1 PM- Costing

Question – 1
Which of the following statements about activity-based costing is/are true?
1. It is not particularly relevant for service industry businesses.
2. It is based on marginal costing principles.
A. 1 only
B. 2 only
C. Neither 1 nor 2
D. Both 1 and 2

Question – 2
Doe Co produces two products, the Ray and the Me. The following information is available about these products.
Ray Me Total
Budgeted production (units) 2,500 2,000 4,500
Machine hours per unit/total 4 3 16,000
Number of production set-ups 12 8 20
Number of orders 72 48 120

Other overhead costs are absorbed on the basis of machine hours.

Using activity-based costing, what is the budgeted overhead cost per unit of the Me, to the nearest $?
$

Production set-up costs 36,000

Ordering costs 84,000

Other overhead costs 64,000

A. $35
B. $36
C. $39
D. $41

Question – 3
Growler Co manufactures two products. The following information is available about these products.
Gord Ed
Budgeted production (units) 8,000 5,000
Material per unit ($) 15 20
Labour per unit ($) 40 50
Machine hours per unit (hours) 3 5
Fixed overheads relating to materials are $140,800. The cost driver for fixed overheads relating to materials is
the cost of material purchased.
General fixed overheads are $284,200. These are absorbed on the basis of machine hours
Using activity-based costing, what is the budgeted fixed overhead cost per unit of product Ed, to the nearest
$0.01?
2 PM- Costing

A. $37.28
B. $38.64
C. $41.80
D. $43.37

Question – 4
The following have been suggested as advantages of using activity-based costing (ABC).
1. ABC is based on the idea that a single cost driver drives the cost behaviour of all items in the cost pool.
2. ABC enables a better understanding of what causes costs.
3. ABC helps the implementation of responsibility accounting.
4. ABC allocates more overheads to high-volume products.
Which of the above are advantages of using ABC?
A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 2 and 4

Question – 5
Curtis runs a printing business. He estimates that his printing machine will need to be set-up 200 times per
month, at a monthly total cost of $80,000. Item 2145 has to be printed in batches of 50 copies, where each batch
requires the machine to be set-up twice. Curtis expects the annual demand for item 2145 to be 5,000 copies.
What amount should be charged to each copy of item 2145 for set-up costs (to the nearest $)?
$ …………
16

Question – 6
RS Co has recently introduced an activity-based costing system. RS Co manufactures two products, details of
which are given below:
Product R Product S
Budgeted production per year (units) 80,000 60,000
Batch size (units) 100 50
Machine set-ups per batch 3 3
Processing time per unit (minutes) 3 5
The budgeted annual costs for two activities are as follows:
$
Machine set-up 180,000
Processing 108,000
What is the budgeted machine set-up cost per unit of Product S?
A. $1.50
B. $1.80
C. $30
D. $150
3 PM- Costing

Question – 7
Identify, by selecting the relevant boxes in the table below, whether the following statements regarding
activity-based costing (ABC) are true or false.
Ture False
ABC recognises that some overhead costs do not depend directly on
True
the volume of output
The cost of implementing activity based costing may exceed the
benefits for some businesses True

Question – 8
Which THREE of the following statements about activity-based costing (ABC) and traditional costing systems
(absorption costing and marginal costing) are correct?
A. No over-absorption or under-absorption of overheads can occur under ABC
B. ABC is useful for businesses which have high overheads in their cost structure
C. ABC is not suitable for use in businesses that provide services
D. Marginal costing understates the true cost of a product when compared to ABC
E. ABC is better than absorption costing in understanding what causes costs to be incurred
F. Both ABC and marginal costing treat all fixed costs as product costs

Question – 9
Which of the following should be categorised as environmental failure costs by an airline?
1. Compensation payments to residents living close to airports for noise pollution caused by their aircraft
2. Air pollution due to the airline’s carbon emissions from their aircraft engines
3. Penalties paid by the airline to the government for breaching environmental regulations
A. 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3

Question – 10
The following are types of management accounting techniques:
1. Flow cost accounting
2. Input/output analysis
3. Life-cycle costing
4. Activity-based costing
Which of the above techniques could a company use to account for its environmental costs?
A. 1 and 3 only
B. 2 and 3 only
C. 1, 2 and 3 only
D. 1, 2, 3 and 4

Question – 11
The following statements have been made about environmental cost accounting:
1. The majority of environmental costs are already captured in a typical organisation’s accounting system
2. Input/output analysis divides material flows in an organisation into three categories: material flows; system
flows; delivery and disposal flows
4 PM- Costing

Which of the above statements is/are true?

A. 1 only
B. 2 only
C. Neither 1 nor 2
D. Both 1 and 2

Question – 12
A road haulage company has decided to adopt environmental management accounting and to include an
analysis of its environmental costs in its monthly management reports under four cost categories. One of the
significant costs of the company is fuel for the trucks.
Which category would be the most appropriate for the fuel costs?
A. Conventional costs
B. Potentially hidden costs
C. Contingent costs
D. Image and relationship costs

Question – 13
Which of the following should be categorised as internal failure costs by a producer of bulk chemicals?
1. Fines payable to the government for pollution more than prescribed limits
2. Costs of disposing of a toxic waste that is a by-product of the production process. This toxic waste is carefully
collected in containers in the factory as it comes out of the process
3. Salaries and other costs of a pollution monitoring team that monitors the emissions to ensure they are below
the permitted limits
4. Filtering equipment used to reduce emissions into the atmosphere to reduce emissions below legal limits
voluntarily
A. 2 only
B. 1, 2 and 4
C. 2 and 3
D. 1 and 3

Question – 14
A company grows different types of tea leaves and blends them together. The tea leaves are picked by hand
because too many leaves were damaged and wasted when picking machines were used. The tea leaves are
then dried and processed and any waste produced is recycled.
The company regularly tests its tea for contaminants, in line with food safety legislation. It recently identified that
one tea plantation contained high levels of contaminated soil after the use of a new pesticide.
Identify the environmental cost classification of each of the following costs.
Prevention Detection Internal Failure External Failure
Cost incurred to clean
contaminated soil
Staff cost for picking leaves by
hand
Costs involved in the recycling of
waste
Cost incurred for testing tea for
contaminants
5 PM- Costing

Question – 15
Which TWO of the following activities are environmental INTERNAL failure costs?
A. Quality control inspections to monitor pollution levels in water leaving a production process
B. Water purification treatment to clean waste water before it leaves the factory
C. Fitting of carbon filters to machine processes to reduce carbon emissions
D. Power usage measuring system to monitor energy consumption within the factory
E. Payment of fines for breaching environmental regulations in the industry
F. Insulation of heating pipes in the factory to reduce heat loss
G. Public relations costs to remedy reputational damage caused by accidental river pollution
H. Capturing and recycling of waste exhaust gases to generate energy

Question – 16
A company's actual production figures for a batch of products are as follows:
Kg $
Material 2,000 10,000
Labour and overhead 26,000
2,000 36,000
Normal loss 10% (200)
1,800 36,000
Abnormal loss (100) (2,000)
Good output 1,700 34,000
In terms of environmental cost categorisations, how would the normal and abnormal losses be
described?
A Normal loss = Potentially hidden costs Abnormal loss = Conventional costs

B Normal loss = Potentially hidden costs Abnormal loss = Contingent costs

C Normal loss = Conventional costs Abnormal loss = Contingent costs

D Normal loss = Contingent costs Abnormal loss = Conventional costs

Question – 17
Zul Co manufactures a single product, the Zoot, which is made from a mix of two chemicals: A and B. The
company accounts for environmental costs using input/output analysis.
Chemical A costs $1,000 per tonne and chemical B costs $1,500 per tonne. Any chemicals which are wasted in
the production process must be disposed of at a cost of $250 per tonne.
June's production run used 10 tonnes of chemical A and 50 tonnes of chemical B. Total output of Zoot was 54
tonnes.
What is the environmental cost of June's production run?
A. $7,000
B. $1,500
C. $8,500
D. $10,000
6 PM- Costing

Question -18
The following statements have been made about environmental cost accounting:
1. The majority of environmental costs are already captured in a typical organisation’s accounting system
2. Input/output analysis divides material flows in an organisation into three categories: material flows; system
flows; delivery and disposal flows
Which of the above statements is/are true?
A. 1 only
B. 2 only
C. Neither 1 nor 2
D. Both 1 and 2

Question -19
A textiles manufacturer makes three textiles at its Bigtown factory: Ax, By and Cz. The dyeing process has been
identified as a bottleneck resource.
Information about the three products is as follows:
Product Ax By Cz
Selling price per metre 10 11 12.5
Material cost per metre 3.0 3.0 4.0
Other variable costs 2.0 3.5 2.0
Time taken in dyeing per metre 10 minutes 10 minutes 15 minutes
The manufacturer wishes to maximise throughput contribution.
What will be the ranking of the textiles in order of priority for the throughput maximising production
plan?
A. Ax, then By, then Cz
B. Cz, then By, then Ax
C. By, then Ax, then Cz
D. By, then Cz, then Ax

Question -20
A company operates a throughput accounting system. The details per unit of Product C are:
Selling price $28.50
Material cost $9.25
Labour cost $6.75
Overhead costs $6.00
Time on bottleneck resource 7.8 minutes
What is the throughput contribution per hour for Product C?
A.$50.00
B.$122.85
C.$121.15
D.$148.08
7 PM- Costing

Question -21
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 32 28 22
Variable costs
Direct material 10 8 6
Direct labour 6 4 4
Variable overhead 4 2 2
Fixed overhead cost 9 6 6
Total product cost 29 20 18
Profit 3 8 4
Additional information:
Demand per period (units) 3,000 4,000 5,000
Time in Process A (minutes) 20 25 15
Each product is produced using Process A, which has a maximum capacity of 2,500 hours per period.
If a throughput accounting approach is used, what will be the ranking of products, in order of priority, for
the profit maximising product mix?
A. D, E, F
B. E, D, F
C. F, D, E
D. D, F, E

Question -22
A product is manufactured in three consecutive processes; preparation, machining and polishing. The time taken
per unit and the total hours available per week are as follows:

Process Preparation Machining Polishing

Hours per unit 2 4 3

Total hours available 100,000 220,000 120,000

Demand for the product is 50,000 units per week.
Which, if any, of the processes is the bottleneck?
A. Preparation
B. Machining
C. Polishing
D. None of the processes
8 PM- Costing

Question -23
A company manufactures a product that requires four hours per unit of machine time. Machine time is a bottleneck
resource as there are only 10 machines that are available for 12 hours per day, five days per week. The product
has a selling price of $130 per unit, direct material costs of $50 per unit, labour costs of $40 per unit and factory
overhead costs of $20 per unit. These costs are based on weekly production and sales of 150 units.
What is the throughput accounting ratio (TPAR) for the product (to two decimal places)?
A. 1.33
B. 2.00
C. 0.75
D. 0.31

Question -24
Payn Co is about to make an investment of $900,000 in manufacturing product 123. Payn Co’s board wishes to
make a return of 25% on the investment in product 123 in the next year. Payn Co expects to sell 20,000 units of
Product 123 for $40 per unit.
What is the target cost of Product 123?
A.$28.75
B.$30.00
C.$31.00
D.$32.00

Question -25
Hera Co is developing a new product using a target costing approach. The initial assumption was that a sales
volume of 200,000 units could be achieved at a selling price of $25 per unit. However, market research indicates
that to achieve a sales volume of 200,000 units, the selling price should be $23.50.
Hera Co wishes to obtain an average profit margin of 20% on sales.
The following data has been estimated for the product:

Direct material $10.45 per unit

Hourly production volume 20 units

Direct labour cost $64 per hour

Variable overheads $82 per hour (absorbed on a direct labour hour basis)
Fixed costs to produce 200,000 units are estimated to be $680,000.
What reduction in the cost per unit is required to achieve the target cost per unit?
A. $0.38
B. $1.15
C. $1.88
D. $2.35
9 PM- Costing

Question -26
Caward Co is planning to introduce a new product. The company seeks to obtain a 25% margin on all products.
The direct cost of the new product is $124.50 per unit and the overhead cost is $91.20 per unit. Market research
indicates that the likely selling price should be $265.00.
What cost reduction must be made to achieve the target cost?
A. $4.62
B. $16.95
C. $22.60
D. $88.95

Question -27
Which of the following statements describes target costing?
A. It calculates the expected cost of a product and then adds a margin to it to arrive at the target selling price
B. It allocates overhead costs to products by collecting the costs into pools and sharing them out according to
each product’s usage of the cost driving activity
C. It identifies the market price of a product and then subtracts the desired profit margin to arrive at the target
cost
D. It identifies different markets for a product and then sells that same product at different prices in each market

Question -28
S Company is a manufacturer of multiple products and uses target costing. It has been noted that Product P
currently has a target cost gap, and the company wishes to close this gap.
Which of the following may be used to close the target cost gap for product P?
A. Use overtime to complete work ahead of schedule
B. Substitute current raw materials with cheaper versions
C. Raise the selling price of P
D. Negotiate cheaper rent for S Company’s premises

Question -29
Which TWO of the following statements about target costing are true?
A. It cannot be used in services industries
B. It aims to achieve an acceptable margin in markets where a competitive market determines the selling price
C. It can be used in conjunction with lifecycle costing to achieve an acceptable lifecycle cost
D. It helps companies to achieve the sales price at which profits are maximized

Question -30
The following statements have been made about life-cycle costing:
1. It helps forecast a product’s profitability over its entire life
2. It takes into account a product’s total costs over its entire life
3. It focuses on the production of monthly profit statements throughout a product’s entire life
Which of the statements are true?
A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 2 only
10 PM- Costing

Question –31
Which of the following costs would be included in the life cycle costs of a product?
1. Planning and concept design costs
2. Proto-type testing costs
3. Distribution and customer service costs
A. 1, 2 and 3
B. 1 and 3 only
C. 2 and 3 only
D. 1 and 2 only

Question -32
The following costs arise in relation to the production of a new product:
1. Research and development costs
2. Design costs
3. Testing costs
4. Advertising costs
5. Production costs
In calculating the lifetime costs of the product, which of the above items would be EXCLUDED?
A. 1, 2 and 3
B. 2 and 3 only
C. 4 and 5
D. None of these costs

Question -33
Cam Co manufactures webcams and is about the launch a new version of its product, the Webcam X, for which
the following information is available:

Projected lifetime sales volume 50,000 units

Product development costs (already incurred) $1,250,000

Marketing costs $1,750,000

Manufacturing costs per unit, based on the prototype, are as follows:
$
Direct material 40
Direct labour 26
Machine costs 21
Quality control costs 10
Rework costs 3
Total manufacturing costs per unit 100
The procurement officer has stated that the materials can be sourced from another supplier, reducing direct
material costs by 10%.
What is the lifecycle cost per unit?
A. $121
B. $131
C. $156
D. $160
11 PM- Costing

Question -34
A bank has developed a new type of account called the Gold Account. Development and advertising costs were
$50,000.
At the start of each of the next four years, 1,000 new customers are expected to open a Gold Account and will
pay the bank $300 each year that they use it. Of the 1,000 new customers who open a Gold Account yearly, 500
are expected to close the account after one year and 500 after two years.
The bank estimates it will cost $400 per customer to administer the Gold Account for each customer’s first year,
which reduces to $50 for each customer's second year.

Ignoring the time value of money, what is the lifecycle profit per customer of the Gold Account?
A. $8.33
B. $12.50
C. $16.67
D. $25.00

Question -35
Which costing approach identifies ways of making an acceptable profit margin on the market price of a
product or service?
A. Activity-based costing
B. Benchmarking
C. Life-cycle costing
D. Target costing