to an external supplier

C to be specifically justified were being undertaken for the first time

D to be set at zero were being undertaken for the first time

9.14

The following details have been taken from the debtor collection records of W plc:

Invoices paid in the month after sale 60%

Invoices paid in the second month after sale 20%
Invoices paid in the third month after sale 15%
Bad debts 5%

Customers paying in the month after the sale are allowed a 10% discount. Invoices for
sales are issued on the last day of the month in which the sales are made.

The budgeted credit sales for the final five months of this year are:

Month August September October November December

Credit sales $80,000 $100,000 $120,000 $130,000 $160,000

Calculate the total amount budgeted to be received in December from

credit sales?

79
9.15

D plc operates a retail business. Purchases are sold at cost plus 25%. The management
team are preparing the cash budget and have gathered the following data:

1. The budgeted sales are as follows:

Month £000
July 100
August 90
September 125
October 140

2. It is management policy to hold inventory at the end of each month which is sufficient
to meet sales demand in the next half month. Sales are budgeted to occur evenly during
each month.

3. Creditors are paid one month after the purchase has been made.

Calculate the entries for “purchases” that will be shown in the cash budget
for August?

9.16

If an entity regularly fails to pay its suppliers by the normal due dates, it may lead to a
number of problems:

(i) Having insufficient cash to settle trade payables;

(ii) Difficulty in obtaining credit from new suppliers;
(iii) Reduction in credit rating;
(iv) Settlement of trade receivables may be delayed.

Which TWO of the above could arise as a result of exceeding suppliers’ trade credit
terms?

A (i) and (ii)

B (i) and (iii)
C (ii) and (iii)
D (iii) and (iv)

80
9.17

An enterprise commenced business on 1 April 2002. Revenue in April 2002 was $20,000,
but this is expected to increase at 2% a month. Credit sales amount to 60% of total sales.
The credit period allowed is one month. Bad debts areexpected to be 3% of credit sales,
but other customers are expected to pay on time. Cash sales represent the other 40% of
revenue.

How much cash is expected to be received in May 2002?

9.18

DY’s trade receivables balance at 1 April 2006 was $22,000. DY’s income statement
showed revenue from credit sales of $290,510 during the year ended 31 March 2007.

DY’s trade receivables at 31 March 2007 were 49 days.

Assume DY’s sales occur evenly throughout the year and that all balances outstanding at
1 April 2006 have been received.

Also, it should be assumed all sales are on credit, there were no bad debts and no trade
discount was given.

How much cash did DY receive from its customers during the year to 31 March 2007?

A $268,510
B $273,510
C $312,510
D $351,510

81
9.19

A company has the following budgeted sales figures:

Month 1 £90,000
Month 2 £105,000
Month 3 £120,000
Month 4 £108,000

80% of sales are on credit and the remainder are paid in cash. Credit customers paying
within one month are given a discount of 1.5%. Credit customers normally pay within the
following time frame:

Within 1 month 40% of credit sales

Within 2 months 70% of credit sales
Within 3 months 98% of credit sales

There is an expectation that 2% of credit sales will become bad debts.

Outstanding receivables at the beginning of month 1 includes £6,000 expected to be

received in month 4.

Calculate the total receipts expected in month 4?

9.20

EX is preparing its cash forecast for the next three months.

Which ONE of the following items should be left out of its calculations?

A Expected gain on the disposal of a piece of land.

B Tax payment due, that relates to last year’s profits.
C Rental payment on a leased vehicle.
D Receipt of a new bank loan raised for the purpose of purchasing new machinery.

82
9.21

Which ONE of the following is correct?

A cash budget prepared on a monthly basis is done to calculate

A the amount of inventory to purchase in the following month.

B when to pay workers’ wages.
C next month’s sales volumes.
D whether there will be sufficient cash in the bank to meet requirements.

9.22

FJ commenced business on 1 April 2008. Sales in April 2008 were $60,000. This is
forecast to increase by 2% per month.

Credit sales accounted for 50% of sales. Credit sales customers are allowed one month to
pay; 75% of April credit customers paid on time. A further 20% are expected to pay after
more than one month, but before two months. The remaining 5% are not expected to pay.
All these percentages are expected to continue in the near future.

Calculate the total amount of cash FJ should forecast to be received in June

2008?

9.23

Which of the following would NOT affect a budgeted cash flow?

a) Depreciation of non-current assets

b) A bad debt write off for a customer
c) Funds from a long-term bank loan
d) Bank interest on overdraft

83
9.24

Company Z pay their suppliers in the ratio of 60% paid one month after purchase and
40% paid two months after purchase. All invoices are received on the last day of each
month.

Those suppliers paid one month after purchase offer company Z a 5% discount and
those suppliers paid two months after purchase offer company Z a 1% discount.

Credit purchases ($)

January 35000
February 40000
March 15000

The amount budgeted to be paid to suppliers in March would be?

a) $15,000
b) $27,880
c) $36,660
d) $38,000

9.25

A car factory had the following budgeted details for a period

Cars
Opening finished goods 10000
Closing finished goods 15000
Sales 35000

Each car requires 60 hours of assembly labour time, however idle time will be 20% of
total labour hours.

Cars as part of quality control procedures are checked and normal reject rates of 25% of
assembled cars are normally returned.

The budgeted direct labour assembly hours per car would be?

84
9.26
The following details exist for a company:

Credit sales (£)

January 100,000
February 125,000
March 98,000
April 95,000
%
Invoices paid in the month after sale 60
Invoices paid in the second month after sales 20
Invoices paid in the third month after sales 10
Bad debts 10

The amount received in April according to the information above would be?

9.27

Finished goods
Opening inventory 6000 units
Closing Inventory 6300 units
Budgeted sales 26700 units

Each unit produced takes 5 hours of labour time and 10% of units are rejected after
production. Production staff are paid $8 per hour.
The total direct labour cost budgeted for this period would be?

a) $1,068,000
b) $1,080,000
c) $1,186,667
d) $1,200,000

9.28
A college offers discounts of 10% to students who pay on enrolment and 50% of
customers pay on enrolment. The extra sales needed to increase cash receipts by £20,000
would be?

a) £20,000
b) £21,053
c) £22,000
d) £44,000

85
9.29

A flexible budgeting system exists for an organisation and financial details for the budget
period are provided below.

40% 60%

Direct materials ($) 67,500 101,250

Direct labour ($) 33,500 50,250
Production overhead ($) 45,000 67,500
Other fixed overhead ($) 20,000 20,000

What would be the total budgeted cost allowance for 70% level of activity?

9.30

Which one of the following reasons is more likely to explain why budgeted production
and sales would be different?

a) Changes in levels of finished goods inventory

b) Changes in levels of work-in-progress
c) Changes in levels of raw materials
d) Changes in levels of idle time and wastage

9.31

A company has the following budgeted details for sales receipts

Opening trade receivables £20,000.

Forecast monthly sales will be £20,000 and this trend is expected to continue throughout
the year.

20% of customers will pay by cash and will be given a 10% discount. Of the remaining
80% credit sales, 60% will settle within one month after sale and 40% will settle 2
months after sale.

Total budgeted receipts for the entire year would be?

a) £212,800
b) £232,800
c) £237,600
d) £240,000

86
9.32

When a budget is updated on a regular basis by adding a later period to it immediately

when an earlier period has expired would be an example of

a) A flexible budget
b) A rolling budget
c) An activity based budget
d) A zero based budget

9.33

A Ltd has the following production budget for garden gnomes:

Budgeted raw material plastic inventory for making garden gnomes:

· Opening inventory 2000kg

· Closing inventory 5000kg
Each garden gnome produced requires 0.4kg of raw material plastic. Each Kg of plastic
costs A Ltd £3.50.

Budgeted finished units inventory of garden gnomes:

· Opening inventory 12000 units

· Closing inventory 15000 units
Budget sales garden gnomes for the next month are forecast to be 26000 units.

Calculate for the following month

(i) the raw material usage (Kg) for the month?

(ii) the value of budgeted material purchases (£) for the month?

87
 Questions for chapter 10 – Standard costing and variance analysis

10.1

W Ltd has the following details regarding the budget and actual sales for their product
offered
Budget Actual

Sales (units) 1000 960

Selling price per unit £300 £280

The standard contribution of selling one unit is £150

Calculate the total sales volume contribution variance?

a) £6000 Adverse
b) £6000 Favourable
c) £19,200 Adverse
d) £20,000 Favourable

10.2

Moogle Plc uses 3kg of raw material Alpha into the production process to produce one
unit of output, but have calculated that this would be after 25% wastage of the raw
material. The cost of 1kg of Alpha is £25.

What would be the standard usage of material Alpha, per unit of output, if Moogle Plc
wanted to include the level of wastage within this standard?

a) 3 kg
b) 4 kg
c) 5 kg
d) 6 kg

88
10.3

The following data has been extracted from the budget of XL Plc:

Activity Overhead cost

(Machine hours) £

10000 £25,000
12000 £29,000
18000 £41,000

In May 2002, the actual activity was 12750 machine hours and the actual overhead cost
incurred was £32,560.

The overhead expenditure variance was?

a) £2,060 (A)
b) £2,060 (F)
c) £1,748 (A)
d) £1,748 (F)

10.4

BB Plc standard cost of labour time per unit was as follows:

4 Hrs @ £5.60 £22.40

The budgeted and actual number of units produced for this period was 4000 and 4260
units respectively, giving an adverse labour efficiency variance of £2,386..

The actual labour hours worked for the period was?

a) 17466
b) 16614
c) 16426
d) 15574

89
10.5
ABC Ltd standard cost of material X which is used to assemble their final product is as
follows
2kg @ £6.50 = £13.00
3000 units were produced for the period. This gave a material usage variance of £4,875
adverse, with material stock for the period rising by 800kg.

The quantity of material purchased for this period was?

a) 6750kg
b) 6000kg
c) 5250kg
d) 7550kg

10.6
Z Plc sells garden gnomes that it purchases from a local distributor. Its budget shows for
the four-week period that it plans to sell 800 gnomes at a unit price of £30, which would
give a contribution to sales ratio of 40%
Actual sales were 770 gnomes at an average selling price of £27.50, the actual
contribution to sales ratio averaged 27%.
The sales volume contribution variance for this period would be?

a) £360 Adverse
b) £1,925 Adverse
c) £2,285 Adverse
d) £3,383 Adverse

10.7
The following data is for XYZ plc.

Budget Actual
Material
Average price £5.00 £5.60
Average usage per unit 3.5kg 3.3kg
Units produced 2,000 2,300

The material usage variance is?

a) £2,240 favourable
b) £2,000 adverse
c) £2,000 favourable
d) £2,300 favourable

90
10.8

The following data is for ABC plc.

Budget Actual

Material
Average price £7.00 £7.60
Units produced 2,000 2,300
Material purchased 6,500kg 6,700kg

The material price variance is?

a) £3,900 adverse
b) £4,020 adverse
c) £7,590 adverse
d) £9,300 adverse

10.9

BB Plc standard cost of labour time per unit was as follows:

8 Hrs @ £7.60 £60.80

The budgeted and actual number of units produced for this period was 4000 and 4260
units respectively, to meet production for the period 32450 hours were worked.

The labour efficiency variance for the period was?

a) £12,388 favourable
b) £3,420 adverse
c) £12,388 adverse
d) £3,420 favourable

91
 The following data is given for questions 10.10 and 10.11 below:

Trafalgar Limited budgets to produce 10,000 units of product D12, each requiring 45
minutes of labour. Labour is charged at £20 per hour, and variable overheads at £15 per
labour hour. During September 2003, 11,000 units were produced. 8,000 hours of labour
were paid at a total cost of £168,000. Variable overheads in September amounted to
£132,000.

10.10

What is the correct labour efficiency variance for September 2003?

A £5,000 Adverse
B £5,000 Favourable
C £5,250 Favourable
D £10,000 Adverse

10.11

What is the correct variable overhead expenditure variance for September 2003?

A £3,750 Favourable
B £4,125 Favourable
C £12,000 Adverse
D £12,000 Favourable

10.12

The following data have been extracted from the budget working papers of WR Limited:

Activity Overhead cost

(machine hours) £
10,000 13,468
12,000 14,162
16,000 15,549
18,000 16,242

In November 2003, the actual activity was 13,780 machine hours and the actual overhead
cost incurred was £14,521.

Calculate the total overhead expenditure variance for November 2003?

92
 The following data is given for sub-questions 10.13 and 10.14 below:

X40 is one of many items produced by the manufacturing division. Its standard cost is
based on estimated production of 10,000 units per month. The standard cost schedule for
one unit of X40 shows that 2 hours of direct labour are required at £15 per labour hour.
The variable overhead rate is £6 per direct labour hour. During April, 11,000 units were
produced; 24,000 direct labour hours were worked and charged; £336,000 was spent on
direct labour; and £180,000 was spent on variable overheads.

10.13

The direct labour rate variance for April is

A £20,000 Favourable
B £22,000 Favourable
C £24,000 Adverse
D £24,000 Favourable

10.14

The variable overhead efficiency variance for April is

A £12,000 Adverse
B £12,000 Favourable
C £15,000 Adverse
D £15,000 Favourable

10.15

The CIMA official definition of the “variable production overhead efficiency variance” is
set out below with two blank sections.

“Measures the difference between the variable overhead cost budget flexed on
_____________ and the variable overhead cost absorbed by _______________ .”

Which combination of phrases correctly completes the definition?

Blank 1 Blank 2

A actual labour hours budgeted output

B standard labour hours budgeted output
C actual labour hours output produced
D standard labour hours output produced

93
The following data is given for sub-questions 10.16 and 10.17 below:

Q plc uses standard costing. The details for April were as follows:

Budgeted output 15,000 units

Budgeted labour hours 60,000 hours
Budgeted labour cost £540,000

Actual output 14,650 units

Actual labour hours paid 61,500 hours
Productive labour hours 56,000 hours
Actual labour cost £522,750

10.16

Calculate the idle time variance for April.

10.17

Calculate the labour efficiency variance for April.

10.18

A company uses standard absorption costing. The following information was recorded by
the company for October:
Budget Actual
Output and sales (units) 8,700 8,200
Selling price per unit £26 £31
Variable cost per unit £10 £10
Total fixed overheads £34,800 £37,000

The sales price variance for October was

A £38,500 favourable
B £41,000 favourable
C £41,000 adverse
D £65,600 adverse

94
10.19

RJD Ltd operates a standard absorption costing system. The following fixed production
overhead data is available for one month:

Budgeted output 200,000 units

Budgeted fixed production overhead £1,000,000
Actual fixed production overhead £1,300,000
Total fixed production overhead variance £100,000 Adverse

The actual level of production was

A 180,000 units.
B 240,000 units.
C 270,000 units.
D 280,000 units.

10.20

SS Ltd operates a standard marginal costing system. An extract from the standard cost
card for the labour costs of one of its products is as follows:

Labour Cost
5 hours x £12 £60

Actual results for the period were as follows:

Production 11,500 units

Labour rate variance £45,000 adverse
Labour efficiency variance £30,000 adverse

Calculate the actual rate paid per direct labour hour.

95
10.21

X Ltd operates a standard costing system and absorbs fixed overheads on the basis of
machine hours. Details of budgeted and actual figures are as follows:

Budget Actual
Fixed overheads £2,500,000 £2,010,000
Output 500,000 units 440,000 units
Machine hours 1,000,000 hours 900,000 hours

The fixed overhead expenditure variance is

A £190,000 favourable
B £250,000 adverse
C £300,000 adverse
D £490,000 favourable

10.22

Which of the following best describes a basic standard?

A A standard set at an ideal level, which makes no allowance for normal losses,
waste and machine downtime.

B A standard which assumes an efficient level of operation, but which includes

allowances for factors such as normal loss, waste and machine downtime.

C A standard which is kept unchanged over a period of time.

D A standard which is based on current price levels.

96
10.23

Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of
maximum bed occupancy, are shown below:

Bed occupancy 82% 94%

Medical supplies cost $410,000 $429,200
During the period, the actual bed occupancy was 87% and the total cost of the medical
supplies was $430,000.

The medical supplies expenditure variance was

A $5,000 adverse
B $12,000 adverse
C $5,000 favourable
D $12,000 favourable

The following data is given for sub-questions 10.24 and 10.25 below:

The budgeted selling price of one of C’s range of chocolate bars was $6.00 per bar. At
the beginning of the budget period market prices of cocoa increased significantly and C
decided to increase the selling price of the chocolate bar by 10% for the whole period. C
also decided to increase the amount spent on marketing and as a result actual sales
volumes increased to 15,750 bars which was 5% above the budgeted volume. The
standard contribution per bar was $2.00 however a contribution of $2.25 per bar was
actually achieved.

10.24
The sales price variance for the period was:

A $9,450 A
B $9,450 F
C $9,000 A
D $9,000 F

10.25
The sales volume contribution variance for the period was:

A $1,500.00 F
B $3,937.50 F
C $3,750.00 F
D $1,687.50 F

97
10.26
Which of the following best describes an adverse materials price variance?

a) The material usage variance is favourable

b) The actual price of material has fallen
c) The material usage variance is adverse
d) The actual cost of material was more than the standard cost of material purchased

10.27
The following budgeted information exists for a company;
Sales 7500 units
Selling Price $55
Production cost (per unit) $20

Actual sales for the period were 7000 units at a selling price of $51. The actual
production cost per unit being $19.

The total adverse sales margin variance would be?

10.28
For a factory to make one unit of product X requires 5 hours of budgeted time at a
budgeted cost of $8 per hour. 800 hours were worked in a period at a total labour cost of
$6600 and 170 units of product X were made.

The favourable direct labour total variance would be?

10.29
Company Y operates a flexible budgeting system.

Budget: Direct material cost $15000 for 5000 kg of production

Materials can be purchased at 5% discount if total production exceeds 6000 kg.

The total variance that would be reported if actual material usage was 8000kg and the
material actual cost was $25600, would be?

a) $1600
b) $2800
c) $10600
d) $11350

98
10.30

Company X makes widgets; each widget made requires 9 active hours worked however,
standard labour hours for all products made should include idle time of 10% of total
labour hours. The standard labour rate per hour is $10.

The standard labour cost for one unit of product will be?

10.31
Budget

Output 1500 units

Direct labour hours 3000 hours
Direct labour cost $27000

During the financial period actual output produced was 1700 units. There was a direct
labour rate variance of $3000 adverse and direct labour efficiency variance of $5500
favourable.

What was the actual direct labour cost in this period?

99
10.32
Budget Actual

Output (units) 1000 1200

£ £
Prime cost 20000 23000
Fixed production overhead 25000 28000
Total cost 45000 51000

The total budget volume variance was?

a) £2000 adverse
b) £3,000 adverse
c) £2000 favourable
d) £6,000 adverse

10.33

A company maintains a standard costing system, all inventory is valued at standard cost.

The following details relate to material G

Actual quantity purchased 5000kg

Actual quantity issued to production 4800kg
Standard quantity for actual output produced 4600kg

During the period the company actually paid £5 per kg less than the standard price.

The materials price variance is?

a) £1000 Favourable
b) £2000 Favourable
c) £25,000 Favourable
d) £25,000 Adverse

100
10.34
The standard labour cost per unit of product Z is $40 (8 hours @ $5 per hour)
Hours worked 1800 hours
Actual labour rate paid $5.50 per hour
Labour efficiency variance $3600 Adverse
How many units of product Z was produced in the above period?
a) 135 units
b) 143 units
c) 135 units
d) 225 units

10.35

Budgeted contribution 9,000

Sales contribution volume variance 900 F
Flexed contribution for actual sales 9,900
Sales price variance 800 A
Actual contribution 9,100

The original sales budget was to sell 2000 units earning budgeted sales revenue of
£50,000.
The actual sales volume in units would be?

10.36
The following details exist for an organisation.
Budgeted sales were 3300 units and actual sales were 3600 units.
Standard variable cost was £34.
Sales price variance £30,000 F
Sales volume variance £21,000 A

The budgeted contribution is?

10.37

The following information relates to a budget period.

The standard labour rate is £8 per hour. One unit produced requires 18 productive hours.
Idle time is budgeted to be 10% of total (productive) hours worked. Standard labour
hours include idle time.

Calculate the standard cost of labour for one unit of product?

101
 Questions for chapter 11 – Process and cost ledger accounting

11.1
A fertilizer is manufactured in two processes, S and T, data for process T for the last
month is as follows:

Material transferred from process S 1,500 litres @ £5 per litre

Good output transferred to finished goods 1,100 litres
Closing work-in-progress 300 litres
Conversion cost incurred £15,800
Closing work-in-progress is fully complete for material, but only 50% processed.

Normal loss is expected to be 10% of input. All losses or gains are fully processed and
have a scrap value of £3 a litre

What was the value of the completed output for the period (to the nearest £)?

a) £20,229
b) £20,598
c) £19,845
d) £19.995

11.2
A fertilizer is manufactured in two processes, S and T, data for process T for the last
month is as follows:

Material transferred from process S 1,500 litres @ £5 per litre

Good output transferred to finished goods 1,100 litres
Closing work-in-progress 300 litres

Conversion cost incurred £15,800

Closing work-in-progress is fully complete for material, but only 50% processed.
Normal loss is expected to be 10% of input. All losses or gains are fully processed and
have a scrap value of £3 a litre

What was the value of the closing work-in-progress for the period (to the nearest £)?

a) £2,985
b) £3,006
c) £3,644
d) £3,542

102
11.3

In process costing, if an abnormal gain arises, the normal accounting entry within the
process account is to:

a) Debit it with the scrap value of the abnormally gained units

b) Credit it with the scrap value of the abnormally gained units
c) Debit it with the full production cost of the abnormally gained units
d) Credit it with the full production cost of the abnormally gained units

11.4

Within process accounting an equivalent unit would be best defined as;

a) A standard unit used within production or processing

b) A percentage of a whole unit representing incomplete work
c) A budgeted unit used each time a cost per unit is calculated
d) Losses experienced within the processing environment

11.5

In process costing, if an abnormal loss arises, the normal accounting entry within the
process account is to:

a) Debit it with the scrap value of the abnormally lost units

b) Credit it with the scrap value of the abnormally lost units
c) Debit it with the full production cost of the abnormally lost units
d) Credit it with the full production cost of the abnormally lost units

11.6

Within a process account abnormal units are valued

a) Normally the same as good output when using equivalent units

b) At scrap proceeds valued
c) At standard cost
d) At full production cost less any scrap proceeds

103
11.7
Opening work-in-progress 1,500 litres, fully complete as to materials and 60%
complete as to conversion

Material input 19,500 litres

Normal loss is 10% of input

Output to process II 17,600 litres

Closing work-in-progress 450 litres, fully complete for material and 50%
complete as to conversion

The number of equivalent units to be included in the calculation of the cost per equivalent
unit, using the weighted average method of valuation, is?

Materials Conversion
a) 21,000 20,050
b) 20,050 20,050
c) 20,050 19,825
d) 18,050 17,825

11.8
Within a standard costing and integrated cost bookkeeping system of ledger accounting, a
periodic statement prepared, showing actual results to budget and showing any
differences between results in the form of variances calculated and further analysed or
sub-divided, would be referred as?
a) A variance statement
b) A flexed budget statement
c) An operating statement
d) A bank statement

11.9
Within a standard costing and integrated cost bookkeeping system of ledger accounting,
the double entry for an adverse variable overhead efficiency variance would be?

Debit Credit
a) Variable overhead efficiency variance account Variable overhead control account
b) Work-in-progress account Variable overhead control account
c) Variable overhead efficiency variance account Work-in-progress account
d) Variable overhead control account Work-in-progress account

104
11.10

Which of the following variances would not appear in an integrated standard cost ledger
system?

a) Material usage variance

b) Labour efficiency variance
c) Total sales volume variance
d) Variable overhead efficiency variance

11.11

The accounting entry for the issue of direct material to production within an integrated
system of ledger accounting would be?

Debit Credit
a) Work-in-progress account Stores ledger control account
b) Stores ledger control account Work-in-progress account
c) Cost of sales account Work-in-progress account
d) Work-in-progress account Finished goods control account

11.12

The accounting entry for an over absorption of production fixed overhead for a period,
within an integrated system of cost bookkeeping could be?

Debit Credit
a) Work-in-progress account Production overhead control account
b) Production overhead control account Income statement
c) Cost of sales account Production overhead control account
d) Production overhead control account Finished goods control account

11.13

Within a standard costing and integrated cost bookkeeping system of ledger accounting,
the double entry for an adverse labour rate variance would be?

Debit Credit
a) Direct labour control account Direct labour rate variance account
b) Work-in-progress account Direct labour rate variance account
c) Direct labour control account Work-in-progress account
d) Direct labour rate variance account Direct labour control account

105
11.14

The double entry for the transfer of completed production for a company operating an
integrated cost ledger bookkeeping system would be?

Debit Credit
a) Work-in-progress account Finished goods control account
b) Cost of sales account Work-in-progress account
c) Finished goods control account Work-in-progress account
d) Cost of sales account Finished goods control account

11.15

Within a standard costing and integrated cost bookkeeping system of ledger accounting,
the double entry for a favourable variable overhead rate variance would be?

Debit Credit
a) Variable overhead rate variance account Variable overhead control account
b) Work-in-progress account Variable overhead control account
c) Variable overhead rate variance account Work-in-progress account
d) Variable overhead control account Variable overhead rate variance account

11.16

Within an integrated cost bookkeeping system of ledger accounting, the double entry for
indirect production overhead absorbed could be?

Debit Credit
a) Production overhead control account Work-in-progress account
b) Work-in-progress account Production overhead control account
c) Production overhead control account Cost of sales account
d) Cost of sales account Production overhead control account

106
11.17

The following company had 12000 litres of materials input in to a process, at a price of
$5 per litre. Also conversion cost incurred for the period was $25,000.

The was no opening or closing work-in-progress

Actual output was 9700 litres for period

The normal loss expected from the process is 10% of input; each litre can be sold for $4 a
litre.

What would be the correct double entry from the above information?

a) DR Abnormal loss $9152 CR Process account $9152

b) CR Process account $9152 DR Abnormal loss $9152
c) DR Abnormal gain $9152 CR Process account $9152
d) CR Process account $9152 DR Abnormal gain $9152

11.18

Within a process costing environment, the correct accounting treatment for a normal loss
which has realisable value would be?

a) DR Abnormal loss CR Normal loss account

b) CR Process account DR Normal loss account
c) DR Abnormal loss CR Normal loss account
d) DR Process account DR Normal loss account

107
11.19

The following company had 12000 litres of materials input in to a process, at a price of
$4 per litre. Also conversion cost incurred for the period was $40,000.

The was no opening work-in-progress

Closing work-in-progress of 500 litres was fully complete for material but only 40%
complete for conversion cost

Actual output was 9700 litres for period

The normal loss expected from the process is 10% of input; each litre can be sold for $1 a
litre.

Which of the following statements is true?

a) An abnormal gain has a arisen and the value of good output is $78,958
b) An abnormal loss has a arisen and the value of good output is $78,958
c) The value of the abnormal gain is $4,884
d) An abnormal loss will be credited and the process account will be debited

11.20

The following company had 12000 litres of materials input in to a process, at a price of
$5 per litre. Also conversion cost incurred for the period was $35,000.

The was no opening work-in-progress

Closing work-in-progress of 1000 litres was fully complete for material but only 30%
complete for conversion cost

Actual output was 10700 litres for period

The normal loss expected from the process is 5% of input; each litre can be sold for $2 a
litre.

Which of the following statements is true?

a) An abnormal loss has a arisen and the value of good output is $90,201
b) The value of the abnormal gain is $1,200
c) The value of the abnormal gain is $6,141
d) The value of closing work-in-progress is $6,141

108
11.21

Within a process costing environment the following information had been entered for a
period.

Direct material 1500 kg @ £15 per kg

Direct labour 500 hours @ £9 per hour

Normal losses expected from the process is 5% of input and the spoilage can be sold for
£5 per kg. Actual output for the period was 1300 kg. There was no opening or closing
work-in-progress

The value of completed output for the period was?

11.22

The following details exist for a process costing environment.

There was no opening work-in-progress for the period.

Input material 5000 kg @ $7 per kg

Labour cost ($) 11900
Production overhead ($) 35520

Outputs

Finished goods 4000kg

Closing WIP 800kg

The following details exist about closing WIP

100% competed for material

70% competed for labour
30% completed for overhead

The value of finished goods would be?

109
11.23

Company Z makes chemical fertilizer by a process, its normal wastage is expected to be

5% of input. If 8000 litres of material was input into the process during a period and an
abnormal gain of 700 litres was recognised, then the quantity of completed output in
litres for the period would have been?

a) 7600 units
b) 8300 units
c) 8700 units
d) 9000 units

11.24

A company makes liquid fertilizer and details during the process of making its product
are as follows.

Materials 10000 litres at $2

Conversion cost $35000
Output for the period 8500 litres

The was no opening WIP at the start of the period. 800 units of closing WIP was
incomplete at the finish of the period, being fully completed for materials and 45%
complete for conversion cost.

Normal loss expected is 5% of input and its scrap value $0.20 per litre

The value of closing WIP for the period would be closest to?

a) $100
b) $1190
c) $3062
d) $50575

11.25

Which of the following is the accounting treatment of an abnormal loss?

a) DR Process Account CR Abnormal loss account

b) DR Abnormal loss account CR Process Account
c) DR Process Account CR Normal loss account
d) DR Normal loss account CR Process Account

110
11.26
What would be the accounting entry for an adverse labour rate variance within an
integrated accounting system?

a) DR Income statement CR Labour rate variance

b) DR Labour rate variance CR Income statement
c) DR Labour rate variance CR Wages control account
d) DR Wages control account CR Labour rate variance

11.27
Within a process costing environment, when a normal loss has scrap value within a
process it would normally?

a) Valued using its scrap value

b) Recorded at nil value
c) Valued fully just like finished goods output
d) Valued by taking a partial share of process costs for the period

11.28
An abnormal loss within a process will occur when?

a) Actual losses are more than normal losses expected

b) Actual losses are less than normal losses expected
c) Output levels are set below budgeted level of production
d) Output levels are set above budgeted level of production

11.29
Within a process costing environment the normal loss expected is 5% of input, the scrap
value is nil. Input during the period was 20000 litres at a cost of £34,500 for the period.
Direct labour expenses for the period was £15,000, production overhead is absorbed on
the basis of 50% of direct labour expenses.

During the period output of 18500 litres was made. There was no opening or closing
work-in-progress.

The value of output would have been?

111
11.30
Within a process costing environment the normal loss expected is 5% of input, the scrap
value is nil. Input during the period was 25000 litres at a cost of £34,500 for the period.
During the period output of 21500 litres was made. Opening work-in-progress was 1500
litres fully complete for material and 80% complete for conversion cost. Closing work-in-
progress was 3500 litres fully complete for material and 60% complete for conversion
cost.
When producing a statement of equivalent units using the average cost method the
number of equivalent units for material and conversion for closing work-in-progress
would be?
a) Material – 25000 equivalent units and Conversion – 23600 equivalent units
b) Material – 25250 equivalent units and Conversion – 23150 equivalent units
c) Material – 25250 equivalent units and Conversion – 23850 equivalent units
d) Material – 25250 equivalent units and Conversion – 25250 equivalent units

11.31
The correct journal entry within a process costing ledger system for an abnormal loss
would be?
a) DR Process Account CR Abnormal loss
b) DR Process Account CR Normal loss
c) DR Normal loss CR Process Account
d) DR Abnormal loss CR Process Account

11.32
The correct journal entry within a process costing ledger system for an abnormal gain
would be?
a) DR Process Account CR Abnormal gain
b) DR Process Account CR Normal loss
c) DR Normal loss CR Abnormal gain
d) DR Abnormal gain CR Process Account

11.33

An abnormal gain within a process will occur when?

a) Actual losses are more than normal losses expected

b) Actual losses are less than normal losses expected
c) Output levels are set below budgeted level of production
d) Output levels are set above budgeted level of production

112
11.34

What would be the double entry for pay as you earn (PAYE) deducted from gross wages
of factory staff?

a) DR Bank Account and CR PAYE Credit Account

b) DR PAYE Credit Account and CR Gross Wages Control Account
c) DR PAYE Credit Account and CR Bank Account
d) DR Gross Wages Control Account and CR PAYE Credit Account

11.35

What would be the correct journal entry for an adverse material usage variance?

a) DR Work-In-Progress Account and CR Variance Control Account

b) DR Raw Material Control account and CR Work-In-Progress Account
c) DR Variance Control Account and CR Work-In-Progress Account
d) DR Raw Material Control account and CR Variance Control Account

11.36

What would be the correct accounting treatment when processing a by-product further?

a) Reduce cost within the income statement by the net profit earned by the by-
product.
b) Apportion a share of the further processing cost of the by-product to the other
joint products
c) Treat the by-product exactly the same as other joint products
d) Directly charge any further process cost and credit additional sales directly to the
income statement

113
 Solutions to chapter 1 – Classification of costs

1.1 Answer B

1.2 Answer B

1.3 Answer D

High-low technique

High 75 180
Low 20 70
55 110

Variable cost £110/55 = £2

Fixed cost £180 = FC + (75 x £2)

Fixed cost £180 = FC + £150
Fixed cost £180 = FC - £150
FC = £30

Therefore for 70 rooms cleaned

TC = £30 + (£2 x 70)
TC = £170

1.4 Answer A

3500 19,875
2500 17,625
1000 2,250

2,250/1000 = 2.25 VC per unit

At 3500 units 19,875 = FC + 2.25 (3500) therefore FC = 12,000

At 2000 units TC = 12,000 + 2.25 (2000) = £16,500

114
1.5 Answer B

4000 x 6.00 = £24,000

6000 x 5.17 = £31,020
2000 £7,020

7,020/2,000 = 3.51 VC per unit

At 6,000 units 31,020 = FC + (6,000 x 3.51) therefore FC = 9,960

Therefore at 6,500 units TC = 9,960 + (3.51 x 6,500) = £32,775

1.6 Answer C

1,118,000 2,341,600
982,000 2,178,500
136,000 163,100

VC £163,100/136,000 = 1.20

FC = 2,341,600 - (£1.20 x 1,118,000)

FC = 1,000,000

1.7 Answer A

1.8 Answer C

45 rooms x 0.5 hours = 22.5 hours

22.5 hours / 0.8 = 28.125 hours

28.125 x £5 an hour = £140.63

115
1.9 Answer A

Tip : The forecast for total operating cost is expressed as

Y = a + bX

a = fixed cost (cost incurred regardless of the activity level for mileage) £800
b = variable cost (the cost of each mile) £0.0002
x = the activity level (the number of miles) 4100 miles

Y = £800 + £0.0002x2

This represents the forecast trend for miles. Once the forecast trend has been found
this would then need inflating by 3% e.g. multiply your answer by 1.03.

a) Work out the forecast ‘budgeted’ trend for the number of miles given
Y = £800 + £0.0002 (4100 2)
Y = £800 + £0.0002 (16810000)
Y = £800 + £0.0002 (16810000)
Y = £800 + £3,362
Y = £4,162
b) Adjust this for inflation
£4,162 x 1.03 = £4,287 flexed budgeted cost for 4100 miles
c) Compare to actual operating cost to calculate the variance
Did cost £5,000
Should cost £4,287
Variance £713 (A)

1.10 Answer A

Tip: The high-low technique uses the highest and the lowest activity and associated
monetary values to predict a variable and fixed cost, by recognising cost behaviour.
This technique concentrates on splitting a semi-variable cost into its fixed and
variable categories in order to help predict cost.

The technique creates a linear relationship for cost forecasting, normally expressed as

Y= a + bX

116
Work out variable cost
Units Overhead cost (£)
3500 16,200
2000 12,000
1500 4,200

£4,200/1500 = £2.80 variable cost per unit.

Work out fixed cost
Use either 3500 or 2000 units to work out the fixed cost as a balancing figure.
£16,200 = Fixed cost + (3500 x £2.80)
£16,200 = Fixed cost + (£9,800)
Fixed cost = £6,400
Therefore
a = £6,400
b = £2.80
The budget for 4000 units
Y = £6,400 + (£2.80 x 4000)
Y = £17,600

1.11 Answer C

Tip: The high-low technique uses the highest and the lowest activity and associated
monetary values to predict a variable and fixed cost, by recognising cost behaviour.
This technique concentrates on splitting a semi-variable cost into its fixed and
variable categories in order to help predict cost.

The technique creates a linear relationship for cost forecasting, normally expressed as
Y= a + bX

Work out variable cost

Units Overhead cost (£)

6,500 33,000
4,500 29,000
2,000 4,000

117
£4,000 / 2,000 = £2 variable cost per unit.

Work out fixed cost

Use either 6,500 or 4,500 units to work out the fixed cost as a balancing figure.
£29,000 = Fixed cost + (4,500 x £2)
£29,000 = Fixed cost + (£9,000)
Fixed cost = £20,000

Therefore
a = £20,000
b = £2

The budget for 5,750 units

Y = £20,000 + (£2 x 5,750)
Y = £31,500

1.12 Answer

The forecast model is:

Y = Ax (to the power of 0.6)

Y = cumulative sales units

A = sales units in month 1
x = month number

June 2007 = month 1

Sales for June 2007 are 1,500 units

Cumulative units to July 2007

Y = 1,500 x 2 (to the power of 0.6)
Y = 2,274 units

Therefore units in the month of July 2007 = 2,274 – 1,500 = 774 units

Cumulative units to Aug 2007

Y = 1,500 x 3 (to the power of 0.6)
Y = 2,900 units

Therefore units in the month of Aug 2007 = 2,900 – 2,274 = 626 units

118
1.13 Answer

Part (i)

The variable cost element is the change in costs from one output level to another.

Therefore:
Output Cost
40,000 units £194,000
25,000 units £143,500
15,000 units £50,500

However there is a further £10,000 of fixed costs to deduct when output exceeds 35,000
units.

Therefore variable costs = £50,500 - £10,000 - £40,500

Variable cost per unit = £40,500 / 15,000 units = £2.70

Part (ii)

To work out total fixed costs at 36,000 units we can take the total costs at any of the two
levels and deduct all variable costs; however don’t forget to include a further £10,000 of
fixed costs if using the lower output level of 25,000 units.

If we take total costs at output level of 40,000 units:

£194,000 – (£2.70 variable cost per unit x 40,000 units) = £86,000

OR

If we take total costs at output level of 25,000 units:

£143,500 + £10,000 – (£2.70 variable cost per unit x 25,000 units) = £86,000

1.14 Answer B

This is a question where you have to use the high-low method to solve, however in the
first instance we need to remove inflation from the figures to ensure that they are like for
like high.

$10,500 / 1.05 = $10,000

$13,390 / 1.03 = $13,000

119
Using high-low method, compare the change in activity to the change in cost.

Units produced Total cost ($)

8,000 13,000
6,000 10,000
2,000 3,000

$3,000 / 2,000 units = $1.50 direct cost per unit produced

Now to obtain the correct figure we must apply inflation index being 1.06:

$1.50 x 1.06 = $1.59

1.15 Answer D

CIMA definition of a cost unit

1.16 Answer B

1.17 Answer A

Coding systems allows reporting to be improved as unique codes can be used to identify
different departments whose financial data can be extracted easily.

1.18 Answer C

Implement accounting codes in their accounting system will allow good quality reports to
help them with their decision making.

1.19 Answer D

Codes must be unique otherwise the system won’t work properly.

1.20 Answer A

To group transaction to generate useful information

120
1.21 Answer B

04000304

1.22 Answer B

Comparing actual results against budget

This is done by the management account

1.23 Answer C

Applying accounting standards to transactions

All the rest are roles undertaken by the management accountant

1.24 Answer B

Shareholders are the owners of the business and need to know if their investment is doing
well.

1.25 Answer C

Suppliers need to know if the company can pay their invoices on time.

1.26 Answer C

Shareholders don’t run the business; the directors do, so therefore they are external users

1.27 Answer D

Employees are internal users, all the rest are external to the company.

1.28 Answer C

Prepared to assist in decision making for departments

All the rest are financial accounts preparation

121
1.29 Answer A

Preparing budgets for the departments

This is undertaken by the management accountant

1.30 Answer

Shows how well the company has performed

Shows how well the company is using its assets to generate revenue
To assist in financial statement preparation

1.31 Answer

Historical in nature
Show the profit or loss for the business
Prepared for external users

1.32 Answer

Forward looking
Reports on variances against budget
Used for decision making purposes

1.33 Answer C

Directors are internal users of financial statements

1.34 Answer

Timely
Accurate
Easily understood

1.35 Answer A

1115 £316,725
1345 £320,175
230 £3,450

122
£3,450/230 = £15

1.36 Answer

High-low technique

High 1200 $19600

Low 500 $14000
700 $5600

$8 per
Variable cost $5600/700 = unit

Total cost $14000= FC + (500 x $8)

Total cost $14000= FC + $4000
Total cost $14000 - Variable cost $4000 = FC
FC = $10000

Therefore for 100 units the budget cost allowance;

TC = $10000 + ($8 x 1000 units)
TC = $18000

1.37 Answer B

1.38 Answer B

1.39 Answer B

1.40 Answer $2 per unit

High-low technique

High 54000 $206000

Low 44000 $186000
10000 $20000

Variable overhead absorption rate $20000/10000 = $2 per unit

123
1.41 Answer A

1.42 Answer B

1.43 Answer A

1.44 Answer £155.88

Garage supervisor salary £2,400

Garage wages for tyre fitting staff £36,990
Other site costs £5,700
Depreciation (£5,000 x 6 machines) £30,000
Average cost per tyre (£25 x 700 tyres) £17,500
The total garage cost £92,590

The total garage cost per customer £92,590 ÷ 594 customers = £155.88.

1.45 Answer B

1.46 Answer C

1.47 Answer £39,000

1800 46,000
1200 34,000
600 24,000

12,000/600 = 20 VC per unit

At 1800 units 46,000 = FC + (20 x 1800) therefore FC = 10,000.

Next year forecast production of 1500 units.

£
1500 units x (£20 VC x 0.90) given forecast decrease of 10% = 27,000
Fixed cost £10,000 x 1.2 (given forecast increase of 20%) = 12,000
39,000

124
1.48 Answer B

1.49 Answer B

1.50 Answer D

125
 Solutions to chapter 2 – The context of management accounting

2.1 Answer D

2.2 Answer A

2.3 Answer D

2.4 Answer
Timely
Accurate
Easily understood

2.5 Answer C

2.6 Answer B

2.7 Answer C

2.8 Answer D

2.9 Answer B

2.10 Answer C

2.11 Answer A

2.12 Answer D

2.13 Answer D

2.14 Answer C

126
 Solutions to chapter 3 – Absorbing fixed production overhead

3.1 Answer B

3.2 Answer C

3.3 Answer D

OAR = £120,000 ÷ 12000 units = £10 OAR.

Production overhead control account entries.

Actual expenditure incurred for the period (debit) 128,000

Overhead absorbed for the period (credit)
£10 OAR x 12300 units actual production = 123,000
Under absorbed (credit) 5,000

3.4 Answer C

3.5 Answer A

If the activity was 1000 hours lower, then the variable overhead would also be (£4.50 x
1000 = £4,500) lower as well, therefore no under recovery of variable overhead would
have occurred.

However the under recovery of fixed production overhead would have been £2.50 x 1000
hours = £2,500 under absorbed.

3.6 Answer D

Actual salaries £320,000

Over absorption £24,000
Overhead absorbed £344,000

£344,000/16,000 hours £21.50 OAR

127
3.7 Answer C
Absorption costing is a method of costing that assigns fixed production overhead to cost
units, jobs or work-in progress accounts during a period, by using pre-determined
overhead absorption rates. Because overhead absorption rates are pre-determined at the
beginning of a financial period and fixed overhead is charged by the process of
absorption below, it is likely a difference or balance within the production overhead
control account will arise at the end of a financial period, this balance is referred to as an
under or over absorption.

Production overhead control

account
Absorption of fixed overhead
Actual production overhead X for the financial period
Actual activity level x O.A.R X

Over absorption? X Under absorption? X

Any surplus in fixed overhead absorbed during the financial period to the income
statement would be an ‘over absorption’ of production overhead
Debit Production overhead control account
Credit Income statement (to reduce fixed overhead absorbed)
Absorbed production overhead
less
Over absorption
=
Actual production overhead expense for the period.

128
 3.8 Answer under absorbed by £480

Assembly Finishing Stores Maintenance

£ £ £ £
Budgeted fixed production overhead 100,000 150,000 50,000 40,000
Reapportion maintenance overhead
£40,000 x 40%:45%:15% 16,000 18,000 6000 -40,000
116,000 168,000 56,000 0
Reapportion stores overhead
£56,000 x 60%:40% 33,600 22,400 -56,000
149,600 190,400 0

Budgeted fixed overhead absorption rate

£149,600 ÷ 100000 budgeted units = £1.496

Production fixed overhead control account (Assembly)

Actual production 120,000 units x £1.496

Actual production overhead £180,000
= F/OH charge during the period £179,520

Under absorption £480

129
3.9 Answer A
Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

*Std Overhead absorption rate per unit (£330,000 ÷ 220,000) = £1.50

Production fixed overhead control account

Actual production (200,000 units) x *O.A.R £1.50

Actual production overhead £260,000
= F/OH charge during the period £300,000

Over absorption
(£300,000 - £260,000) £40,000

Over absorption of fixed overheads for the period is £40,000.

3.10 Answer C

An adverse fixed production overhead total variance means that the overheads have been
under absorbed. This means that actual overheads were greater than budgeted overheads.

We need to find out how much of the fixed overheads have been absorbed into
production and then dividing this by the budget overhead absorption rate (OAR) we can
find out actual production level.

Actual fixed production overhead costs = £1,950,000

Fixed production overhead total variance = £150,000
Fixed overheads absorbed = £1,950,000 - £150,000 = £1,800,000

OAR = £1,500,000 ÷ 300,000 units = £5 per unit

Actual production level = £1,800,000 ÷ £5 per unit = 360,000 units

130
3.11 Answer A

Under absorption means that more production overheads were actually needed than
expected based on actual output. Therefore “flexed” production overheads (budget cost
based on actual output) can be found by subtracting the under absorption from the actual
production overheads.

Actual production overheads = £481,250

Under absorption = £19,250
Flexed production overheads = £481,250 - £19,250 = £462,000

The overhead absorption rate (OAR) used can be calculated by dividing flexed
production overheads by actual standard hours.

OAR = £462,000 / 38,500 = £12 per hour

Budgeted production overheads = £12 x 38,000hrs = £456,000

3.12 Answer C

3.13 Answer D

Absorption costing is a method of costing that assigns fixed production overhead to cost
units, jobs or work-in progress accounts during a period, by using pre-determined
overhead absorption rates. Because overhead absorption rates are pre-determined at the
beginning of a financial period and fixed overhead is charged by the process of
absorption below, it is likely a difference or balance within the production overhead
control account will arise at the end of a financial period, this balance is referred to as an
under or over absorption.

Production overhead control account

Absorption of fixed overhead

Actual production overhead X for the financial period
Actual activity level x O.A.R X

Over absorption? X Under absorption? X

Any deficit in fixed overhead absorbed during the financial period to the income
statement would be an ‘under absorption’ of production overhead

131
 Debit Income statement (to reduce fixed overhead absorbed)
Credit Production overhead control account

Absorbed production overhead

add
under absorption
=
Actual production overhead expense for the period.

3.14 Answer D

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

OAR = ($450,000 ÷ 900,000hrs) = $0.50 per labour hr

Standard labour hours per unit = 900,000 hours / 50,000 units = 18 hours per unit

Standard hours flexed for actual output = 18 hours x 60,000 units = 1,080,000 hours

Over absorption of fixed overheads for the period is $65,000.

Production fixed overhead control account

Actual production (1,080,000 hours) x OAR ($0.50)

Actual production overhead $475,000
= F/OH charge during the period $540,000
Over absorption
($540,000 - $475,000) $65,000

3.15 Answer $6

$111,000 ÷ 18500 hours = $6 per direct labour hour

132
3.16 Answer B

Production overhead now charged on the percentage of budgeted direct labour cost?

Production overhead $10 million.

Budgeted labour cost ($2000/100 hours budgeted labour cost given) = $20 an hour.
Budgeted direct labour hours for the period was 200000 hours, therefore budgeted total
labour cost = $20 an hour x 200000 hours = $4 million.

Production overhead $10 million/$4 million x 100 = 250% of direct cost is how
production overhead would now be allocated to this job.

$
Direct materials 4000
Direct labour:
Budgeted labour time (100 hours) 2000
Overtime incurred 900
Production overhead 250% x $2000 labour cost 5000
Revised cost of the job 11900

The answer would be no difference to the existing cost of this job. The overtime paid is
not direct cost and therefore would not be used to absorb production overhead.

3.17 Answer C

Cost centre Assembly Machining Inspection

Maintenance

Production overhead allocated 250,000 350,000 40,000

Inspection 80,000 x 50:30:20 40,000 24,000 16,000

56,000

Maintenance 56,000 x 40:30:30 22,400 16,800 16,800 -56,000

Inspection 16,800 x 50:30:20 8,400 5,040 -16,800 3,360

3,360

Maintenance 3,360 x 40:30:30 1,344 1,008 1,008 -3.360

Inspection 1,008 x 50:30:20 504 302 202

133
Maintenance 202 x 40:30:30 81 61 61

Inspection 61 x 50:30:20 31 18 12

Maintenance 12 x 40:30:30 7 5

Total production overhead 322,767 397,234 0 0

Note for the last apportionment a difference of $12 existed. This was immaterial and
therefore nothing allocated to the inspection department.

Alternative approach (mathematics)

Let

I = amount of overhead to apportion out of inspection department.

I = 80000 + 0.3M

M = amount of overhead to apportion out of maintenance department.

M = 40000 + 0.2I

Solve and then reapportion without the long winded way above…

I = 80000 + 0.3M

I = 80000 + 0.3(40000 + 0.2I)

I = 80000 + 12000 + 0.06I

0.94I = 92000 therefore I = 92000/0.94 = $97,872

I = 97,872

Now solve M…

M = 40000 + 0.2I

M = 40000 + 0.2(97,872)

M = 59,574

134
The effect of doing the above is to avoid reapportionment!

Cost centre Assembly Machining Inspection

Maintenance

Production overhead allocated 250,000 350,000 80,000 40,000

Inspection 97,872 x 50:30:20 48,936 29,362 -97,872 19,574

Maintenance 59,574 x 40:30:30 23,830 17,872 17,872 -59,574

Total production overhead 322,766 397,234 0 0

3.18 Answer $16.00

Machining
$35784/17892 machine hours = $2 per machine hour x 5 hours = $10.00

Assembly
$28596/19064 labour hours = $1.50 per labour hour x 2 hours = $3.00

Finishing
$18123/12082 labour hours = $1.50 per labour hour x 2 hours = $3.00
Overhead absorption rate per unit $16.00

135
 3.19 Answer B

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

OAR = (£245,000÷ 122,500 hours) = £2 per machine hour.

Over absorption of fixed overheads for the period would be £10,600.

Production fixed overhead control account

Actual hours (119,200 hours) x OAR (£2)

Actual production overhead £249,000
= Overhead charged during the period £238,400
Under absorption
(£249,000- £238,400) £10,600

3.20 Answer D

3.21 Answer D

3.22 Answer A

3.23 Answer £132,000.

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. hours, in order to find an overhead
absorption rate (OAR). This simple method allows fixed overhead to be absorbed (or
‘charged’) for a period, in this case it would have been £138,000 absorbed (see below).

136
 Production fixed overhead control account

Actual absorption of overhead (balance) £138,000

Actual production overhead £134,500

Over absorption £3,500

The overhead absorption rate (OAR) would be £138,000 absorbed ÷ 11500 actual hours =
£12 per hour OAR. Therefore if budgeted labour hours were 11000 hours (500 below
actual labour hours), then budgeted production overhead for the period would have been
11000 hours x £12 per hour OAR = £132,000.

3.24 Answer B

Over absorption of fixed production overheads (DR Fixed Production Overhead Control
Account and CR Income Statement), leads to a direct reduction to overhead charged in
the income statement for the period.

Given the OAR is calculated as

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

Only one of two situations (or both) can cause an over absorption of fixed production
overheads, that is ‘budgeted production overhead is lower than expected’ or the
‘normal/budget level of activity is more than expected’, hence too much fixed overhead
would be charged for the period (ignoring any overspending which may have arisen).

3.25 Answer £14.77

4 machine hours for machining x (£13,600 ÷ 10000 hours) = £5.44

3 labour hours for finishing x (£59,700 ÷ 30000 hours) = £5.97

3 labour hours for storage x (£44,800 ÷ 40000 hours) = £3.36

Fixed overhead absorption rate per unit = £14.77

137
 Solutions to chapter 4 – Absorption and marginal costing

4.1 Answer A
Valuation of inventory
£
Direct cost per unit 5.00
Variable overhead per unit 3.00
Total variable production cost per unit 8.00 MC valuation per unit
Fixed overhead absorbed per unit
£30,000 ÷ 5000 units = 6.00
Total production cost per unit 14.00 AC valuation per unit

Under the absorption costing method, a greater amount of fixed overhead would be
carried forward to the next financial period, due to closing inventory being higher than
opening inventory (production > sales). (1000 units – 400 units x £6.00) = £3,600.
Therefore using absorption costing, profit would be £3,600 greater than it would be using
marginal costing.

4.2 Answer A

A marginal costing organisation would value inventory at variable production cost

only never full production cost, when contrasted with an absorption costing company.
The selling a distribution expenses are non-production related and therefore would not be
included in the valuation of closing inventory.

£
Material 30,000
Labour 20,000
Variable production overhead 10,000
60,000

Variable production cost per unit

£60,000 ÷ 2000 units = £30.00

Valuation of closing inventory

£30.00 x (2000 units - 1750 units sold) £7,500

138
4.3 Answer A

Prime cost (7.50 + 6.50 + 2.00) = 16.00

Sales (9,000 x 40) = 360,000

Prime cost (9,200 x 16) = (147,200)
Closing stock (200 x 16) = 3,200
Contribution 216,000
Fixed overhead (56,750)
Profit 159,250

4.4 Answer B

Prime cost (7.50 + 6.50 + 2.00) = 16.00 + OAR 5.00 = £21.00

Sales (9,000 x 40) = 360,000

Prime cost (9,200 x 16) = (147,200)
Absorbed fixed overhead (9,200 x 5) (46,000)
Closing stock (200 x 21) = 4,200
Under absorption (56,750 – 46,000) (10,750)
Profit 160,250

Alternatively if the marginal costing profit was £159,250 production exceeds sales by
200 units therefore 200 x £5.00 = £1,000 fixed overhead carried forward to the next
period under absorption costing therefore the profit will be £1,000 more than marginal
costing.

4.5 Answer C

Stock levels rose by 6,000 units and absorption costing profit is £60,000 higher.
Therefore fixed production overhead per unit included in stock was £60,000/6,000 units =
£10 per unit of stock.

The budgeted level of activity was £100,000/£10 OAR = 10,000 units

4.6 Answer A

139
4.7 Answer A

Tip: Marginal costing

The difference between absorption and marginal costing organisations, is that the
marginal costing organisation makes no attempt to ‘absorb’ fixed production overhead
into a standard cost unit or the income statement. It treats production overhead as a
period cost only and charges it entirely to the profit and loss account for each period. It
is equally important to remember that marginal costing organisations would also value
stock at variable production cost only not full production cost, when contrasted with an
absorption costing company.

£ £
Sales revenue 820,000

Less:
Variable production cost 300,000
Closing stock (W1) -45,000
255,000
Variable selling cost 105,000
360,000
Contribution 460,000

Fixed production cost 180,000

Fixed selling cost 110,000
290,000
Profit 170,000

W1 Closing stock valuation

(£300,000 ÷ 1000 units) x 150 units = 45,000

140
4.8 Answer B

Tip: Marginal costing

The difference between the absorption and marginal costing approach, is that the
marginal costing approach makes no attempt to ‘absorb’ fixed production overhead
into a standard cost unit or the income statement. It treats production overhead as a
period cost only and charges it entirely to the income statement for each period.

It is equally important to remember that marginal costing organisations would also

value inventory at variable production cost only never full production cost, when
contrasted with an absorption costing company.

£
Material 40,000
Labour 12,600
Variable overhead 9,400
62,000

Variable production cost per unit

£62,000 ÷ 2000 units = £31.00

Valuation of closing inventory

£31.00 x (2000 units – 1750 units sold) £7,750

141
4.9Answer B

Tip: The only reason why profits differ under both methods of costing is due to the
different way that each method values inventory. Marginal costing organisations
value inventory at variable production cost only never full production cost, when
contrasted with an absorption costing company.

When production > sales

Stock levels rise (closing stock > opening stock) therefore a greater amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating a higher profit than
marginal costing.

When production < sales

Stock levels fall (closing stock < opening stock) therefore a smaller amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating lower profit than marginal
costing.

When production = sales

Stock levels remain unchanged (closing stock = opening stock) therefore both
methods would give exactly the same profit.

Valuation of inventory
£
Variable direct cost per unit 6.00
Variable production overhead per unit 3.50
Total variable production cost per unit 9.50 MC valuation per unit
Fixed overhead absorbed per unit
£29,500 ÷ 5000 units = 5.90
Total production cost per unit 15.40 AC valuation per unit

Under the absorption costing method, a greater amount of fixed overhead would be
carried forward to the next financial period, due to closing stock being higher than
opening stock (production > sales). (900 units – 400 units x £5.90) = £2,950. Therefore
using absorption costing, profit would be £2,950 greater than it would be using marginal
costing.

142
4.10 Answer B

Tip: A marginal costing system would value inventory at variable production cost
only not full production cost, when contrasted with to an absorption costing system.
The different methods of stock valuation explains why there would be profit
differences.
When production > sales
Stock levels rise (closing stock > opening stock) therefore a greater amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating a higher profit than
marginal costing.

When production < sales

Stock levels fall (closing stock < opening stock) therefore a smaller amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating lower profit than marginal
costing.
When production = sales
Stock levels remain unchanged (closing stock = opening stock) both methods would
give exactly the same profit.

Fixed overhead absorption rate included in the value of stock for an absorption costing
system equals £250 per unit (£500,000 ÷ 2000 units).

Under the absorption costing method, a lower amount of fixed overhead would be carried
forward to the next financial period, due to closing stock being lower than opening stock
(production < sales). (800 units – 500 units x £250 per unit) = £75,000. Therefore
using absorption costing, profit would be £75,000 lower than it would be if using
marginal costing.

4.11 Answer B

A marginal costing system would value inventory at variable production cost only not
full production cost.

Variable production costs = $20,000 + $6,300 + $4,700 = $31,000

Closing inventory = 400 units

Closing inventory should be valued as a proportion of variable production cots.

Therefore:

Value of closing inventory = $31,000 x (400 units / 4,000 units) = $3,100

143
4.12 Answer B

When production > sales

Stock levels rise (closing stock > opening stock) therefore a greater amount of fixed
overhead under absorption costing is being carried forward to the following period within
the valuation of the closing stock, therefore creating a higher profit than marginal costing.

144
 Solutions to chapter 5 – Specific order costing

5.1 Answer B

5.2 Answer D

5.3 Answer B

Estimated Profit = £2.0m – (£0.1m + £1.4m) = £0.5m x £0.9m/£1.8m = £0.25m

5.4 Answer C

Estimated Profit = £2.0m – (£0.5m + £1.0m) = £0.5m x £1.0m/£1.5m = £0.33m

5.5 Answer B

Estimated Profit = £2.0m – (£0.5m + £1.0m) = £0.5m x £1.5m/£2.0m = £0.375m

5.6 Answer D

If sales margin (Profit/Sales = 20%) then

Selling price assume 100%

Cost of job (80%)
Estimated profit 20%

Profit as a percentage of cost would therefore be 20%/80% = mark-up of 25% on cost

Sales as a percentage of cost would therefore be 100%/80% = 125% cost

Selling price 500 (125% of cost)

Cost of job (400)
Estimated profit 100 (25% cost or 20% of sales)

145
5.7 Answer

$
Direct materials ($1000 + $400) 1400
Direct labour (20 x $10) + (30 x $7) = 410
Production overhead (20 x $5) + (30 x $5) = 250
2060
Administration (2060 x 20%) = 412
Total cost 2472
Profit mark-up 100% (W1) 2472
The selling price 4944

The problem is that you are told sales margin (profit as a % of sales), but you need mark-
up (profit as a % of cost).

So if profit is 50% of selling price…

If selling price is 100 (assume) then profit is 50% of that much (50) therefore cost must
be the difference = 50 cost. Therefore mark-up 50 profit ÷ 50 cost = 100% mark-up on
cost.

5.8 Answer D

Assume selling price 100

Then profit would be 40% x 100 = (40)
Cost of sales 60

If sales margin is 40/100 = 40%. Then mark-up (profit as a % of cost of sales) would be
40/60 = 66.67%. Therefore take £20 cost and add 66.67% mark-up to cost = (20 x
1.6667) = £33.33.

5.9 Answer £2600

Overhead absorption rate (OAR) = Budgeted production overhead

Budget level of activity (hours)

* Overhead absorption rate per unit ($650,000 ÷ 50000 hours) = £13.00 per hour.
If labour $1,200 has been budgeted then divided by the hourly labour rate ($300,000 ÷
50,000 hours) = $6 an hour = 200 hours actually worked.
Therefore production overhead absorbed would be 200 hours actually worked x £13.00
per hour OAR = £2600.

146
5.10 Answer £56

The direct cost of making product X = £25 per unit

2 machine hours x £5 per machine hour = £10 per unit
£35 per unit
£35 per unit x 20% = £7 per unit
£42 per unit
£42 x mark-up 33.33% (W1) £14 per unit
Selling price £56

W1
The total cost per unit is £42. Sales margin (profit as a percentage of sales) is 25%, but
given we have cost, then we need mark-up (profit as a percentage of cost) to establish a
selling price. Assume Sales = 100, then if sales margin is 25% then profit would be 25.
Therefore cost would be (balance) 100 – 25 = 75. Therefore mark-up would be 25/75 =
33.33% mark-up.

5.11 Answer 100% mark-up on cost

Assume selling price 100

Then profit would be 50% x 100 = (50)
Cost of sales 50

If sales margin is 50P/100S = 50%. Then mark-up (profit as a % of cost) would be

50P/50C = 100% mark-up on cost.

5.12 Answer £24.33

ROI = Profit
Capital employed

12% (0.12) = Profit

£1,500,000

Profit therefore was 12% £1,500,000 = £180,000

Add back fixed overhead of £400,000 = £580,000 total contribution

Average contribution for each unit sold

£580,000 total contribution/30,000 units = £19.33 a unit

147
Price for each unit sold

£19.33 contribution per unit + £5 variable cost per unit = £24.33 price per unit sold.

Or £580,000 total contribution + (30,000 units x £5 variable cost per unit) = £730,000
sales revenue. £730,000 ÷ 30000 units = £24.33 price per unit sold.

5.13 Answer £51.67

Marginal cost pricing adds a mark-up to variable production cost only.

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Total variable costs for X for August 62,000
£62,000 ÷ 2000 units produced (not sold) = £31 variable cost per unit + 66.67% mark-up
on cost = £31 x 1.6667 = £51.67.
Assume selling price 100
Then profit would be 40% x 100 = (40)
Cost of sales 60
If sales margin is 40P/100S = 40%. Then mark-up (profit as a % of cost) would be
40P/60C = 66.67% mark-up on cost.

5.14 Answer £70.42

Full cost pricing cost pricing adds a mark-up to variable and fixed (total) production cost.

Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Total costs for X for August 84,500

£84,500 ÷ 2000 units produced (not sold) = £42.25 full cost per unit + 66.67% mark-up
on cost = £42.25 x 1.6667 = £70.42.

Assume selling price 100

Then profit would be 40% x 100 = (40)
Cost of sales 60

If sales margin is 40P/100S = 40%. Then mark-up (profit as a % of cost) would be

40P/60C = 66.67% mark-up on cost.

148
5.15 Answer

£
Direct materials 35,000
Direct labour (3400 x £7.50 per hour) 25,500
Variable Overhead 4,500
Production overhead (3400 x £5) 17,000
82,000
Administration (82,000 x 20%) = 16,400
Total cost 98,400
Profit mark-up 100% on cost (W1) 98,400
The selling price 196,800

(W1) The problem is that you are told sales margin (profit as a % of sales), but you need
mark-up (profit as a % of cost). So if profit is 50% of selling price…

If selling price is 100 (assume) then profit is 50% of that much (50) therefore cost must
be the difference = 50 cost. Therefore mark-up 50 profit ÷ 50 cost = 100% mark-up on
cost.

149
 Solutions to chapter 6 – Service costing

6.1 Answer C

6.2 Answer D

Actual salaries £320,000

Over absorption £24,000
Overhead absorbed £344,000

£344,000/16,000 hours £21.50 OAR

6.3 Answer B

10% discount is offered to students who pay on enrolment and 50% of customers pay on
enrolment; therefore 50% x 10% = 5% sales lost before you receive £20,000. Therefore
£20,000/0.95 = £21,053 or if £20,000 represents 95% then 100% of sales would be
(100%/95%) x £20,000 = £21,053.

PROOF: £21,053 x 50% get discount x 10% discount = £1,053 discounts given.

Therefore sales £21,053 - £1,053 discounts given = £20,000 received.

6.4 Answer £10 per bed per overnight stay.

400 beds x 90% capacity x 365 days = composite cost units of 131400 bed overnight
stays. £1.314 million ÷ 131400 patient overnight stays = £10 per bed per overnight stay.

6.5 Answer A

150
 Solutions to chapter 7 – Decision making

7.1 Answer B

Sensitivity measures the percentage change in a key input needed to make a project break
even, in other words to have a project with a zero NPV.

In this question we are looking at the sensitivity of annual cash outflows. We need to
compare this to the project’s NPV. Whatever key factor we are looking at we always
need to work out its PV when comparing it to the projects NPV.

PV = annual cash outflow x annuity factor at 12% for 5 years

PV = $50,000 x 3.605 = $180,250
Sensitivity = ($160,000 / $180,250) x 100% = 89% (nearest whole number)

7.2 Answer

Revenue Contribution
£m £m
Product X (given) 10 1.5
Product Y (given) 20 2.0
30 3.5
Product Z (balance) 12 3.0
Budgeted contribution 6.5
Fixed overhead 5.5
Budgeted profit 1.0

Revenue for Product Z

(£3.0m contribution ÷ 0.25 C/S ratio) = £12m

7.3 Answer B

When we are at the break-even point this means that we make no profit and no loss,
therefore at this point fixed costs will be equal to contribution.

Therefore:

If fixed costs = £320,000 then this must also be contribution.

C/S ratio = £320,000 / £800,000 = 0.4

Revenue needed to achieve target profit = (Fixed costs + desired profit) / C/S ratio

151
Therefore:

Revenue needed to achieve £50,000 profit = (£320,000 + £50,000) / 0.4 = £925,000

7.4 Answer C

Product D Product E Product F

Contribution per unit ($) 12.00 14.00 10.00

Time in Process A 20 25 15
(mins per unit)

Contribution per hour 12 / 20 = 0.60 14 / 25 = 0.56 10 / 15 = 0.667

($)

Ranking 2nd 3rd 1st

7.5 Answer

This is a simple limiting factor question. They have identified that direct labour cost is
our limiting factor and so we need to work contribution per $ of direct labour cost then
rank them in order of profitability.

Service J H N
SP $84 $122 $145

Direct materials $12 $23 $22

Direct labour $15 $20 $25
Variable overhead $12 $16 $20
Variable cost per unit $39 $59 $67

Contribution per unit $45 $63 $78

Direct labour cost per unit $15 $20 $25

Contribution per unit of LF $45/$15 =$3 $63/$20 = $3.15 $78/$25 = $3.12

Ranking 3 1 2

152
7.6 Answer C

Characterized by curving lines, as opposed to rectilinear which has straight lines.

7.7 Answer B

Tip: Only sales and variable cost (and therefore contribution) will rise and fall with
sales volume, fixed cost will remain constant.

% %
Revenue 100 x 60% 60
Variable cost 30 x 60% 18
Contribution 70 x 60% 42
Fixed cost 22 (constant) 22
Profit 48 20

Revised profit as a percentage of revised revenue would be (20 ÷ 60) = 33.3%.

7.8 Answer

They have identified that cooking time is our limiting factor and so we need to work out
contribution per minute of cooking time and then rank them in order of profitability.

Meal K L M
SP $5 $3 $4.40
Ingredients ($2) ($1) ($1.30)
Variable conversion costs ($1.60) ($0.80) ($1.85)
Contribution $1.40 $1.20 $1.25
Cooking time per meal 10 4 8
Contribution per minute $1.40/10 = $0.14 $1.20/4 = $0.30 $1.25/8 = $0.16
Rank 3 1 2

7.9 Answer 500 medium pies and 250 large pies

This is a limiting factor question. They have identified that fruit is our limiting factor and
so we need to work out contribution per kg of fruit and then rank them in order of
profitability.

Meal Small Medium Large

SP $3.00 $5.00 $9.00
Ingredients ($1.80) ($2.40) ($4.60)

153
Direct labour ($0.40) ($0.50) ($0.60)
Variable overhead ($0.30) ($0.50) ($0.80)
Contribution $0.50 $1.60 $3.00
Kgs of fruit per pie 0.2 0.3 0.6
Contribution per kg $0.50/0.2 = $2.50 $1.60/0.3 = $5.33 $3.00/0.6 = $5.00
Rank 3 1 2

We have 300kgs of fruit available.

1. Make as much of the medium pies first.

0.3kg x 500 pies = 150kg of fruit would be used. We would have 150kgs of fruit left.

2. Make as much of the large pies now.

How many pies can be made: 150kgs / 0.6kgs per pie = 250 pies.

Therefore make 500 medium pies and 250 large pies.

7.10 Answer D

Break-even revenue = Fixed overhead / C/S ratio

Therefore: $2,500,000 / 0.35 = $7,142,857

7.11 Answer make 400 Z units, 240 X units and 270 Y units.

Product X Y Z
Contribution per unit $7 $9 $11
Materials per unit (kg) $6/$10 = 0.6 $8/£10 = 0.8 $6/$10 = 0.6
Contribution per kg $7 / 0.6 = $11.67 $9 / 0.8 = $11.25 $11 / 0.6 = $18.33
Rank 2 3 1

We have 600kgs of material available.

1. Make as much of product Z first.

0.6kg x 400 units = 240kg of material would be used. We would now have 360kgs of
material left.

2. Make as much of product X now.

0.6kg x 240 units = 144kg of material would be used. We would now have 216kgs of
material left.

154
3. Make as much of product Y now.

How many Y’s can be made: 216kgs / 0.8kg per unit = 270 units.

Therefore make 400 Z units, 240 X units and 270 Y units.

7.12 Answer A

W X Y
Selling price 180 150 150
Less:
Direct material 41 20 30
Direct labour 30 20 50
Variable production overheads 24 16 20
Contribution per unit (£) 85 94 50

Bottleneck machine (minutes per unit) 7 10 7

85/7 94/10 50/7

Contribution per minute (£) = 12.14 = 9.4 = 7.14

Ranking 1st 2 nd 3rd

7.13 Answer

We need to calculate the C/S ratio in order work out the increase in sales needed to have
a profit of £100,000.

Contribution ($’000) = 400 – 240 = 160

C/S ratio = 160 / 400 = 0.4

Fixed costs will not change with sales and so the extra contribution will achieve the
desired profit.

Extra contribution needed is £40,000 and therefore using the C/S ratio we can calculate
the increase in sales needed.

Therefore: $40,000 / 0.4 = $100,000 extra sales needed.

Percentage increase in sales = $100,000 / $400,000 x 100% = 25%

155
7.14 Answer A

Margin of safety 25%

So breakeven sales 6000 – (25% 6000) = 4500 units

Breakeven x Contribution = Fixed Cost

(4500 x £250 x 60%) = Fixed Cost
Fixed Cost = £675,000

7.15 Answer D

To produce a limiting factor analysis for each product you would need the calculation for
the contribution per unit first. The profit includes the deduction of general fixed
overhead therefore if this is added back it will give the contribution per unit.

Profit 10.00 16.50 40.00

Fixed overhead 4.00 2.00 12.00
Contribution per unit 14.00 18.50 52.00

Kg raw material per unit 5 10 5

Contribution per kg £2.80 £1.85 £10.40

The most to the least profitable product produced would be C, A, B.

7.16 Answer B

If both sales price and variable cost rises by 20% then contribution would also rise by
20% therefore the breakeven point would decrease (fixed overhead shared amongst a
greater contribution per unit.

7.17 Answer A

Current breakeven 450,000/(50 x 10% C/S ratio) = 90000 units

New breakeven 500,000/(50 x 20% C/S ratio) = 50000 units

Decreases by 40000 units

156
7.18 Answer A

SP £50.00
VC -£20.00 £50 x 0.4
C per unit £30.00 £50 x 0.6

£400,000/£30 = 13333 units

or

£400,000/0.6 = £666,667

£666,667 / £50 = 13333 units

7.19 Answer C

SP £50.00
VC -£20.00 £50 x 0.4
C per unit £30.00 £50 x 0.6

(£400,000 + £200,000)/£30 = 20000 units

or

(£400,000 + £200,000)/0.6 = £1,000,000

£1,000,000 / £50 = 20000 units

7.20 Answer D

SP £50.00
VC -£20.00 £50 x 0.4
C per unit £30.00 £50 x 0.6

£400,000/£30 = 13333 units

157
or

£400,000/0.6 = £666,667

£666,667 / £50 = 13333 units

MOS = 25000 – 13333 = 11667 units

or

11667/25000 47%

7.21 Answer D

A B C
Contribution per unit £15.00 £18.00 £55.00

Hours required per unit 2.5 5.0 2.5

Contribution per labour hour £6.00 £3.60 £22.00

Ranking Second Third First

7.22 Answer C

AFTER £600,000 /(£100-£45) = 10909

BEFORE £700,000/(£100-£30) = 10000

Change in break even units sold 909

Fixed cost falls from £700,000 to £600,000.

Variable cost rises by 50% (1.5 x £30) = £45.

158
7.23 Answer A

3500 19,875
2500 17,625
1000 2,250

2,250/1,000 = 2.25 VC per unit

At 3500 units 19,875 = FC + 2.25 (3500) therefore FC = 12,000

At 2000 units TC = 12,000 + 2.25 (2000) = £16,500

Break even point = £12,000/(£5.00-£2.25) = 4364 units.

7.24 Answer C

7.25 Answer 14%

We know that at a cost of capital of 15% the project has a negative NPV of $3,216, and at
10% a positive NPV of $12,304. The internal rate of return (IRR) is that cost of capital
where the NPV of a project is zero. This is achieved through trial and error and then
interpolation. If we have a cost of capital which yields a positive NPV, then we need to
find a cost of capital when applied to the project that will give a negative NPV.

In this question they have given us this already. We simply need to interpolate.

Using interpolation formula:

A + ( a x [B - A] ) A = lower DF rate
a–b B = higher DF rate
a = NPV of A
b = NPV of B

IRR = 10% + ( (12,304 / (12,304 - - 3,216) x [15% - 10%] ) = 14% (nearest 1%)

7.26 Answer 11.32%

(1 + M) = (1 + R) x (1 + I)

M = Money cost of capital

R = Real cost of capital
I = General rate of inflation

159
1.18 = (1 + R) (1.06)
1.18/1.06 = 1 + R
1.1132 = 1 + R
1.1132 – 1 = R
0.1132 = R
R = 11.32% (nearest 0.01%)

7.27 Answer 3 years and 4 months

Year Cashflow Cumulative

0 (£400,000) (£400,000)
1 £100,000 (£300,000)
2 £120,000 (£180,000)
3 £140,000 (£40,000)
4 £120,000 £80,000
5 £100,000 £180,000

Payback period
= 3 years + (12 months x 40,000/(40,000 + 80,000))
= 3 years and 4 months.

7.28 Answer 4 years and 6 months

Year Cashflow DF @ 10% PV Cumulative

PV
0 (£450,000) 1 (£450,000) (£450,000)
1 £130,000 0.909 £118,170 (£331,830)
2 £130,000 0.826 £107,380 (£224,450)
3 £130,000 0.751 £97,630 (£126,820)
4 £130,000 0.683 £88,790 (£38,030)
5 £130,000 0.621 £80,730 £42,700

Discounted payback period

= 4 years + (12 months x 38,030/(38,030 + 42,700))
= 4 years and 6 months.

7.29 Answer 15.28%

We know that at a cost of capital of 10% investment C has an NPV of $48,000. The
internal rate of return (IRR) is that cost of capital where the NPV of a project is zero.
This is achieved through trial and error and then interpolation. If we have a cost of capital
which yields a positive NPV then we need to find a cost of capital when applied to
investment C will give a negative NPV.
160
In order to achieve a negative NPV we must select a higher cost of capital than 10%
because this effectively increases the discounting effect on the cashflows and therefore
giving a negative NPV.

Choose the largest cost of capital given to you in the formulae sheet in the exam. This is
20% and will hopefully give a negative NPV. You do not have to choose a 20% you can
choose another cost of capital, for example 17% but it may not be large enough to give
you a negative NPV, and therefore you would have do the calculation again for a higher
cost of capital.

Year 0 1 2 3 4 5
£ £ £ £ £ £
Cashflow (350,000) 50,000 110,000 130,000 150,000 100,000
DF @ 20% x1 x 0.833 x 0.694 x 0.579 x 0.482 x 0.402
PV (350,000) 41.650 76,340 75,270 72,300 40,200

NPV = (£44,240)

Using interpolation formula:

A + ( a x [B - A] ) A = lower DF rate
a–b B = higher DF rate
a = NPV of A
b = NPV of B

IRR = 10% + ( (48,940 / (48,490 - - 44,240) x [20% - 10%] ) = 15.28%

7.30 Answer 2.6 years

Year Cashflow Cumulative
0 ($80,000) ($80,000)
1 $20,000 ($60,000)
2 $30,000 ($30,000)
3 $50,000 $20,000

Payback period
= 2 years + (12 months x 30,000/(30,000 + 20,000))
= 2.6 years.

7.31 Answer £150,000

A perpetuity is a constant amount received or paid forever.

(1 / r) x amount = PV of perpetuity

161
r = cost of capital

£80,000 / 0.08 = £1,000,000

NPV = - £850,000 + £1,000,000 = £150,000

7.32 Answer 34%

ARR % = Average profit over the life of the project x 100

Average investment

[where “average investment” = (Opening Investment + Closing Investment)/2]

($’000s) ($’000s)
Cashflows 80 + 90 + 100 + 60 + 40 = 370
Depreciation (200)
Profit 170

Average profit 170 / 5 = 34

ARR (34 / 100) x 100% 34%

7.33 Answer 26%

We know that at a cost of capital of 10% the investment has an NPV of $87,980. The
internal rate of return (IRR) is that cost of capital where the NPV of a project is zero.
This is achieved through trial and error and then interpolation. If we have a cost of capital
which yields a positive NPV then we need to find a cost of capital when applied to the
investment will give a negative NPV.

In order to achieve a negative NPV we must select a higher cost of capital than 10%
because this effectively increases the discounting effect on the cashflows and therefore
giving a negative NPV.

Choose the largest cost of capital given to you in the formulae sheet in the exam. This is
20% and will hopefully give a negative NPV. You do not have to choose a 20% you can
choose another cost of capital, for example 17% but it may not be large enough to give
you a negative NPV, and therefore you would have do the calculation again for a higher
cost of capital.

162
 Year 0 1 2 3 4 5
$ $ $ $ $ $
Cashflow (200,000) 80,000 90,000 100,000 60,000 40,000
DF @ 20% x1 x 0.833 x 0.694 x 0.579 x 0.482 x 0.402
PV (200,000) 66,640 62,460 57,900 28,920 16,080

NPV = $32,000
In this case we still have a positive NPV even at a cost of capital of 20%. This means that
our IRR lies beyond 20%. Ideally we would recalculate at a higher cost of capital to
obtain a negative NPV, however the examiner has deemed this not necessary and you
need only make a sensible attempt to obtain an appropriate NPV. Furthermore you should
get a close enough approximation to the IRR when you use the interpolation formula. We
now use the interpolation formulae as normal.

Using interpolation formula:

A + ( a x [B - A] ) A = lower DF rate
a–b B = higher DF rate
a = NPV of A
b = NPV of B

IRR = 10% + ( (87,980 / (87,980 – 32,000) x [20% - 10%] ) = 26%

7.34 Answer 11.11%

(1 + M) = (1 + R)(1 + I)

M = Money cost of capital

R = Real cost of capital
I = General rate of inflation

(1 + 0.2) = (1 + R)(1 + 0.08)

1.2 / 1.08 = 1+ R
1.1111 = 1 + R
0.1111 = R

Real cost of capital = 11.11%

7.35 Answer 1.5 years

We need to add back annual depreciation to profit to obtain the annual cash flow to
calculate payback.

Annual depreciation = ($400,000 - $50,000) / 5 = $70,000

163
 Profit Depreciation Cash flow Cumulative cash flow
0 ($400,000) (400,000)
1 $175,000 $70,000 $245,000 ($155,000)
2 $225,000 $70,000 $295,000 $140,000

Payback occurs between years 1 and 2.

Payback = 1 year + (155,000 / (155,000 + 140,000)) = 1.5 years (nearest 0.1 years)

7.36 Answer A

(1 + M) = (1 + R) x (1 + I)

M = Money cost of capital

R = Real cost of capital
I = General rate of inflation

(1 + M) = (1.06) (1.04)
1 + M = 1.1024
M = 0.1024
M = 10.24%

7.37 Answer 4 years

Year Cashflow ($) Cumulative ($)

0 (15,000) (15,000)
1 2,500 (12,500)
2 3,000 (9,500)
3 5,500 (4,000)
4 4,000 0

Payback period = 4 years

7.38 Answer 13.33%

ARR % = Average profit over the life of the project x 100

Average investment

[where “average investment” = (Opening Investment + Closing Investment)/2]

($) ($)
Cash flows 2,500 + 3,000 + 5,500 + 4,000 + 3,000 = 18,000

164
 Depreciation 15,000 – 3,000 = (12,000)
Profit 6,000

Average profit 6,000 / 5 = 1,200

Average investment (15,000 + 3,000) / 2 = 9,000

ARR (1,200 / 9,000) x 100% = 13.33%

7.39 Answer A

X Y Z
Contribution per unit £5.00 £35.00 £10.00

Hours required per unit 3.0 5.0 4.0

Contribution per labour hour £1.67 £7.00 £2.50

Ranking Third First Second

7.40 Answer B

7.41 Answer D

7.42 Answer D

7.43 Answer £47,588

The contribution margin ratio, is sometimes called the profit-volume ratio, or

contribution-sales ratio, it indicates the percentage of each sales available to cover fixed
costs and perhaps a target profit as well.

Sales for a period of £189,780 x 40% = contribution £75,912

Fixed costs for the period of £28,324
Actual profit £47,588

165
7.44 Answer 55814 units

If 25% of total cost is variable cost then $50 x 25% = $12.50 variable cost per unit.

Contribution per unit = (selling price) $120 – (variable cost) $12.50 = $107.50
contribution per unit.

($5m fixed cost + $1m target profit) ÷ $107.50 contribution per unit = 55814 units.

7.45 Answer D

7.46 Answer A

The replacement cost is more to do with relevant costing.

7.47 Answer D

7.48 Answer B

7.49 Answer A

When fixed cost increases the profit line would shift downwards. The effect of this is
that the point at which the profit line cuts the horizontal axis will shift to the right,
indicating a higher break-even point.

7.50 Answer D

7.51 Answer B

7.52 Answer

Fixed cost $100,000 + target profit $250,000 = $350,000

$350,000/ (C/S) ratio 40% (0.4) = sales revenue $875,000.

7.53 Answer 14.2%

166
The IRR method
This is achieved through trial, error and interpolation. If we have a cost of capital which
yields a positive NPV then we need to find a cost of capital when applied that will give a
negative NPV.

Using interpolation formula:

IRR =
A + ( a x [B - A] ) A = lower DF rate
a–b B = higher DF rate
a = NPV of A
b = NPV of B

IRR = 10% + ($8,900 ÷ ($8,900 + $1,600)) x (15% - 10%)

IRR = 10% + 4.2%
IRR = 14.2%

7.54 Answer D

Clearly each product would be cheaper to make internally but there is a shortage of
machine hours, therefore this problem is like limiting factor analysis but rather than
attempting to maximise contribution, you are instead attempting to minimise cost.

A B C
External cost per unit £20.00 £32.00 £9.00

Hours required per unit 5 5 7

External per hour £4.00 £6.40 £1.29

Ranking Second First Third

The external cost per hour of making product B is highest, so to minimise cost use all
machine hours on this product first, then product A and then product C.

B 3000 units x 5 hours = 15000 hours

Hours left 20000 hours less 15000 hours = 5000 hours!

Given product A is the second most expensive you make these products next.

167
Product A made = 5000 hours ÷ 5 hours per product = 1000 units made.

You have now run out of machine hours therefore would have to buy all of product C
from a supplier but this would minimise cost!

7.55 Answer D

7.56 Answer A

7.57 Answer B

7.58 Answer D

7.59 Answer A

7.60 Answer 50000 units.

· Fixed cost equals £20000 + £50000 = £70000.

· Variable cost equals £30000 + £10000 + £40000 = £80000.
· Contribution equals £250000 (sales) less £80000 (variable cost) = £170000.
· Contribution per unit equals £170000 ÷ 85000 units = £2 per unit.
· Break-even volume = Fixed cost (£70000) ÷ £2 contribution per unit equals =
35000 units.
· Margin of safety = budgeted units (85000) less break-even units (35000) = 50000
units.

168
 Solutions to chapter 8 – Manufacturing accounts

8.1 - Answer C £311,000

Manufacturing account
£
Opening inventory of raw materials 20,000
+ Purchases of raw materials during the period 203,000
- Returns outwards (5,000)
+ Carriage inwards 8,000
Less closing inventory of raw materials (30,000)
= Raw materials used during the period 196,000

Direct labour costs 105,000

Direct Expenses 10,000

Prime cost 311,000

8.2 – Answer A £370,000

a) Manufacturing account
£
Opening inventory of raw materials 20,000
+ Purchases of raw materials during the period 203,000
- Returns outwards (5,000)
+ Carriage inwards 8,000
Less closing inventory of raw materials (30,000)
= Raw materials used during the period 196,000

Direct labour costs 105,000

Direct expenses 10,000
Prime cost 311,000
Production overheads
Indirect labour – supervisors 60,000
Factory cost of goods produced 371,000

Add opening WIP 25,000

Less closing WIP (26,000)
Factory cost of goods completed 370,000

169
8.3 - Answer B £2,000

Prime cost £80,000

+ Production overheads £ 2,000
= Factory cost of goods produced £82,000

Add opening WIP £ 9,000

Less closing WIP (bal fig) (£ 2,000)
Factory cost of goods completed £89,000

8.4 - Answer D

All direct costs

8.5 – Answer $125,000 closing work in progress

$’000
Factory cost of goods produced 450
Add opening work in progress 25
Less closing work in progress (bal fig) (125)
Factory cost of goods completed 350

8.6 – Answer $125,000 opening work in progress

$’000
Factory cost of goods produced 950
Add opening work in progress (bal fig) 125
Less closing work in progress (325)
Factory cost of goods completed 750

8.7 – Answer $180,000 opening work in progress

$’000
Prime cost 1,020
Add total indirect factory overheads 75
Factory cost of goods produced 1,095
Add opening work in progress (bal fig) 180
Less closing work in progress (325)
Factory cost of goods completed 950

170
8.8 – Answer D

An increase in prime cost will increase factory cost of goods produced

All the others are independent of each other.

8.9 – Answer C

Increase in work in progress (i.e. closing work in progress) will reduce the cost of factory
cost of goods completed

8.10 – Answer A

The prime cost consists of all direct material, direct labour and direct overheads

8.11 Answer

Prime cost
Indirect factory overheads
Direct labour costs

The other items are included in other parts of the income statement and do not form part
of the cost of goods produced.

8.12 – Answer $1,475,000

$ $

Sales 1,800,000
Less cost of goods sold
Opening inventory of finished goods 0
Add factory cost of goods completed
Opening inventory of raw materials 20,000
+ Purchases of raw materials during the period 203,000
- Returns outwards (5,000)
+ Carriage inwards 8,000
Less closing inventory of raw materials (30,000)
= Raw materials used during the period 196,000

Direct labour costs 105,000

Prime cost 301,000

171
Production overhead:
Indirect labour – supervisors 60,000
Factory cost of goods produced 361,000

Add opening WIP 25,000

Less closing WIP (26,000)
Factory cost of goods completed 360,000
Less closing inventory of finished goods (35,000)
Cost of goods sold (360,000 – 35,000) (325,000)
Gross profit 1,475,000

8.13 – 8.18 Answers

$’000
Sales 205

Less cost of goods sold

Manufacturing account
Opening inventories of raw materials 12
+ Raw material purchases during the year 150
- Closing inventories of raw materials (9)
Raw materials used during the period 153
Direct manufacturing costs during the year 35
Prime cost 188
Indirect factory overheads 16
Factory cost of goods produced 204

+ Opening work in progress 6

- Closing work in progress (5)
Factory cost of goods completed 205
+Opening inventories of finished goods 15
- Closing inventories of finished goods (17)
Cost of goods sold (203)

Gross profit 2
- Administration expenses 5
- Distribution costs 3 (8)
Net loss (6)

8.13 – Answer $153,000

Value raw materials used during the year

172
8.14 – Answer $188,000

Prime cost for the year

8.15 – Answer $205,000

Factory cost of goods completed for the year

8.16 – Answer $203,000

Value of the cost of goods sold for the year

8.17 – Answer $2,000

8.18 – Answer loss of $6,000

173
 Solutions to chapter 9 – Budgeting

9.1 Answer C

28,000 x 0.1 = 2,800

25,000 x 0.6 = 15,000
30,000 x 0.15 = 4,500
22,300

9.2 Answer A

50,000 x 0.6 x 0.85 = 25,500

45,000 x 0.2 = 9,000
40,000 x 0.1 = 4,000
38,500

9.3 Answer A

9.4 Answer B

9.5 Answer C

9.6 Answer B

9.7 Answer A

9.8 Answer D
Budget (Kg)

Opening Stock 400

Purchases (Balance) 3433
3833
Usage (1000 x 3 Kg) -3000
Wastage (3000 x 10%/90%) -333
Closing stock 500

174
9.9 Answer D

9.10 Answer A

9.11 Answer B
A method of budgeting whereby all activities are re-evaluated each time a budget is
formulated.

9.12 Answer D

9.13 Answer C

9.14

December
$
Invoices paid in the month after sale
November ($130,000 x 60% x 90%) 70,200
Invoices paid in the second month after sale
October ($120,000 x 20%) 24,000
Invoices paid in the third month after
sale
September ($100,000 x 15%) 15,000

109,200

9.15
Mark-up is (Gross profit ÷ Cost of Sales) = 25%

Sales (cost + gross profit) (balance) 125

Cost (assumed) 100
Gross profit (25% of cost) 25

Then Sales Margin (Gross profit ÷ Sales)

(25 ÷ 125) = 20%

175
 Cost of sales are (100 ÷ 125) = 80% of sales

Cost of sales
July £100,000 x 80% = 80,000
August £90,000 x 80% = 72,000
July August
Opening stock 40,000 36,000
Add: Purchases 76,000 86,000
116,000 122,000
Less: Closing stock (50% of next months COS) 36,000 50,000
Cost of sales 80,000 72,000

i. July purchases £76,000 will be paid in August

ii. August purchases £86,000 will be paid in September

9.16 Answer C

(i) Having insufficient cash to settle trade payables;

The entity is failing to pay its suppliers by the normal due dates, this means they are
deliberately paying them late, they do have sufficient cash. If there are insufficient funds,
then the entity can’t help it, they can only pay when they have enough cash available.

(ii) Difficulty in obtaining credit from new suppliers;

Delaying payments will affect the entities credit ratings and therefore obtaining goods on
credit from new suppliers who will be reluctant to offer credit.

(iii) Reduction in credit rating;

Delaying payments will affect credit ratings.

(iv) Settlement of trade receivables may be delayed.

This has nothing to do with the trade payables

176
9.17 Answer $19,800
Credit sales is one month after sale and 3% bad debts

April May
Revenue 20,000 20,400
Cash received (x 40%) 8,000 8,160
Credit sales cash for May (20,000x 60% x 97%) 11,640
Total cash received in May (8,160 + 11,640) 19,800

9.18 Answer B
Revision - trade receivable days (turnover)

Year end trade receivables x 365 days

Credit sales

Therefore year end trade receivables = Trade receivable days / 365 x credit sales

DY’s trade receivables at the beginning of the period $22,000

DY’s trade receivables at the end of the period $39,000

– 49 days / 365 days x $290,510

Trade receivables control account

$ $
Bal b/f 22,000 Bal c/f 39,000
Credit sales 290,510
Cash received (bal 273,510
fig)

Total 312,510 Total 312,510

9.19
£
Cash sales £108,000 x 20% 21,600
Within 1 month £120,000 x 80% x 40% x 98.5% 37,824
Within 2 months £105,000 x 80% x 30% 25,200
Within 3 months £90,000 x 80% x 28% 20,160
Brought forward 6,000
Total receipts in month 4 110,784

177
9.20 Answer A
The expected gain on the disposal of the land is an accounting calculation and not a cash
flow item. The sales proceeds from the disposal of the asset would be included in the
cash forecast.
All the other items are actual cash inflows or outflows.

9.21 Answer D
A cash budget is prepared to see if the organisation has sufficient cash.

9.22 Answer $60,162

$ April 08 May 08 June 08

Sales (x 1.02) 60,000 61,200 62,424

Cash sales x 50% 31,212

Cash from April 60,000 x 50% x 20% 6,000
Cash from May 61,200 x 50% x 75% 22,950
Cash received in June 60,162

9.23 Answer A

9.24 Answer C
March
January invoices $35,000 x 0.4 x 0.99 = $13,860
February invoices $40,000 x 0.6 x 0.95 = $22,800
Total payments to suppliers in March $36,660

9.25 Answer 100 hours

60 hours (productive or active) is 80% of total assembly hours, before rejects.

Therefore 60 hours x (100%/80%) = 75 hours.

Then you have to account for rejects, if 25% of cars are returned then 75 hours is 75% of
total hours required. Therefore 75 hours x (100%/75%) = 100 hours.

The information about sales and opening and closing finished goods are irrelevant since
the question asks for the budgeted direct labour assembly hours per car.

178
9.26 Answer £93,800
April (£)
January 100,000 x 10% = 10,000
February 125,000 x 20% = 25,000
March 98,000 x 60% = 58,800
93,800

Bad debts do not form part of the % receipts for calculation, therefore can be ignored.

9.27 Answer D

Production budget
OS FGs 6000
+ Production (balance) 27000
33000
- Sales 26700
CS FGs 6300

27000 ‘good production’ x (100%/90%) = 30000 units of total production before 10% of
units are rejected. 30000 units x 5 hours of labour time x $8 = $1,200,000.

9.28 Answer B

10% discount is offered to students who pay on enrolment and 50% of customers pay on
enrolment; therefore 50% x 10% = 5% sales lost before you receive £20,000. Therefore
£20,000/0.95 = £21,053 or if £20,000 represents 95% then 100% of sales would be
(100%/95%) x £20,000 = £21,053.

PROOF: £21,053 x 50% get discount x 10% discount = £1,053 discounts given.

Therefore sales £21,053 - £1,053 discounts given = £20,000 received.

9.29 Answer $275,500

40%
Direct materials ($) 67,500
Direct labour ($) 33,500
Production overhead ($) 45,000
146,000 x (70%/40%) = 255,500
Other fixed overhead ($) 20,000 Fixed = 20,000
Flexed budget at 70% activity level 275,500

179
9.30 Answer A

9.31 Answer B
In the year… try relating the answer to a calendar year to understand it better!
Opening trade receivables would all pay in Jan and Feb (in the year) 20,000
12 months sales x £20,000 (say Jan-Dec) = 240,000
However trade receivables still outstanding for Nov-Dec? (W1) -22,400
Cash discounts in the year (W2) -4,800
Cash and credit sales received Jan-Dec 232,800

W1
· November monthly sales are £20,000 x 80% credit sales x 40% will settle 2
months after sale (not paying this year) = £6,400.
· December monthly sales are £20,000 x 80% credit sales (not paying this year) =
£16,000.
· Trade receivables outstanding at the end of the year £6,400 + £16,000 = £22,400.
W2
Cash discounts for the year £20,000 x 12 months x 20% of customers will pay by cash
and will be given a 10% discount, therefore cash discount = £4,800

9.32 Answer B

9.33 Answer

(i) The raw material usage (Kg) for the month would be 11600 kg

(ii) The value of budgeted material purchases (£) for the month would be 14600 kg x
£3.50 = £51,100.

WORKINGS:

Production Budget:

Opening inventory 12000 units

Add: Production (balancing figure) 29000 units

41000 units

Less: Sales (given) 26000 units

Closing inventory 15000 units

180
Production budget will drive material usage.

Raw Materials Budget:

Opening inventory 2000 kg

Add: Purchases (balancing figure) 14600 kg

16600 kg

Less: Material usage (0.4kg x 29000 units) 11600 kg

Closing inventory 5000 kg

181
 Solutions to chapter 10 – Standard costing and variance analysis

10.1 Answer A

(1000 units – 960 units) x £150 Std cont per unit = £6,000 Adverse.

10.2 Answer B

3 kg (after wastage of 25%) x 100%/75% (after wastage) = 4 kg

4 kg = 100% before wastage

10.3 Answer A

Using high/low method to separate fixed and variable cost

High 18000 £41,000

Low 10000 £25,000
8000 £16,000

Variable cost £16,000/8,000 = £2.00

Therefore fixed cost (18,000 x 2 = 36,000) – 41,000 = 5,000

Therefore 12750 hours should cost ((12750 x 2) + 5,000) 30,500

12750 hours did cost 32,560
2,060 (A)

10.4 Answer A

2,386/5.60 = 426 variance in labour hours

Should take 4hrs x 4,260 units = 17,040 hours therefore if adverse it took 426 hrs longer
than expected.

17,040 + 426 = 17,466 hours

10.5 Answer D

Adverse variance £4,875/6.50 = 750kg variance in usage.

Should have used 3000 units x 2kg = 6,000kg

182
Therefore actual usage 6000kg + 750kg = 6750kg

Closing stock rose by 800kg therefore must have purchased 6750kg + 800kg = 7550kg

10.6 Answer A

(800 units – 770 units) x Std cont per unit (0.4 x £30 Std selling price) = £360 (A)

10.7 Answer D

Did use
2300 x 3.3 kg = 7590
Should use
2300 x 3.5 kg = 8050
460
x
x Standard price £5.00

Material usage variance £2,300.00 (F)

or 2300 x (3.3 kg - 3.5 kg) x £5.00 = £2,300.00 (F)

10.8 Answer B

Did purchase
6700 kg x (£7.60 - £ 7.00) = £4020 (A)

10.9 Answer A

Did work 32450

Should work
4260 x 8 hours = 34080
1630

x Standard price £7.60

Material usage variance £12,388 (F)

183
10.10 Answer B

Labour efficiency variance

Hours
Actual production did take 8000
Actual production should take (11000 units x 0.75 hrs) (8250)
250
x £20
Labour efficiency variance £5,000 (F)

Shorter method Labour efficiency variance (8000 – 8250 x £20) = £5,000 (F)

Tip: This variance calculation always uses the actual hours worked never hours paid if
there is a difference between the two within a question.

10.11 Answer C

Variable overhead expenditure variance

£
Did spend (actual hours worked x actual OH rate) 132,000
Should spend (8000 hrs x £15) (120,000)
Variable overhead expenditure variance 12,000 (A)

Tip: Variable overhead expenditure within a question will be assumed to be driven by

labour hours worked never paid if there is a difference between the two e.g. if production
stops and staff are idle then no variable overhead should be incurred.

10.12

Tip: The high-low technique uses the highest and the lowest activity and associated
monetary values to predict a variable and fixed cost, by recognising cost behaviour.
This technique concentrates on splitting a semi-variable cost into its fixed and
variable categories in order to help predict cost.

The technique creates a linear relationship for cost forecasting, normally expressed as

Y= a + bX

184
Work out variable cost
Machine hours Overhead cost (£)
18000 16,242
10000 13,468
8000 2,774

£2,774/8000 = £0.34675 per machine hour variable cost.

Work out fixed cost
Use either 18000 or 10000 machine hours to work out the fixed cost as a balancing
figure.
£16,242 = Fixed cost + (18000 x £0.34675)
£16,242 = Fixed cost + (£6,242)
Fixed cost = £10,000
Therefore
a = £10,000
b = £0.34675
The budget for 13,780 machine hours
Y = £10,000 + (£0.34675 x 13,780)
Y = £14,778
The total overhead expenditure variance
Did spend £14,521
Should spend £14,778
Variance £257 (F)

10.13 Answer D

Tip: Labour rate variance

Did spend (actual hours paid x actual rate) X

Should spend (actual hours paid x standard rate) (X)
Labour rate variance X

This variance calculation always uses the actual hours paid for never hours worked if
there is a difference between the two within a question.

185
Labour rate variance
£
Did spend (actual hours paid x actual rate) 336,000
Should spend (24000 x £15) (360,000)
Labour rate variance 24,000 (F)

10.14 Answer A

Tip: Variable overhead efficiency variance

Hours
Actual production did take X
Actual production should take (actual production x standard hours) (X)
X
x standard v/oh overhead rate £x
Variable overhead efficiency variance X

This variance calculation always uses the actual hours worked never hours paid if there
is a difference between the two within a question; the proforma is similar to the labour
efficiency variance

Variable overhead efficiency variance

Hours
Actual production did take 24000
Actual production should take (11000 x 2 hours) (22000)
2000
x standard v/oh overhead rate x £6
Variable overhead efficiency variance £12,000 (A)

10.15 Answer C

Measures the difference between the variable overhead cost budget flexed on actual
labour hours and the variable overhead cost absorbed by output produced. Actual
output drives standard hours and therefore the absorption of variable production
overhead.

186
10.16

Tip: Labour idle time variance

Hours
Actual hours paid X
Actual hours worked (X)
Idle time X
x standard rate per hour
Labour idle time variance X
The difference between labour hours paid and worked. Always adverse if no idle
time is expected in the budget.

Labour idle time variance

(61500 hours – 56000 hours) = 5500 hours x £9 (W1) per hour = £49,500 (A).

Standard rate per hour = £540,000 ÷ 60000 hours = £9 per hour.

10.17

Tip: This variance calculation always uses the actual hours worked never hours paid
if there is a difference between the two within a question. A labour efficiency
variance is the difference between how long your workforce did and should have
taken according to actual production volume, valued at standard rate.

Labour efficiency variance

Hours
Actual production did take 56000
Actual production should take (14650 units x (W1) 4 hrs) (58600)
2600
x £9
Labour efficiency variance £23,400 (F)

Shorter method: Labour efficiency variance (56000 – 58600 x £9) = £23,400 (F).

W1 60000 hours ÷ 15000 units = 4 hours standard hours per unit.

187
 10.18 Answer B
8200 x (£31-£26) = £41,000 (F)

10.19 Answer B
Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

*Std Overhead absorption rate per unit (£1m ÷ 200000 units) = £5

The total fixed production overhead variance is £100,000 (A) this represents the under
absorption of fixed overhead for the period.

Production fixed overhead control account

Actual production (?) x *O.A.R £5

Actual production overhead £1,300,000 = F/OH absorbed or charged during
the period (Balance) £1,200,000

Under absorption £100,000

Fixed overhead absorbed £1,200,000 ÷ £5 OAR = 240000 units actually produced.

The sum of the fixed overhead expenditure and volume variance would be equal to the
under absorption £100,000 (A). F/OH Expenditure variance (£1.0m - £1.3m) = £300,000
(A) + F/OH Volume variance ((240000 – 200000 units) x £5 OAR) = £200,000 (F) =
Under absorption of fixed overhead for the period £100,000 (A).

10.20
Hours
Actual production did take (balance) 60,000
Actual production should take
(11,500 units x 5 hours) (57,500)
2,500
x standard labour rate per hour x £12
Labour efficiency variance 30,000 (A)

188
Using the labour efficiency variance calculation we can work out actual hours paid (and
worked) during the period. 60,000 hours can now be used to work out the actual labour
cost for the period.
£
Did spend (60,000 hours paid x actual rate) Balance 765,000
Should spend (60,000 hours paid x £12) (720,000)
Labour rate variance 45,000 (A)

The actual rate paid per direct labour hour = £765,000 ÷ 60,000 hours paid = £12.75

10.21 Answer D

Fixed
Actual fixed overhead expenditure X
overhead
Budgeted fixed overhead expenditure (X)
expenditure
Fixed overhead expenditure variance X
variance

£2,010,000 - £2,500,000 = £490,000 (F)

10.22 Answer C

10.23 Answer B

In order to work out the expenditure variance we need to compare the budgeted
expenditure at 87% bed occupancy to the actual expenditure. We will calculate the
variable cost for each 1% increase in bed occupancy by comparing the costs of the flexed
budgets given.
Machine hours Cost ($)
82% 410,000
94% 429,000
12% 19,200

$19,200/12 = $1,600 per 1% increasing bed occupancy

Therefore the budget cost at 87% occupancy is the cost at 82% plus 5% of costs.

$410,000 + ($1,600 x 5) = $418,000.

The expenditure variance = $430,000 - $418,000 = $12,000 adverse

189
10.24 Answer B

Sales price Did sell (actual quantity sold x actual price) X

variance Should sell (actual quantity sold x standard price) (X)
Sales price variance X

15,750 x ($6.60 - £6) = $9,450 (F)

10.25 Answer A

Budgeted sales = $15,650 / 1.05 = 15,000 units

(15,750 – 15,000) x $2 Standard contribution per bar = $1,500 (F)

10.26 Answer D

10.27 Answer

The total sales margin variance would be the difference between actual and budgeted unit
sales, valued at the standard contribution per unit ($55 - $20).

Actual 7000 units

Budget 7500 units
500 units

x std cont per unit ($55 - $20).

= $17500 Adverse

10.28 Answer

Actual labour cost $6600

Flexed labour cost (170 units x 5 hours x $8) $6800
The direct labour total variance $200 (F)

190
10.29 Answer B

Flexed cost for 8000 kg x ( ($15000/5000 kg = $3 per Kg) = $24000

But this is before discount;

Less 5% discount as production exceeds 6000 kg.

$24000 x 0.95 (after 5% discount) = $22800

Actual cost of 8000 kg. $25600

Total variance $2800 (A)

10.30 Answer $100

9 hours (90% active) x 100%/90% = 10 hours total labour time to make one widget.

10 total standard hours x $10 = $100.

10.31 Answer $28,100

Flexed (budgeted) material cost for 1700 units:

$27000 Direct labour cost/1500 units = $18 a unit x 1700 units = 30,600

Direct labour rate variance of $3000 adverse + 3,000

(actual cost was higher than flexed cost)

Direct labour efficiency variance of $5500 favourable. - 5,500

(actual cost was lower than flexed cost)

The actual direct labour cost 28,100

10.32 Answer A

The difference between budgeted (flexed) cost and actual cost.

The difference between the actual amount of expenditure and the estimated amount (the
amount budgeted when setting the expense/overhead rates prior to the start of the year).

Budgeted prime cost (variable cost) 20000/1000 units = £20 a unit for prime cost.

Fixed production overhead (budgeted) £25,000.

191
Therefore:
Actual cost based on 1200 units produced (given) 51,000

Flexed budgeted cost (£20 a unit x 1200 units) + £25,000 = 49,000

Budget volume variance 2,000(A)

10.33 Answer C

Proforma for material price variance:

Did spend (actual quantity purchased x actual price) X

Should spend (actual quantity purchased x standard price) (X)
Material price variance X

Or… actual quantity purchased (5000kg) x (actual price less standard price, actual price
was £5 less than standard price).

The material price variance measures the impact on contribution when the actual quantity
of material purchased was at a lower or higher price than the standard price. This
variance calculation always uses the quantity of material purchased never material used if
there is a difference between material purchased and used (issued) in a question.

If the company paid £5 less than the standard price then the material price variance would
be favourable. The materials price variance would be £5 x 5000kg = £25,000 (F)

10.34 Answer C

Actual production did take 1800 hours

Actual production should take;
Actual production x standard hours (8 hours) (X)
720 hours (balance)
x Standard Rate per hour $5 per hour
Labour efficiency variance $3600 Adverse

The labour efficiency variance measures the impact on contribution when the actual
quantity of labour hours worked was at a lower or higher amount than standard
efficiency. This variance calculation always uses actual hours worked never hours paid if
there is a difference between hours paid and worked in a question.

$3600 A ÷ Standard Rate per hour $5 per hour = 720 hours (balance). 720 hours less
than actual hours, since the efficiency variance is adverse. Therefore standard hours for
actual production would be 1800 - 720 = 1080 standard hours. 1080 standard hours for
actual production ÷ 8 standard hours per unit = actual production 135 units.

192
10.35 Answer 1100 units

· Budgeted contribution 9,000/2000 units budgeted to be sold = standard

contribution per unit of £4.50.
· Sales contribution volume variance 900 F means actual sales volume was greater.
In fact greater by 900 ÷ standard contribution per unit of £4.50 = 200 units.
· Therefore actual sales units 900 + 200 = 1100 units

Units
Did sell (actual quantity sold) X
Should sell (original budgeted quantity sold) (X)
X
Sales volume x Standard Contribution per unit
(contribution) Sales volume (contribution) variance X
variance .
The sales volume (contribution) variance measures the difference
between the original and flexed budgeted contribution. It measures the
impact on contribution, when actual sale of units is more or less than
the original budgeted sale of units. This method of calculation would
be applied when marginal costing is used by the organisation.

10.36 Answer £231,000

Units
Did sell (actual quantity sold) 3600
Should sell (original budgeted quantity sold) (3300)
300
x Standard Contribution per unit
Sales volume (contribution) variance £21,000 A
.

Sales volume variance £21,000 A ÷ (3600 units actually sold - 3300 units budgeted to be
sold) = £70 standard contribution per unit. Therefore the budgeted contribution would be
£70 x budgeted sales 3300 units = £231,000.

10.37 Answer £160

18 productive hours (90% before idle time) x (100%/90%) = 20 hours x £8 per hour =
£160.

193
 Solutions to chapter 11 – Process and cost ledger accounting

11.1 Answer A

Value of completed output £18.39 x 1,100 = £20,229

Material Conversion
Good output 1,100 1,100
Abnormal gain (50) (50)
Closing WIP 300 150(50%)
1,350 1,200

Cost (1,500 x £5) £7,500 £15,800

Scrap (normal loss 150 x £3) (£450)
£7,050 £15,800

Cost per equivalent unit £5.22 £13.17 = £18.39

11.2 Answer D

Value of closing WIP (300 x £5.22) + (150 x £13.17) = £3,542

Material Conversion
Good output 1,100 1,100
Abnormal gain (50) (50)
Closing WIP 300 150(50%)
1,350 1,200

Cost (1,500 x £5) £7,500 £15,800

Scrap (normal loss 150 x £3) (£450)
£7,050 £15,800

Cost per equivalent unit £5.22 £13.17 = £18.39

11.3 Answer C

11.4 Answer B

11.5 Answer D

11.6 Answer A

194
11.7 Answer C

Total Material Conversion

Normal loss 950 - -
Good output 17,600 17,600 17,600
Closing WIP 450 450 (100%) 225 (50%)
Abnormal loss (W1) 2,000 2,000 2,000
21,000 20,050 19,825

(W1) (1500 + 19500 = 21000 input – (950 + 17600 + 450) = 2000 units abnormal loss

11.8 Answer C

11.9 Answer C

11.10 Answer C

11.11 Answer A

11.12 Answer B

11.13 Answer D

11.14 Answer C

11.15 Answer D

11.16 Answer B

195
11.17 Answer A

Process Account

Input (DR) Litres $ Output (CR) Litres $

Materials input 12000 60,000 Normal loss (10% x 12000) 1200 4,800

Conversion cost 25,000 Actual output 9700

Abnormal loss (balance) 1100

Total 12000 Total 12000

Equivalent units

Material Conversion cost

Actual output 9700 9700

Abnormal loss (balance) 1100 1100

Total 10800 10800

Materials input $60,000

Conversion cost $25,000

Scrap proceeds ($4,800)

Total $55,200 $25,000

Cost per equivalent unit $5.11 $3.21

Valuation of abnormal loss:

$5.11 x 1100 = $5621

$3.21 x 1100 = $3531

$9152

11.18 Answer B

196
11.19 Answer B

Process Account

Input (DR) Litres $ Output (CR) Litres $

Materials input 12000 48,000 Normal loss (10% x 12000) 1200 1,200

Conversion cost 40,000 Actual output 9700

Abnormal loss (balance) 600

Closing WIP 500

Total 12000 Total 12000

Equivalent units

Material Conversion cost

Actual output 9700 9700

Closing WIP 500 200

Abnormal loss (balance) 600 600

Total 10800 10500

Materials input $48,000

Conversion cost $40,000

Scrap proceeds ($1,200)

Total $46,800 $40,000

Cost per equivalent unit $4.33 $3.81

Valuation of good output

$4.33 x 9700 = $42,001

$3.81 x 9700 = $36,957

$78,958

197
11.20 Answer D

Process Account

Input (DR) Litres $ Output (CR) Litres $

Materials input 12000 60,000 Normal loss (5% x 12000) 600 1,200

Conversion cost 35,000 Actual output 10700

Abnormal gain (balance) 300 Closing WIP 1000

Total 12300 Total 12300

Equivalent units

Material Conversion cost

Actual output 10700 10700

Closing WIP 1000 300

Abnormal gain (balance) (300) (300)

Total 11400 10700

Materials input $60,000

Conversion cost $35,000

Scrap proceeds ($1,200)

Total $58,800 $35,000

Cost per equivalent unit $5.16 $3.27

Valuation of closing WIP

$5.16 x 1000 = $5,160

$3.27 x 300 = $981

$6,141

198
11.21 Answer £24,297.

Process Account

Input (DR) Kg £ Output (CR) Kg £

Materials input 1500 22,500 Normal loss (5% x 1500) 75 375

Labour cost 4,500 Abnormal loss (balance) 125

Actual output 1300

Total 1500 Total 1500

Equivalent units

Material Labour cost

Actual output 1300 1300

Abnormal loss (balance) 125 125

Total 1425 1425

Costs £22,500 £4,500

Scrap (£375)

Total cost £22,125 £4,500

Cost per equivalent unit £15.53 £3.16 = £18.69

Valuation of finished goods (completed output)

1300 equivalent units exist (identical) in each of the 2 expense columns for finished
goods, therefore £18.69 x 1300 = £24,297.

199
11.22 Answer $70000

Process Account

Input (DR) Kg $ Output (CR) Kg $

Materials input 5000 35,000 Actual output 4000

Labour cost 11,900 Abnormal loss (balance) 200

Production overhead 35,520 Closing WIP 800

Total 5000 Total 5000

Equivalent units

Material Labour cost Production overhead

Actual output 4000 4000 4000

Closing WIP 800 560 240

Abnormal loss (balance) 200 200 200

Total 5000 4760 4440

Costs $35000 $11900 $35520

Cost per equivalent unit $7.00 $2.50 $8.00 = $17.50

Valuation of finished goods

4000 equivalent units exist (identical) in each of the 3 expense columns for finished
goods therefore $17.50 x 4000 = $70000.

200
11.23 Answer B

Process account

litres litres
Normal loss
Material input 8000 (5% 8000) 400
Abnormal gain 700 Output (BALANCE) 8300
8700 8700

11.24 Answer C

Process account

litres $ litres $
Material 10000 20000 Normal loss
Conversion cost 35000 (5% 10000) 500 100
Output 8500
Abnormal loss (BAL) 200
Closing WIP 800
10000

201
Statement of Equivalent units (average cost method)

Material Conversion
Output 8500 8500
Closing WIP 800 (100%) 360 (45%)
Abnormal loss 200 200
9500 9060

$ $
Scrap proceeds (100)
Other cost input 20000 35000
19900 35000

Cost per equivalent unit $2.09 $3.86

Valuation of closing WIP

Material (800 x $2.09) = $1672
Conversion cost (360 x $3.86) = $1390
$3062

Tip: The normal loss expected is ignored from a statement of equivalent units.

Tip: The proceeds from a normal loss is normally deducted from material cost in priority
when working out the material cost per equivalent unit for valuation purposes.

11.25 Answer B

11.26 Answer C

11.27 Answer A

11.28 Answer A

202
11.29 Answer £57,000

Process account

litres £ litres £
Material 20000 34,500 Normal loss
Labour cost 15,000 (5% 20000) 1000 nil
Overhead (50% x 15000) 7,500 Output 18500
Abnormal loss (BAL) 500
20000

Given no opening or closing work-in-progress, all costs can be amalgamated together.

Statement of Equivalent units

Expenses
Output 18500
Abnormal loss 500
19000

Total expenses £57,000

Cost per equivalent unit (£57,000 ÷ 19000) £3

Valuation of output
18500 x £3 = £55,500.

Tip: The normal loss expected is always ignored from a statement of equivalent units.

203
11.30 Answer C

Process Account

Input (DR) Litres £ Output (CR) Litres £

Opening WIP 1500

Materials input 25000 34,500 Normal loss (5% x 25000) 1250 NIL

Conversion cost 35,000 Actual output 21500

Abnormal gain (balance) 300 Closing WIP 3500

Abnormal loss (BALANCE) 250

Total 26500 Total 26500

Statement of equivalent units

Material Conversion cost

Actual output 21500 21500

Closing WIP 3500 2100 60% complete for conversion cost

Abnormal loss (balance) 250 250

Total 2525 0 23850

Normal loss units would be excluded from a statement of equivalent units because the
units are not valued for cost purposes.

11.31 Answer D

11.32 Answer A

11.33 Answer B

11.34 Answer D

11.35 Answer C

11.36 Answer A

204
 C01 Mock Exam

The following C01 mock exam should be attempted once all questions from chapters one
to eleven (1-11) have been completed within this exam practice kit.

This mock exam should be

timed (2 hours maximum).

Your real computer based assessment will be 2 hours maximum and the pass mark will
be to score 50% or more.

Your target to pass this mock exam is to score

correctly 25 questions out of 50 questions (or more).

Each question answered correctly is worth 2%, for example 28 questions answered
correctly would score 28 x 2% = 56%.

205
Question 1 of 50
A company has a contribution to sales (C/S) ratio of 40%. Fixed cost estimated for the
period is $100,000.

For the company to earn a profit of $250,000, its sales revenue would be?

Question 2 of 50
The following information exists about a project:

· NPV at 10% +$8,900

· NPV at 15% - $1,600

What would be the internal rate of return for the project (to 1 decimal place)?

Question 3 of 50
Which of the following is the accounting treatment of an abnormal loss?

a) DR Process Account CR Abnormal loss account

b) DR Abnormal loss account CR Process Account
c) DR Process Account CR Normal loss account
d) DR Normal loss account CR Process Account

Question 4 of 50
When the cost of capital is increased which one of the following about NPV and payback
is true?

a) The NPV will increase and the payback period will increase
b) The NPV will decrease and the payback period will increase
c) The NPV will decrease and the payback period will decrease
d) The NPV will decrease and the payback period will remain constant

206
Question 5 of 50

What type of chart is best represented by the diagram above?

a) A break-even chart
b) A profit-volume chart
c) A variable cost chart
d) A semi-variable cost chart

Question 6 of 50
A company has the following budgeted details for sales receipts

Opening trade receivables £20,000.

Forecast monthly sales will be £20,000 and this trend is expected to continue throughout
the year.

20% of customers will pay by cash and will be given a 10% discount. Of the remaining
80% credit sales, 60% will settle within one month after sale and 40% will settle 2
months after sale.

Total budgeted receipts for the entire year would be?

a) £212,800
b) £232,800
c) £237,600
d) £240,000

207
Question 7 of 50
Machining Assembly Finishing

Budgeted production overhead ($) 35784 28596 18123

Budgeted machine hours 17892
Budgeted labour hours 4473 19064 12082

To make one unit requires 5 hours of machine time in the machining department and 2
labour hours within each of the assembly and finishing departments.

The overhead absorption rate per unit is?

Question 8 of 50

XYZ Plc manufactures three products from the same type of machine, which is in short
supply. The following budget relates to these products:

Product X Product Y Product Z

£/unit £/unit £/unit
Sales price 20.00 60.00 30.00
Variable cost 15.00 25.00 20.00
Fixed cost 3.00 1.50 5.00
Profit 2.00 33.50 5.00

Machine Hours
per unit 3.0 5.0 4.0

The fixed cost represents indirect production overhead apportioned to each product. The
most and the least profitable use of the machine time for the above products would be?

Most profitable Least Profitable

a) Product Y Product X
b) Product X Product Z
c) Product Z Product X
d) Product Z Product Y

208
Question 9 of 50
Within a process costing environment the normal loss expected is 5% of input, the scrap
value is nil. Input during the period was 25000 litres at a cost of £34,500 for the period.
During the period output of 21500 litres was made. Opening work-in-progress was 1500
litres fully complete for material and 80% complete for conversion cost. Closing work-in-
progress was 3500 litres fully complete for material and 60% complete for conversion
cost.
When producing a statement of equivalent units using the average cost method the
number of equivalent units for material and conversion for closing work-in-progress
would be?
a) Material – 25000 equivalent units and Conversion – 23600 equivalent units
b) Material – 25250 equivalent units and Conversion – 23150 equivalent units
c) Material – 25250 equivalent units and Conversion – 23850 equivalent units
d) Material – 25250 equivalent units and Conversion – 25250 equivalent units

Question 10 of 50
A company has $5m in fixed cost, its selling price is budgeted to be $120 and its
budgeted total cost per unit is expected to be $50. If 25% of total cost represents
variable cost.

How many units to earn a profit of $1,000,000 (to the nearest unit)?

Question 11 of 50

A company runs a job costing system. Direct material and labour of $2,700 and $1,200
have been budgeted and charged to job number 349 respectively. Budgeted production
overhead for the period was $650,000 and actual production overhead $625,000.
Budgeted direct labour hours were 50,000 at budgeted total cost of $300,000.

The production overhead to be charged to job number 349 would be?

209
Question 12 of 50
Budget

Output 1500 units

Direct labour hours 3000 hours
Direct labour cost $27000

During the financial period actual output produced was 1700 units. There was a direct
labour rate variance of $3000 adverse and direct labour efficiency variance of $5500
favourable.

What was the actual direct labour cost in this period?

Question 13 of 50
Which of the following are characteristics of good information: (Tick 3 boxes only)

Timely
Accurate
Must be produced in PowerPoint
Easily understood
Must have graphs and drawings

Question 14 of 50
Overheads will always be over-absorbed when

a) actual output is higher than budgeted output.

b) actual overheads incurred are higher than the amount absorbed.
c) actual overheads incurred are lower than the amount absorbed.
d) budgeted overheads are lower than the overheads absorbed.

210
Question 15 of 50
A college offers discounts of 10% to students who pay on enrolment and 50% of
customers pay on enrolment. The extra sales needed to increase cash receipts by £20,000
would be?

a) £20,000
b) £21,053
c) £22,000
d) £44,000

Question 16 of 50
An abnormal loss within a process will occur when?

a) Actual losses are more than normal losses expected

b) Actual losses are less than normal losses expected
c) Output levels are set below budgeted level of production
d) Output levels are set above budgeted level of production

211
Question 17 of 50
A company in the next period needs to make 1000 units of products A and 3000 units of
product B and C. All three products are made using the same machines, machine
capacity next period will be a maximum of 20000 hours.

A B C
Internal if product made in house ($) 10 15 5
Machine hours if made in house 5 5 7
Market price if purchased from a supplier ($) 20 32 9
In order to minimise internal cost how many units of product C should be purchased from
an external supplier?

a) None
b) 1167 units
c) 2800 units
d) 3000 units

Question 18 of 50
A company makes liquid fertilizer and details during the process of making its product
are as follows.

Materials 10000 litres at $2

Conversion cost $35000
Output for the period 8500 litres

The was no opening WIP at the start of the period. 800 units of closing WIP was
incomplete at the finish of the period, being fully completed for materials and 45%
complete for conversion cost.

Normal loss expected is 5% of input and its scrap value $0.20 per litre

The value of closing WIP for the period would be closest to?

a) $100
b) $1190
c) $3062
d) $50575

212
Question 19 of 50
The standard labour cost per unit of product Z is $40 (8 hours @ $5 per hour)
Hours worked 1800 hours
Actual labour rate paid $5.50 per hour
Labour efficiency variance $3600 Adverse
How many units of product Z was produced in the above period?
a) 135 units
b) 143 units
c) 135 units
d) 225 units

Question 20 of 50
A company uses an absorption costing system and calculates its overhead absorption rate
based on machine hours.

Budgeted Actual

Production overhead (£) 245,000 249,000

Machine hours 122,500 119,200

Production overhead for the period above would have been?

a) Over absorbed by £10,600

b) Under absorbed by £10,600
c) Under absorbed by £4,000
d) Over absorbed by £4,000

213
Question 21 of 50
A company operates a standard absorption costing system. The following fixed
production overhead data are available for the latest period:

Budgeted Output 300,000 units

Budgeted Fixed Production Overhead £1,500,000
Actual Fixed Production Overhead £1,950,000
Fixed Production Overhead Total Variance £150,000 adverse

The actual level of production for the period was nearest to

a) 277,000 units
b) 324,000 units
c) 360,000 units
d) 420,000 units

Question 22 of 50
The following details exist about job number 123;

Assembly Packaging
Direct materials $1000 $400
Direct labour hours 20 hours 30 hours
Direct labour rate per hour $10 $7
Production overhead per direct labour hour $5 $5
Administration 20% of production cost
Profit margin 50% of selling price

The selling price of job 123 would be?

214
Question 23 of 50
The following data relates to a manufacturing company. At the beginning of August there
was no inventory. During August 2,000 units of product X were produced, but only 1,750
units were sold. The financial data for product X for August were as follow:

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Total costs for X for August 84,500

To achieve a profit margin of 40% of sales (profit as a percentage of sales) and

using marginal cost pricing, the price for product X (to the nearest 2 decimals)
would be?

Question 24 of 50
Assembly workers are paid an hourly wage and a bonus for each unit produced. What
type of cost would this be?

a) Variable cost
b) Fixed cost
c) Semi-variable cost
d) Stepped fixed cost

Question 25 of 50
The following details exist for an organisation.
Budgeted sales were 3300 units and actual sales were 3600 units.
Standard variable cost was £34.
Sales price variance £30,000 F
Sales volume variance £21,000 A

The budgeted contribution is?

215
Question 26 of 50
The following information relates to a budget period.

The standard labour rate is £8 per hour. One unit produced requires 18 productive hours.
Idle time is budgeted to be 10% of total (productive) hours worked. Standard labour
hours include idle time.

Calculate the standard cost of labour for one unit of product?

Question 27 of 50
A flexible budgeting system exists for an organisation and financial details for the budget
period are provided below.

40% 60%

Direct materials ($) 67,500 101,250

Direct labour ($) 33,500 50,250
Production overhead ($) 45,000 67,500
Other fixed overhead ($) 20,000 20,000

What would be the total budgeted cost allowance for 70% level of activity?

Question 28 of 50
The wages of an assembly worker within a car factory would be best classified as?

a) A direct labour cost

b) A direct overhead expense
c) An indirect expense
d) An indirect labour expense

216
Question 29 of 50
Company X makes widgets; each widget made requires 9 active hours worked however,
standard labour hours for all products made should include idle time of 10% of total
labour hours. The standard labour rate per hour is $10.

The standard labour cost for one unit of product will be?

Question 30 of 50
Within a process costing environment the normal loss expected is 5% of input, the scrap
value is nil. Input during the period was 20000 litres at a cost of £34,500 for the period.
Direct labour expenses for the period was £15,000, production overhead is absorbed on
the basis of 50% of direct labour expenses.

During the period output of 18500 litres was made. There was no opening or closing
work-in-progress.

The value of output would have been?

Question 31 of 50
A company operates an absorption costing system whereby prices are charged based on
the full cost of a product made. Production overhead is absorbed using an overhead
absorption rate of £5 per machine hour. Product X uses 2 machine hours to make one unit
of product.

The direct cost of making product X is £25 per unit. The company adds 20% to total
production cost in order to cover non-production expenses. If the company needed to
earn a 25% sales margin from the sale of product X.

What would be the selling price for product A?

217
Question 32 of 50
The following budgeted information exists about a company;

Output Costs
(units) (£)
1200 34,000
1800 46,000

It is forecast that fixed cost will increase by 20% and the variable cost will decrease by
10% in the next year.

The forecast budgeted cost next year for an output of 1500 units would be?

Question 33 of 50
When a budget is updated on a regular basis by adding a later period to it immediately
when an earlier period has expired would be an example of

a) A flexible budget
b) A rolling budget
c) An activity based budget
d) A zero based budget

Question 34 of 50
Budgeted contribution 9,000
Sales contribution volume variance 900 F
Flexed contribution for actual sales 9,900
Sales price variance 800 A
Actual contribution 9,100

The original sales budget was to sell 2000 units earning budgeted sales revenue of
£50,000.
The actual sales volume in units would be?

218
Question 35 of 50
When output levels increase which one of the following would be more likely considered
false?

a) The total variable cost will rise

b) The variable cost per unit falls
c) The total fixed cost will remain the same
d) The fixed cost per unit falls

Question 36 of 50
The following information exists about a car tyre garage

Number of tyre machines 6

Number of tyres used 700
Number of customers 594

Garage supervisor salary £2,400

Garage wages for tyre fitting staff £36,990
Depreciation (per tyre machine) £5,000
Other site costs £5,700

Average cost per tyre £25

The total garage cost per customer for the above period (to the nearest £0.01) was?

Question 37 of 50
Which one of the following is not a characteristic of good information?

a) Accurate

b) Complete

c) Relevant

d) Historical

219
Question 38 of 50
Which one of the following is not a purpose of management information?

a) Planning
b) Decision making
c) Controlling
d) Researching

Question 39 of 50
Which one of the following is an example of strategic level management information?

a) A variance analysis report

b) A business forecast
c) An investment appraisal report
d) A work schedule for the next day

Question 40 of 50
Company Z pay their suppliers in the ratio of 60% paid one month after purchase and
40% paid two months after purchase. All invoices are received on the last day of each
month.

Those suppliers paid one month after purchase offer company Z a 5% discount and
those suppliers paid two months after purchase offer company Z a 1% discount.

Credit purchases ($)

January 35000
February 40000
March 15000

The amount budgeted to be paid to suppliers in March would be?

a) $15,000
b) $27,880
c) $36,660
d) $38,000

220
Question 41 of 50
According to a profit volume (PV) chart, when fixed cost increases, the point at which
the profit line cuts the horizontal axis of the chart would?

a) Shift to the right

b) Shift to the left
c) Disappear off the chart
d) Remain constant

Question 42 of 50
Within a company one purchase ledger clerk needs to be recruited for every 50 supplier
accounts that need management and administration. Which one of the following types of
cost would this be?

a) Fixed cost
b) Step cost
c) Variable cost
d) Mixed cost

Question 43 of 50
Which one of the following is not a main role of the management accountant?

a) Design, implement and manage integrated information systems

b) Design and implement corporate governance, including risk management
c) Ensuring delivery of optimum efficiency and effectiveness in the use of resources
d) To prepare statutory company accounts

221
Question 44 of 50
The following details exist for a company:

Credit sales (£)

January 100,000
February 125,000
March 98,000
April 95,000
%
Invoices paid in the month after sale 60
Invoices paid in the second month after sales 20
Invoices paid in the third month after sales 10
Bad debts 10

The amount received in April according to the information above would be?

Question 45 of 50
Budget Actual

Output (units) 1000 1200

£ £
Prime cost 20000 23000
Fixed production overhead 25000 28000
Total cost 45000 51000

The total budget volume variance was?

a) £2000 adverse
b) £3,000 adverse
c) £2000 favourable
d) £6,000 adverse

222
Question 46 of 50
If the level of stock decreases during a period, assuming the overhead absorption rate
remains unchanged:

a) Absorption costing profits will be lower and closing stock valuation higher than
under marginal costing
b) Absorption costing profits will be higher and closing stock valuation lower than
under marginal costing
c) Absorption costing profits will be lower and closing stock valuation lower than
under marginal costing
d) Absorption costing profits will be higher and closing stock valuation higher than
under marginal costing

Question 47 of 50
When operating a costing system, which one of the following would best explain the
process of overhead allocation?

a) Sharing costs between employees

b) Sharing costs between cost centres
c) Sharing costs between cost units
d) Specifically attributing a cost to a particular cost centre

Question 48 of 50
Which one of the following reasons is more likely to explain why budgeted production
and sales would be different?

a) Changes in levels of finished goods inventory

b) Changes in levels of work-in-progress
c) Changes in levels of raw materials
d) Changes in levels of idle time and wastage

223
Question 49 of 50
A company maintains a standard costing system, all inventory is valued at standard cost.

The following details relate to material G

Actual quantity purchased 5000kg

Actual quantity issued to production 4800kg
Standard quantity for actual output produced 4600kg

During the period the company actually paid £5 per kg less than the standard price.

The materials price variance is?

a) £1000 Favourable
b) £2000 Favourable
c) £25,000 Favourable
d) £25,000 Adverse

Question 50 of 50
Which one of the following is an example of operational level information?

a) A variance analysis report

b) A business forecast
c) An investment appraisal report
d) A work schedule for the next day

224
 Solutions to the C01 Mock Exam

Question 1 of 50
Answer

Fixed cost $100,000 + target profit $250,000 = $350,000

$350,000/ (C/S) ratio 40% (0.4) = sales revenue $875,000.

Question 2 of 50
Answer 14.2%

The IRR method

This is achieved through trial, error and interpolation. If we have a cost of capital which
yields a positive NPV then we need to find a cost of capital when applied that will give a
negative NPV.

Using interpolation formula:

IRR =
A + ( a x [B - A] ) A = lower DF rate
a–b B = higher DF rate
a = NPV of A
b = NPV of B

IRR = 10% + ($8,900 ÷ ($8,900 + $1,600)) x (15% - 10%)

IRR = 10% + 4.2%
IRR = 14.2%

Question 3 of 50
Answer B

Question 4 of 50
Answer D

225
Question 5 of 50
Answer B

Question 6 of 50
Answer B

In the year… try relating the answer to a calendar year to understand it better!

Opening trade receivables would all pay in Jan and Feb (in the year) 20,000
12 months sales x £20,000 (say Jan-Dec) = 240,000
However trade receivables still outstanding for Nov-Dec? (W1) -22,400
Cash discounts in the year (W2) -4,800
Cash and credit sales received Jan-Dec 232,800

W1

· November monthly sales are £20,000 x 80% credit sales x 40% will settle 2
months after sale (not paying this year) = £6,400.
· December monthly sales are £20,000 x 80% credit sales (not paying this year) =
£16,000.
· Trade receivables outstanding at the end of the year £6,400 + £16,000 = £22,400.
W2
Cash discounts for the year £20,000 x 12 months x 20% of customers will pay by cash
and will be given a 10% discount, therefore cash discount = £4,800

Question 7 of 50
Answer $16.00

Machining
$35784/17892 machine hours = $2 per machine hour x 5 hours = $10.00

Assembly
$28596/19064 labour hours = $1.50 per labour hour x 2 hours = $3.00

Finishing
$18123/12082 labour hours = $1.50 per labour hour x 2 hours = $3.00
Overhead absorption rate per unit $16.00

226
Question 8 of 50
Answer A

X Y Z
Contribution per unit £5.00 £35.00 £10.00

Hours required per unit 3.0 5.0 4.0

Contribution per labour hour £1.67 £7.00 £2.50

Ranking Third First Second

Question 9 of 50
Answer C

Process Account

Input (DR) Litres £ Output (CR) Litres £

Opening WIP 1500

Materials input 25000 34,500 Normal loss (5% x 25000) 1250 NIL

Conversion cost 35,000 Actual output 21500

Abnormal gain (balance) 300 Closing WIP 3500

Abnormal loss (BALANCE) 250

Total 26500 Total 26500

Statement of equivalent units

Material Conversion cost

Actual output 21500 21500

Closing WIP 3500 2100 60% complete for conversion cost

Abnormal loss (balance) 250 250

Total 2525 0 23850

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Normal loss units would be excluded from a statement of equivalent units because the
units are not valued for cost purposes.

Question 10 of 50
Answer 55814 units

If 25% of total cost is variable cost then $50 x 25% = $12.50 variable cost per unit.

Contribution per unit = (selling price) $120 – (variable cost) $12.50 = $107.50
contribution per unit.

($5m fixed cost + $1m target profit) ÷ $107.50 contribution per unit = 55814 units.

Question 11 of 50
Answer £2600

Overhead absorption rate (OAR) = Budgeted production overhead

Budget level of activity (hours)

* Overhead absorption rate per unit ($650,000 ÷ 50000 hours) = £13.00 per hour.
If labour $1,200 has been budgeted then divided by the hourly labour rate ($300,000 ÷
50,000 hours) = $6 an hour = 200 hours actually worked.
Therefore production overhead absorbed would be 200 hours actually worked x £13.00
per hour OAR = £2600.

Question 12 of 50
Answer $28,100

Flexed (budgeted) material cost for 1700 units:

$27000 Direct labour cost/1500 units = $18 a unit x 1700 units = 30,600

Direct labour rate variance of $3000 adverse + 3,000

(actual cost was higher than flexed cost)

Direct labour efficiency variance of $5500 favourable. - 5,500

(actual cost was lower than flexed cost)

The actual direct labour cost 28,100

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Question 13 of 50
Answer
Timely
Accurate
Easily understood

Question 14 of 50
Answer C

Question 15 of 50
Answer B

10% discount is offered to students who pay on enrolment and 50% of customers pay on
enrolment; therefore 50% x 10% = 5% sales lost before you receive £20,000. Therefore
£20,000/0.95 = £21,053 or if £20,000 represents 95% then 100% of sales would be
(100%/95%) x £20,000 = £21,053.

PROOF: £21,053 x 50% get discount x 10% discount = £1,053 discounts given.

Therefore sales £21,053 - £1,053 discounts given = £20,000 received.

Question 16 of 50
Answer A

Question 17 of 50
Answer D

Clearly each product would be cheaper to make internally but there is a shortage of
machine hours, therefore this problem is like limiting factor analysis but rather than
attempting to maximise contribution, you are instead attempting to minimise cost.

A B C
External cost per unit £20.00 £32.00 £9.00

Hours required per unit 5 5 7

229
External per hour £4.00 £6.40 £1.29

Ranking Second First Third

The external cost per hour of making product B is highest, so to minimise cost use all
machine hours on this product first, then product A and then product C.

B 3000 units x 5 hours = 15000 hours

Hours left 20000 hours less 15000 hours = 5000 hours!

Given product A is the second most expensive you make these products next.
Product A made = 5000 hours ÷ 5 hours per product = 1000 units made.

You have now run out of machine hours therefore would have to buy all of product C
from a supplier but this would minimise cost!

Question 18 of 50
Answer C

Process account

litres $ litres $
Material 10000 20000 Normal loss
Conversion cost 35000 (5% 10000) 500 100
Output 8500
Abnormal loss (BAL) 200
Closing WIP 800
10000

230
Statement of Equivalent units (average cost method)

Material Conversion
Output 8500 8500
Closing WIP 800 (100%) 360 (45%)
Abnormal loss 200 200
9500 9060

$ $
Scrap proceeds (100)
Other cost input 20000 35000
19900 35000

Cost per equivalent unit $2.09 $3.86

Valuation of closing WIP

Material (800 x $2.09) = $1672
Conversion cost (360 x $3.86) = $1390
$3062

Tip: The normal loss expected is ignored from a statement of equivalent units.

Tip: The proceeds from a normal loss is normally deducted from material cost in priority
when working out the material cost per equivalent unit for valuation purposes.

Question 19 of 50
Answer C

Actual production did take 1800 hours

Actual production should take;
Actual production x standard hours (8 hours) (X)
720 hours (balance)
x Standard Rate per hour $5 per hour
Labour efficiency variance $3600 Adverse

The labour efficiency variance measures the impact on contribution when the actual
quantity of labour hours worked was at a lower or higher amount than standard
efficiency. This variance calculation always uses actual hours worked never hours paid if
there is a difference between hours paid and worked in a question. $3600 A ÷ Standard
Rate per hour $5 per hour = 720 hours (balance). 720 hours less than actual hours, since
the efficiency variance is adverse. Therefore standard hours for actual production would
be 1800 - 720 = 1080 standard hours. 1080 standard hours for actual production ÷ 8
standard hours per unit = actual production 135 units.

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 Question 20 of 50
Answer B

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

OAR = (£245,000÷ 122,500 hours) = £2 per machine hour.

Over absorption of fixed overheads for the period would be £10,600.

Production fixed overhead control account

Actual hours (119,200 hours) x OAR (£2)

Actual production overhead £249,000
= Overhead charged during the period £238,400
Under absorption
(£249,000- £238,400) £10,600

Question 21 of 50
Answer C

An adverse fixed production overhead total variance means that the overheads have been
under absorbed. This means that actual overheads were greater than budgeted overheads.

We need to find out how much of the fixed overheads have been absorbed into
production and then dividing this by the budget overhead absorption rate (OAR) we can
find out actual production level.

Actual fixed production overhead costs = £1,950,000

Fixed production overhead total variance = £150,000
Fixed overheads absorbed = £1,950,000 - £150,000 = £1,800,000

OAR = £1,500,000 ÷ 300,000 units = £5 per unit

Actual production level = £1,800,000 ÷ £5 per unit = 360,000 units

232
Question 22 of 50
Answer

$
Direct materials ($1000 + $400) 1400
Direct labour (20 x $10) + (30 x $7) = 410
Production overhead (20 x $5) + (30 x $5) = 250
2060
Administration (2060 x 20%) = 412
Total cost 2472
Profit mark-up 50% (W1) 2472
The selling price 4944

The problem is that you are told sales margin (profit as a % of sales), but you need mark-
up (profit as a % of cost).

So if profit is 50% of selling price…

If selling price is 100 (assume) then profit is 50% of that much (50) therefore cost must
be the difference = 50 cost. Therefore mark-up 50 profit ÷ 50 cost = 100% mark-up on
cost.

Question 23 of 50
Answer £51.67

Marginal cost pricing adds a mark-up to variable production cost only.

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Total variable costs for X for August 62,000
£62,000 ÷ 2000 units produced (not sold) = £31 variable cost per unit + 66.67% mark-up
on cost = £31 x 1.6667 = £51.67.
Assume selling price 100
Then profit would be 40% x 100 = (40)
Cost of sales 60
If sales margin is 40P/100S = 40%. Then mark-up (profit as a % of cost) would be
40P/60C = 66.67% mark-up on cost.

233
Question 24 of 50
Answer C

Question 25 of 50
Answer £231,000
Units
Did sell (actual quantity sold) 3600
Should sell (original budgeted quantity sold)(3300)
300
x Standard Contribution per unit
Sales volume (contribution) variance £21,000 A
.

Sales volume variance £21,000 A ÷ (3600 units actually sold - 3300 units budgeted to be
sold) = £70 standard contribution per unit. Therefore the budgeted contribution would be
£70 x budgeted sales 3300 units = £231,000.

Question 26 of 50
Answer £160

18 productive hours (90% before idle time) x (100%/90%) = 20 hours x £8 per hour =
£160.

Question 27 of 50
Answer $275,500

40%
Direct materials ($) 67,500
Direct labour ($) 33,500
Production overhead ($) 45,000
146,000 x (70%/40%) = 255,500
Other fixed overhead ($) 20,000 Fixed = 20,000
Flexed budget at 70% activity level 275,500

234
Question 28 of 50
Answer A

Question 29 of 50
Answer $100

9 hours (90% active) x 100%/90% = 10 hours total labour time to make one widget.

10 total standard hours x $10 = $100.

Question 30 of 50
Answer £57,000

Process account

litres £ litres £
Material 20000 34,500 Normal loss
Labour cost 15,000 (5% 20000) 1000 nil
Overhead (50% x 15000) 7,500 Output 18500
Abnormal loss (BAL) 500
20000

Given no opening or closing work-in-progress, all costs can be amalgamated together.

Statement of Equivalent units

Expenses
Output 18500
Abnormal loss 500
19000

Total expenses £57,000

Cost per equivalent unit (£57,000 ÷ 19000) £3

235
Valuation of output

18500 x £3 = £55,500.

Tip: The normal loss expected is always ignored from a statement of equivalent units.

Question 31 of 50
Answer £56

The direct cost of making product X = £25 per unit

2 machine hours x £5 per machine hour = £10 per unit
£35 per unit
£35 per unit x 20% = £7 per unit
£42 per unit
£42 x mark-up 33.33% (W1) £14 per unit
Selling price £56

W1
The total cost per unit is £42. Sales margin (profit as a percentage of sales) is 25%, but
given we have cost, then we need mark-up (profit as a percentage of cost) to establish a
selling price. Assume Sales = 100, then if sales margin is 25% then profit would be 25.
Therefore cost would be (balance) 100 – 25 = 75. Therefore mark-up would be 25/75 =
33.33% mark-up.

Question 32 of 50
Answer £39,000

1800 46,000
1200 34,000
600 24,000

12,000/600 = 20 VC per unit

At 1800 units 46,000 = FC + (20 x 1800) therefore FC = 10,000.

Next year forecast production of 1500 units.

£
1500 units x (£20 VC x 0.90) given forecast decrease of 10% = 27,000
Fixed cost £10,000 x 1.2 (given forecast increase of 20%) = 12,000
39,000

236
Question 33 of 50
Answer B

Question 34 of 50
Answer 1100 units

· Budgeted contribution 9,000/2000 units budgeted to be sold = standard

contribution per unit of £4.50.
· Sales contribution volume variance 900 F means actual sales volume was greater.
In fact greater by 900 ÷ standard contribution per unit of £4.50 = 200 units.
· Therefore actual sales units 900 + 200 = 1100 units

Units
Did sell (actual quantity sold) X
Should sell (original budgeted quantity sold) (X)
X
Sales volume x Standard Contribution per unit
(contribution) Sales volume (contribution) variance X
variance .
The sales volume (contribution) variance measures the difference
between the original and flexed budgeted contribution. It measures the
impact on contribution, when actual sale of units is more or less than
the original budgeted sale of units. This method of calculation would
be applied when marginal costing is used by the organisation.

Question 35 of 50
Answer B

Question 36 of 50
Answer £155.88

Garage supervisor salary £2,400

Garage wages for tyre fitting staff £36,990
Other site costs £5,700

237
Depreciation (£5,000 x 6 machines) £30,000
Average cost per tyre (£25 x 700 tyres) £17,500
The total garage cost £92,590

The total garage cost per customer £92,590 ÷ 594 customers = £155.88.

Question 37 of 50
Answer D

Question 38 of 50
Answer D

Question 39 of 50
Answer B

Question 40 of 50
Answer C
March
January invoices $35,000 x 0.4 x 0.99 = $13,860
February invoices $40,000 x 0.6 x 0.95 = $22,800
Total payments to suppliers in March $36,660

Question 41 of 50
Answer A

When fixed cost increases the profit line would shift downwards. The effect of this is
that the point at which the profit line cuts the horizontal axis will shift to the right,
indicating a higher break-even point.

Question 42 of 50
Answer B

238
Question 43 of 50
Answer D

Question 44 of 50
Answer £93,800
April (£)
January 100,000 x 10% = 10,000
February 125,000 x 20% = 25,000
March 98,000 x 60% = 58,800
93,800

Bad debts do not form part of the % receipts for calculation, therefore can be ignored.

Question 45 of 50
Answer A

The difference between budgeted (flexed) cost and actual cost.

The difference between the actual amount of expenditure and the estimated amount (the
amount budgeted when setting the expense/overhead rates prior to the start of the year).

Budgeted prime cost (variable cost) 20000/1000 units = £20 a unit for prime cost.

Fixed production overhead (budgeted) £25,000.

Therefore:
Actual cost based on 1200 units produced (given) 51,000

Flexed budgeted cost (£20 a unit x 1200 units) + £25,000 = 49,000

Budget volume variance 2,000(A)

Question 46 of 50
Answer A

239
Question 47 of 50
Answer D

Question 48 of 50
Answer A

Question 49 of 50
Answer C

Proforma for material price variance:

Did spend (actual quantity purchased x actual price) X

Should spend (actual quantity purchased x standard price) (X)
Material price variance X

Or… actual quantity purchased (5000kg) x (actual price less standard price, actual price
was £5 less than standard price).

The material price variance measures the impact on contribution when the actual quantity
of material purchased was at a lower or higher price than the standard price. This
variance calculation always uses the quantity of material purchased never material used if
there is a difference between material purchased and used (issued) in a question.

If the company paid £5 less than the standard price then the material price variance would
be favourable. The materials price variance would be £5 x 5000kg = £25,000 (F)

Question 50 of 50
Answer D

240