Chapter 1: The fundamentals of costing

1 A cost unit is
A a unit of product or service in relation to which costs are ascertained
B the cost per hour of operating a machine
C the cost per unit of electricity consumed
D a measure of output of work in a standard hour LO 1a

2 Certain types of income and cost are of no interest to the cost accountant.
An example of such income or cost is
A indirect labour
B purchase of raw materials
C dividends received
D rent paid on a factory LO 1a

3 Variable costs are conventionally deemed to

A be constant in total when production volume changes
B be constant per unit of output
C vary per unit of output as production volume changes
D vary, in total, from period to period when production is constant LO 1b

4 Which of the following costs would not be the concern of the supervisor of a production
department?
A Material costs
B Labour costs
C Maintenance costs for a machine
D Lease payments on a machine LO 1a

5 A company makes one delivery per week to all of its customers.

The cost of these deliveries is
A a selling and distribution cost
B a prime cost
C a production overhead
D a direct production expense LO 1b

ICAEW 2019 Chapter 1: The fundamentals of costing 3

 6 A hospital has total costs of £1 million for 20X1. During 20X1, 200,000 patients were treated
and doctors were paid £500,000.
What is the most appropriate cost per patient for the hospital to use?
A £0.20
B £2.50
C £5.00
D £7.50 LO 1b

7 A business has ascertained that its total costs (TC) can be estimated for any level of
production (P) and sales (S) according to the following equation:
TC = (£5 P + £1,000) + (£2 S + £500)
If the production level was 500 units and sales were 400 units, what would be the
company's fixed costs?
A £1,500 The fixed costs are those costs which are unaffected by changes in
B £4,800 activity levels, which could be calculated by considering the total costs
if both production and sales levels were 0.
C £3,500 -> TC = ($5 x 0 + $1000) + ($2 x 0 + $500) = $1500
D £3,300 LO 1b

8 Bo Feeters Shoes Ltd manufactures two types of shoe in its factory.

A typical monthly budget is as follows:
Shoe Type A Shoe Type B
Monthly output 2,100 units 4,400 units
Time per unit 24 minutes 36 minutes
Unavoidable non-productive time is 20% of productive time, and is paid £4 per hour.
Operatives are paid £3.60 per unit of shoe Type A produced and £6 per unit of shoe
Type B.
What is the monthly cost of operatives' wages in the factory?
Total productive labour cost for Shoe Type A: 2100 x 3.6 = 7560
A £13,920
Unproductive cost for Shoe Type A: 2100 x (24/60) x 4 x 20% = 672
B £33,960 Total monthly cost of operatives' wages for Shoe Type A: 7560 + 672 = 8232
Total productive labour cost for Shoe Type B: 4400 x 6 = 26400
C £36,744 Unproductive cost for shoe type B: 4400 x (36/60) x 4 x 20% = 2112
D £50,664 Total monthly cost of operatives' wages for Shoe Type B: 26400 + 2112 = 28512
Total monthly cost of operatives' wages in the factory: 8232 + 28512 = 36744 LO 1b

4 Management Information: Question Bank ICAEW 2019

 9 If a sales representative is paid a basic salary plus commission for each sale made, this wage
cost is best described as
A a semi-variable cost
B a fixed cost
C a variable cost
D a production cost LO 1b

10 Prime cost is
A the total of all direct costs
B the total of all costs incurred in manufacturing a product
C the same as the fixed cost of a cost unit
D any cost which does not vary with changes in output levels LO 1b

11 A cost which contains both fixed and variable components, and so is partly affected by
changes in the level of activity is known as
A a direct cost
B a variable cost
C an indirect cost
D a semi-variable cost LO 1b

12 Which of the following costs are fixed per unit, but change in total, as production levels
change?
A Variable costs
B Direct costs
C Fixed costs
D Step costs Ex: woring hours increase, additional material purchase,... LO 1b

13 If an assembly line supervisor is paid a salary of £100 each week and an additional £0.10 for
every unit of production made in the week, this wage could be described as
A a semi-variable cost
B a fixed cost
C a variable cost
D a step cost LO 1b

ICAEW 2019 Chapter 1: The fundamentals of costing 5

 14 A company has a photocopier for which a fixed rental is payable up to a certain number of
copies each period. If the number of copies exceeds this amount, a constant charge per
copy is made for all subsequent copies during that period.
Which of the following graphs depicts the cost described?
A
Total
Cost

Level of activity
B
Total
Cost

semi-variable cost

Level of activity
C
Total
Cost

Level of activity
D
Total
Cost

Level of activity
LO 1b

6 Management Information: Question Bank ICAEW 2019

 15 A factory making soft toys uses a particular machine on each production line. Each machine
costs £1,000 per month to hire. Each production line can make up to 100 toys per month.
Which of the following best describes the cost of hiring the machines?
A A step cost -> If the factory made between 1 and 100 toys in one
month the cost would be £1,000. However if they made
B A variable cost 101 toys they would need two production lines, and
C A fixed cost therefore two machines. The cost would then be £2,000. As
this cost can be seen to increase with output it cannot be
D A semi-variable cost fixed. LO 1b

16 The annual salary paid to a business's financial accountant would best be described as
A a variable administrative cost
B a fixed production cost
C part of prime cost
D a fixed administrative cost LO 1b

17 The following is a graph of cost against level of activity:

Cost

Level of activity
To which of the following costs does the graph correspond?
A Electricity bills made up of a standing charge and a variable charge
B Bonus payments to employees when production reaches a certain level
C Sales representatives' commissions payable per unit up to a maximum amount of
commission
D Bulk discounts on purchases, the discount being given on all units purchased LO 1b

18 A company's telephone bill consists of two parts:

(1) a charge of £40 per month for line rental
(2) a charge of £0.01 per minute of call time
Which of the following equations describes the total annual telephone cost, C, if the
company uses T minutes of call time in a year?
A C = 480 + 0.01T
B C = 40 + 0.01T
C C = 480 + 0.12T
D C = 40 + 0.01T/12 LO 1b

ICAEW 2019 Chapter 1: The fundamentals of costing 7

 19
1600

1400

1200

1000

800

600

400

200

0
0 20 40 60 80

In the graph above, the x-axis represents volume of output, and the y-axis represents total
costs. Which of the following could explain the shape of the graph?
A Fixed costs = 500. Variable costs per unit are constant until output is 30, then
additional costs per unit are higher.
B Fixed costs = 500. Variable costs per unit are constant until output is 30, then all costs
per unit (from the first unit onwards) are higher.
C Fixed costs cannot be determined, because the two parts of the line will intersect the
y-axis at different points. Variable costs per unit are constant until output is 30, then
additional costs per unit are higher.
D Fixed costs cannot be determined, because the two parts of the line will intersect the
y-axis at different points. Variable costs per unit are constant until output is 30, then all
costs per unit (from the first unit onwards) are higher. LO 1b

20 Which of the following statements is correct?

A The use of cost accounting is restricted to manufacturing operations.
B The format of management accounts is regulated by Financial Reporting Standards.
C Management accounts are usually prepared for internal use by an organisation's
managers.
D Financial accounts and management accounts are each prepared from completely
different sets of basic data. LO 1a

8 Management Information: Question Bank ICAEW 2019

 21 Which of the following would be most useful for monitoring and controlling the costs
incurred by a freight transport organisation?
A Cost per tonne carried
B Cost per kilometre travelled
C Cost per driver hour
D Cost per tonne-kilometre LO 1a

22 Which of the following items might be a suitable cost unit within the accounts payable
department?
(1) Postage cost
(2) Invoice processed
(3) Supplier account
A Item (1) only
B Item (2) only
C Item (3) only
D Items (2) and (3) only LO 1a

23 What is the correct description of the following graph?

Cost
(£)

0
Output (level of activity)
A The line with the constant upward slope represents fixed costs; D represents variable
cost per unit
B The line with the constant upward slope represents variable costs; D represents fixed
costs
C The line with the constant upward slope represents total costs; D represents fixed costs
D The line with the constant upward slope represents total costs; D represents variable
cost per unit LO 1b

ICAEW 2019 Chapter 1: The fundamentals of costing 9

 24 What is the correct description of the following graph?
Cost
(£)

Q
0
Output (level of activity)
A Total fixed costs fall after production reaches Q, but variable costs per unit increase.
B Fixed costs are constant until production reaches Q after which fixed costs step up to a
higher level.
C Variable costs per unit are constant until output reaches Q after which all production
(from the first unit onwards) incurs higher variable costs per unit.
D Variable costs per unit are constant until output reaches Q after which further
production incurs higher variable costs per unit. LO 1b

25 Select the cost classification that best describes each of the following:
Labour paid per hour worked
A Fixed
B Variable
C Semi-variable
Rent of a factory
D Fixed
E Variable
F Semi-variable
Salary plus profit-related pay
G Fixed
H Variable
I Semi-variable LO 1b

26 Which two of the following would be regarded as cost objects?

A Business rates paid on a factory Cost object: Anything for which we are trying to
ascertain the cost.
B An operating theatre in a hospital Ex: - a unit of a product (a car, a table...)
- a unit of a service (cleaning,...)
C Labour used in cleaning offices
- a department or function (the accounts department,...)
D A branch of a high street bank - a project (the installation of a new computer system,...)
- a new product or service (eg, to enable the cost of
E Glue used in making a chair development to be identified) LO 1a

10 Management Information: Question Bank ICAEW 2019

 27 Which two of the following would be regarded as elements of cost?
A A meal in a restaurant The total cost of a cost unit of product or
service is made up of the following three
B An operation in a hospital elements of cost:
- Materials
C A branch of a high street building society
- Labour
D Labour used in assembling a car - Other expenses (such as rent and rates,
interest charges and so on)
E Wood used in making a chair LO 1a

28 Adam is responsible for preparing a monthly analysis of total department costs for the
Managing Director of XYZ. Adam's boss, the Department Manager, has asked Adam to
exclude a number of costs from the monthly analysis to 'give a better impression' of the
department, and has threatened to start disciplinary proceedings against Adam for poor
work if he fails to do so.
Which threat does this represent?
A Familiarity
B Self-interest
C Intimidation
D Self-review LO 5a

29 The ICAEW Code of Ethics exemplifies which of the following theoretical approaches to
ethical codes?
A A rules-based approach
B A framework-based approach
C A compliance-based approach
D A tick box approach LO 5a

ICAEW 2019 Chapter 1: The fundamentals of costing 11