FINAL MOCK EXAM
1. The senior manager is suspicious of a local manager’s accounts and thinks that the profit
performance may have been overstated.
Which of the following would be a plausible explanation of an overstatement of profit?
A. Delaying payments to payables
B. Shortening the useful economic life of a non-current asset
C. Overstatement of a prepayment
D. Overstatement of an accrual
2. Which of the following statements regarding standard setting is correct?
A. Imposed standards are more likely to be achieved
B. Managers across the organisation should be targeted using the same standard
C. Standards should be set at an ideal level with no built in stretch
D. Participation in standard setting is more motivating than where standards are imposed
3. Which of the following statement (s) about measuring effectiveness in not-for-profit
organisations is/ are true?
A. Effectiveness targets cannot usually be expressed financially, and therefore non- financial
targets must be used
B. The effective level of achievement could be measured by comparing actual performance
against target
4. Which of the following statement (s) is/ are true regarding planning and operational
variances?
A. Planning and operational variances are calculated when it is necessary to assess a manager
on results that are within his/ her control
B. Revised standards are required because variances may arise partly due to an unrealistic
budget, and not solely due to operational factors
5. Which of the following conditions must be true for a price discrimination strategy to be
effective?
A. Buying power of customers must be similar in both market segments
B. Goods must not be able to move freely between market segments
C. Goods must be able to move freely between market segments
D. The demand curves in each market must be the same
6. A company produces a range of products and uses an absorption costing system. Which
TWO of the following are unlikely to be a consequence of the company switching to an ABC
system?
A. Indirect overheads will be shared between products on a fairer basis
B. Product pricing decisions will be improved
C. The prime production cost of each product will fall
D. Cost control on indirect overheads will be harder to achieve
E. Total production cost of each product will change
7. Which TWO of the following are not usually a characteristic of a modern manufacturing
environment?
A. Shorter production cycles
B. A greater emphasis on quality
C. A greater use of advanced technology
D. Reduced levels of employee participation
E. Increased rigidity in processes
8. Which of the following statements are true regarding ABC and cost drivers?
A. A cost driver is any factor that causes a change in the cost of an activity
B. For long term variable overhead costs, the cost driver will be the volume of activity
C. Traditional absorption costing tends to under-allocate overhead costs to low-volume
products
9. Which of the following statement (s) is/ are true regarding activity- based costing?
A. A cost pool is an activity which consumes resources and for which overhead costs are
identified and allocated
B. An activity-based costing overhead absorption rate is calculated in the same way as an
absorption costing OAR, and will result in the same OAR being calculated.
10. A company makes two products using the same type of materials and skilled workers. The
following information is available:
Product A Product B
Budgeted volume (units) 1,000 2,000
Material per unit (£) 10 20
Labour per unit (£) 5 20
Fixed costs relating to material handling amount to £100,000. The cost driver for these costs
is the volume of materials purchased.
General fixed costs, absorbed on the basis of labour hours, amount to £180,000
Using ABC, what is the total fixed overhead amount to be absorbed into each unit of product
B (to the nearest whole £)?
11. W Co. has been asked to quote for a special contract. The contract requires 100 hours of
labour. However, the labourers, who are each paid £15 per hour, are working at full
capacity.
There is a shortage of labour in the market. The labour required to undertake this special
contract would have to be taken from another contract, Z, which currently utilises 500 hours
of labour and generates £5,000 worth of contribution.
If the labour was taken from contract Z, then the value of whole contract Z would have to be
delayed, and as such delay would invoke a penalty of £1,000.
What is the relevant cost of the labour for the special contract?
12. Brunto is considering a new project but is unsure how much overhead to include in the
calculations to help him decide whether or not to proceed. Existing fixed overheads are
absorbed at the rate of £8 per hour worked. Brunto is certain that the project will involve an
incremental 500 labour hours.
The project will involve extra machine running costs and these variable overheads cost him £4 per
hour.The number of extra machine hours is expected to be 450 hours. The difference between this
figure and the 500 labour hours above is expected idle time.
The project will require a little more temporary space that can be rented at a fixed cost of £1,200 for
the period of hire. The overhead is not included in the fixed overhead absorption rate above.
What is the overhead to be charged against the project decision?
13. A company uses an activity-based costing system to attribute overhead costs to its three
products. The following budget data relates to this year:
Product X Y Z
Production (units) 50,000 25,000 20,000
Batch size 250 100 400
Material handling costs are determined by the number of batches of each product and have been
estimated to be £60,000 per year.
What is the cost driver for material handling costs?
14. Leon ltd prints two weekly magazines: Hello (40,000 copies in one weekly production run)
and the Family (25,000 copies in total, 2 production runs every week.) Total Production run
set- up costs amount to £2,150 every week. Leon uses Activity- Based Costing and the
number of production runs as a cost driver.
What is the set- up cost for each copy of the Family?
17. UV Company has been asked to quote for a special contract. The following information about
the material has been given:
Material X:
Book value £5 per kg
Scrap value £0.50 per kg
Replacement cost £5.50 per kg
The contract requires 10 kgs of Material X. There are 250 kgs of this material in inventory which
was purchased in error over 2 years ago. If Material X is modified, at a cost of £2 per kg, it could
then be used as a substitute for material Y which is in regular use and currently cost £6 per kg.
What is the relevant cost of the materials for the special contract?
18. A linear programming model has been formulated for 2 products, X and y. The objective
function is depicted by the formula C = 5X + 6Y, where C= contribution, X = the number of
product X to be produced and Y= the number of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard cost of
material Z is £2 per kg.
The shadow price for material Z has been worked out and found to be £2.80 per kg.
If an extra 20 kg of material Z becomes available at £2 per kg, what will the maximum increase in
contribution be?
19. What is the purpose of a flexible budget?
A. To compare actual and budgeted results at virtually any level of production
B. To reduce the total time in preparing the annual budget
C. To allow management some latitude in meeting goals
D. To eliminate cyclical fluctuations in production reports by ignoring variable costs
20. Cleveclogs is short of labour for a new one- off project needing 600 hours of labour and has
choices as to where to source this. He could hire new people temporarily from an agency at a
cost of £9 per hour. Alternatively, he could recruit new temporary staff at a fixed cost pf
advertising of £1,200 but then only pay £6 per hour for the time. He could also redirect some
staff from existing work who are currently paid £7 per hour and who make sandals that
generate a contribution of £3 per hour after all variable costs. Sandals are a good selling
product and CleverClogs will lose the production and the related sales whilst staff if working
on the new one-off project.
What is the relevant cash flow?
STRETCH AND CHALLENGE QUESTIONS
S1 Duff Co manufactures three products, X,Y and Z and uses cost plus pricing. Each product uses the
same materials and the same type of direct labour, but in different quantities. For many years, the
company has been using full absorption costing and absorbing overheads on the basis of direct labour
hours. Budgeted production and sales volumes for X, Y and Z for the next year are 20,000 units, 16,000
units and 22,000 units respectively.
The budgeted direct cost of the three products are:
X Y Z
$ per unit $ per unit $ per unit
Direct Material 25 22 28
Direct Labour ($12 per hour) 30 36 24
Batch Size (units per set up) 500 800 400
Number of purchase order per batch 4 5 4
Machine hour per unit 1.5 1.25 1.4
In the next year Duff Co also expects to incur indirect production cost of $1,377,400 and the company
has calculated the Overhead Production Rate to be $9.70 per direct labour hour.
The indirect production costs are analysed as follows:
Cost Pool $ Cost Driver
Machine Set up Cost 2,80,000 Number of batches
Material Ordering Cost 316000 Number of Purchase orders
Machine Running Cost 420000 Number of machine hours
General Facility Cost 361400 Number of machine hours
Q1 What is the full production cost per unit of product Z, using Duff’s Co. current method of
absorption costing?
A. $71.40 per unit
B. $79.25 per unit
C. $93.10 per unit
D. Cannot be determined without more information
Q2 What is the overhead cost per unit for product X, using activity based costing?
A. $19.25 per unit
B. $24.64 per unit
C. $26.21 per unit
D. $72.21 per unit
Q3 Using activity-based costing, total overhead allocated to product Z amount to $576,583. What is
the budgeted full cost production per unit using activity-based costing, for product Z?
A. $65.40 per unit
B. $78.21 per unit
C. $79.64 per unit
D. $83.20 per unit
Q4 Which of the following statements about activity-based costing (ABC) in Duff Co. are correct?
(1) ABC can be applied to all overhead costs, not just production overheads.
(2) ABC provides a more accurate cost per unit of X, Y or Z, and as a result pricing should be
improved.
(3) ABC recognises that overhead costs are not all related to production and sales volume of X, Y
and Z.
(4) ABC will be of limited benefit if Duff Co’s overhead costs are primarily volume related, or if
the overheads represent a small proportion of the overall cost.
A. (1) and (2) only
B. (2) and (4) only
C. (1), (2) and (3) only
D. (1), (2), (3) and (4)
Q5 Using activity-based costing (ABC), the production cost of product X is very similar to the cost
calculated using traditional absorption costing, but the cost for product Y is almost $10 less.
Demand for X and Y is relatively elastic.
(1) If the company decides to adopt ABC, the price of product X will change.
(2) If the company decides to adopt ABC, sales volumes of X are likely to remain unchanged.
(3) If the company decides to adopt ABC, the price of product Y will go down.
(4) A reduced selling price is unlikely to give rise to increased sales volumes.
A. (1) and (2) only
B. (2) and (3) only
C. (1) and (4) only
D. (1), (2), (3) and (4)
.
EXTRA PRACTICE QUESTION
Price Marginal Mark-Up Margin
Cost (%) (%)
£100 £25 300.0 75.0
£240 £72
£680 £272 150.0 60.0
£750 100.0
£2,800 40.0
£2,700 33.3
£3,360 20.0
£5,800 10.0
£6,250 5.3
