Chapter 2: Calculating unit costs (Part 1)..............................................................................................

2
Chapter 3: Calculating unit costs (Part 2)..............................................................................................6
Chapter 4: Marginal costing and absorption costing...........................................................................12
Chapter 5: Pricing calculations............................................................................................................17
Chapter 6: Budgeting...........................................................................................................................23
Chapter 7: Working capital..................................................................................................................26
Chapter 9: Standard costing and variance analysis..............................................................................32
Chapter 10: Breakeven analysis and limiting factor analysis..............................................................37
Chapter 2: Calculating unit costs (Part 1)

1  Which of the following would normally be classified as a direct labour cost

A The basic pay of production line staff
B Overtime premiums paid – if the overtime is not worked at the specific request of a customer
C The basic pay of production line supervisors
D Idle time payments to production line staff

2  A manufacturing firm is very busy and overtime is being worked.

The amount of overtime premium paid to production line workers would normally be classed as:
A  Factory overheads C  Direct labour costs
B  Part of prime cost D  Administrative overheads

3  Wage payments for idle time of direct workers within a production department are classified as:
A  Direct labour cost C  Administration overhead
B  Prime cost D Factory overhead

4 Grant Leeve is an assembly worker in the main assembly plant of Gonnaway Co. Details of his gross
pay for the week are as follows.
Basic pay for normal hours worked: 38 hours at £5 per hour £190
Overtime: 8 hours at time and a half £60
Gross pay £250
Although he is paid for normal hours in full, Grant had been idle for 10 hours during the week because of
the absence of any output from the machining department.
The indirect labour costs that are included in his total gross pay of £250 are:
A  £20 B  £50 C  £70 D  £110

5 Which of the following would be classified as indirect costs for a food product manufacturer?
(i)  Food label on a tin of beans
(ii)  Maintenance materials used to repair production machinery
(iii)  Cleaner’s wages in the factory
A  (i) only B  (ii) and (iii) only C  All of them D  None of them

6 A small engineering company that makes generators specifically to customers’ own designs has had
to purchase some special tools for a particular job. The tools will have no further use after the work has
been completed and will be scrapped.
Which one of the following options is the correct cost classification for these tools?
A  Variable production overheads C  Indirect expenses
B  Fixed production overheads D  Direct expenses

7 Which of the following statements about a direct cost are correct?

(i) A direct cost can be traced in full to the product, service or department that is being costed.
(ii)  A cost that is a direct cost of one cost object might be an indirect cost of a different cost object.
(iii)  A direct cost might also be referred to as an overhead cost.
(iv)  Expenditure on direct costs will probably vary every period.
A  (i) and (ii) only B  (i) and (iii) only C  (i), (ii) and (iv) only D  All of them

8 Which of the statements is true?

A  Total direct costs are always greater than total indirect costs
B  Indirect costs are alternatively called overheads
C  Fixed costs per unit are the same at all levels of production
D  A direct cost will always be a variable cost

9 A shop carries out repairs on customers’ electrical items, eg televisions, DVD players, etc. From the
point of view of costing individual repair jobs, identify the most appropriate description for each cost.
Repair person paid a fixed wage per week
A  Direct and variable B  Direct and fixed C  Indirect and fixed
Replacement electrical components
D  Direct and variable E  Direct and fixed F  Indirect and fixed
Rent of the repair shop
G  Direct and variable H  Direct and fixed I  Indirect and fixed

10 A company pays £1 per unit as a royalty to the designer of a product which it manufactures and sells.
When costing units of the company’s product, the royalty charge is classified as a:
A  Direct expense B  Production overhead C  Administrative overhead D  Selling overhead

11 Cigar Co had the following entries in its materials control account:

Opening inventory £13,000
Closing inventory £18,000
Deliveries from suppliers £250,000
Returns to suppliers £25,000
The value of the issue of materials to production is:
A  £220,000 B  £225,000 C  £230,000 D  £270,000

12 Which THREE of the following are recognised and possibly acceptable methods of valuing inventory?
A  First in, Last out (FILO) D  Future anticipated cost
B  First in, First out (FIFO) E  Standard cost
C  Last in, First out (LIFO)

.
13 A wholesaler had an opening inventory of 750 units of geronimo valued at £80 each on 1 February.
The following receipts and sales were recorded during February.
4 February Received 180 units at a cost of £85 per unit
18 February Received 90 units at a cost of £90 per unit
24 February Sold 852 units at a price of £110 per unit
Using the FIFO valuation method, what was the cost of the units of geronimo sold on 24 February?
A £68,160 B £68,670 C £69,960 D £93,720

14 A wholesaler had an opening inventory of 750 units of product A valued at £80 each on 1 February.
The following receipts and sales were recorded during February.
4 February Received 180 units at a cost of £85 per unit
18 February Received 90 units at a cost of £90 per unit
24 February Sold 852 units at a price of £110 per unit
Using the LIFO valuation method (to the nearest £), what was the gross profit earned from the product A
sold on 24 February?
A  £17,040 B  £23,760 C  £69,960 D  £93,720

15 A wholesaler had an opening inventory of 330 units of mavis valued at £75 each on 1 February.
The following receipts and sales were recorded during February.
4 February Received 180 units at a cost of £85 per unit
18 February Received 90 units at a cost of £90 per unit
24 February Sold 432 units at a price of £110 per unit
Using the cumulative weighted average cost method of valuation, what was the cost of the mavis’ sold
on 24 February?
A  £33,696 B  £34,560 C  £35,280 D  £38,880

16 At the beginning of week 15 there were 200 units of pixie held in the stores. 80 of these had been
purchased for £7.55 each in week 14 and 120 had been purchased for £7.91 each in week 13.
On day 3 of week 15 a further 60 pixies were received into stores at a purchase cost of £7.96 each. The
only issue of pixies occurred on day 4 of week 15, when 75 pixies were issued to production. Using the
LIFO valuation method, what was the total cost of the pixies issued on day 4?
A  £566.25 B  £590.85 C  £593.25 D  £597.00
17 At the beginning of week 12 there were 500 units of component J held in the stores. 200 of these
components had been purchased for £6.25 each in week 11 and 300 had been purchased for £6.50
each in week 10. On day 3 of week 12 a further 150 components were received into stores at a purchase
cost of £6.60 each. The only issue of component J occurred on day 4 of week 12, when 90 units were
issued to production. Using the FIFO valuation method, what was the value of the closing inventory of
component J at the end of week 12?
A  £585 B  £594 C  £3,596 D  £3,605

18 In a period of falling prices, four students have recorded the cost of sales of commodity X. One
student has used the FIFO method of inventory valuation and one has used the LIFO method. The other
two students have used an average cost method, using the periodic and cumulative weighted average
basis respectively. The gross profits recorded by the students were as follows:
Student Recorded gross profit (£)
A 12,600
B 13,400
C 14,500
D 15,230
Which student was using the LIFO method of inventory valuation?
A  Student A B  Student B C  Student C D  Student D

19 Which of the following are true?

(i)  With FIFO, the inventory valuation will be close to replacement cost
(ii)  With LIFO, inventories are issued at a price which is close to the current market value
(iii)  Decision making can be difficult with both FIFO and LIFO because of the variations in prices
(iv)  A disadvantage of the weighted average method of inventory valuation is that the resulting issue
price is rarely an actual price that has been paid and it may be calculated to several decimal places.
A  (i) and (ii) only B  (i), (ii) and (iv) only C  (i) and (iii) only D  (i), (ii), (iii) and (iv)

20 For many years William has faced rising prices on his main raw material. He maintains inventories of
this material at a constant volume. He uses the FIFO method of inventory valuation. If he had used the
LIFO method this would have resulted in:
A  Higher cost of sales and lower inventory value C  Lower cost of sales and lower inventory value
B  Higher cost of sales and higher inventory value D  Lower cost of sales and higher inventory value
Chapter 3: Calculating unit costs (Part 2)

1 Which of the following decribes a cost centre?

A  Units of a product or service for which costs are ascertained
B  Amounts of expenditure attributable to various activities
C  Functions or locations for which costs are ascertained and related to cost units for control purposes
D A section of an organisation for which budgets are prepared and control is exercised

2  Which of the following is a valid reason for calculating overhead absorption rates?
A  To reduce the total overhead expenditure below a predetermined level
B  To ensure that the total overhead expenditure does not exceed budgeted levels
C  To attribute overhead costs to cost units
D  To attribute overhead costs to cost centres

3  Which of the following is known as spreading common costs over cost centres on the basis of benefit
received?
A  Overhead absorption C  Overhead allocation
B  Overhead apportionment D Overhead analysis

4  The process of overhead apportionment is carried out so that:

A  Costs may be controlled
B  Cost units gather overheads as they pass through cost centres
C  Whole items of cost can be charged to cost centres
D  Common costs are shared among cost centres

5 The following information is available for the two production departments (machining and assembly)
and one service department (the canteen) at Wilmslow.
Machining Assembly Canteen
Budgeted overheads £15,000 £20,000 £5,500
Number of staff 30 20 5
After reapportionment of the service cost centre costs, what will be the overhead cost of the machining
department cost centre?
A  £3,300 B  £17,750 C  £18,000 D  £18,300

6 The works manager of a company is fully occupied in running the production lines in the factory. The
logistics manager spends some time on production and some time organising distribution.
How would their salaries be dealt with when calculating a fixed overhead absorption rate for the factory?
Works manager Logistics manager
A  Allocated to factory C Allocated to factory
B  Apportioned to factory D Apportioned to factory

7 The following extract of information is available concerning the four cost centres of EG Limited.
Production cost centres Service cost centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 -
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned £28,500 £18,300 £8,960 £8,400
The overhead cost of the canteen is to be re-apportioned to the production cost centres on the basis of
the number of employees in each production cost centre.
After the re-apportionment, the total overhead cost of the packing department, to the nearest £, will be:
A  £1,200 B  £9,968 C  £10,080 D  £10,160

8 Select which THREE of the following statements on the determination of overhead absorption rates are
correct.
A  Costs can be allocated where it is possible to identify which department caused them
B  Supervisors’ salaries are likely to be apportioned rather than allocated
C  Costs need to be apportioned where they are shared by more than one department
D  There is no need for a single product company to allocate and apportion overheads in order to
determine overhead cost per unit
E Apportionment always produces the correct result

9 Which of the following bases of apportionment would be most appropriate for apportioning heating
costs to production cost centres?
A Floor space occupied in square metres C Number of employees
B Volume of space occupied in cubic metres D Labour hours worked

10 A company makes three products in a period.

Quantity (units) Labour hours per unit
Product A 1,000 4
Product B 2,000 6
Product C 3,000 3
Total 6,000
Overheads for the period are £30,000 and they are absorbed on the basis of labour hours. What is the
fixed overhead cost absorbed by a unit of Product B?
A  £30.00 B  £5.00 C  £7.20 D  £1.20
 .
13 Budgeted fixed overheads for cost centre 1 during the last accounting period were £64,800 for
apportioned overheads and £95,580 for allocated overheads. A predetermined machine hour rate is
used to absorb fixed overheads into product costs. Budgeted machine hours during the period were
1,800. Actual fixed overheads were £178,200 and actual machine hours for the period were 1,782.
What was the fixed overhead absorption rate per machine hour?
A  £89.10 B  £90.00 C  £99.00 D  £100.00

14 The following information is recorded in the machinery department relating to activity levels and
overheads in period 1. Machine hours (£) Overheads (£)
Budget 22,000 460,000
Actual 27,000 390,000
Overheads are absorbed on the basis of machine hours.
What is the overhead absorption rate for the machinery department to two decimal places?
A  £14.44 B  £17.04 C  £17.73 D  £20.91

15 Which of the following statements about overhead absorption rates are true?
(i)  They are usually determined in advance for each period
(ii)  They are used to charge overheads to products
(iii)  They are normally based on actual data for each period
(iv)  They are used to control overhead costs
A  (i) and (ii) only C  (ii), (iii) and (iv) only
B  (i), (ii) and (iv) only D  (iii) and (iv) only

16  A product requires four hours of direct labour at £5.25 per hour, and requires direct expenses of
£53.50. In its production, it requires 24 minutes of complex welding. Possible overhead absorption rates
have been calculated to be £7.10 per direct labour hour or £41.50 per welding machine hour. Using the
direct labour hour basis of overhead absorption, calculate to the nearest penny the total product cost.
A  £81.90 B  £91.10 C  £102.90 D  £119.50

17  Lerna Ltd produces hydras in three production departments and needs to apportion budgeted
monthly overhead costs between those departments. Budgeted costs are as follows.
Rent of factory £ 2,000
Rates for factory £ 1,000
Machine insurance £ 1,000
Machine depreciation £ 10,000
Factory manager’s salary £ 7,000
£21,000
The following additional information is available.
 Department A Department B Department C
Area (square metres) 3,800 3,500 700
Value of machinery (£000) 210 110 80
Number of employees 34 16 20
The total budgeted monthly overhead cost for Department C is:
A  £1,837.50 B  £4,462.50 C  £6,000.00 D  £7,000.00

18 A company manufactures two products, J and K, in a factory divided into two production cost centres,
Primary and Finishing. In order to determine a budgeted production overhead cost per unit of product,
the following budgeted data are available.
Primary Finishing
Allocated and apportioned production overhead costs £96,000 £82,500
Direct labour minutes per unit
Product J 36 25
Product K 48 30
Budgeted production is 6,000 units of product J and 7,500 units of product K. Production overheads are
to be absorbed on a direct labour hour basis.
The budgeted production overhead cost per unit for product K is:
A  £10.00 B  £13.20 C  £14.00 D  £14.60

19 Which of the following statements about predetermined overhead absorption rates are true?
(i)  Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally high or
low overhead expenditure or activity levels.
(ii)  Using a predetermined absorption rate offers the administrative convenience of being able to record
full production costs sooner.
(iii) Using a predetermined absorption rate avoids problems of under/over absorption of overheads
because a constant overhead rate is available.
A  (i) and (ii) only B  (i) and (iii) only C  (ii) and (iii) only D  (i), (ii) and (iii)

20 Bumblebee Co absorbs production overhead costs on a unit basis. For the year just ended,
Bumblebee Co’s production overhead expenditure was budgeted at £150,000 but was actually £148,000
while the budgeted activity level (production units) was 30,000 units and 29,000 units were actually
produced. Which of the following is true?
A  Fixed overheads were under absorbed by £5,000, this being the difference between budgeted
expenditure and 29,000 units at £5 per unit
B  Fixed overheads were under absorbed by £5,000, this being the difference between budgeted and
actual production at £5 per unit
C  Fixed overheads were over absorbed by £3,000, this being partly the difference between budgeted
and actual expenditure and partly the production shortfall of 1,000 units
D  Fixed overheads were under absorbed by £3,000, this being partly the difference between budgeted
and actual expenditure and partly the production shortfall of 1,000 units LO 1c
21 A manufacturing company, Leyton Friday, has three production departments X, Y and Z. A
predetermined overhead absorption rate is established for each department on the basis of machine
hours at budgeted capacity. The overheads of each department consist of the allocated costs of each
department plus a share of the service department’s overhead costs. All overheads are fixed costs.
The table shows incomplete information available relating to the period just ended.
Production department Z
Budgeted allocated overhead expenses £ 61,500
Budgeted service department apportionment £ 42,000
Budgeted machine capacity (hours) ?
Pre-determined absorption rate per machine hour ?
Actual machine utilisation (hours) 10,000
Over/(under) absorption of overhead £(11,500)
Actual overhead expenditure incurred in each department was as per budget. Budgeted capacity and the
absorption rate per hour in department Z were:
A  Budgeted capacity 11,111 hours, absorption rate per hour of £10.35
B  Budgeted capacity 11,111 hours, absorption rate per hour of £9.20
C  Budgeted capacity 11,250 hours, absorption rate per hour of £10.35
D  Budgeted capacity 11,250 hours, absorption rate per hour of £9.20

22 The budgeted overhead absorption rate for variable production overheads in department X of Lublin’s
factory is £3.00 per direct labour hour and for fixed overhead is £4.50 per direct labour hour. Actual direct
labour hours worked exceeded the budget by 500 hours.
If expenditures were as expected for variable and fixed overheads, the total over-absorbed overhead for
the period would be:
A  £507.50 B  £1,500.00 C  £2,250.00 D  £3,750.00

25 Budgeted and actual data for the year ended 31 December 20X1 is shown in the following table.
Budget Actual
Production (units) 5,000 4,600
Fixed production overheads £10,000 £9,500
Sales (units) 4,000 4,000
Fixed production overheads are absorbed on a per unit basis.
Why did under/over absorption occur during the year ended 31 December 20X1?
A The company sold fewer units than it produced
B  The company sold fewer units than it produced and spent less than expected on fixed overheads
C  The company produced fewer units than expected
D  The company produced fewer units than expected and spent less on fixed overheads
26 Budgeted overheads for a period were £340,000. At the end of the period the actual labour hours
worked were 21,050 hours and the actual overheads were £343,825.
If overheads were over absorbed by £14,025, how many labour hours were budgeted to be worked?
A  20,000 B  20,225 C  21,050 D  21,700

27 The budgeted absorption rate for variable production overhead in department X of Wiggipen Ltd’s
factory is £2.50 per direct labour hour and for fixed overhead is £4 per direct labour hour. Actual direct
labour hours worked fell short of budget by 1,000 hours.
If expenditures for the actual level of activity were as expected for variable and fixed overheads, the total
under or over absorbed overhead for the period would be:
A  £4,000 under-absorbed C  £6,500 under-absorbed
B  £4,000 over-absorbed D  £6,500 over-absorbed

28 AB produces two products, A and B. Budgeted overhead expenditure for the latest period was
£54,500. Overheads are absorbed on the basis of machine hours. Other data for the period are as
follows: Product A Product B
Actual results: Units Units
Opening inventory 400 700
Sales 1,800 2,400
Closing inventory 500 500
Production 1,900 2,200
Budgeted results:
Production 1,700 2,500
Machine hours per unit 2 3
If actual overhead expenditure for the period was £55,400, what was the under or over absorption of
overhead for the period?
A  £900 under-absorbed C  £3,400 under-absorbed
B  £900 over-absorbed D  £3,400 over-absorbed
Chapter 4: Marginal costing and absorption costing

1 The following cost details relate to one unit of product MC.

£ per unit
Variable materials 9.80
Variable labour 8.70
Production overheads
Variable 1.35
Fixed 9.36
Selling and distribution overheads
Variable 7.49
Fixed 3.40
Total cost 40.10
In a marginal costing system the value of a closing inventory of 4,300 units of product MC will be:
A £85,355 B £117,562 C £125,603 D £172,430

2 A company manufactures product S and product T.

The following information relates to the latest period.
Product S Product T
Variable labour cost per unit £60 £48
Other variable production costs per unit £70 £50
Budgeted production units 3,400 4,000
Labour hours 17,000 16,000
Variable labour is paid at £12 per hour.
Fixed production overhead incurred of £214,500 was the same as budgeted for the period. Fixed
production overhead is absorbed on the basis of labour hours.
Fixed production overhead absorption rate = £214,500/(17,000 + 16,000) = £6.50 per labour hour
The value of the closing inventory of product S using absorption costing was £65,000. If marginal costing
had been used the value of this inventory would have been:
A  £52,000 B £53,150 C £260,000 D £442,000

36
3 Ticktock Ltd makes clocks with a selling price of £50 per clock. Budgeted production and sales volume
is 1,000 clocks per month. During September 1,000 clocks were made and 800 clocks were sold. There
was no opening inventory.
The variable cost per clock is £25. Fixed costs in September were, as budgeted, £5,000. Using marginal
costing the contribution and profit for September would be calculated as:
A  Contribution: £25,000, Profit: £20,000 B Contribution: £20,000, Profit: £15,000
C Contribution: £20,000, Profit: £16,000 D Contribution: £25,000, Profit: £16,000
4 Which THREE of the following statements concerning marginal costing are true?
A  Marginal costing is an alternative method of costing to absorption costing
B  Contribution is calculated as sales revenue minus fixed cost of sales
C  Closing inventories are valued at full production cost
D  Fixed costs are treated as a period cost and are charged in full to the income statement of the
accounting period in which they are incurred
E Marginal cost is the cost of a unit which would not be incurred if that unit were not produced

5 Which TWO of the following statements concerning marginal costing systems are true?
A Such systems value finished goods at the variable cost of production
B Such systems incorporate fixed overheads into the value of closing inventory
C Such systems necessitate the calculation of under- and over-absorbed overheads
D Such systems write off fixed overheads to the income statement in the period in which they were
incurred

6  A company budgets during its first year of operations to produce and sell 15,900 units per quarter of
its product at a selling price of £24 per unit.
Budgeted costs are as follows:
£ per unit
Variable production costs 8.50
Fixed production costs 2.50
Variable selling costs 6.00
In the first quarter the unit selling price, variable unit cost and expenditure on fixed production costs were
as budgeted. The sales volume was 16,000 units and closing inventory was 400 units.
The absorption costing profit for the quarter was:
A  £110,750 B £112,000 C £112,250 D  £113,250

7 Which of the following statements about profit measurement under absorption and marginal costing is
true (assuming unit variable and fixed costs are constant)?
Profits measured using absorption costing will be …
A ... higher than profits measured using marginal costing
B … lower than profits measured using marginal costing
C … either lower or higher than profits measured using marginal costing
D … the same as, or lower than, or higher than profits measured using marginal costing

8 If the number of units of finished goods inventory at the end of a period is greater than that at the
beginning, marginal costing inventory will result in (assuming unit variable and fixed costs are constant):
A  Less operating profit than the absorption costing method
B The same operating profit as the absorption costing method
C More operating profit than the absorption costing method
D  More or less operating profit than the absorption costing method depending on the ratio of fixed to
variable costs

9  Adams Ltd’s budget for its first month of trading, during which 1,000 units are expected to be
produced and 800 units sold, is as follows: £
Variable production costs 95,500
Fixed production costs 25,800
Selling price is £250 per unit
The profit calculated on the absorption cost basis compared with the profit calculated on the marginal
cost basis is:
A £24,260 lower B £5,160 higher C £5,160 lower D £24,260 higher

10 Bright makes and sells boats. The budget for Bright’s first month of trading showed the following:
£
Variable production cost of boats 45,000
Fixed production costs 30,000
Production cost of 750 boats 75,000
Closing inventory of 250 boats (25,000)
Production costs of 500 boats sold 50,000
Sales revenue 90,000
Production cost of boats sold (50,000)
Variable selling costs (5,000)
Fixed selling costs (25,000)
Profit 10,000
The budget has been produced using an absorption costing system. If a marginal costing system were
used, the budgeted profit would be:
A £22,500 lower B £10,000 lower C £10,000 higher D £22,500 higher

11 A company produces a single product for which cost and selling price details are as follows:
£ per unit £ per unit
Selling price 28
Variable material 10
Variable labour 4
Variable overhead 2
Fixed overhead 5
21
Profit per unit 7
Last period, 8,000 units were produced and 8,500 units were sold. The opening inventory was 3,000
units and profits reported using marginal costing were £60,000.
The profits reported using an absorption costing system would be:
A  £47,500 B £57,500 C £59,500 D £62,500

14 In March, a company had a marginal costing profit of £78,000. Opening inventories were 760 units
and closing inventories were 320 units. The company is considering changing to an absorption costing
system. What profit would be reported for March, assuming that the fixed overhead absorption rate is £5
per unit?
A £74,200 B £75,800 C £76,400 D £80,200

15 When comparing the profits reported under marginal and absorption costing when the levels of
inventories increased (assuming unit variable and fixed costs are constant):
Absorption costing profits will be… and closing inventory valuations… than those under marginal costing
A … lower … higher …
B … lower … lower …
C … higher … lower …
D … higher … higher …

16 Which TWO of the following statements are advantages of marginal costing as compared with
absorption costing?
A It complies with accounting standards
B It ensures the company makes a profit
C  It is more appropriate for short-term decision making
D  Fixed costs are treated in accordance with their nature (ie as period costs)
E It is more appropriate when there are strong seasonal variations in sales demand

18 Which TWO of the following statements are correct?

A Absorption unit cost information is the most reliable as a basis for pricing decisions
B A product showing a loss under absorption costing will also make a negative contribution under
marginal costing
C When closing inventory levels are higher than opening inventory levels and overheads are constant,
absorption costing gives a higher profit than marginal costing
D In a multi-product company, smaller volume products may cause a disproportionate amount of set up
overhead cost
E Marginal unit cost information is normally the most useful for external
19 Iddon Ltd makes two products, Pye and Tan, in a factory divided into two production departments,
Machining and Assembly. Both Pye and Tan need to pass through the Machining and Assembly
departments. In order to find a fixed overhead cost per unit, the following budgeted data are relevant:
Machining Assembly
Fixed overhead costs £120,000 £72,000
Labour hours per unit: Pye 0.5 hours 0.20hours
Tan 1.0 hours 0.25hours
Budgeted production is 4,000 units of Pye and 4,000 units of Tan (8,000 units in all) and fixed overheads
are to be absorbed by reference to labour hours.
What is the budgeted fixed overhead cost of a unit of Pye?
A £18 B £20 C £24 D £28

20 Norbury plc has just completed its first year of trading. The following information has been collected
from the accounting records: £
Variable cost per unit
Manufacturing 6.00
Selling and administration 0.20
Fixed costs
Manufacturing 90,000
Selling and administration 22,500
Production was 75,000 units and sales were 70,000 units. The selling price was £8 per unit throughout
the year. Calculate the net profit for the year using absorption costing.
A £13,500 B  £19,500 C £21,000 D £22,500
Chapter 5: Pricing calculations

1 Product X is produced in two production cost centres. Budgeted data for product X are as follows:
Cost centre A Cost centre B
Direct material cost per unit £60.00 £30.30
Direct labour hours per unit 3 1
Direct labour rate per hour £20.00 £15.20
Production overhead absorption
rate per direct labour hour £12.24 £14.94
General overheads are absorbed into product costs at a rate of 10% of total production cost.
If a 20% return on sales is required from product X, its selling price per unit should be:
A £271.45 B £282.31 C £286.66 D £298.60

2 A company manufactures two products for which budgeted details for the
forthcoming period are as follows:
Product L £ per unit Product T£ per unit
Materials 6.00 9.00
Labour (£15 per hour) 30.00 22.50
Production overhead of £61,200 is absorbed on a labour hour basis. Budgeted output is 4,000 units of
product L and 6,000 units of product T.
The company adds a mark up of 20% to total production cost in order to determine its unit selling prices.
The selling price per unit of product L is:
A  £47.52 B  £51.84 C  £54.00

3 Print Ltd manufactures ring binders which are embossed with the customer’s own logo. A customer
has ordered a batch of 300 binders. The following data illustrate the cost for a typical batch of 100
binders: £
Variable materials 30
Wages (paid on a per binder basis) 10
Machine set up (fixed per batch) 3
Design and artwork (fixed per batch) 15
58
Print Ltd absorbs production overhead at a rate of 20% of variable wages cost. A further 5% is added to
the total production cost of each batch to allow for selling, distribution and administration overhead.
Print Ltd requires a profit margin of 25% of sales value. The selling price for a batch of 300 binders
should be:
A £189.00 B £193.20 C £201.60 D £252.00
4 A firm makes special assemblies to customers’ orders and uses job costing.
The data for a period are:
Job A Job B Job C
Opening work in progress £ 26,800 42,790 0
Material added in period £ 17,275 0 18,500
Labour for period £ 14,500 3,500 24,600
The budgeted overheads for the period were £126,000 and these are absorbed on the basis of labour
cost. Job B was completed and delivered during the period and the firm wishes to earn a
33 1/3% profit margin on sales. What should be the selling price of job B?
A  £69,435 B  £75,523 C  £84,963 D  £258,435

5 Halcow Ltd operates a job costing system and its standard net profit margin is 20% of sales value.
The estimated costs for job 173 are as follows:
Direct materials 5 metres @ £20 per metre
Direct labour 14 hours @ £8 per hour
Variable production overheads are recovered at the rate of £3 per direct labour hour. Fixed production
overheads for the year are budgeted to be £200,000 and are to be recovered on the basis of the total of
40,000 direct labour hours for the year. Other overheads, in relation to selling, distribution and
administration, are recovered at the rate of £80 per job. The selling price to be quoted for job 173 is:
A  £404 B  £424 C  £485 D £505

6 An item priced at £90.68, including local sales tax at 19%, is reduced in a sale by 20%. The new price
before sales tax is added is:
A  £58.76 B  £60.96 C  £72.54 D  £76.20

7 Three years ago a retailer sold electronic calculators for £27.50 each. At the end of the first year he
increased the price by 5% and at the end of the second year by a further 6%. At the end of the third year
the selling price was £29.69 each. The percentage price change in year three was a:
A  2.7% decrease B  3.0% increase C  3.0% decrease D  3.4% decrease

8 At a sales tax rate of 12%, an article sells for £84, including sales tax.
If the sales tax rate increases to 171⁄2%, the new selling price will be:
A £75.00 B £86.86 C £88.13 D £88.62

9  A greengrocer sells apples either for 45p per kg, or in bulk at £9 per 25 kg bag.
The percentage saving per kg from buying a 25 kg bag is:
A 9% B 11.25% C 20% D 25%

10  A skirt which cost a clothes retailer £50 is sold at a profit of 25% on the selling price.
The profit is therefore:
A  £12.50 B  £16.67 C  £62.50 D £66.67

12 A company calculates the prices of jobs by adding overheads to the prime cost and
then adding 30% to total costs as a profit mark up. Job number Y256 was sold for
£1,690 and incurred overheads of £694. What was the prime cost of the job?
A £489 B £606 C £996 D £1,300

13 A company prices its product at the full cost of £4.75 per unit plus 70%. A competitor has just
launched a similar product selling for £7.99 per unit. The company wishes to change the price of its
product to match that of its competitor. The product mark up percentage should be changed to:
A  1.1% B 1.8% C 40.6% D 68.2%

15 The following data relate to the Super.

Material cost per unit £15.00
Labour cost per unit £52.05
Production overhead cost per machine hour £9.44
Machine hours per unit 7
General overhead absorption rate 8% of total production cost
The capital invested in manufacturing and distributing 953 units of the Super per annum is estimated to
be £136,200. If the required annual rate of return on capital invested in each product is 14%, the selling
price per unit of the Super must be:
A £102.62 B £153.14 C £163.79 D £163.91
16  A product’s marginal costs are 60% of its fixed costs. Selling prices are set on a full cost basis to
achieve a margin of 20% of selling price. To the nearest whole number, which percentage mark up on
marginal costs would produce the same selling price as the current pricing method?
A 67% B 108% C 220% D 233%

17 A company determines its selling prices by adding a mark up of 100% to the variable cost per unit. If
the selling price is increased by 50%, the quantity sold each period is expected to reduce by 40% but the
variable cost per unit will remain unchanged.
The total revenue will … and the total contribution will …
A … increase … increase … B … increase … decrease …
C …decrease … increase … D … decrease … decrease …

18 The following information is available for the latest period.

Fixed costs £160,000
Variable cost per unit £4
Profit £10,000
A 2% increase in selling price would not alter the number of units sold each period but the profit would
increase by £5,000. The current selling price per unit is:
A £0.08 B £10.00 C £12.50 D £12.75

21 The following data relate to Bailey plc, a manufacturing company with several divisions. Division X
produces a single product which it sells to division Y and also to external customers.
Sales to division Y(£) External sales(£)
Sales revenue
At £25 per unit 250,000
At £20 per unit 100,000
Variable costs at £12 per unit (60,000) (120,000)
Contribution 40,000 130,000
Fixed costs (20,000) (50,000)
Profit 20,000 80,000
A supplier offers to supply 5,000 units at £18 each to division Y.
If division Y buys from the external supplier and division X cannot increase its external sales, the change
in total profit of Bailey plc will be a:
A £10,000 decrease B  £30,000 decrease C £10,000 increase D £30,000 increase
22 Which TWO of the following criteria should be fulfilled by a transfer pricing system?
A  Should encourage dysfunctional decision making
B  Should encourage output at an organisation-wide profit-maximising level
C Should encourage divisions to act in their own self interest
D  Should encourage divisions to make entirely autonomous decisions
E  Should enable the realistic measurement of divisional profit

23 Which of the following best describes a dual pricing system of transfer pricing?
A  The receiving division is charged with the market value of transfers made and the supplying division is
credited with the standard variable cost
B The receiving division is credited with the market value of transfers made and the supplying division is
charged with the standard variable cost
C  The receiving division is charged with the standard variable cost of transfers made and the supplying
division is credited with the market value
D  The receiving division is credited with the standard variable cost of transfers made and the supplying
division is charged with the market value

25 Division P produces plastic mouldings, all of which are used as components by Division Q. The cost
schedule for one type of moulding, item 103, is shown below.
Direct material cost per unit £3.00
Direct labour cost per unit £4.00
Variable overhead cost per unit £2.00
Fixed production overhead costs each year £120,000
Annual demand from Division Q is expected to be 20,000 units
Two methods of transfer pricing are being considered:
(i) Full production cost plus 40%
(ii)  A two-part tariff with a fixed fee of £200,000 each year
The transfer price per unit of item 103 transferred to Division Q using both of the transfer pricing
methods listed above is:
(i) (ii) (i) (ii)
A  £12.60 £9 C  £21.00 £9
B  £12.60 £19 D  £21.00 £19

26 A and B are two divisions of company C. A manufactures two products, the X and the Y. The X is sold
outside the company. The Y is sold only to division B at a unit transfer price of £410. The unit cost of the
Y is £370 (variable cost £300 and absorbed fixed overhead £70). Division B has received an offer from
another company to supply a substitute for product Y at a price of £330 per unit.
Assume Division A and B have spare operating capacity. Which of the following statements is correct
with regard to the offer from the other company?
The offer is … from the point of view of company C and the manager of Division B … a sub-optimal
decision
A … not acceptable … will make …
B … not acceptable … will not make ...
C … is acceptable … will make …
D  … is acceptable … will not make …

27 Division J manufactures product K incurring a total cost of £50 per unit. Product K is sold to external
customers in a perfectly competitive market at a price of £57, which represents a mark up of 90% on
marginal cost. Division J also transfers product K to division R. If transfers are made internally then
division J does not incur variable selling costs which amount to 5% of the total variable cost.
Assuming that the total demand for product K exceeds the capacity of division J, the optimum transfer
price per unit between division J and division R is:
A  £54.50 B  (£55.50=57:1,9;30;0,05) C  £56.72 D  £57.00

33 Next month’s budget for a single product company is shown below.

£ £
Sales of 1,200 units 600,000
Manufacturing costs:
Variable 216,000
Fixed 60,000
Selling costs:
Variable 132,000
Fixed 78,000
Administration costs (fixed) 36,000
Net profit (522,000)
78,000
The company’s variable manufacturing cost per unit is now expected to increase by 10%, but all other
costs remain unchanged. Assuming an unchanged volume of sales, calculate the selling price per unit
that would maintain the contribution ratio.
A £531 B £733 C  £550 D  £518
Chapter 6: Budgeting.

12  A company is preparing its production budget for product Z for the forthcoming year. Budgeted sales
of product Z are 1,500 units. Opening inventory is 120 units and the company wants to reduce
inventories at the end of the year by 10%. The budgeted number of units of product Z to be produced is:
A  1,392 B  1,488 C 1,500 D 1,512

13 Research Ltd purchases a chemical and refines it before onward sale. Budgeted sales of the refined
chemical are as follows. Litres
January 40,000
February 50,000
March 30,000
(i)  The target month-end inventory of unrefined chemical is 30% of the chemical needed for the
following month’s budgeted production.
(ii)  The targeted month-end inventory of refined chemical is 30% of next month’s budgeted sales.
Calculate the budgeted purchases of unrefined chemical for January.
A  56,200 litres B  49,750 litres C  48,250 litres D  43,300 litres

15 Barlow plc manufactures two products, Vip and Bip. It intends to produce 2,000 units of each product
in the next year to meet the sales budget. Each Vip requires 2 kg of material Z and 1 kg of material Y
and each Bip requires 3 kg of material Z and 4 kg of material Y. At present there are 200 kg of Z and 500
kg of Y in inventory. Barlow plc intends to increase the inventory levels of these materials by the end of
the year to 600 kg of Z and 800 kg of Y. Material Z costs £4 per kg and material Y costs £5 per kg.
What is the total materials purchases for the next year?
A £86,900 B £90,000 C £93,100 D £96,400

16 A retailing company makes a gross profit of 25% on sales. The company plans to increase inventory
by 10% in June. The budgeted sales revenue for June is £25,000. Opening inventory on 1 June is
valued at £5,000. What are the budgeted inventory purchases for June?
A  £18,250 B  £19,125 C  £19,250 D  £25,500

17 Budgeted sales of X for December are 18,000 units. At the end of the production process for X, 10%
of production units are scrapped as defective. Opening inventories of X for December are budgeted to
be 15,000 units and closing inventories will be 11,400 units. All inventories of finished goods must have
successfully passed the quality control check.
The production budget for X for December, in units, is:
A  12,960 B  14,400 C15,840 D  16,000

19 George has been asked by his bank to produce a budgeted income statement for the six months
ending on 31 March 20X4. He forecasts that monthly sales will be £3,000 for October, £4,500 for each of
November and December and £5,000 per month from January 20X4 onwards. Selling price is fixed to
generate a margin on sales of 33 1/3%.Overhead expenses (excluding depreciation) are estimated at
£800 per month. He plans to purchase non-current assets on 1 October costing £5,000, which will be aid
for at the end of December and are expected to have a five-year life, at the end of which they
will possess a nil residual value. The budgeted net profit for the six months ending 31 March 20X4 is:
A  £3,200 B  £3,700 C  £3,950 D  £8,200

21 A retailing company budgets to maintain inventories at the end of each month which are sufficient to
meet the budgeted sales requirements for the following month.Two months’ credit will be received from
suppliers of inventory. Budgeted sales, which earn a gross profit margin of 20% of sales value, are as
follows: £
January 28,300
February 26,100
March 33,800
April 30,690
The budgeted balance sheet as at the end of March will show a payables balance of:
A £47,920 B £51,592 C £59,900 D £64,490

22 A company’s master budget contains the following budgeted income statement.

Sales revenue (5,000 units) £ 120,000
Variable materials cost £ 24,000
Variable labour cost £ 32,500
Variable overhead £ 13,000
Fixed overhead £ 41,000
£ 110,500
Budgeted net profit £ 9,500
The company’s management are considering a change in the materials specification. This would reduce
the materials cost per unit by 10%. The reduced product quality would necessitate a 2% reduction in the
selling price and the sales volume would fall by 5%.
The revised budgeted net profit for the period would be:
A  £3,620 B £6,975 C  £9,025 D  £9,375
24 A company has recorded the following costs over the last six months.
Month Total cost (£) Units produced (£)
1  74,000 3,000
2   72,750 1,750
3   73,250 2,000
4   75,000 2,500
5  69,500 1,500
6  72,750 2,000
Using the high-low method, which of the following represents the total cost equation?
A Total cost = 61,250 + (1.25 * quantity) C Total cost = 65,000 + (1.25 * quantity)
B Total cost = 65,000 + (3 * quantity) D Total cost = 61,250 + (3 * quantity)

25 A company has recorded the following costs over the last four months.
Month Cost (£) Production (Units)
1  21,995 1,050
2  19,540 1,090
3  19,000 750
4  17,200 700
Using the high-low method, the expected cost of producing 950 units is:
A  £17,030 B  £18,700 C  £20,625 D  £23,343

30 A company’s weekly costs (£C) were plotted against production level (P) for the last 50 weeks and a
regression line calculated to be C = 100 + 20P.
Which of the following statements about the breakdown of weekly costs is true?
A  Fixed costs are £100. Variable costs per unit are £20.
B  Fixed costs are £20. Variable costs per unit are £100.
C  Fixed costs are £20. Variable costs per unit are £5.
D  Fixed costs are £100. Variable costs per unit are £4.

33 The correlation coefficient between two variables, x and y, is +0.72.

The proportion of variation in y that is explained by variation in x is (to two decimal places):
A  0.52 B  0.72 C  0.85 D  1.44
35 The correlation coefficient between advertising expenditure and sales revenue is calculated to be
0.85. Which of the following statements is true?
A  There is a weak relationship between advertising expenditure and sales revenue
B 85% of the variation in sales revenue can be explained by the corresponding variation advertising
expenditure
C  72% of the variation in sales revenue can be explained by the corresponding variation advertising
expenditure
D  Sales revenue will increase by 85% more than advertising expenditure will increase

36  The linear relationship between advertising in thousands of pounds (X) and sales in tens of
thousands of pounds (Y) is given by Y = 5 + 2X.
Which TWO of the following statements are correct?
A  For every £1,000 spent on advertising, sales revenue increases by £50,000 on average
B When nothing is spent on advertising the average level of sales is £50,000
C  For every £1,000 spent on advertising, sales revenue increases by £20,000 on average
D  When nothing is spent on advertising, the average level of sales is £20,000
Chapter 7: Working capital

2 A cash budget has been drawn up as follows:

January February March
£ £ £
Receipts
Credit sales 10,000 11,000 12,500
Cash sales 5,000 4,500 6,000
Payments
Suppliers 6,500 4,200 7,800
Wages 2,300 2,300 3,000
Overheads 1,500 1,750 1,900
Opening cash 500
The closing cash balance for March is budgeted to be:
A £5,800 B £12,450 C £17,750 D £18,250

3 A machine that was bought in January 20X1 for £44,000 and has been depreciated by £8,000 per
year, is expected to be sold in December 20X3 for £17,600. What is the net cash inflow or (outflow) that
will appear in the cash budget for December 20X3?
A  £9,000 inflow B £15,200 inflow C £17,600 inflow D  £17,600 outflow

4 Jason is preparing a cash budget for July. His actual credit sales are:
April £40,000
May £30,000
June £20,000
July £25,000
His recent debt collection experience has been as follows:
Current month’s sales 20%
Prior month’s sales 60%
Sales two months prior 10%
Cash discounts taken 5%
Bad debts 5%
How much should Jason budget to collect from customers during July?
A  £19,750 B  £20,000 C  £22,000 D £26,000

5 Lotsa plc has budgeted that sales will be £101,500 in January 20X2, £580,500 in
February, £215,000 in March and £320,500 in April. Half of sales will be credit sales. 80% of
customers are expected to pay in the month after sale, 15% in the second month after sale, while the
remaining 5% are expected to be bad debts. Customers who pay in the month after sale can claim a 4%
early settlement discount.
What level of sales receipts should be shown in the cash budget for March 20X2 (to the nearest £)?
A £338,025 B £347,313 C £568,550 D £587,125
6 A company has a two month receivables cycle. It receives in cash 45% of the total gross sales value in
the month of invoicing. Bad debts are 7% of total gross sales value and there is a 10% discount for
settling accounts within 30 days.
What percentage of the first month’s sales will be received as cash in the second month?
A  38% B  43% C  48% D  58%

7 From the customer collection records of Low Ltd, it is possible to determine that 60% of invoices are
paid in the month after sale, 30% in the second month after sale and 5% in the third month after sale.
Invoices are raised on the last day of each month and 5% become bad debts. Customers who settle in
the month after sale are entitled to a 4% settlement discount. Budgeted credit sales in January 20X6 are
£221,500, in February £332,000, in March £175,000 and in April £384,000.
What is the amount budgeted to be received in April from credit sales (to the nearest £)?
A £211,475 B £215,675 C £290,284 D £299,500

9 Sam is a trading company that holds no inventories. Each month the following relationships hold:
Gross profit 40% of sales
Closing trade payables 30% of cost of sales
Sales are budgeted to be £48,500 in April and £36,500 in May.
How much cash is budgeted to be paid in May to suppliers?
A  £19,740 B £21,900 C £23,340 D £24,060

11 The following is an extract from an entity’s budget for next month.

Sales £520,000
Gross profit on sales 30%
Increase in trade payables over the month £15,000
Decrease in cost of inventory held over the month £22,000
The budgeted payment to trade payables is:
A £327,000 B £357,000 C £371,000 D £401,000

12 A company is preparing the budget for a product, and the following data has been provided:
Month 1 Month 2 Month 3 Month 4
Planned sales (units) 2,000 2,200 2,500 2,600
Closing inventory in each month must be 50% of the next month’s sales. Suppliers are paid in the month
following purchase. The standard cost of materials is £4 per unit.
What is the budgeted payment to suppliers in month 3?
A  £8,200 B £9,400 C  £10,000 D  £10,200

15 Aaron Products is considering the implementation of a revised receivables policy, which will result in
an increase in the average collection period from the current 60 days to 90 days. This is expected to lead
to a 20% increase in annual sales revenue, currently £960,000, resulting in additional inventories and
trade payables of £30,000 and £15,000 respectively. It is expected that all customers will take advantage
of the extended credit period. The net increase in working capital investment that would result from the
change in policy, assuming a 360-day year, is:
A  £31,000 B  £95,000 C  £113,000 D  £143,000

18 A company’s cash budget for the next six months is shown below.
Jan Feb Mar Apr May Jun
Cash receipts £’000 £’000 £’000 £’000 £’000 £’000
From customers 5 8 10 15 14 15
Investment maturing - - 5 - - -
5 8 15 15 14 15
Cash payments
To suppliers 6 8 12 10 8 4
Tax - - 4 - - -
Wages and other 4 4 4 3 4 4
Capital expenditure - 5 - - - -
Loan repayment - - - 2 - -
10 17 20 15 12 8
Net inflow/(outflow) (5) (9) (5) - 2 7
Balance b/f 2 (3) (12) (17) (17) (15)
Balance c/f (3) (12) (17) (17) (15) (8)
The company’s overdraft facility is only for £15,000. It has been proposed to reschedule the cash flows
by delaying payment of 50% of the supplier payments in each of the first five months by one month.
The maximum overdraft and the overdraft at the end of June will now be:
Maximum End of June
A  £18,000 £8,000
B  £12,000 £6,000
C  £18,000 £6,000
D  £12,000 £8,000
19 A telephone business has annual sales of £1.1 million and a gross profit margin of 10%. It is currently
experiencing short-term cash flow difficulties, and intends to delay its payments to trade suppliers by one
month. To the nearest £, the amount by which the cash balance will benefit in the short term from this
change in policy, assuming sales are spread evenly over the year, and inventory levels remain constant
throughout, is:
A £82,500 B £83,333 C £91,667 D £100,833

21 A company has annual sales of £3 million and its gross profit is 60% of sales.
Inventory turnover is 60 days, customers take an average of 35 days to pay and the company pays its
suppliers after 25 days. Defining working capital as average inventories plus average receivables minus
average trade payables and using a 365-day year for your calculations, to the nearest £1,000, the
company’s working capital will be:
A  £280,000 B £403,000 C  £567,000 D £699,000

22 The following information relates to a business:

Debt collection period 11 weeks
Raw material inventory holding period 3 weeks
Suppliers’ credit period 6 weeks
Production period 2 weeks
Finished goods inventory holding period 7 weeks
What is the working capital (operating) cycle of the business?
A  6 weeks B  7 weeks C  17 weeks D  29 weeks

23 Using the table below and a 365-day year, calculate the length of the working capital cycle (operating
cycle). £
Inventories: Raw materials 250,000
Work in progress 115,000
Finished goods 186,000
Purchases 1,070,000
Cost of goods sold 1,458,000
Sales 1,636,000
Receivables 345,000
Trade payables 162,000
A  174 days B  182 days C 193 days D 293 days
25  The following information is available for a wholesale business for the latest year.
Opening balance Closing balance
£’000 £’000
Receivables 200 220
Inventory 120 220
Payables 170 130
The cost of goods sold during the year was £2,000,000 and the company earns a margin of 20% of
sales. Half of all sales are credit sales and the remainder are cash sales. Using a 365-day year in your
calculations, what is the length of the cash operating cycle in respect of credit sales?
A  65 days B  66 days C  68 days D  118 days

31 A retailing company’s current assets and current liabilities comprise inventory at cost £2,100,
receivables, cash and trade payables. Its financial ratios include the following:
Quick (liquidity) ratio 2:1
Rate of inventory turnover 10 times p.a.
Gross profit margin 30%
Receivables collection period 1 month
Payables payment period 1.6 months
The opening inventory, receivables and payables balances are the same as the closing balances.
The closing cash in hand balance will be:
A  £3,100 B  £2,170 C  £1,000 D £100

32 Fenton Ltd’s projected revenue for 20X1 is £350,000. It is forecast that 12% of sales will occur in
January and remaining sales will be equally spread among the other eleven months. All sales are on
credit. Receivables accounts are settled 50% in the month of sale, 45% in the following month, and 5%
are written off as bad debts after two months. The budgeted cash collections for March are:
A £24,500 B  £26,600 C  £28,000 D  £32,900

40 If a company moves from a defensive working capital policy to an aggressive working capital policy, it
should expect:
A  Liquidity to decrease, whereas expected profitability would increase
B  Expected profitability to increase, whereas risk would decrease
C  Liquidity would increase, whereas risk would also increase
D  Risk and profitability to decrease

41 Albert’s Autos is a small garage providing car servicing. Business is good, there is a steady stream of
income from repeat customers and breakdown recoveries. There are no significant cash reserves and
there is no need for an overdraft. Now the organisation that passes on most of the breakdown recovery
work offers Albert a contract to supply recovery services over a 50-mile radius. It is seeking 60 days
credit rather than Albert’s usual 30 days. Albert is keen but has been warned to look for signs of
overtrading. Which TWO of the following are most likely to be symptoms of overtrading?
A  A lengthening of the cash operating cycle D  A rapid increase in sales
B  A rapid reduction in sales E  A shortening of the cash operating cycle
C  Increase in the level of the current ratio

43 The different functions within a company (finance, production, marketing, etc) often have differing
views about what is an ‘appropriate’ level of inventory. Essentially, two inventory problems need to be
answered – how much to order and when to order?
If we order inventory more frequently which of the following can we expect?
A Lower ordering costs and lower average inventory
B  Lower ordering costs and higher average inventory
C  Higher ordering costs and lower average inventory
D  Higher ordering costs and higher average inventory

44 The Economic Order Quantity (EOQ) can be expressed as follows:

What does h describe in this formula?

A The cost of holding one unit of inventory for one period C The cost of a unit of inventory
B The cost of placing one order D The customer demand for the item

45 Fruit & Nut Ltd is re-evaluating its inventory control policy. Its daily demand for wooden boxes is
steady at 40 a day for each of the 250 working days (50 weeks) of the year. The boxes are currently
bought weekly in batches of 200 from a local supplier for £2 each. The cost of ordering the boxes from
the local supplier is £64 per order, regardless of the size of the order. The inventory holding costs,
expressed as a percentage of inventory value, are 25% pa. The Economic Order Quantity (EOQ) can

be expressed as follows:

Identify the correct EOQ:

A 101 boxes B 253 boxes C 1,600 boxes D 2,262 boxes

49 Total usage of one item of Archer Ltd’s inventory for the next month is estimated to be 100,000 units.
The costs incurred each time an order is placed are £180. The carrying cost per unit of the item each
month is estimated at £2. The purchase price of each unit is £4. The economic order quantity formula is:

. When using this formula to find the optimal quantity to be ordered, identify the amounts that are

included in the calculation.

Cost per order (£180) Carrying cost per unit per month (£2) Purchase price per unit (£4)
A  Included C Included E  Included
B  Not included D Not included F  Not included
Chapter 9: Standard costing and variance analysis

1  Which of the following would not be used to estimate standard material prices?
A  The availability of bulk purchase discounts C  The forecast movement of prices in the market
B  Purchase contracts already agreed D  Performance standards in operation

2  Which of the following statements about budgets and standards is/are correct?
(i)  Budgets can be used in situations where output cannot be measured but standards cannot be used in
such situations.
(ii)  Budgets can include allowances for inefficiencies in operations but standards use performance
targets which are attainable under the most favourable conditions.
(iii) Budgets are used for planning purposes, standards are used only for control purposes.
A  (i), (ii) and (iii) B  (i) and (ii) only C  (i) only D  (ii) and (iii) only

3 Which of the following is not a cause of variances?

A  Actual prices are different from budgeted prices
B  Actual resource usage is different from planned resource usage
C  Actual production volume is different from budgeted production volume
D  Actual prices are different from forecast prices

The following information relates to questions 4 and 5

Telgar plc uses a standard costing system, with its material inventory account being maintained at
standard cost. The following details have been extracted from the standard cost card in respect of
materials. 8 kg @ £0.80/kg = £6.40 per unit. Budgeted production in April was 850 units. The following
details relate to actual materials purchased and issued to production during April when actual production
was 870 units. Materials purchased 8,200 kg costing £6,888 Materials issued to production 7,150 kg

4  The material price variance for April was:

A  £286 adverse B  £286 favourable C  £328 adverse D  £328 favourable

5  The material usage variance for April was:

A  £152.00 favourable B  £152.00 adverse C  £159.60 adverse D  £280.00 adverse

The following information relates to questions 6 and 7

Revue plc uses a standard costing system. The budget for one of its products for September includes
labour cost (based on 4 hours per unit) of £117,600. During September 3,350 units were made which
was 150 units less than budgeted. The labour cost incurred was £111,850 and the number of labour
hours worked was 13,450.

6  The labour rate variance for the month was:

A  £710 favourable B  £1,130 favourable C  £1,130 adverse D  £5,750 adverse
7  The labour efficiency variance for the month was:
A  £415.80 adverse B  £420.00 adverse C  £420.00 favourable D  £710.00 favourable

The following information relates to questions 8 to 10

Extracts from Verona Ltd’s records for June are as follows.
Budget Actual
Production 520 units 560 units
Variable production overhead cost £3,120 £4,032
Labour hours worked 1,560 2,240

8  The variable production overhead total variance for June is:

A  £240 adverse B  £672 adverse C  £672 favourable D  £912 adverse

9  The variable production overhead expenditure variance for June is:

A  £448 favourable B  £448 adverse C  £672 adverse D  £912 adverse

10  The variable production overhead efficiency variance for June is:

A  £1,008 adverse B  £1,120 adverse C  £1,120 favourable D  £1,360 adverse

12 The following information relates to Product M, made and sold by Nan Ltd.
Standard £ per unit Actual £ per unit
Selling price 20 22
Material 6 8
Labour 3 4
Variable overhead 2 4
Total variable costs (11) (16)
Contribution 9 6
Nan Ltd budgeted for a sales volume of 1,000 units, but actually sold 100 units less than this.
Which of the following shows the correct calculation of the sales price and contribution volume
variances?
A  Sales price variance = £1,800 favourable C  Sales price variance = £2,000 favourable
Sales volume variance = £2,000 adverse Sales volume variance = £2,000 adverse
B  Sales price variance = £2,000 favourable D  Sales price variance = £1,800 favourable
Sales volume variance = £900 adverse Sales volume variance = £900 adverse
14 A company budgets to make and sell 83,000 units of its product each period. The standard
contribution per unit is £8.
The following variances (A = adverse; F = favourable) were reported for the latest period.

Variances £
Sales volume contribution 42,400 (A)
Sales price 7,310 (F)
Material total 7,720 (F)
Material price 10,840 (F)
Labour total 6,450 (A)
Variable overhead total 4,250 (A)
Fixed overhead expenditure 8,880 (F)
The budgeted fixed overhead expenditure for the period was £210,000.
The actual profit for the period was:
A  £424,810 B  £435,650 C  £483,190 D  £634,810

15  In a period, 11,280 kg of material were used at a total standard cost of £46,248. The material usage
variance was £492 adverse.
What was the standard allowed weight of material for the production achieved?
A  10,788 kg B  11,160 kg C  11,280 kg D  11,400 kg

16  During a period, 17,500 labour hours were worked at a standard cost of £6.50 per hour. The labour
efficiency variance was £7,800 favourable. How many standard hours should have been worked?
A  1,200 B  16,300 C  17,500 D  18,700
17  The following information relates to material costs for the latest period.
Actual material purchased and used 210,000 kg
Standard material for actual output 175,000 kg
Total actual materials cost £336,000
Materials price variance £21,000 adverse
What was the standard materials price per kg?
A  £1.50 B  £1.70 C  £1.80 D  £2.04

25 A business has a budgeted materials cost of £7 per kg. During the month of June 2,500 kg of the
material was purchased and used at a cost of £18,750 in order to produce 1,250 units of the product.
The budgeted materials cost of £14,000 had been based upon budgeted production of 1,000 units of the
product. What was the materials total variance?
A £1,250 adverse B £1,250 favourable C £4,750 adverse D £4,750 favourable

26 A business has a budgeted labour cost per unit of £15.50. During the month of December production
details were as follows:
Budget 12,600 units Actual 12,000 units
The actual labour cost for the month was £199,400
What was the labour total variance as a percentage of the flexed budgeted figure?
A  2.1% adverse B  2.1% favourable C  7.2% adverse D  7.2% favourable

27 A company’s actual output for the period was 22,000 units and variable overhead costs were in line
with budget. The budgeted variable overhead cost per unit was £3 and total overhead expenditure of
£108,000 meant that fixed overheads were £8,000 under budget.
What was the budgeted level of fixed overheads for the period?
A  £34,000 B  £50,000 C  £66,000 D  £116,000

29  A product requires raw material with a standard cost of 50p per kg. In February, 2,500 kg of raw
material were purchased at a cost of £1,500 of which 2,300 kg of raw material were used in that month’s
production. If raw material inventory is valued at standard cost and there was no opening inventory of
raw material, which of the following represents the material price variance for February?
A  £250 adverse B  £230 adverse C  £230 favourable D  £250 favourable

30 The following is extracted from Proteus Ltd’s monthly management reporting:

Performance report for October £
Budgeted contribution (10,000 units) 172,000
Variances Adverse (£) Favourable (£)
Labour rate 3,600
Labour efficiency 8,000
Material price 10,800
Material usage 4,800
14,400 12,800 (1,600)
Actual contribution (10,000 units) 170,400
The purchasing manager decided to buy a superior quality material that was more expensive than the
standard material for use in October. This superior material gives rise to less waste. Labour was able to
convert this superior material into the final product in less than the standard time. Also impacting on the
results, however, was a wage rise, agreed in July, which was implemented at the beginning of October.
The decision to purchase the superior quality materials caused the profit in October to change. Select
which of the following best describes that change.
A  Fall by £1,600 B  Rise by £4,800 C  Fall by £6,000 D  Rise by £2,000

31 The following data are available with regard to a product for a given period:
Actual Budget
Sales (units) 10,100 10,000
Sales value £ 105,040 £ 102,000
Variable costs at standard 86,860 86,000
Contribution 18,180 16,000
The favourable sales volume variance was:
A  £1,020 B  £1,040 C  £180 D  £160

32 The following information relates to a firm’s labour costs for the year:
Standard rate per hour £2.00
Actual rate per hour £4.00
Actual hours worked 130,000
Labour efficiency variance £10,000 favourable
The standard number of labour hours for actual output were:
A  125,000 hours B  127,500 hours C  132,500 hours D  135,000 hours
Chapter 10: Breakeven analysis and limiting factor analysis

3 A company makes a single product and incurs fixed costs of £30,000 per month. Variable cost per unit
is £5 and each unit sells for £15. Monthly sales demand is 7,000 units.
The breakeven point in terms of monthly sales units is:
A 2,000 units B 3,000 units C 4,000 units D 6,000 units

4 A company manufactures a single product for which cost and selling price data are as follows:
Selling price per unit £12 Variable cost per unit £8 Fixed costs per month £96,000 Budgeted monthly
sales (units) 30,000. The margin of safety, expressed as a percentage of budgeted monthly sales, is:
A  20% B  25% C  73% D  125%

5 Uula plc makes a single product, which it sells for £16 per unit. Fixed costs are £76,800 per month and
the product has a contribution ratio of 40%.
In a month when actual sales were £224,000, Uula plc’s margin of safety, in units, was:
A 2,000 B 12,000 C 14,000 D 32,000

6 A company has budgeted sales revenue of £500,000 for Period 1, with an associated contribution of
£275,000. Fixed production costs are £137,500 and fixed selling costs are £27,500.
What is the breakeven sales revenue?
A £165,000 B £250,000 C £300,000 D £366,667

7 A company has calculated its margin of safety to be 20% of budgeted sales. Budgeted sales are 5,000
units per month and budgeted contribution is £25 per unit.
What are the budgeted fixed costs per month?
A  £25,000 B  £100,000 C  £125,000 D  £150,000

8 Doer Ltd makes a single product, the Whizzo. This product sells for £15, and makes a contribution of
£5 per unit. Total fixed costs per annum are £11,125.
If Doer Ltd wishes to make an annual profit of £11,875 how many Whizzos do they need to sell?
A  1,533 units B  2,225 units C  2,375 units D  4,600 units

9 Jackson plc expects a new venture to yield a gross profit of 50% on sales.
Fixed salary costs are expected to be £23,520 per month and other expenses are expected to be 8% of
sales.
Calculate the sales revenue necessary to yield a monthly profit of £58,800.
A  £56,000 B  £140,000 C  £164,640 D  £196,000

10 Bandido Ltd manufactures and sells a single product, with the following estimated costs for next year.
Unit cost
100,000 units of output (£) 150,000 units of output (£)
Variable materials 20.00 20.00
Variable labour 5.00 5.00
Production overheads 10.00 7.50
Marketing costs 7.50 5.00
Administration costs 5.00 4.00
47.50 41.50
Fixed costs are unaffected by the volume of output. Bandido Ltd’s management think they can sell
150,000 units per annum if the sales price is £49.50. The breakeven point, in units, at this price is:
A  36,364 B  90,000 C  101,020 D  225,000

12 JJ Ltd manufactures a product which has a selling price of £14 and a variable cost of £6 per unit. The
company incurs annual fixed costs of £24,400. Annual sales demand is 8,000 units.
New production methods are under consideration, which would cause a 30% increase in fixed costs and
a reduction of £1 in the variable cost per unit. The new production methods would result in a superior
product and would enable the sales price to be increased to £15 per unit.
If the organisation implements the new production methods and wishes to achieve the same profit as
that under the existing method, the number of units to be produced and sold annually would be:
A  3,960 B  4,755 C  7,132 D  8,915
16 A company produces a single product for which standard cost details are as follows.
£ per unit
Material (£2 per kg) 8
Labour (£6 per hour) 18
Production overhead 9
Total production cost 35
The item is perishable and no inventories are held. Demand for next period will be 6,000 units but only
19,000 hours of labour and 22,000 kg of material will be available.
What will be the limiting factor next period?
A  Material only B  Labour only C  Material and labour D  Sales demand

17 A company makes three products to which the following budget information relates:
B (£ per unit) A (£ per unit) T (£ per unit)
Selling price 100 120 145
Labour at £20 per
hour 40 40 60
Materials at £10 per kg 10 20 30
Fixed overheads 30 40 20
Profit 20 20 35
The marketing department says the maximum annual demand is for 1,000 units of Product B, 1,200 units
of product A and 1,500 units of product T, and the factory has budgeted to produce that number of units.
It has just been discovered that next year materials will be limited to 5,000 kg and labour to 10,000
hours.
If the company wishes to maximise profit, the priority in which the products should be made and sold is:
A B then A then T B A then B then T C T then A then B D T then B then A

18 A company makes three products and has produced the following standard cost cards.
X (£ per unit) Y (£ per unit) Z (£ per unit)
Selling price 100 80 70
Variable costs
Material 20 30 5
Labour 30 10 5
Fixed overheads 40 10 40
Profit 10 30 20
The same labour is used to make all three products, but in different quantities.
Assume that the company can make and sell any combination of products.
In a month where expenditure on labour is restricted to £50,000, what is the maximum contribution and
profit that can be earned?
A  Contribution: insufficient information to calculate, Profit: insufficient information to calculate
B  Contribution: Insufficient information to calculate, Profit: £200,000
C  Contribution: £600,000, Profit: Insufficient information to calculate
D  Contribution: £600,000, Profit: £200,000

20 Using the following data Chin has correctly selected the plan which will maximise profit for next
month, assuming 15,000 labour hours are available.
Product M Product Q
£ per unit £ per unit £ per unit £ per unit
Selling price 171 235
Less Variable costs 26 45
Materials 60 80
Labour (at £10 per hour)
86 125
Contribution 85 110
Maximum demand (units) 1,000 1,200
If an extra 48 hours were available (at the normal hourly rate of £10) and allocated optimally, profit for
next month would be expected to increase by:
A  £180 B  £660 C  £680 D  £880

21 MNP plc produces three products from a single raw material that is limited in supply. Product details
for period 6 are as follows: Product M Product N Product P
Maximum demand (units) 1,000 2,400 2,800
Optimum planned production 720 nil 2,800
Unit contribution £4.50 £4.80 £2.95
Raw material cost per unit (£0.50 per kg) £1.25 £1.50 £0.75
The planned production optimises the use of 6,000 kg of raw material that is available from MNP plc’s
normal supplier at the price of £0.50 per kg. However, a new supplier has been found that is prepared to
supply a further 1,000 kg of the material.
The maximum price that MNP plc should be prepared to pay for the additional 1,000 kg of the material is:
A  £1,740 B  £1,800 C  £2,240 D  £2,300
22 Jethro Ltd manufactures three products, the selling prices, maximum demand and cost details of
which are as follows. X (£) Y (£) Z (£)
Unit selling price 150 190 190
Unit costs
Materials (£10/kg) 20 10 30
Labour (£8/hr) 32 48 40
Variable overheads 16 24 20
Fixed overheads 48 72 60
Maximum demand (units) 590 840 660
In the forthcoming period direct materials are restricted to 1,400 kg and the company has contracted to
supply 100 units of Z and 130 units of Y to a customer (included in the maximum demand figures above).
What is the profit-maximising production plan?
X (Units) Y (Units) Z (Units)
A 130 840 100
B 280 840 Nil
C Nil 2 466
D 1 840 186

23 Green Ltd manufactures two components, the Alpha and the Beta, using the same machines for
each. The budget for next year requires the production of 4,000 units of each component.
The variable production cost per component is as follows:
Machine hours per unit Variable production cost (£ per unit)
Alpha 3 20
Beta 2 36
Only 16,000 machine hours will be available next year. A sub-contractor has quoted the following unit
prices to supply components: Alpha £29; Beta £40.
The optimum plan to obtain the components required is:
Component Alpha Component Beta
Produce Purchase from Produce Purchase from
(Units) sub-contractor (Units) (Units) sub-contractor (Units)
A 0 4,000 0 4,000
B 2,000 2,000 0 4,000
C 2,666 1,334 4,000 0
D 4,000 0 2,000 2,000
24 Blue plc manufactures two components, the Aura and the Venta, using the same machines for each.
The budget for next year requires the production of 400 units of each component.
The variable production cost per component is as follows:
Machine hours per unit Variable production cost (£ per unit)
Aura 30 360
Venta 20 360
A maximum of 15,000 machine hours will be available next year. A sub-contractor has quoted the
following unit prices to supply components: Aura £390; Venta £400.
The optimum plan to obtain the components required is:
Component Alpha Component Beta
Produce Purchase from Produce Purchase from
(Units) sub-contractor (Units) (Units) sub-contractor (Units)
A 400 0 150 250
B 250 150 375 25
C 233 167 400 0
D 0 400 0 400

25 A company has only 6,000 kg of an irreplaceable raw material called Grunch. Grunch can be used to
make three possible products X, Y and Z, details of which are given below:
X Y Z
Maximum demand (units) 4,000 3,000 5,000
Constant unit selling price (£/unit) £3.00 £4.00 £5.00
Constant unit variable cost (£/unit) £1.50 £2.40 £2.60
Fixed costs (£/unit) £1.80 £2.20 £2.40
Quantity of raw material Grunch to make one unit of product (kg) 0.30 0.40 0.80
If the company’s objective is to maximise profit, which of the following production schedules should be
chosen?
X (Units) Y (Units) Z (Units)
A 2,666 3,000 5,000
B 4,000 3,000 5,000
C 4,000 2,000 5,000
D 4,000 3,000 4,500