CIMA

Operational Level – Paper P1

MANAGEMENT ACCOUNTING
Exam Practice Kit

Tutor contact details

Tufal Choudhury
[email protected]
077 9090 4122

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P1 MANAGEMENT ACCOUNTING

Syllabus overview

P1 stresses the importance of costs and the drivers of costs in the production, analysis and
use of information for decision making in organisations. The time focus of P1 is the short
term. It covers budgeting as a means of short-term planning to execute the strategy of
organisations. In addition it provides competencies on how to analyse information on
costs, volumes and prices to take short-term decisions on products and services and to
develop an understanding on the impact of risk to these decisions. P1 provides the
foundation for cost management and the long-term decisions covered in P2.

Syllabus Chapters relevant from the

Syllabus topic
weighting Acorn study manual

A. Cost accounting systems 30% 4, 5, 6 and 7

B. Budgeting 25% 1, 2 and 3

C. Short-term decision making 30% 2, 9 and 10

D. Dealing with risk and uncertainty 15% 8

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CONTENTS

Objective test questions

Question Answer
Chapter page page
number number

1 Classification of costs and maths for budgets 5 185

2 Advanced mathematics for budgets 17 195

3 Budgeting 43 215

4 Absorption, marginal and activity based costing 65 231

5 Standard costing and variance analysis 97 263

6 Modern manufacturing methods 121 293

7 Environmental cost accounting 141 309

8 Decision theory 147 313

9 Linear programming 163 331

10 Relevant costing 171 337

MOCK 1 90 minute test (syllabus mixture of 60 questions) 345 365

MOCK 2 90 minute test (syllabus mixture of 60 questions) 375 395

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 Chapter 1 - Classification of costs and maths for budgets

1.1

The table below shows the output, total costs and the cost inflation index for a business in
two periods. Cost behaviour patterns were the same in both periods.

Output level Total cost Inflation index

12,000 units $21,000 1.05
16,000 units $26,780 1.03

The variable cost per unit at an inflation index of 1.08 will be:

A $1.56
B $1.45
C $1.50
D $1.62

The following data are given for sub-questions 1.2 and 1.3 below

A company is estimating its costs based on past information. The total costs incurred by
the company at different levels of output were as follows:

Output (units) Total costs $

160,000 2,420,000
185,000 2,775,000
190,000 2,840,000

The company uses the high-low method to separate total costs into their fixed and
variable elements. Ignore inflation.

1.2

The estimated total costs for an output of 205,000 units is:

A $2,870,000
B $3,050,000
C $3,064,211
D $3,080,857

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1.3

The company has now established that there is a stepped increase in fixed costs of
$30,000 when output reaches 180,000 units.

The estimate of total costs for an output of 175,000 units using the additional information
is:

A $2,645,000
B $2,275,000
C $2,615,000
D $2,630,000

1.4

The budgeted costs for a company at different levels of output are as follows:

Output Total costs

24,000 units $304,000
30,000 units $352,000
35,000 units $392,000

The variable cost per unit will reduce by 5% for output levels above 40,000 units. The
reduced cost per unit will apply to all units. Fixed costs will increase by $30,000 for
output levels above 38,000 units.

Calculate the budgeted total costs for an output level of 45,000 units.

1.5

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

Output 2,000 units 3,500 units

Total cost £12,000 £16,200

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

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

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1.6

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

Volume (units) Cost

4,500 £29,000
6,500 £33,000

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

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

1.7

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

Output 25,000 units 40,000 units

Total cost £143,500 £194,000

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

Calculate for a budgeted output of 36,000 units:

(i) the variable cost per unit;

(ii) the total fixed costs.

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1.8

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

Output level Total cost Inflation index

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

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

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

1.9

A company has recorded the following activity levels and distribution costs for the
previous three quarters:

Quarter Volume Total cost

Units $
1 64,000 200,000
2 80,000 240,000
3 100,000 290,000

What will be the distribution costs in quarter 4 if the expected level of activity is 85,000
units? You should assume that the cost behaviour pattern in the previous three quarters
will continue in quarter 4.

A $252,500
B $255,000
C $254,303
D $253,963

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1.10

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

Production (units) 2,500 3,500

Production cost (£) 17,625 19,875

The budget cost allowed for an activity of 2,000 units would be

A £16,500
B £12,000
C £13.450
D £9,500

1.11

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

Units Average cost (£)

4000 £6.00
6000 £5.17

What would be the total cost forecast for 6,500 units?

A £31,000
B £32,775
C £24,000
D £10,000

1.12

Using the available data, predict what the cost would be of cleaning 70 bedrooms within
a hotel?

Bedrooms cleaned 20 35 55 75

Total cleaning cost (£) 70 102 137 180

A £150
B £160
C £165
D £170

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1.13

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

Number of passengers Total cost

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

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

A TC = 1,200,000 + 1.2P
B TC = 1,100,000 + 2.1P
C TC = 1,000,000 + 1.2P
D TC = 1,800,000 + 2.1P

1.14

The following information relates to an accountancy practice

Number of consultations by audit managers 1,115 1,345

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

The variable cost per consultation would be?

A £15.00
B £223.05
C £238.00
D £284.06

1.15

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

A Fixed cost
B Variable cost
C Functional cost
D Stepped cost

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1.16

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

A The supervision cost for a team of workers making bottles

B The labour cost in connection with making the bottles
C Overtime payments in connection with making the bottles
D The salary for quality control workers inspecting bottles made

1.17

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

Units Average cost (£)

4001 £6.00
6001 £5.17
Using the information above what would be the total cost forecast for 6,500 units?

A £31,000
B £32,775
C £24,000
D £10,000

1.18

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

A A cost that varies with a measure of activity

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

1.19

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

A £112.50
B £135.00
C £140.63
D £160.00
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1.20

A cost unit is

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

1.21

A prime cost is

A The total cost of making a product

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

1.22

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

A Preparation of the statement of financial position

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

1.23

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

A Preparing forecast budgets for departments

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

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1.24

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

A For external purposes only

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

1.25

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

A Preparing budgets for the departments

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

1.26

Which of the following if any are characteristics of financial accounting?

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

1.27

Which of the following if any are characteristics of management accounting?

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

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1.28

The following budgeted financial information exists for a company ;

Units Cost
500 $14,000
800 $16,400
1200 $19,600

The budget cost allowance for the production of 1,000 units would be?

1.29

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

A Fixed cost
B Step cost
C Variable cost
D Mixed cost

1.30

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

A Indirect labour cost

B Indirect expenses
C Direct expenses
D Prime cost

1.31

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

A Increase when total output increases

B Decrease when total output increases
C Remain constant when total output increases
D Remain constant when total output decreases

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1.32

The following information exists in a machining department;

Machine hours 44,000 54,000

Total overhead $186,000 $206,000

The variable overhead absorption rate would be?

1.33

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

Units 200 400 800

Cost per unit $50.00 $25.00 $12.50

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

A Fixed cost
B Step cost
C Variable cost
D Mixed cost

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 Chapter 2 - Advanced mathematics for budgets

2.1

A company is preparing its annual budget and is estimating the number of units of
Product A that it will sell in each quarter of Year 2. Past experience has shown that the
trend for sales of the product is represented by the following relationship:

y = a + bx where
y = number of sales units in the quarter
a = 10,000 units
b = 3,000 units
x = the quarter number where 1 = quarter 1 of Year 1

Actual sales of Product A in Year 1 were affected by seasonal variations and were as
follows:

Quarter 1: 14,000 units

Quarter 2: 18,000 units
Quarter 3: 18,000 units
Quarter 4: 20,000 units

Calculate the expected sales of Product A (in units) for each quarter of Year 2, after
adjusting for seasonal variations using the additive model.

2.2

A company provides three different levels of customer service support for one of its
software products.

The following data relate to these three levels of support:

Support level Superior Standard Basic

$ per contract $ per contract $ per contract
Annual fee 1,000 750 400

Annual variable costs 450 250 180

Annual fixed costs (see note below) 200 100 50
Profit 350 400 170

Note: The total annual fixed costs are budgeted to be $1,000,000. None of these costs are
specific to any type of customer service support.

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Assuming that the number of customer service support contracts sold are in the
proportion:

Superior 20% Standard 30% Basic 50%

The annual revenue needed to be generated to break even is closest to

A $1,690,000
B $1,695,000
C $1,710,000
D $2,270,000

2.3

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

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

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

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

Calculate the revenue that needs to be generated by Product Z for S plc to achieve the
budgeted profit.

2.4

A company makes and sells three products, R, S, and T. Extracts from the weekly profit
statements are as follows:

R S T Total
$ $ $ $
Sales 10,000 15,000 20,000 45,000

Variable cost of sales 4,000 9,000 10,000 23,000

Fixed costs* 3,000 3,000 3,000 9,000

Profit 3,000 3,000 7,000 13,000

* general fixed costs absorbed using a unit absorption rate

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If the sales revenue mix of products produced and sold were to be changed to: R 20%, S
50%, T 30% then the new average contribution to sales ratio

A would be higher.
B would be lower.
C would remain unchanged.
D cannot be determined without more information.

The following data are given for sub-questions 2.5 and 2.6 below

A company sells three different levels of TV maintenance contract to its customers:

Basic, Standard and Advanced. Selling prices, unit costs and monthly sales are as
follows:

Basic Standard Advanced

£ £ £
Selling price 50 100 135
Variable cost 30 50 65

Monthly contracts sold 750 450 300

2.5

Calculate the average contribution to sales ratio of the company based on the sales mix
stated above.

2.6

Calculate the average contribution to sales ratio of the company if the total number of
monthly contracts sold remains the same, but equal numbers of each contract are sold.

2.7

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

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

A $1,400,000
B $11,500,000
C $875,000
D $7,143,000
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2.8

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

Selling price 23 26 28

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

Profit 3 4 5

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

X 240 units Y 600 units Z 400 units

No inventories of finished products are held.

Required:

Calculate the optimum product mix for the next accounting period.

2.9

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

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

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

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2.10

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

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

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

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

2.11

The overhead costs of RP Limited have been found to be accurately represented by the
formula
y = £10,000 + £0.25x

where y is the monthly cost and x represents the activity level measured as the number of
orders.

Monthly activity levels of orders may be estimated using a combined regression analysis
and time series model:
a = 100,000 + 30b

where a represents the de-seasonalised monthly activity level and b represents the month
number.

In month 240, the seasonal index value is 108.

Calculate the overhead cost for RP Limited for month 240 to the nearest £1,000.

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2.12

The following details relate to three services provided by JHN.

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

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

Most profitable Least profitable

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

2.13

Z plc has found that it can estimate future sales using time-series analysis and regression
techniques. The following trend equation has been derived:

y = 25,000 + 6,500x
where:
y is the total sales units per quarter, and
x is the time period reference number.

Z has also derived the following set of seasonal variation index values for each quarter
using a multiplicative (proportional) model:

Quarter 1 70
Quarter 2 90
Quarter 3 150
Quarter 4 90

Using the above model, calculate the forecast for sales units for the third quarter of year
7, assuming that the first quarter of year 1 is time period reference number 1.

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2.14

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

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

2.15

A company uses time series and regression techniques to forecast future sales. It has
derived a seasonal variation index to use with the multiplicative (proportional) seasonal
variation model. The index values for the first three quarters are as follows:

Quarter Index value

Q1 80
Q2 80
Q3 110

The index value for the fourth quarter (Q4) is:

A -270
B -269
C 110
D 130

2.16

The budgeted profit statement for a company, with all figures expressed as percentages of
revenue, is as follows:
%
Revenue 100
Variable costs 30
Fixed costs 22
Profit 48

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

A 20%
B 33.3%
C 60%
D 80%
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2.17

The following details relate to ready meals that are prepared by a food processing
company:

Ready meal K L M
$/meal $/meal $/meal
Selling price 5 3 4.40
Ingredients 2 1 1.30
Variable conversion costs 1.60 0.80 1.85
Fixed conversion costs 0.50 0.30 0.60
Profit 0.90 0.90 0.65

Oven time (minutes per ready meal) 10 4 8

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

2.18

A bakery produces three different sized fruit pies for sale in its shops. The pies all use the
same basic ingredients. Details of the selling prices and unit costs of each pie are as
follows:
Small Medium Large
$ per pie $ per pie $ per pie
Selling price 3.00 5.00 9.00

Ingredients 1.80 2.40 4.60

Direct labour 0.40 0.50 0.60
Variable overhead 0.30 0.50 0.80

Weekly demand (pies) 200 500 300

Fruit (kgs per pie) 0.2 0.3 0.6

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

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2.19

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

Y = Ax (to the power of 0.6)

Where:

 Y is the cumulative sales units

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

June 2007 is Month 1.

Sales in June 2007 will be 1,500 units.

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

2.20

A company will forecast its quarterly sales units for a new product by using a formula to
predict the base sales units and then adjusting the figure by a seasonal index.

The formula is BU = 4000 + 80Q

Where BU = Base sales units and Q is the quarterly period number

The seasonal index values are:

Quarter 1 105%
Quarter 2 80%
Quarter 3 95%
Quarter 4 120%

The forecast increase in sales units from Quarter 3 to Quarter 4 is

A 25%
B 80 units
C 100 units
D 1,156 units

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2.21

KL has determined from past experience that the following equation provides a reliable
estimate of its future sales volume:

y = 15,000 + 2,200x

y is the total sales units per quarter, and

x is the time period

KL has also derived the following set of seasonal variation index values for each quarter
using the multiplicative model:

Quarter 1 80
Quarter 2 110
Quarter 3 120
Quarter 4 90

Required:

Calculate the forecast sales units for the third quarter of year 6 using the above model and
assuming that the first quarter of year 1 is time period 1.

The following data are given for sub-questions 2.22 and 2.23

A company is estimating future sales using time-series analysis. The following trend
equation has been derived from actual sales data for Year 1:

y = 22,000 + 800x

y is the total sales units for the quarter, and

x is the time period (Quarter 1 of Year 1 is time period 1)

The following set of seasonal variation index values has been derived using a
multiplicative model and based on Year 1 actual sales:

Quarter 1 70
Quarter 2 90
Quarter 3 130
Quarter 4 110

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2.22

Using the above multiplicative time series model, sales for Year 2 Quarter 3 would be
estimated as:

A 35,880 units
B 40,040 units
C 27,600 units
D 27,730 units

2.23

Using an additive time series model, the amount of the seasonal variation for Quarter 2
would be:

A - 2,680
B - 2,360
C + 2,680
D + 2,360

2.24

X Plc sells three products. The budgeted contribution to sales ratio for each product and
the sales mix is as follows:

Product C/S ratio Mix

A 10% 30%
B 68% 40%
C 28% 30%

If the budgeted fixed cost for the period were £345,000, the breakeven sales revenue
would be nearest to

A £907,900
B £893,800
C £893,700
D £890,000

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2.25

R Plc manufactures three products, which have the following data:

Product X Product Y Product Z

Contribution to sales ratio 30% 25% 40%
Maximum sales value (£000) 900 1,000 500
Minimum sales value (£000) 100 200 300

There are also fixed costs of £450,000

The lowest breakeven sales value, subject to meeting the above sales value constraints is
nearest to

A £1,366,700
B £1,356,700
C £1,456,800
D £1,556,800

2.26

X Ltd provides a single unit the ‘widget’ to its customers. Analysis for the year shows
that, when the budgeted level of activity was 6,000 units with a sales value of £250 a unit,
the margin of safety was 25%.

The budgeted contribution to sales ratio of the product was 60%.

Budgeted fixed costs for the year were

A £675,000
B £775,000
C £825,000
D £456,000

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2.27

L Plc sells three products, details about them include:

C/S ratio Product mix

Product P 50% 2
Product Q 45% 3
Product R 30% 5

If the yearly fixed cost is £600,000, the yearly breakeven sales revenue, to the nearest £1,
will be

A £1,551,675
B £1,345,670
C £1,558,442
D Impossible to calculate without further information

2.28

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

Product A Product B Product C

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

Machine hours
per unit 1.0 0.5 3.0

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

Most profitable Least Profitable

A Product B Product A
B Product A Product C
C Product C Product A
D Product C Product B

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2.29

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

A Increase
B Decrease
C Remain constant
D Would be impossible to calculate without further information

2.30

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

A 40,000 units
B 30,000 units
C 20,000 units
D 10,000 units

2.31

Contribution per limiting factor is:

A Contribution per unit / limiting factor used per unit

B Limiting factor used per unit / Contribution per unit
C Sales price per unit / limiting factor used per unit
D Limiting factor used per unit / Sales price per unit

2.32

The trend of a companies sales (in units) is expressed as Y = 3x + 350

Where Y = Sales
X = the period

In accounting period 26, the seasonal variation will have an index of 90. The expected
sales for this period to the nearest units will be?

A 187
B 428
C 385
D 400

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2.33

X Plc is preparing the sales forecast for next year.

The regression equation Y = 20x + 560 has been found to be a reliable method of
calculating X Plc deseasonlised sales in units.

Where Y is the total sales units and X refers to the accountancy period. Quarterly
seasonal variations have been found to be:

Q1 Q2 Q3 Q4

+15% +25% -15% -30%

In accountancy period 35 (which is quarter 3) the seasonally adjusted sales in units is

expected to be?

A 1,560
B 560
C 1,260
D 1,071

2.34

The overhead cost of X Ltd has been found to accurately reflect the following formula

Y = £20,000 + £0.50X

Where Y is the monthly cost and X the activity in labour hours

Each month’s activity level, in labour hours, may be estimated using a combined
regression and time series model:

a = 50,000 + 40b

Where “a” is the deseasonalised month’s activity level and “b” the month number.

In month 250, when the seasonal index value was 123, the overhead cost (to the nearest
£1,000) would be

A £55,000
B £56,000
C £57,000
D £58,000

31 | P a g e
2.35

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

A 13,333
B 8,000
C 20,000
D 11,667

2.36

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

A 13,333
B 8,000
C 20,000
D 11,667

2.37

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

A 13,333
B 8,000
C 20,000
D 11,667

32 | P a g e
2.38

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

Product A Product B Product C

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

Labour hours
per unit 2.5 5.0 2.5

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

Most profitable Least Profitable

A Product B Product A
B Product A Product C
C Product C Product A
D Product C Product B

2.39

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

A Break even units would rise by 3,333 units

B Break even units would fall by 3,333 units
C Break even units would rise by 909 units
D Break even units would fall by 909 units

33 | P a g e
2.40

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

Product X Product Y Product Z

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

Machine Hours
per unit 3.0 5.0 4.0

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

Most profitable Least Profitable

A Product Y Product X
B Product X Product Z
C Product Z Product X
D Product Z Product Y

2.41

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

A Sales demand
B Principle or key budget factor
C Avoidable budget factor
D Unavoidable budget factor

2.42

The equation of a straight line is given by y = a +bx. The method which is NOT used for
estimating a straight line is:

A Linear regression
B The line of best fit
C Time series
D Interpolation

34 | P a g e
2.43

x
x x
x x x x
xx
x x
x
The above data is:

A Perfectly negatively correlated

B Positively correlated
C Negatively correlated
D not correlated

2.44

The correlation between variables “b” and “d” is 0.96. This means that:

A There is a weak relationship between b and d

B There is a strong relationship between b and d
C There is a 4% chance that b is d
D There is a 96% chance that b is d

2.45

n = 5, ∑X = 128, ∑Y = 6,040, ∑X2 = 3,408, ∑XY = 160,560, ∑Y2 = 7,568,800. The

correlation coefficient is:

A 0.993
B 0.938
C 0.867
D 0.834

35 | P a g e
2.46

If the correlation coefficient is 0.56, the coefficient of determination is:

A 0.3136
B 0.7483
C 0.44
D 0.21

2.47

x x
x
x
x
x
x x

The above data is:

A Perfectly negatively correlated

B Positively correlated
C Negatively correlated
D not correlated

2.48

The coefficient of determination:

A Measures the strength of the relationship between two variables

B Shows the strength of the relationship between how variables are ranked
C Is the found by square rooting variance
D Tells us the proportion explained by a variable by another variable

36 | P a g e
2.49

If a regression equation (in £m) y = 10 + 2.9x links sales (y) to the level of marketing
costs (x), when £6,000 is spent on marketing, compared to £2,000 spent previously, the
extra sales are:

A £10,017,400
B £11,600
C £5,800
D £17,400

2.50

One of the component parts of a time series is cyclical variation. An example of this
would be:

A An economic recession
B A strike
C A long term increase in costs of 3% each year
D A decrease in sales over summer

2.51

Based on the last 6 periods, the underlying trend of train drivers turning up late for work
is y = 73 – 0.78x, where y = number of train drivers turning up late and x = period
number.

If the 7th period has a seasonal factor of 1.05, assuming a multiplicative model then the
forecast for period 7 is:

A 50.9
B 60.9
C 70.9
D 80.9

2.52

Mobile phone users in a town in the 3rd quarter of 2002 were 10,456. The underlying
trend at this point was 9,500 and the seasonal factor is +36.44. Using the additive model
for seasonal adjustment, the seasonally adjusted figure for the quarter is:

A 9,464
B 10,492
C 9,536
D 10.420

37 | P a g e
2.53

Over a 25 month period, the underlying linear trend for the number of teachers playing
truant is y = 26 + 5.3x, where y = number of truants and x = period number. If the 26th
period has seasonal factor of –46.52, assuming an additive model then the forecast for
period 26 is:

A 117
B 115
C 210
D 215

2.54

The seasonality for a particular product is as follows:

Quarters Q1 Q2 Q3 Q4
Seasonality +25% +35% -45% -65%

If the demand for Q1 was 145 units, then the forecasted demand for Q2 is (assume a
multiplicative model):

A 157 units
B 153 units
C 47 units
D 43 units

2.55

One of the component parts of a time series is seasonal variation. An example of this
would be:

A An economic recession
B A strike
C A long term increase in costs of 3% each year
D A decrease in sales over summer

2.56

Which one of the following is NOT an assumption of linear regression?

A Relies on future data

B Assumes a linear relationship
C Interpolation is more accurate than extrapolation
D Assumes there is an actual relationship between the variables

38 | P a g e
2.57

Mean of X = 10, Mean of Y = 430

∑X = 167
∑Y = 900
∑X2 = 8,345
∑XY = 240,345
n = 14

Use the above information to construct the regression line y = a + bx

A y = 73.2 + 41.56x
B y = 68.6 + 36.14x
C y = 62.6 + 18.63x
D y = 60.1 + 17.42x

2.58

Which one of the following is not true, for time series forecasts to be reliable?

A Residual variations are immaterial

B Trend should continue as previously
C Seasonal variations should continue as previously
D Extrapolation should be reliable and accurate

2.59

A trend equation is given as follows: T = 0.0003w2 + 0.5w + 67.4

Where “w” represents the year intended for forecast. The forecast for the year 2000 is
estimated at 1.23 times trend. The forecast for the year 2000 is:

A 2678 units
B 2515 units
C 2241 units
D 2789 units

2.60

The multiplicative model compared to the additive model is:

A Better because it changes trend values by a constant seasonal variation

B Inferior because it over emphasises the trend both negatively or positively
C Better because it is compatible with other forecasting models
D Inferior because it is not compatible with other forecasting models

39 | P a g e
2.61

A time series analysis was done using the multiplicative model. It was used to forecast
the sales for the next quarter which was worked out to be £265,000. The trend value for
sales for that period that was used was £375,000. The season variation value was
approximately?

A 1.145
B 1.123
C 0.701
D 0.863

2.62

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

 Revenue 100%
 Variable costs 40%
 Fixed costs 20%
 Profit 40%

If the sales volume turns out to be only 80% of that budgeted, the profit, expressed as a
percentage of the revised revenue will be?

Give your answer to the nearest whole percentage.

2.63

The budgeted profit statement for Division A is:

Sales $20,000
Variable costs $16,000
Contribution $4,000
Fixed costs $2,000
Profit $2,000

What is the break-even point for Division A?

40 | P a g e
2.64

Label this diagram with the following the words. Not all apply and some can be used
more than once.

Sales revenue, Production costs, Semi-variable costs, Break even point, Fixed costs,
Margin of safetly, Stepped fixed costs, Variable costs, Budgeted sales

Cost and
revenue £

Output (units)
0

2.65

A company has three products with the following contribution to sales ratios:

Product A: 40%
Product B: 50%
Product C: 54%

If the product mix in sales value is 40% Product A, 25% Product B and 35% Product C,
what is the overall contribution to sales ratio?

Give your answer to the nearest 0.1%

41 | P a g e
2.73

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

A The organisation is producing products which earn the highest profit per unit
B The organisation is producing products which use the least of the limiting factor
C The organisation is producing products which earn the highest contribution per
unit
D The organisation is producing products which earn the highest contribution per
limiting factor

2.74
According to a profit volume (PV) chart, when fixed cost increases, the point at which
the profit line cuts the horizontal axis of the chart would?

A Shift to the right

B Shift to the left
C Disappear off the chart
D Remain constant

42 | P a g e
 Chapter 3 - Budgeting

3.1

AB is preparing its cash budget for the next quarter. Which of the following items should
NOT be included in the cash budget?

A Payment of tax due on last year’s profits

B Gain on the disposal of a piece of machinery
C Repayment of the capital amount of a loan
D Receipt of interest from short term investments

3.2

AB is preparing its cash budget for next year. The estimated accounts payable balance at
the beginning of next year is $540,000. The budgeted purchases for next year are
$6,800,000, occurring evenly throughout the year. It is estimated that 75% of purchases
will be on credit and the remainder will be for cash. The company pays for credit
purchases in the month following purchase. The budgeted cash payments to suppliers
next year are:

A $6,375,000
B $6,773,333
C $6,915,000
D $5,215,000

3.3

AB is preparing its purchases budget for raw material C for the forthcoming year. The
opening inventory of raw material C is expected to be 2,000kg and the price is expected
to be $8 per kg.

Raw material C is used only in the production of Product D. Each unit of Product D
requires two kg of material C. Budgeted sales of Product D for the forthcoming year and
for the following year are 36,000 units in each year. Sales will occur evenly throughout
each year. The opening inventory is expected to be 6,000 units.

AB will implement a new inventory policy from the first month of the forthcoming year.
The closing inventory that will be required at the end of the forthcoming year is as
follows:

 Raw material inventory: one month's production requirements

 Finished goods inventory: one month's sales requirements

Calculate the material purchases budget for the forthcoming year.

43 | P a g e
3.4

A company commenced business on 1 August. Total sales revenue in August was

$200,000 and is expected to increase at a rate of 2% per month. Credit sales represent
60% of total sales revenue and the remaining 40% is cash sales. The credit period
allowed is one month. Bad debts are expected to be 3% of credit sales but the remaining
credit sales customers are expected to pay on time.

The estimated receipts in September from cash and credit sales are:

A $195,552
B $196,400
C $198,000
D $201,600

3.5

The following details have been extracted from the accounts payable records of RS.

Invoices paid in the month of purchase 15% of total value

Invoices paid in the first month after purchase 65% of total value
Invoices paid in the second month after purchase 20% of total value

The pattern of payments is expected to continue in the future and has been used to
produce RS’s cash budget for October to December.

Purchases for October to December are budgeted as follows:

October $280,000
November $250,000
December $300,000

A settlement discount of 5% is taken on invoices paid in the month of purchase.

The amount budgeted to be paid to suppliers in December is:

A $264,500
B $261,250
C $250,325
D $263,500

44 | P a g e
3.6

A master budget comprises the

A budgeted income statement and budgeted cash flow statement only.

B budgeted income statement and budgeted balance sheet only.
C budgeted income statement and budgeted capital expenditure only.
D budgeted income statement, budgeted balance sheet and budgeted cash flow
statement only.

3.7

PJ has budgeted sales for the next two years of 144,000 units per annum spread evenly
throughout each year. The estimated closing inventory at the end of this year is 6,500
units. PJ wants to change its inventory policy so that it holds inventory equivalent to one
month’s sales. The change in inventory policy will take place at the beginning of next
year and will apply for the next two years.

Each unit produced requires 2 hours of direct labour. The budgeted direct labour rate per
hour is $15. It is anticipated that 80% of production will be paid at the budgeted rate and
the remainder will be paid at the overtime rate of time and a half. PJ treats overtime costs
as part of direct labour costs.

Calculate the direct labour cost budget for the next year.

3.8

JB has budgeted production for the next budget year of 36,000 units. Each unit of
production requires 4 labour hours and the budgeted labour rate is $12 per hour excluding
overtime.

Idle time is expected to be 10% of total hours available i.e. including idle time. Due to
labour shortages it is expected that 20% of the hours paid, including idle time, will be
paid at an overtime rate of time and a half.

Calculate the labour cost budget for the year.

45 | P a g e
3.9

Which of the following statements apply to feedforward control?

(i) It is the measurement of differences between planned outputs and actual outputs.
(ii) It is the measurement of differences between planned outputs and forecast outputs.
(iii) Target costing is an example.
(iv) Variance analysis is an example.

A (i) and (iii)

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

3.10

Which of the following best describes a basic standard?

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

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

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

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

D A standard which is based on current price levels.

3.11

GS has budgeted sales for the next two years of 24,000 units per annum spread evenly
throughout both years. The estimated opening inventory of finished goods at the start of
the next year is 500 units but GS now wants to maintain inventory of finished goods
equivalent to one month’s sales.

Each unit uses 2kg of material. The estimated opening raw material inventory at the start
of the next year is 300kg but GS now wants to hold sufficient raw material inventory at
the end of each month to cover the following month’s production.

The change in the policy for inventory holding for both raw materials and finished goods
will take effect in the first month of next year and will apply for the next two years.

The budgeted material cost is $12 per kg.

Calculate the material purchases budget for the next year in $.

46 | P a g e
3.12

A flexible budget is a budget that is

A set prior to the control period and not subsequently changed in response to
changes in activity, costs or revenues
B continuously updated by adding a further accounting period when the earliest
accounting period has expired
C changed in response to changes in the level of activity
D changed in response to changes in costs

The following data are given for sub-questions 3.13 and 3.14

A company has budgeted to produce 5,000 units of Product B per month. The opening
and closing inventories of Product B for next month are budgeted to be 400 units and 900
units respectively. The budgeted selling price and variable production costs per unit for
Product B are as follows:

$ per unit
Selling price 20.00
Direct costs 6.00
Variable production overhead costs 3.50

Total budgeted fixed production overheads are $29,500 per month.

The company absorbs fixed production overheads on the basis of the budgeted number of
units produced. The budgeted profit for Product B for next month, using absorption
costing, is $20,700.

3.13

Prepare a marginal costing statement which shows the budgeted profit for Product B for
next month.

3.14

Explain, using appropriate calculations, why there is a difference between the profit
figures for the month using marginal costing and using absorption costing.

47 | P a g e
The following data are given for sub-questions 3.15 and 3.16:

RT is preparing the production budget for Product R and the material purchases budget
for Material T for next year. Each unit of Product R requires 6 kg of Material T.

The estimated inventory at the beginning of next year for Product R is 6,000 units and the
company wants to decrease the inventory held by 10% by the end of next year.

The estimated inventory at the beginning of next year for Material T is 60,000 kg and due
to problems with the material supplier the closing inventory at the end of next year is to
be increased to 75,000 kg. The budgeted sales of Product R for next year are 80,000
units.

3.15

Calculate the production budget for Product R for next year.

3.16

Calculate the material purchases budget for Material T for next year.

3.17

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

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

each cost heading as close to zero as possible.

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

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

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

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

budget centre must equal zero.

48 | P a g e
3.18

Which of the following statements are true?

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

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

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

A (i) and (ii) only

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

3.19

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

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

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

Which combination of two phrases correctly completes the definition?

Blank 1 Blank 2

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

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

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

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

49 | P a g e
3.20

H has a budgeted production for the next budget year of 12,000 units spread evenly over
the year. It expects the same production level to continue for the next two years. Each
unit uses 4kg of material.

The estimated opening raw material inventory at the start of the next budget year is
3,000kg. H’s future policy will be to hold sufficient raw material inventory at the end of
each month to cover 110% of the following month’s production.

The budgeted material cost is $8 per kg for purchases up to 49,000kg. The excess of
purchases over 49,000kg in a year will be at a cost of $7.50 per kg.

Calculate the material purchases budget for the year in $.

3.21

The term ‘budgetary slack’ refers to the:

A Lead time between the preparation of the functional budgets and the approval
of the master budget by senior management

B Difference between the budgeted output and the actual output

C Difference between budgeted capacity utilisation and full capacity

D Intentional over estimation of costs and/or under estimation of revenue in a

budget

3.22

JK has budgeted sales for next year of 24,000 units and inventory levels are expected to
remain constant throughout the year. Each unit produced will require 3 labour hours and
the budgeted labour rate will be $15 per hour. It is estimated that 10% of units produced
will be wasted.

It is expected that 15% of the total hours worked will be paid at overtime rates. 10% of
the total hours will be paid at the basic rate plus an overtime premium of 50% of the basic
rate. 5% of the total hours will be paid at the basic rate plus an overtime premium of
100% of the basic rate. The labour cost budget for next year is:

A $1,350,000
B $1,306,800
C $1,188,000
D $1,320,000

50 | P a g e
3.23

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

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

3.24

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

Invoices paid in the month after sale 60%

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

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

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

Month August September October November December

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

Calculate the total amount budgeted to be received in December from credit sales.

3.25

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

1. The budgeted sales are as follows:

Month £000
July 100
August 90
September 125
October 140

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

51 | P a g e
3. Creditors are paid one month after the purchase has been made.

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

(i) August
(ii) September
(iii) October

3.26

A company has the following budgeted sales figures:

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

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

Within 1 month 40% of credit sales

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

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

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

received in month 4.

Calculate the total receipts expected in month 4.

3.27

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

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

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

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

52 | P a g e
3.28

Which ONE of the following is correct?

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

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

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

3.29

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

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

Calculate the total amount of cash FJ should forecast to be received in June 2008.

3.30

AB is preparing its cash budget for next year. The accounts receivable at the beginning of
next year are expected to be $460,000. The budgeted sales are $5,400,000 and will occur
evenly throughout the year. 80% of the budgeted sales will be on credit and the remainder
will be cash sales. Credit customers pay in the month following sale.

The budgeted cash receipts from customers next year are:

A $5,040,000
B $5,410,000
C $5,500,000
D $4,420,000

53 | P a g e
3.31

Q Plc is preparing a cash budget to July. The credit sales are

£
April 32,000
May 30,000
June 25,000
July 28,000

The recent experience in terms of how credit sales are collected is as follows:

Current months sales 10%

Prior months sales 60%
Sales two months prior 15%
Cash discounts given 10%
Bad debts 5%

How much do you expect to collect from debtors during July?

A £19,200
B £29,200
C £22,300
D £27,400

3.32

The following details have been extracted from the debtor collection records of S Plc

Invoice paid in the month after sale 60%

Invoice paid in the second month after sale 20%
Invoice paid in the third month after sale 10%
Bad debts 10%

Customers paying in the month after sale are entitled to receive a 15% discount. Credit
sales for January to April are budgeted as follows:

Jan Feb Mar Apr

£40,000 £45,000 £50,000 £60,000

The amount forecast to be received from debtors in April is

A £38,500
B £29,900
C £32,400
D £40,500
54 | P a g e
3.33

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

A Closing Stock + Cost of Sales – Material Purchases

B Closing Stock – Cost of Sales + Material Purchases
C Closing Stock + Cost of Sales + Material Purchases
D Closing Stock – Cost of Sales – Material Purchases

3.34

A flexible budget is a budget

A With variable production cost only

B Which shows costs and revenues at different activity levels
C Prepared using a spreadsheet package
D Which shows fixed production cost only

3.35

Zero based budgeting is best defined as

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

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

3.36

William has opening stock of £6,000 and purchases of £15,000. Cost of goods sold is
£8,000.

What is the value of closing stock?

A £13,000
B £17,000
C £15,000
D £8,000

55 | P a g e
3.37

A master budget would include

A A budgeted profit and loss account

B A budgeted profit and loss account and balance sheet
C A budgeted profit and loss account, balance sheet and cash flow statement
D A budgeted profit and loss account, balance sheet, cash flow statement and
functional budgets

3.38

A fixed budget is?

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

B A budget, which shows costs and revenues at different activity levels
C A budget prepared using a spreadsheet package
D A budget, which shows fixed production cost only

3.39

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

A 1,100 units
B 1,433 units
C 3,100 units
D 3,433 units

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3.40

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

A Depreciation
B Bad debts
C Discounts given to customers
D Payments to suppliers

3.41

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

when an earlier period has expired would be an example of

A A flexible budget
B A rolling budget
C An activity based budget
D A zero based budget

3.42

What is feedforward control?

A The comparison of actual results with planned outcomes and taking action to
correct differences in order to achieve the desired future results.

B The comparison of forecast results with planned outcomes and taking action to
avoid forecast differences.

C The forecasting of future events as a basis for a system of budgetary planning and
control.

D The communication of budgetary plans to budget holders in advance of the budget

period.

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3.43

What does responsibility accounting mean? Select all that apply if any.

To allow comparisons between the budge and actual results and then any
major differences can be investigated.

To allows mangers to be responsible for the management of resources that

they have been allocated in the budget, and as a result assessed on the
success of resource management.

To allow a more efficient production of goods and services because they can
be linked with one another.

To allow judgements to be made on the performance of the managers by

comparing the actual results with the budget.

To allow targets to be created for managers that they will want to achieve.

To allow everyone to understand what resources are available and how they
are to be allocated to different budgets.

3.44

What is the behavioural side of budgets concerned about? Select all that apply if any.

How budgets or standards affect people within an organisation

How budgets or standards affect costs
How budgets or standards affect profits
How budgets or standards affect the environment
How budgets or standrads affect resource allocation

3.45

Which of these relate to feedback control? Select all that apply if any.

Feedback can be negative (adverse) or positive (favourable)

Feedback is based on comparing actual to a standard of performance
It isa pre-emptive reaction to actual change
Examples of feedback control is a rolling budget
Control action would be ‘closing the stable door after the horse has bolted’

58 | P a g e
3.46

Which of these relate to feedforward control? Select all that apply if any.

Forecasting ahead and doing something now before the event occurs
They are good for adaptive planning
Examples of feedforward control is variance analysis
Control action would be ‘closing the stable door before the horse bolts’
Part of the output of a system is measured and returned as input to regulate
the systems further output.

3.47

Fill in this diagram of an open loop control system using the words below:

Input, Sensor, Comparator, Output, High Level Controller, Effector, Process

59 | P a g e
3.48

Which of these if any describe a double feeback loop system? Select all that apply if any.

It is an open loop control system

Corrective action is not automatically taken
Environmental factors are not considered before any control action
It is not a closed loop control sytem
It includes human intervention

3.49

Which if these if any describe a single feedback loop system? Select all that apply if any.

It is an open loop control system

Corrective action is automatically taken
Environmental factors are not considered before any control action
It is a closed loop control sytem
It includes human intervention

3.50

Which of these defines the “High Level Controller” in an open control system?

A Detects information it is programmed or instructed to find

B Compares results against a predetermined standard or plan
C It is either automatic or human action taken to correct future undesired outcomes
D It is human intevention

3.51

Whioch of these defines the “sensor” in an open control system?

A Detects information it is programmed or instructed to find

B Compares results against a predetermined standard or plan
C It is the process undertaken to make or create value
D It is the input of raw data

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3.52

Associate the correct word with the relevant example, not all words will apply.

Input, Process, Sensor, Output, Comparator, Effector, High Level Controller

Sales being generated by sales reps

Comparisons are made between the target level of sales expected

by sales reps and the actual results

The report showing level of sales and commissions earned by

different sales reps

Sales manager takes action over those sales reps that did not meet
their sales targets

3.53

Associate the correct word with the relevant example, not all words will apply.

Input, Process, Sensor, Output, Comparator, Effector, High Level Controller

The sales manager will review the level of sales and production and
in conjunction with the production manager and together agree on
appropriate action to increase or decrease raw materials levels to
ensure that a satisfactory level of production is reached to support
sales.

Comparisons are made between the actual level of sales and actual
level of production of finished goods.

This is a quality control procedure of the finished product to ensure it

meets certain standards.

These are the products themselves which are sold customers.

The raw materials are used in the production process.

Raw materials being delivered to a factory to go into production.

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3.54

Which of these defines the “comparator” in an open control system?

A Detects information it is programmed or instructed to find

B Compares results against a predetermined standard or plan
C It is the process undertaken to make or create value
D It is the input of raw data

3.55

Which of these defines the “Effector” in an open control system?

A Detects information it is programmed or instructed to find

B Compares results against a predetermined standard or plan
C It is either automatic or human action taken to correct future undesired outcomes
D It is human intevention

3.56

Which of these, if any, are why budgetary planning and control might be inappropriate in
a rapidly changing business environment.

Stifle innovation and creativity

Consume large amounts of management time to set
Too internal in focus
Ceate barriers within departments
Too short-term in focus

3.57

Which of the following if any are examples of feedback control?

Variance analysis
Cash flow forecasting
Target costing
Budget setting process

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3.58

A company has a production budget for the next 2 years of 36,000 units per annum to be
produced evenly throughout both years. Each unit uses 2 kg of material. The estimated
opening raw material inventory at the start of the next year is 2,000 kg but the company
then wants to hold sufficient raw material inventory at the end of each month to cover the
following month's production. The budget material cost is $12 per kg.

What is the material purchases budget for the next year?

3.59

A company is deciding whether to develop a new product. The development of the

product would require an investment of $2 million, on which the company would require
an annual return of 15%.

Market research anticipates an annual demand of 55,000 units if the unit selling price is
$18.

Calculate the target cost per unit.

3.60

In the context of budgeting and control, the term 'goal congruence' refers to:

A The setting of a budget which does not include budgetary slack

B The alignment of the budget with the company's strategic objectives
C The setting of a budget that challenges managers
D The alignment of the company's objectives with the personal objectives of the
manager

63 | P a g e
3.61

Which types of budget is described in each of the following?

A budget that is set prior to the control period and not subsequently
changed in response to changes in activity, costs or revenues

A budget that is continuously updated by adding a further accounting

period when the earliest accounting period has expired

A budget that is changed in response to changes in the level of

activity

A budget that is based on the previous budget or actual results for

changes in the activity and inflation

Place each of the following options against ONE of the above

Rolling, Flexible, Incremental, Fixed

64 | P a g e
 Chapter 4 - Absorption, marginal and activity based costing

The following information is given for sub-questions 4.1 and 4.2 below :

RS has recently introduced an activity based costing system. RS manufactures two

products, details of which are given below:

Product R Product S
Budgeted production per annum (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

4.1

The budgeted processing cost per unit of Product R is:

A $0.20
B $0.51
C $0.60
D $0.45

4.2

The budgeted machine set-up cost per unit of Product S is:

A $150
B $1.80
C $1.50
D $30

65 | P a g e
The following data are given for questions 4.3 and 4.4:

LM operates a parcel delivery service. Last year its employees delivered 15,120 parcels
and travelled 120,960 kilometres. Total costs were $194,400.

LM has estimated that 70% of its total costs are variable with activity and that 60% of
these costs vary with the number of parcels and the remainder vary with the distance
travelled.

LM is preparing its budget for the forthcoming year using an incremental budgeting
approach and has produced the following estimates:

• All costs will be 3% higher than the previous year due to inflation
• Efficiency will remain unchanged
• A total of 18,360 parcels will be delivered and 128,800 kilometres will be travelled.

4.3

Calculate the total variable costs related to the number of parcels delivered.

4.4

Calculate the total variable costs related to the distance travelled.

The following data are given for questions 4.5, 4.6 and 4.7:

DRP Limited has recently introduced an Activity Based Costing system. It manufactures
three products, details of which are set out below:

Product D Product R Product P

Budgeted annual production (units) 100,000 100,000 50,000
Batch size (units) 100 50 25
Machine set-ups per batch 3 4 6
Purchase orders per batch 2 1 1
Processing time per unit (minutes) 2 3 3

Three cost pools have been identified. Their budgeted costs for the year ending 31
December 2004 are as follows:

Machine set-up costs £150,000

Purchasing of materials £70,000
Processing £80,000

66 | P a g e
4.5

Calculate the annual budgeted number of:

(a) batches
(b) machine set-ups

4.6

Calculate the annual budgeted number of:

(a) purchase orders

(b) processing minutes

4.7

Calculate the budgeted overhead unit cost for Product R for inclusion in the budget for
2004.

4.8

Summary results for Y Limited for March are shown below:

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

Using marginal costing, the profit for March was

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

The following data are given for sub-questions 4.9 and 4.10:

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

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

4.9

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

A £6,575
B £7,750
C £8,500
D £10,562

4.10

The value of inventory of X at 31 August using a throughput accounting approach is

A £5,000
B £6,175
C £6,575
D £13,725

4.11

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

Variable direct costs per unit £6.00

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

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

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

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

B £2,950 greater than it would be using marginal costing.
C £4,700 lower than it would be using marginal costing.
D £4,700 greater than it would be using marginal costing.
68 | P a g e
The following data are given for sub-questions 4.12 to 4.13:

K makes many products, one of which is Product Z. K is considering adopting an

activity-based costing approach for setting its budget, in place of the current practice of
absorbing overheads using direct labour hours. The main budget categories and cost
driver details for the whole company for October are set out below, excluding direct
material costs:

Budget category £ Cost driver details

Direct labour 128,000 8,000 direct labour hours
Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours

* A quality test is performed after every 75 units produced

The following data for Product Z is provided:

Direct materials budgeted cost of £21.50 per unit

Direct labour budgeted at 0.3 hours per unit
Batch size 30 units
Set-ups 2 set-ups per batch
Budgeted volume for October 150 units

4.12

Calculate the budgeted unit cost of product Z for October assuming that a direct labour-
based absorption method was used for all overheads.

4.13

Calculate the budgeted unit cost of product Z for October using an activity-based costing
approach.

4.14

Explain in less than 50 words, why the costs absorbed by a product using an activity-
based costing approach could be higher than those absorbed if a traditional labour-based
absorption system were used, and identify two implications of this for management.

69 | P a g e
4.15

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

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

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

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

4.16

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

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

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

The budgeted information for the year is as follows:

Budgeted fixed production overheads

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

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

The actual output achieved was 120,000 units.

Calculate the under/over absorption of fixed production overheads for the Assembly
department.

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4.17

CJD Ltd manufactures plastic components for the car industry. The following budgeted
information is available for three of their key plastic components:

W X Y
£ per unit £ per unit £ per unit
Selling price 200 183 175
Direct material 50 40 35
Direct labour 30 35 30

Units produced and sold 10,000 15,000 18,000

The total number of activities for each of the three products for the period is as follows:

Number of purchase requisitions 1,200 1,800 2,000

Number of set ups 240 260 300

Overhead costs have been analysed as follows:

Receiving/inspecting quality assurance £1,400,000

Production scheduling/machine set up £1,200,000

Calculate the budgeted profit per unit for each of the three products using activity based
budgeting.

4.18

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

The budgeted production overheads for the period were

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

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4.19

RDE plc uses an activity based costing system to attribute overhead costs to its three
products. The following budgeted data relates to the year to 31 December 2008:

Product X Y Z
Production units (000) 15 25 20
Batch size (000 units) 2.5 5 4

Machine set up costs are caused by the number of batches of each product and have been
estimated to be £600,000 for the year.

Calculate the machine set up costs that would be attributed to each unit of product Y.

4.20

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

Extracts from the company’s records for last year were as follows:
Budget Actual
Fixed production overhead $450,000 $475,000
Output 50,000 units 60,000 units
Labour hours 900,000 930,000

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

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

4.21

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

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

The under / over absorption of overheads was

A £40,000 over absorbed

B £40,000 under absorbed
C £70,000 over absorbed
D £70,000 under absorbed
72 | P a g e
4.22

Overheads will always be over-absorbed when

A actual output is higher than budgeted output.

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

4.23

Fixed production overheads will always be under-absorbed when

A actual output is lower than budgeted output.

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

4.24

An ABC system refers to

A A Japanese style problem solving device that is particularly helpful in inventory

management
B An inventory management method that concentrates effort on the most important
items
C Accuracy, brevity and clarity in the quality of system reporting
D A mainframe solution to managing inventory

4.25

Which of these is an advantage of ABC?

A Very good for a company which has one or two products

B Gives 100% illustration of what drives fixed costs
C Cheap to run and maintain
D More efficient management of resources

73 | P a g e
4.26

For a hospital which of these does not seem like a sensible activity and cost driver?

Activity Cost driver

A Insurance for building Maintenance costs
B Phone appointments No. of patients
C Patient main reception No. of patients
D Length of patient stay No. of patients

4.27

Satisfying customers whilst minimising resource use is an example of:

A Activity based management

B Customer profitability analysis
C Distribution channel profitability
D Business process re-engineering

4.28

Y Ltd operates an activity based costing system to allocate overhead to cost units.

In its budget for the year, the company expected to undertake a total number of quality
control inspections of 550 at a total cost of £5,775. During this period, a total number of
inspections of 468 were undertaken, which incurred an actual cost of £4,500. The over or
under recovery of these costs for the above period was

A Over absorption £414

B Under absorption £414
C Over absorption £1,275
D Under absorption £1,275

74 | P a g e
4.29

It manufactures two products details were as follows:

Product A Product B
Budgeted annual production (units) 50,000 30,000
Batch size (units) 1,000 300
Machine set ups per batch 7 5

Budgeted costs for the machine set up for the above period was £55,250.

The budgeted machine set up cost per unit for the above period was:

A £50
B £55
C £60
D £65

4.30

A plc operates an absorption costing system; details about budget and actual cost and
activity levels are as follows:

Budget Actual
Production (units) 12,000 12,300
Production overhead (£) 120,000 128,000

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

A Under absorption £8,000

B Over absorption £8,000
C Over absorption £5,000
D Under absorption £5,000

4.31

Under-absorbed overheads occur when

A Actual overhead is more than budgeted overhead

B Budget overhead is less than absorbed overhead
C Absorbed overhead is less than actual overhead
D Absorbed overhead is more than budget overhead

75 | P a g e
4.32

The budgeted overhead absorption rate for variable production overhead in a department
was £4.50 per direct labour hour and for the fixed production overhead £2.50 per direct
labour hour. In the period actual direct labour hours worked were 1,000 less than budget.
If actual production overhead were as expected for variable and fixed overhead, the total
under-absorbed production overhead for the period would have been:

A £2,500
B £7,000
C £0
D £4,500

The following information relates to 4.33 and 4.34:

Details for product A are as follows

£
Selling price 40.00
Direct material (7.50)
Direct labour (6.50)
Variable overhead (2.00)
Fixed overhead absorption rate (5.00)
Profit 19.00

Budgeted production for the month was 10,000 units, but the company only produced
9,200 units, incurring fixed overhead costs of £56,750. Sales for the period were 9,000
units.

4.33

The marginal costing profit for the above period is

A £159,250
B £160,250
C £170,250
D £171,250

4.34

The absorption costing profit for the above period is

A £159,250
B £160,250
C £170,250
D £171,250

76 | P a g e
4.35

In a period a company had opening stock of 7,000 units and closing stock of 13,000 units.
Profits based on marginal costing were £567,000 and for absorption costing £627,000.

If budgeted fixed production overhead for the period was £100,000, the budgeted level of
activity in units was:

A 8,000 units
B 9,000 units
C 10,000 units
D 11,000 units

4.36

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

A Absorption costing profits will be lower and closing stock valuation higher than
under marginal costing
B Absorption costing profits will be higher and closing stock valuation lower than
under marginal costing
C Absorption costing profits will be lower and closing stock valuation lower than
under marginal costing
D Absorption costing profits will be higher and closing stock valuation higher than
under marginal costing

4.37

Which of the following if any are characteristics of batch costing?

Product made is unique or specific to the customer’s request

Products are heterogeneous
Identical or homogenous products produced
Production possible and normally complete within a single accounting period
Products are always intangible

77 | P a g e
4.38

For a job which has a cost estimated at £400, the company needs to ensure they have a
selling price, which is charged and will earn a profit of 20% of the selling price.

What would be the price charged for the job?

A £400
B £450
C £480
D £500

4.39

Which of the following if any are characteristics of service costing?

Product made is unique or specific to the customer’s request

Products are heterogeneous
Identical or homogenous products produced
Production possible and normally complete within a single accounting period
Products are always intangible

4.40

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

The overhead absorption rate per consultancy hour would have been?

A £15.00
B £18.75
C £20.00
D £21.50

78 | P a g e
4.41

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

Debit Credit
A Work-in-progress account Production overhead control account
B Production overhead control account Profit and loss account
C Cost of sales account Production overhead control account
D Production overhead control account Finished goods control account

4.42

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

Debit Credit
A Work-in-progress account Finished goods control account
B Cost of sales account Work-in-progress account
C Finished goods control account Work-in-progress account
D Cost of sales account Finished goods control account

4.43

The following information is relevant to handling customer enquires within a call centre.

 1000 customer enquires

 30000 minutes of staff capacity

The average cycle time for the call centre would be? minutes

79 | P a g e
4.44

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

Chemical X

Direct cost per unit £5.00

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

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

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

B £3,600 lower than it would be using marginal costing
C £8,400 greater than it would be using marginal costing
D £8,400 lower than it would be using marginal costing

4.45

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

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

A £7,500
B £9,500
C £13,750
D £18,250

80 | P a g e
4.46
Which of the following are characteristics of batch costing?

i Identical or homogenous products produced

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

A i only
B ii only
C ii and iii only
D All of the above

4.47
For a job which has a cost estimated of £400, a company needs to ensure they have a
selling price that will earn a profit of 20% of sales.

What would be the selling price charged for the job?

A £400
B £450
C £480
D £500

4.48

The following details exist about job number 123;

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

The selling price of job 123 would be?

81 | P a g e
4.49

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

A £26.67
B £28.00
C £32.00
D £33.33

4.50

Activity based costing (ABC) is claimed to provide more accurate product costs than a
traditional absorption costing system.

Which of the following statements does NOT support this claim?

A ABC uses cost drivers to allocate overhead costs to products by cost pool
B ABC will improve gives an exact understanding of how overheads were onsumed
C ABC assigns overheads to each major activity
D ABC uses volume based cost drivers

4.51

A company uses an activity based costing system. Three products are manufactured,
details of which are given below:

A B C
Annual production (units) 80,000 100,000 50,000
Batch size (uints) 100 50 25
Machine set-ups per batch 3 4 6

Annual machine set-up costs are $150,000.

The machine set-up cost per unit of Product B (to the nearest $0.01) is:

A $0.46
B $0.65
C $6.70
D $0.54

82 | P a g e
4.52

A company produced 5,000 units of Product B last month. The opening and closing
inventory of Product B was 400 units and 900 units respectively. The selling price and
production costs for Product B were as follows:

 Selling price $20

 Direct costs $6
 Variable prod o/h costs $3.50
 Fixed prod o/h costs $5.90
 Gross profit $4.60

What is the gross profit for Product B last month, using absorption costing?

Give your answer to the nearest whole $.

4.53

Which if any of the following statements regarding marginal and absorption costing are
true in the context of pricing decisions?

Marginal costing is appropriate for long-term pricing decisions

Marginal costing is appropriate for short-term pricing decisions

Absorption costing when used for pricing decisions includes the 'total-cost'
of the product

Marginal costing ensures the recovery of all costs incurred in selling prices

Marginal costing is more appropriate than absorption costing for use in one-
off pricing decisions

Absorption costing is more appropriate than marginal costing for use in one-
off pricing decisions

83 | P a g e
4.54

Put the following stages of an activity based budgeting system in chronological order.

Take action to adjust the capacity of resources to match the projected supply

Determine the resources that are required to perform organisational activities

Estimate the production and sales volume by individual products and

customers

Estimate the demands for organisational activities

Place EACH of the following options against ONE of the above

.
1st, 2nd, 3rd and 4th

4.55

Classify the following activity based costs incurred in a multi-product manufacturing

environment by placing the activities next to the costs below:

 Unit level activities

 Batch level activities
 Product sustaining activities
 Facility sustaining activities

Cost Classification
Purchase order processing costs

Product advertising costs

Factory rent and rates

Direct labour costs

Product redesign costs

Material handling costs

84 | P a g e
4.56

A company uses an activity based costing system to attribute overhead costs to its three
products. The following budgeted 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 for the year. What is the cost driver rate for material
handling costs?

4.57

Which of the following if any is NOT used as the basis to absorb production overheads in
a traditional absorption costing system?

Number of production units

Number of machine hours
Number of labour hours
Number of set-ups

4.58
Fixed production overhead is more likely to be under absorbed when?

A The actual overhead incurred is lower than the amount of overhead absorbed
B The actual overhead incurred is higher than the amount of overhead absorbed
C Actual output is higher than budgeted output for a period
D Budgeted overhead is lower than the actual overhead absorbed

4.59

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

A Insurance of machinery
B Rent and rates of the factory
C Factory canteen
D Supervision salary overhead within the assembly department

85 | P a g e
4.60

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

Production overhead $111,000 $116,897

Direct labour hours 18,500 19,353

The overhead absorption rate per direct labour hour would be?

4.61

The following detains exist for job number 897

$
Direct materials 4,000
Direct labour:
Budgeted labour time (100 hours) 2,000
Overtime incurred 900
Production overhead charged 5,000
Total 11,900

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

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

A $5,000
B $11,900
C $14,150
D $17,250

86 | P a g e
4.62
A company uses an absorption costing system and calculates its overhead absorption rate
based on machine hours.

Budgeted Actual

Production overhead (£) 245,000 249,000

Machine hours 122,500 119,200

Production overhead for the period above would have been?

A Over absorbed by £10,600

B Under absorbed by £10,600
C Under absorbed by £4,000
D Over absorbed by £4,000

4.63

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

A Sharing costs between employees

B Sharing costs between cost centres
C Sharing costs between cost units
D Specifically attributing a cost to a particular cost centre

4.64
When common costs are shared amongst cost centres, this process is known as?

A Overhead budgeting
B Overhead absorption
C Overhead allocation
D Overhead apportionment

4.65
Which one of the following about overhead absorption rates is true?

A They are predetermined in advance for a period of time

B They are based on actual information for a period of time
C They are calculated before the process of overhead allocation and apportionment
D They always are an accurate reflection of actual performance for a period of time

87 | P a g e
4.66

A company uses an absorption costing system using labour hours as its basis of charging
production overhead for the period. Actual labour hours for the financial period were
11,500 hours and this was 500 hours above budgeted labour hours for the period. Actual
production overhead for the period was £134,500 and there was an over absorption of
production overhead the period of £3,500.

What is budgeted level of production overhead for the period?

4.67

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

A The production activity was higher than budget and fixed production overhead
expenditure lower than budget.
B The production activity was lower than budget and fixed production overhead
expenditure higher than budget.
C The production activity was the same as the budget and fixed production overhead
expenditure lower than budget.
D The production activity was higher than budget and fixed production overhead
expenditure the same as the budget.

4.68

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

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

4.69

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

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

What would be the selling price for product A?

88 | P a g e
4.70

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

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

4.71

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

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

4.72

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

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

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

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

89 | P a g e
4.73

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

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

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

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

4.74

The following details exist about job number 113;

 Direct Material £35,000

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

The selling price of job 113 would be?

4.75

Which of the following are characteristics of service costing?

Select ALL that apply.

Identical or homogenous product produced

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

90 | P a g e
4.76

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

The overhead absorption rate per consultancy hour would have been?

A £15.00
B £18.75
C £20.00
D £21.50

4.77
A college offers discounts of 10% to students who pay on enrolment and 50% of
customers pay on enrolment. The extra sales needed to increase cash receipts by £20,000
would be?

A £20,000
B £21,053
C £22,000
D £44,000

4.78

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

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

4.79

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

A Cost per tonne per mile

B Cost per tonne
C Cost per delivery
D Cost per driver

91 | P a g e
4.80

Details of 2 customers Mr Pink and Mr White and total company sales:

Mr Pink Mr White Company

Number of:
Packs sold (000) 50 27 300
Sales visits to customers 24 12 200
Orders placed by customers 75 20 700
Normal deliveries to customers 45 15 240
Urgent deliveries to customers 5 0 30

Activity costs: $000s

Sales visits to customers 50
Processing orders placed by customers 70
Normal deliveries to customers 120
Urgent deliveries to customers 60

Work out the 4 relevant cost drivers.

4.81

Details of 2 customers Mr Pink and Mr White and total company sales:

B D Company

Number of:
Packs sold (000) 34 45 300
Sales visits to customers 30 12 200
Orders placed by customers 43 30 700
Normal deliveries to customers 70 45 240
Urgent deliveries to customers 25 4 30

Activity Cost driver rate

Normal delivery $700/delivery
Order processing $400/order
Urgent deliveries $3,000/urgent delivery
Sales visits $500/visit

92 | P a g e
Fill in the CPA statement below:

B D

Costs $000 $000

Sales visits

Orders processing

Normal deliveries

Urgent deliveries

Total costs

4.82

The main difference (or differences) between how traditional costing and activity based
costing treat indirect manufacturing costs is (are) that

A Traditional costing uses only production volume based drivers while activity
based costing uses only non production volume based drivers.

B D amd E

C Traditional cost allocations are usually based on a plant wide overhead rate, while
ABC systems use departmental overhead rates.

D Traditional costing treats only unit level costs as variable, while ABC systems
treat unit level, batch level and product level costs as variable.

E A and C

93 | P a g e
4.83

Indicate which are true or false.

Statements True or False

If products are uniform and customers are similar in their demands,

activity based costing may not offer a significant advantage over
machine hours when assigning overhead.

In activity based costing, the manufacturing overhead cost per unit will
depend partially on the number of units in a batch.

The cost to set up production equipment is best allocated directly to

products via machine hours.

4.84

Which would be the most favorable basis for allocating manufacturing overhead for a
factory with automated equipment and a significant variation of services by its indirect
labour?

A Direct labour hours

B Machine hours
C ABC
D None of the above

4.85

The ABC cost allocation system excludes consideration of which of the following if any?

Costs allocated to service departments using the reciprocal costing method

Committed fixed costs
Direct costs of materials
Variable non-manufacturing costs
Manufacturing fixed overhead costs

94 | P a g e
4.86

Which of the following, if any, is true of an activity based costing system?

An activity based costing system will provide a more accurate apportionment

of overheads to products than absorption costing

An activity based costing system will cost less to administer than an

absorption costing system

The activity based costing system will be less detailed than an absorption
costing system

An activity based costing system is easier to administer than an absorption

costing system

4.87

Indicate which are true or false.

Statements True or False

Under ABC, indirect manufacturing costs are predominantly assigned

on the basis of direct machine hours.

Setup cost is an example of a batch-level cost. .

In ABC the assumption is that prodcuts use resources or cause costs.

4.88

A company has a budgeted level of fixed overheads of £385,000 and the overhead
recovery rate is £4.25 per machine hour, what is the number of machine hours we expect
to use?

A 4,250
B 385,000
C 90,600
D 1,636

95 | P a g e
4.89

Which would be the least favorable basis for allocating manufacturing overhead for a
factory with automated equipment and a significant variation of services by its indirect
labour?

A Direct labour hours

B Machine hours
C ABC
D None of the above

96 | P a g e
 Chaper 5 - Standard costing and variance analysis

The following information is given for sub-questions 5.1 and 5.2 below

A company manufactures Product Y using a single raw material which is used

exclusively in the manufacture of Product Y. It operates a JIT purchasing system and
there is no inventory of raw materials. The following data relate to the production of
Product Y for April.

Budgeted production 11,000 units

Standard material cost per unit 3kg per unit @ $4 per kg

Actual production 10,000 units

Material purchased and used 32,000 kg @ $4.80 per kg

It has now been decided that the standard price for the raw material should have been $5
per kg.

5.1

The material price planning variance for April is:

A $6,000 Adverse
B $30,000 Adverse
C $32,000 Adverse
D $33,000 Adverse

5.2

The material price operational variance for April is:

A $6,000 Favourable
B $30,000 Adverse
C $6,400 Favourable
D $32,000 Adverse

97 | P a g e
5.3

The fixed production overhead volume variance can be defined as

A the difference between the budgeted fixed production overhead cost and the
standard fixed production overhead cost absorbed by actual production.

B the difference between the standard fixed production overhead cost absorbed by
actual production and the actual fixed overhead cost incurred.

C the difference between the budgeted and actual fixed production overhead cost.

D the difference between the budgeted fixed production overhead cost and the
budgeted production at the actual absorption rate incurred.

The following data are given for sub-questions 5.4, 5.5 and 5.6 below

DB manufactures and sells e-readers. The standard labour cost per unit of the product is
$7. Each unit takes 0.5 hours to produce at a labour rate of $14 per hour. The budgeted
production for August was 20,000 units.

The Production Director subsequently reviewed the market conditions that had been
experienced during August and determined that market labour rates were $17.50 per
hour. The actual production was 22,000 units. Actual labour hours worked were 11,400
hours at $15.50 per hour.

Calculate the following variances for August:

5.4

Calculate the labour rate planning variance

5.5

Calculate the labour rate operational variance

5.6

Calculate the labour efficiency operational variance

98 | P a g e
The following data are given for sub-questions 5.7 and 5.8 below

A company operates a standard absorption costing system. Details of budgeted and actual
figures for February are given below:

Budget Actual
Production (units) 29,000 26,000
Direct labour hours per unit 3.0 2.8
Direct labour cost per hour $10.00 $10.40

5.7

The labour rate variance for the period was:

A $34,800 A
B $34,800 F
C $29,120 A
D $31,200 A

5.8

The labour efficiency variance for the period was:

A $58,000 F
B $60,320 F
C $52,000 F
D $54,080 F

The following data are given for questions 5.9 and 5.10

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

5.9

What is the correct labour efficiency variance for September 2003?

A £5,000 Adverse
B £5,000 Favourable
C £5,250 Favourable
D £10,000 Adverse
99 | P a g e
5.10

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

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

5.11

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

Activity Overhead cost

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

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

Calculate the total overhead expenditure variance for November 2003.

The following data are given for questions 5.12 and 5.13

SW plc manufactures a product known as the TRD100 by mixing two materials. The
standard material cost per unit of the TRD100 is as follows:

£
Material X 12 litres @ £2.50 30

Material Y 18 litres @ £3.00 54

In October 2003, the actual mix used was 984 litres of X and 1,230 litres of Y. The actual
output was 72 units of TRD100.

5.12

Calculate the total material mix variance for October 2003.

5.13

Calculate the total material yield variance for October 2003.

100 | P a g e
The following data are given for sub-questions 5.14 and 5.15:

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

5.14

The direct labour rate variance for April is

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

5.15

The variable overhead efficiency variance for April is

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

5.16

The fixed overhead volume variance is defined as

A the difference between the budgeted value of the fixed overheads and the standard
fixed overheads absorbed by actual production.

B the difference between the standard fixed overhead cost specified for the
production achieved, and the actual fixed overhead cost incurred.

C the difference between budgeted and actual fixed overhead expenditure.

D the difference between the standard fixed overhead cost specified in the original
budget and the same volume of fixed overheads, but at the actual prices incurred.

101 | P a g e
The following data are given for sub-questions 5.17 and 5.18:

D Limited manufactures and sells musical instruments, and uses a standard cost system.
The budget for production and sale of one particular drum for April was 600 units at a
selling price of £72 each. When the sales director reviewed the results for April in the
light of the market conditions that had been experienced during the month, she believed
that D Limited should have sold 600 units of this drum at a price of £82 each. The actual
sales achieved were 600 units at £86 per unit.

5.17

Calculate the selling price planning variance

5.18

Calculate the selling price operating variance

The following data are given for sub-questions 5.19 and 5.20

A company has a process in which the standard mix for producing 9 litres of output is as
follows:
$
4·0 litres of D at $9 per litre 36·00
3·5 litres of E at $5 per litre 17·50
2·5 litres of F at $2 per litre 5·00
58·50

A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest
period were:
$
4,300 litres of D at $9.00 per litre 38,700
3,600 litres of E at $5.50 per litre 19,800
2,100 litres of F at $2.20 per litre 4,620
63,120

Actual output for this period was 9,100 litres.

5.19

Calculate the total materials mix variance

5.20

Calcualte the total materials yield variance

102 | P a g e
5.21

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

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

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

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

The total vehicle operating cost variance for September was closest to

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

5.22

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

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

Which combination of phrases correctly completes the definition?

Blank 1 Blank 2

A actual labour hours budgeted output

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

103 | P a g e
The following data are given for sub-questions 5.23 to 5.25:

The following data relate to Product Z and its raw material content for September.

Budget
Output 11,000 units of Z
Standard materials content 3 kg per unit at $4.00 per kg

Actual
Output 10,000 units of Z
Materials purchased and used 32,000 kg at $4•80 per kg

It has now been agreed that the standard price for the raw material purchased in
September should have been $5 per kg.

5.23

The materials planning price variance for September was

A $6,000 Adverse
B $30,000 Adverse
C $32,000 Adverse
D $33,000 Adverse

5.24

The materials operational usage variance for September was

A $8,000 Adverse
B $9,600 Adverse
C $9,600 Favourable
D $10,000 Adverse

5.25

The materials operational price variance for September was

A $6,000 Adverse
B $6,400 Favourable
C $30,000 Adverse
D $32,000 Adverse

104 | P a g e
5.26

A company operates a standard costing system and prepares monthly financial

statements. All materials purchased during February were used during that month. After
all transactions for February were posted, the general ledger contained the following
balances:
Debit Credit
£ £
Finished goods control 27,450
Materials price variance 2,400
Materials usage variance 8,400
Labour rate variance 5,600
Labour efficiency variance 3,140
Variable production overhead variance 2,680
Fixed production overhead variance 3,192

The standard cost of the goods produced during February was £128,500.

The actual cost of the goods produced during February was

A £96,998
B £124,448
C £132,552
D £160,002

5.27

Overheads will always be over-absorbed when

A actual output is higher than budgeted output.

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

The following data are given for sub-questions 5.28 and 5.29:

A company has a process in which three inputs are mixed together to produce Product S.
The standard mix of inputs to produce 90 kg of Product S is shown below:

$
50 kg of ingredient P at $75 per kg 3,750
30 kg of ingredient Q at $100 per kg 3,000
20 kg of ingredient R at $125 per kg 2,500
9,250

105 | P a g e
During March 2,000 kg of ingredients were used to produce 1,910 kg of Product S.
Details of the inputs are as follows:

$
1,030 kg of ingredient P at $70 per kg 72,100
560 kg of ingredient Q at $106 per kg 59,360
410 kg of ingredient R at $135 per kg 55,350
186,810
5.28

Calculate the materials mix variance for March.

5.29

Calculate the materials yield variance for March.

The following data are given for sub-questions 5.30 to 5.31:

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

Budgeted output 15,000 units

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

Actual output 14,650 units

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

5.30

Calculate the idle time variance for April.

5.31

Calculate the labour efficiency variance for April.

106 | P a g e
The following data are given for sub-questions 5.32 to 5.34:

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

5.32

The sales price variance for October was

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

5.33

The sales volume profit variance for October was

A £6,000 adverse
B £6,000 favourable
C £8,000 adverse
D £8,000 favourable

5.34

The fixed overhead volume variance for October was

A £2,000 adverse
B £2,200 adverse
C £2,200 favourable
D £4,200 adverse

107 | P a g e
5.35

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

Budgeted output 200,000 units

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

The actual level of production was

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

The following data are given for sub-questions 5.36 to 5.37:

PP Ltd operates a standard absorption costing system. The following information has
been extracted from the standard cost card for one of its products:

Budgeted production 1,500 units

Direct material cost: 7 kg x £4.10 £28.70 per unit

Actual results for the period were as follows:

Production 1,600 units

Direct material (purchased and used): 12,000 kg £52,200

It has subsequently been noted that due to a change in economic conditions the best price
that the material could have been purchased for was £4.50 per kg during the period.

5.36

Calculate the material price planning variance.

5.37

Calculate the operational material usage variance.

108 | P a g e
5.38

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

Labour Cost
5 hours x £12 £60

Actual results for the period were as follows:

Production 11,500 units

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

Calculate the actual rate paid per direct labour hour.

The following data are given for sub-questions 5.39 and 5.40:

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

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

5.39

The fixed overhead expenditure variance is

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

5.40

The fixed overhead volume variance is

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

109 | P a g e
The following data are given for sub-questions 5.41 and 5.42:

Product XYZ is made by mixing three materials (X, Y and Z). There is an expected loss
of 20% of the total input. The budgeted and actual results for Period 1 are shown below.
There were no opening or closing inventories of any materials or of the finished product.
Budget Actual
Output of XYZ 800 kg 960 kg
Material
X 500 kg @ $5⋅ 00 per kg 600 kg @ $4⋅ 70 per kg
Y 300 kg @ $6⋅ 00 per kg 380 kg @ $6⋅ 50 per kg
Z 200 kg @ $7⋅ 00 per kg 300 kg @ $7⋅ 10 per kg
Total input 1,000 kg 1,280 kg

5.41

Calcualte the total materials mix variance.

5.42

Calcualte the total materials yield variance.

5.43

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

production overhead data are available for the latest period:

Budgeted Output 300,000 units

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

The actual level of production for the period was nearest to

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

110 | P a g e
The following data are given for sub-questions 5.44 and 5.45:

PQR Ltd operates a standard absorption costing system. Details of budgeted and actual
figures are as follows:
Budget Actual
Sales volume (units) 100,000 110,000
Selling price per unit £10 £9.50
Variable cost per unit £5 £5.25
Total cost per unit £8 £8.30

5.44

Calculate the sales price variance.

5.45

Calculate the sales volume profit variance.

5.46

Operation B, in a factory, has a standard time of 15 minutes. The standard rate of pay for
operatives is £10 per hour. The budget for a period was based on carrying out the
operation 350 times. It was subsequently realised that the standard time for Operation B
included in the budget did not incorporate expected time savings from the use of new
machinery from the start of the period. The standard time should have been reduced to 12
minutes.

Operation B was actually carried out 370 times in the period in a total of 80 hours. The
operatives were paid £850.

The operational labour efficiency variance was

A £60 adverse
B £75 favourable
C £100 adverse
D £125 adverse

111 | P a g e
5.47

The production volume ratio in a period was 95%.

Which statement will always be true?

A Actual hours worked exceeded the budgeted hours.

B Actual hours worked exceeded the standard hours of output.
C Budgeted hours exceeded the standard hours of output.
D Budgeted output was less than the actual output.

5.48

The fixed overhead volume variance is defined as

A the difference between the budgeted value of the fixed overheads and the standard
fixed overheads absorbed by actual production.

B the difference between the standard fixed overhead cost specified for the
production achieved, and the actual fixed overhead cost incurred.

C the difference between budgeted and actual fixed overhead expenditure.

D the difference between the standard fixed overhead cost specified in the original
budget and the same volume of fixed overheads, but at the actual prices incurred.

112 | P a g e
The following data are given for sub-questions 5.49 and 5.50:

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

5.49

The sales price variance for the period was:

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

5.50

The sales volume contribution variance for the period was:

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

5.51

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

A Higher.
B Lower.
C Equal.
D Impossible to answer without further information.

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5.52

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

Bed occupancy 82% 94%

Medical supplies cost $410,000 $429,200

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

The medical supplies expenditure variance was

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

5.53

The systematic comparison of key factors between sections or departments within the
same organisation is called

A Internal benchmarking
B Performance appraisal
C Environmental auditing
D Quality assessment

5.54

X Plc uses a standard absorption costing system. Details for the month were as follows

Budget Actual

Sales units 7,300 6,780

Selling price per unit £13.00 £13.80

Profit per unit £5.00 £5.20

The sales price and volume variance for the month was

Volume Price
A £2,600 (A) £5,424 (F)
B £2,600 (A) £5,424 (A)
C £2,600 (F) £4,480 (A)
D £2,600 (F) £4,480 (F)
114 | P a g e
The following data is to be used for 5.55 and 5.56:

Z Plc sells garden gnomes that it purchases from a local distributor. Its budget shows for
the four-week period that it plans to sell 800 gnomes at a unit price of £30, which would
give a contribution to sales ration of 40%

Actual sales were 770 gnomes at an average selling price of £27.50, the actual
contribution to sales ratio averaged 27%

5.55

The sales price variance was

A £2,000 (A)
B £1,925 (F)
C £1,925 (A)
D £2,000 (F)

5.56

The sales volume variance was

A £360 (A)
B £360 (F)
C £223 (A)
D £223 (F)

The following data is to be used for MCQ 5.57 and 5.58:

Meat and Veg Ltd manufactures steak and kidney pies, the standard cost of a 1Kg pie
being as follows:
£
0.6kg Steak @ £5.60 per kg 3.36
0.6kg Kidney @ £1.40 per kg 0.84
4.20

Actual data for the month was as follows:

1kg pies produced 1,350

Raw material used:

Steak Kidney
Quantity (Kg) 852 990
Cost (£) 5,106 1,287

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5.57

The total material mix variance (to the nearest £) using the weighted average approach
for both ingredients would be?

A £145 (A)
B £145 (F)
C £290 (A)
D £290 (F)

5.58

The total material yield variance would be?

A £1,134 (A)
B £1,134 (F)
C £777 (A)
D £648 (F)

5.59

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

Activity Overhead cost

(Machine hours) £

10,000 £25,000
12,000 £29,000
18,000 £41,000

In May 2002, the actual activity was 12,750 machine hours and the actual overhead cost
incurred was £32,560.

The overhead expenditure variance was?

A £2,060 (A)
B £2,060 (F)
C £1,748 (A)
D £1,748 (F)

116 | P a g e
5.60

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

4 Hrs @ £5.60 £22.40

The budgeted and actual number of units produced for this period was 4,000 and 4,260
units respectively, giving an adverse labour efficiency variance of £2,386 (A). The actual
labour hours worked for the period was?

A 17,466
B 16,614
C 16,426
D 15,574

5.61

ABC Ltd standard cost of material X which is used to assemble their final product is as
follows

2kg @ £6.50 = £13.00

3,000 units were produced for the period. This gave a material usage variance of £4,875
adverse, with material stock for the period rising by 800kg.

The quantity of material purchased for this period was?

A 6,750kg
B 6,000kg
C 5,250kg
D 7,550kg

5.62

A budget has been prepared which includes the standard cost of material per unit of £50
(4kg of material P at £12.50 per kg). Budgeted production was 1,000 units. There was a
shortage of material P during this month and the price per kg fluctuated to £13.00 per kg.
During this period 950 units were manufactured at a material cost of £50,160 for 3,800kg
of material P. What was the material price operational and planning variance for this
period?

Operational Planning
A £760(A) £1,900(A)
B £760(A) £1,900(F)
C £760(F) £2,000(F)
D £760(A) £2,000(A)
117 | P a g e
The following information is to be used for 5.63 to 5.65:

A unit takes two types of labour to complete, unskilled and skilled.

£
0.5hrs @ £1.40 an hour (unskilled) 0.70
0.6hrs @ £7.50 an hour (skilled) 4.50
5.20

On a Wednesday afternoon 60 units were manufactured, incurring the following actual

expenses:

Unskilled 28 hours £45.00

Skilled 40 hours £270.00

5.63

The labour yield variance for the above period (to the nearest £1) was?

A £9(A)
B £9(F)
C £6(A)
D £9(F)

5.64

It was found during the period that the labour rate per hour for skilled labour was
estimated as too high, it should have been £5.50 an hour rather than the £7.50 an hour
used within the standard cost.

What was the operational and planning variance for the labour rate variance for skilled
labour?

Operational Planning
A £50(A) £80(A)
B £50(F) £72(A)
C £50(A) £80(F)
D £50(F) £72(F)

118 | P a g e
5.65

Using the new revised standard of £5.50 an hour for skilled labour, what would be the
planning and operational efficiency variance for skilled labour if the budget was wrong
and it should have been 0.5 hours per unit rather than the 0.6 hours as planned above?

Operational Planning
A £55(A) £33(F)
B £55(F) £33(A)
C £55(A) £45(A)
D £55(F) £45(A)

119 | P a g e
120 | P a g e
 Chapter 6 - Modern manufacturing methods

6.1

A just-in-time (JIT) purchasing system may be defined as:

A A purchasing system in which the purchase of material is contracted so that the

receipts and usage of material coincide.

B A purchasing system which is based on estimated demand for finished products.

C A purchasing system where the purchase of material is triggered when inventory

levels reach a pre-determined re-order level.

D A purchasing system which minimises the sum of inventory ordering costs and
inventory holding costs.

6.2

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

The throughput contribution per hour for Product C is:

A $50.00
B $122.85
C $121.15
D $148.08

121 | P a g e
6.3

MN plc uses a Just-in-Time (JIT) system and backflush accounting. It does not use a raw
material stock control account. During April, 1,000 units were produced and sold. The
standard cost per unit is £100: this includes materials of £45. During April, conversion
costs of £60,000 were incurred.

What was the debit balance on the cost of goods sold account for April?

A £90,000
B £95,000
C £105,000
D £110,000

The following data are given for questions 6.4 and 6.5:

A company produces three products using three different machines. No other products
are made on these particular machines. The following data is available for December
2003.

Product A B C
Contribution per unit £36 £28 £18
Machine hours required per unit
Machine 1 5 2 1.5
Machine 2 5 5.5 1.5
Machine 3 2.5 1 0.5
Estimated sales demand (units) 50 50 60

Maximum machine capacity in December will be 400 hours per machine.

6.4

(a) Calculate the machine utilisation rates for each machine for December 2003.

(b) Identify which of the machines is the bottleneck machine.

6.5

(a) State the recommended procedure given by Goldratt in his “Theory of Constraints”
for dealing with a bottleneck activity.

(b) Calculate the optimum allocation of the bottleneck machine hours to the three
products.

122 | P a g e
6.6

An rganization manufactures four products – J, K, L and M. The products use a series

of different machines but there is a common machine, X, which causes a bottleneck. The
standard selling price and standard cost per unit for each product for the forthcoming year
are as follows:

J K L M
£/unit £/unit £/unit £/unit
Selling price 2,000 1,500 1,500 1,750
Cost:
Direct materials 410 200 300 400
Labour 300 200 360 275
Variable overheads 250 200 300 175
Fixed overheads 360 300 210 330
Profit 680 600 330 570
Machine X – minutes per unit 120 100 70 110

Direct material is the only unit level manufacturing cost.

Using a throughput accounting approach, how would you rank the products?

6.7

Definition A: “A technique where the primary goal is to maximise throughput while

simultaneously maintaining or decreasing inventory and operating costs.”

Definition B: “A system whose objective is to produce or procure products or

components as they are required by a customer or for use, rather than for inventory.”

Which of the following pairs of terms correctly matches the definitions A and B above?

Definition A Definition B

A Manufacturing resource planning Just-in-time

B Enterprise resource planning Material requirements planning
C Optimised production technology Enterprise resource planning
D Optimised production technology Just-in-time

123 | P a g e
6.8

Which of the following statements is/are true?

(i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing

technology and modern quality control into a single computerised coherent system.

(ii) Flexible manufacturing systems (FMS) are simple systems with low levels of
automation that offer great flexibility through a skilled workforce working in teams.

(iii) Electronic data interchange (EDI) is primarily designed to allow the operating units
in an organisation to communicate immediately and automatically with the sales and
purchasing functions within the organisation.

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

The following data are given for sub-questions 6.9 to 6.11:

SM makes two products, Z1 and Z2. Its machines can only work on one product at a
time. The two products are worked on in two departments by differing grades of labour.
The labour requirements for the two products are as follow:

Minutes per unit of product

Z1 Z2
Department 1 12 16
Department 2 20 15

There is currently a shortage of labour and the maximum times available each day in
Departments 1 and 2 are 480 minutes and 840 minutes, respectively.

The current selling prices and costs for the two products are shown below:

Z1 Z2
£ per unit £ per unit
Selling price 50.00 65.00
Direct materials 10.00 15.00
Direct labour 10.40 6.20
Variable overheads 6.40 9.20
Fixed overheads 12.80 18.40
Profit per unit 10.40 16.20

As part of the budget-setting process, SM needs to know the optimum output levels. All
output is sold.
124 | P a g e
6.9

Calculate the maximum number of each product that could be produced each day, and
identify the limiting factor/bottleneck.

6.10

Using traditional contribution analysis, calculate the ‘profit-maximising’ output each day,
and the contribution at this level of output.

6.11

Using a throughput approach, calculate the ‘throughput-maximising’ output each day,

and the ‘throughput contribution’ at this level of output.

6.12

A company operates a just-in-time purchasing and production system and uses a

backflush accounting system with a single trigger point at the point of sale. A summary
of the transactions that took place in June (valued at cost) is:

£
Conversion costs incurred 890,000
Finished goods produced 1,795,000
Finished goods sold 1,700,000
Conversion costs allocated 840,000

The two items debited to the cost of goods sold account in June would be

£ £
A 890,000 and 95,000
B 1,700,000 and 50,000
C 1,700,000 and 95,000
D 1,795,000 and 50,000

125 | P a g e
6.13

Definition 1: “A system that converts a production schedule into a listing of materials and
components required to meet the schedule so that items are available when needed.”

Definition 2: “An accounting system that focuses on ways by which the maximum return
per unit of bottleneck activity can be achieved.”

Which of the following pairs of terms correctly matches definitions 1 and 2 above?

Definition 1 Definition 2

A Manufacturing resources planning (MRP2) Backflush accounting

B Material requirements planning (MRP1) Throughput accounting
C Material requirements planning (MRP1) Theory of constraints
D Supply chain management Throughput accounting

6.14

Which of the following statements is/are true?

(i) Enterprise Resource Planning (ERP) systems use complex computer systems, usually
comprehensive databases, to provide plans for every aspect of a business.

(ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of
automation that offer great flexibility through a skilled workforce working in teams.

(iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of inventory
items so that they are available immediately when they are needed in the production
process.

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

126 | P a g e
6.15

Which of the following definitions are correct?

(i) Just-in-time (JIT) systems are designed to produce or procure products or components
as they are required for a customer or for use, rather than for inventory;

(ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled

production systems, capable of producing any of a range of parts and of switching
quickly and economically between them;

(iii) Material requirements planning (MRP) systems are computer based systems that
integrate all aspects of a business so that the planning and scheduling of production
ensures components are available when needed.

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

6.16

JJ Ltd manufactures three products: W, X and Y. The products use a series of different
machines but there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the forthcoming
period are as follows:

W X Y
£ £ £
Selling price 200 150 150

Cost
Direct materials 41 20 30
Labour 30 20 36
Overheads 60 40 50
Profit 69 70 34

Bottleneck machine
– minutes per unit 9 10 7

40% of the overhead cost is classified as variable

Using a throughput accounting approach, what would be the ranking of the products for
best use of the bottleneck?

127 | P a g e
6.17

S Ltd manufactures three products, A, B and C. The products use a series of different
machines but there is a common machine, P, that is a bottleneck. The selling price and
standard cost for each product for the forthcoming year is as follows:

A B C
$ $ $
Selling price 200 150 150
Direct materials 41 20 30
Conversion costs 55 40 66
Machine P – minutes 12 10 7

Calculate the return per hour for each of the products.

6.18

Two CIMA definitions follow:

1. A system that converts a production schedule into a listing of the materials and
components required to meet that schedule so that adequate stock levels are maintained
and items are available when needed.

2. An accounting oriented information system, generally software driven, which aids in

identifying and planning the enterprise-wide resources needed to resource, make, account
for and deliver customer orders.

Which of the following pairs of terms matches the definitions?

Definition 1 Definition 2
A Material requirements planning Enterprise resource planning
B Manufacturing resource planning Material requirements planning
C Material requirements planning Manufacturing resource planning
D Manufacturing resource planning Enterprise resource planning

128 | P a g e
The following data are given for sub-questions 6.19 and 6.20:

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

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

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

6.19

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

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

6.20

The value of the inventory of Product X at the end of October using throughput
accounting was:

A $630
B $1,080
C $1,100
D $2,000

6.21

A company can produce many types of product but is currently restricted by the number
of labour hours available on a particular machine. At present this limitation is set at
12,000 hours per annum. One type of product requires materials costing $5 which are
then converted to a final product which sells for $12. Each unit of this product takes 45
minutes to produce on the machine. The conversion costs for the factory are estimated to
be $144,000 per annum. Calculate the throughput accounting ratio for this product and
state the significance of the result.

129 | P a g e
6.22

The following details relate to Product Z:

$/unit
Selling price 45.00
Purchased components 14.00
Labour 10.00
Variable overhead 8.50
Fixed overhead 4.50

Time on bottleneck resource 10 minutes

Product return per minute is

A $0.80
B $1.25
C $2.10
D $3.10

6.23

In the context of quality costs, customer compensation costs and test equipment running
costs would be classified as:

Customer compensation costs Test equipment running costs

A Internal Failure Costs Prevention Costs

B Internal Failure Costs Appraisal Costs
C External Failure Costs Appraisal Costs
D External Failure Costs Prevention Costs

130 | P a g e
The following scenario is to be used for questions 6.24 and 6.25:

A company manufactures three products: W, X and Y. The products use a series of

different machines, but there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the next period
are as follows:

W X Y
£ £ £
Selling price 180 150 150

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

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

6.24

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

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

6.25

Using a throughput accounting approach, the rank order (best first) of the products would
be

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

131 | P a g e
6.26

Which of the following statements are true?

(i) Enterprise Resource Planning (ERP) systems are accounting oriented information
systems which aid in identifying and planning the enterprise wide resources needed to
resource, make, account for and deliver customer orders.

(ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled

production systems, capable of producing any of a range of parts and of switching
quickly and economically between them.

(iii) Just-In-Time (JIT) is a system whose objective is to produce, or to procure, products

or components as they are required.

A (i) and (ii) only

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

The following data are given for sub-questions 6.27 and 6.28:

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

Selling price per unit 32 28 22

Variable costs per unit

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

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

Each of the products is produced using Process A which has a maximum capacity of
2,500 hours per period.

132 | P a g e
6.27

If a traditional contribution approach is used, the ranking of products, in order of priority,

for the profit maximising product mix will be:

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

6.28

If a throughput accounting approach is used, the ranking of products, in order of priority,

for the profit maximising product mix will be:

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

6.29

Core features of world-class manufacturing involve:

A Competitor benchmarking and an investment in training and development

B An investment in IT and technical skills
C Global sourcing networks and an awareness of competitor strategies
D A strong customer focus and flexibility to meet customer requirements

6.30

Corrective work, the cost of scrap and materials lost are

A Examples of internal failure costs

B Examples of external failure costs
C Examples of appraisal costs
D Examples of preventative costs

133 | P a g e
6.31

Economies of scope refers to

A The economic viability of making alterations to systems

B An organisation becoming economically viable through a process of “rightsizing”
C Mass production assembly lines achieving economies through volume of
output
D Economically producing small batches of a variety of products with the same
machines

6.32

Which ONE of the following statements about Kaizen would NOT be correct?

A Kaizen is similar to TQM

B Kaizen means continuous improvement
C Kaizen may use quality circles
D Kaizen is a measure of quality

6.33

Which ONE of the following would NOT normally be a characteristic of lean production
methods?

A Mass production techniques

B Flexible workforce
C JIT stock control
D Continuous improvement

6.34

Which ONE of the following would NOT be an example of an internal failure cost for an
organisation?

A Failure analysis and correction of defects found in production

B Re-inspection of goods after defects have been found in production
C Scrap of materials and work-in-progress
D Training staff to reduce defects during the production process

134 | P a g e
6.35

Which ONE of the following product processes tend to deal with deal with ‘high variety’
and ‘low volumes’?

A Continuous
B Job
C Project
D Mass

6.36

Which ONE of the following is a key feature of a lean philosophy?

A Quality accreditation
B Continuous improvement
C Elimination of waste
D Service quality improvement

6.37

The following information is relevant to handling customer enquires within a call centre.

 1000 customer enquires

 30 minutes average duration per customer enquiry
The total throughput time for the call centre would be? minutes

6.38

Which of the following are less likely to be forms of waste to eliminate when using lean
production methods?

Select THREE only.

Services
Waiting time
Movement
Quality
Over-production
Cost
Defects
Transport

135 | P a g e
6.39

Which ONE of the following would describe machine operators and assembly workers
which are trained to undertake routine servicing, fault diagnosis and maintenance of their
own operating machinery?

A Lean production
B Total productive maintenance
C Total quality management
D Lean synchronisation

6.40

Which ONE of the following would describe a car manufacturer which is organised into
smaller standalone factories with teams in each factory responsible for making a
complete product or small range of products?

A Layout and flow

B Lean synchronisation
C Focus factories
D Cellular manufacturing

6.41

Which ONE of the following means ‘the flow of products or services delivered exactly to
what customers require and with zero waste in this process?

A Lean synchronisation
B JIT systems
C Flexible manufacturing systems
D Sustainable operations

6.42

A key feature of a lean philosophy within operations is

A removal of waste
B incremental change
C official accreditation
D continuous improvement

136 | P a g e
6.43

The aim of total productive maintenance is which ONE of the following?

A Inclusivity and empowerment

B Motivation and teamwork
C Engagement and commitment
D Prevention and continuity

6.44

Small groups of employees that meet to identify work problems and their solution are
known as

A Quality circles
B Peer counsellors
C Cellular production teams
D Teleworkers

6.45

Which ONE of the following is NOT a cost of quality?

A Internal failure
B Appraisal
C Prevention
D Transaction

6.46

Which ONE of the following would be a characteristic to explain quality control?

A Feedforward Control
B Feedback Control
C Continuous improvement
D Quality assurance procedures and systems

137 | P a g e
6.47

Which of the following would be examples of prevention costs for quality?

Select THREE only.

Rework of work-in-progress
Regular inspection and routine servicing of equipment
Supplier quality assurance schemes
Performance measures to monitor quality
Inspection of materials and components
Consumer acceptance testing
TQM culture of staff

6.48

Which of the following would be examples of external failure costs for quality?
Select THREE only.

Customer complaint departments

Wastage of raw materials
Product performance testing
Cost of free repairs under gurantee
Regular inspection of equipment
Poor brand reputation
Retraining of staff due to ineffective processes

6.49

Which ONE of the following processes is used commonly in car manuafacturing today?

A Job production
B Dedicated cell production
C Focus factory production
D Batch production

6.50

Information systems or software which can provide a list of parts and materials required
for the type and number of products entered thus allowing better inventory management,
would normally be called?

A Computer aided manufacturing

B Manufacturing resource planning
C Materials requirement planning
D Enterprise resource planning

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6.51

Collaborating with its suppliers may bring a company added value because it can

A Strike a harder bargain with its suppliers

B Work with a supplier to improve quality and reduce costs
C Avoid transaction costs
D Introduce price competition amongst suppliers

6.52

Total productive maintenance involves

A Maintaining worker satisfaction and high productivity

B A cycle of PDCA
C A prevention of quality failures through equipment faults
D Eliminating non-value adding activities from a process

6.53

A lean approach is associated with which ONE of the following?

A Supply sourcing strategies

B Demographic profiling
C Employee selection criteria
D Removal of waste

6.54

Which ONE of the following is NOT a feature of a service?

A Intangibility
B Immediate consumption
C Inventory management
D Involvement of the consumer

6.55

Loss of goodwill and the expense of product recalls are known as which ONE of the
following?

A External failure costs

B Costs of lean
C Excess production costs
D Transaction costs

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6.56

Quality failure costs incurred before the good or service has been transferred to the
customer would normally be described as?

A Prevention costs
B Appraisal costs
C Internal failure costs
D External failure costs

6.57

A necessary product/service requirement to meet the Japanese interpretation of ‘quality’

is to

A Comply with all safety standards

B Cost no more than necessary
C Meet a design brief
D Meet customer expectations

6.58

An approach of producing goods or purchasing stock only when required is referred to as

A Just-in-time
B Ad hoc
C Level capacity strategy
D Plan-do-check-act (PDCA) quality

6.59

Which of the following is normally accepted as a requirement of JIT to be successful?

A Bulk buying from suppliers

B High levels of demand from customers
C Training and involvement of staff
D Mass automation

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 Chapter 7 - Environmental cost accounting

7.1

A fully sustainable operation is one that?

A Zero impact or positive impact on the ecological environment

B Adopts the philosophy of continuous improvement
C Produces low carbon emissions and other greenhouse gasses (GHGs)
D Cares about corporate social responsibility

7.2

Which of these if any will occur as a result of having an effective environmental costing
sytem?

Increased costs over the long term

Increaed revenues
Improved decision making
Reduced customer value due to greater costs
Improved company image
Less opportutnites for premium pricing

7.3

Which of these are known as environmental costs? Select all that apply.

Noise from built up traffic areas

Aesthetic impacts on the local landscape from unsightly factory plants
Increased material costs due to global prices
Health impact through carbon dioxide emissions from companies
Increased labour costs due to shortage of skiils

7.4

What is environmental cost accounting? Select all that apply.

Allocation of environmental costs to the material flows of a firm’s operations

Allocation of environmental costs to physical aspects of a firm’s operations
Provides consistency between environmental goals and non-financial goals
Environmental improvement does not lead to financial improvement

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7.5

Which of these if any are part of environmental accounting?

Ignoring the effect on the environment by company’s activities

Identifying the costs and revenues from the environment
Developing performance measures to encourage more sales creation
Organisations commitment and attitude towards the environment is sensitive
and should not be disclosed

7.6

Which of these if any is an environmental tax?

Landfill tax
Income tax
Court imposed fine on illegal dumping of waste
Road tax

7.7

Which of these if any is an environmental loss?

A one off tax on company profits to pay for new recycle bins
Company fine for using toxic illegal chemcials in manufacture
Increased fuel duty
A tax on tobacco to fund additional hospitals in the UK

7.8

Which of these if any is a reason for environmental accounting?

Increase productivity
Reduces pollution
Increases profits
Increases goodwill with customers

7.9

Which if these if any is not a reason for environmental accounting?

Allows businesses to use more non-renewable resources

Allows businesses to understand what the polluting emissions are
Allows businesses to sell products and services at a premium price
Allows businesses to support local produce

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7.10

Complete the following sentances with the following words, not all words maybe used:

Cheap, increased, decreased, costly, conserving, resources, energy, reduction,

environment, water

Energy and water consumption have proven to be both very __________ to businesses as
well as having significant impact on the ____________ through ____________ carbon
emissions. Businesses should look towards ways of _____________ the use of these
___________ as far as practicable. Energy and ____________ consumption are closely
linked as energy is needed to heat up water and so a _________ in water useage would
mean a reduction in _____________ useage as well.

7.11

Which of these if any are ways of reducing energy consumption?

Lights should be turned off when leaving the office

Not cleaning windows to conserve energy in water consumption
Regularly servicing and checking machinery
Opening windows to cool down a building whilst the heating is on
Lights should be turned on in all rooms whether they are used or not
Windows should be opened when the air conditioning is on to help circulate
and control the temperature
Equipemt not in use should be kept remain on in standby mode so as to
facilitate JIT production
Fixing leaky pipes will reduce water consumption

7.12

Which of these if any are not ways of reducing energy consumption?

Energy bills should be reviewed on a regular basis

Allowing people to smoke outside will save on heating in the office as they
can warm up with a cigarette
Doors should be kept open to allow heat to travel to other rooms
Windows should be shut when the air conditioning is on
Not fixing dripping taps will reduce enrgy consumption
Office heating should be monitored and reductions in temperature should be
considered

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7.13

Which of these if any are advantages of using ABC in environmental accounting?

Automatically reveals environment driven costs

Costs can be more accurately integrated within manufacturing planning,
control
Allows businesses to gain non-sustainable competitive advantage
Integrates environmental cost accounting into the strategic management
process

7.14

Which of these if any are disadvantages of using ABC in environmental accounting?

Tracking systems for environmental wastes are needed in order to assign costs
It does not allows us to use cost data to develop superior strategies
Does not allow intangible and uncertain environmental factors to be brought
into the decision-making framework
Requires clear definition of environmental costs

7.15

Which of these if any relate to the Kyoto Protcol?

International agreement linked with climate change

Contribution analyisis technique
Binding targets for countries for reducing greenhouse gas emissions
Similar to TQM

7.16

Which of these if any are the mechanisms of the Kyoto Protocol?

Emissions trading
Transfer pricing
Clean development mechanism
Joint implementation

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7.17

Which of these if any explains emissions trading?

Spare emissions units can be sold to other countries

Being able to launch an emission reduction project
Earn emission reduction units from an emission removal project
It is known as carbon trading

7.18

Which of these if any exaplins the clean development mechanism?

Allows the earning of saleable certified emission reduction credits

Allows the earning emission reduction units
Allows the sale of sapre emissions units
An example is a rural electrification project using solar panels

7.19

Which of these if any explains joint implementation?

Allows a country to earn emission reduction units

It can count towards its Kyoto target
Allows countries to combine renewable and non-renewable resources
A country is required to jointly with other countries sell emissions units

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146 | P a g e
 Chapter 8 - Decision theory

8.1

A company is considering the launch of a new product which it estimates has a 75%
chance of success if no marketing is undertaken. The company believes that if it
undertakes a marketing campaign costing $50,000 the probability of success of the
product will increase to 90%.

If successful, the product will make a profit of $300,000, before marketing costs.
However, if it is unsuccessful, the product will make a loss of $80,000 before marketing
costs.

Calculate whether it is worthwhile for the company to undertake the marketing campaign.

8.2

A company is planning to launch a new product. The price at which it will sell the
product will be determined by the level of competition in the market which is currently
uncertain. The possible selling prices and variable costs and their respective associated
probabilities are as follows:

Selling price per unit

$ Probability
60 0·30
64 0·25
68 0·45
Variable cost per unit
$ Probability
20 0⋅25
24 0⋅40
26 0⋅35

Selling price and variable cost per unit are independent of each other.

Calculate the probability of the contribution per unit being equal to or greater than $40.

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8.3

EF sells personal computers on which it gives a one year warranty. EF is estimating the
cost of warranty claims for next year.

If all products under warranty need minor repairs the total cost is estimated to be $2
million. If all products under warranty need major repairs it would cost $6 million. If all
products under warranty need to be replaced it would cost $10 million.

Based on past experience EF has estimated that 80% of products under warranty will
require no repairs, 15% will require minor repairs, 3% will require major repairs and 2%
will need to be replaced.

Calculate the expected value of the cost of warranty claims for next year.

The following information is given for sub-questions 8.4 and 8.5 below

A marketing manager is deciding which of four potential selling prices to charge for a
new product. The market for the product is uncertain and reaction from competitors may
be strong, medium or weak. The manager has prepared a payoff table showing the
forecast profit for each of the possible outcomes.

Competitor Selling price

Reaction
$80 $90 $100 $110
Strong $70,000 $80,000 $70,000 $75,000
Medium $50,000 $60,000 $70,000 $80,000
Weak $90,000 $100,000 $90,000 $80,000
8.4

Identify the selling price that would be chosen if the manager applies the maximin
criterion to make the decision.

8.5

Identify, using a regret matrix, the selling price that would be chosen if the manager
applies the minimax regret criterion to make the decision.

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8.6

A decision maker who makes decisions using the maximax decision criterion would be
described as:

A Pessimistic
B Optimistic
C A bad loser
D Cautious

The following information is given for sub-questions 8.7 and 8.8 below

The committee of a new golf club is setting the annual membership fee. The number of
members depends on the membership fee charged and economic conditions. The forecast
annual cash inflows from membership fees are shown below.
Membership level
Membership Fee Low Average High
$000 $000 $000
$600 360 480 540
$800 400 440 480
$900 360 405 495
$1,000 320 380 420

8.7

If the maximin criterion is applied the fee set by the committee would be:

A $600
B $800
C $900
D $1,000

8.8

If the minimax regret criterion is applied the fee set by the committee would be:

A $600
B $800
C $900
D $1,000

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8.9

A decision maker who makes decisions using the expected value criterion would be
classified as:

A Risk averse
B Risk seeking
C Risk neutral
D Risk spreading

8.10

PT provides expert quality assurance services on a consultancy basis. The management of

the company is unsure whether to price the services it offers at the Deluxe, High,
Standard or Low fee level. There is uncertainty regarding the mix of staff that would be
available to provide each of the services. As the staff are on different pay scales the mix
of staff would affect the variable costs of each service.

Staffing mix Fee level

Deluxe High Standard Low
X $135,000 $140,000 $137,500 $120,000
Y $150,000 $160,000 $165,000 $160,000
Z $165,000 $180,000 $192,500 $200,000

The table below details the annual contribution earned from each of the possible
outcomes. If PT applies the minimax regret criterion, the fee level it will choose is:

A Deluxe
B High
C Standard
D Low

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8.11

PL currently earns an annual contribution of $2,880,000 from the sale of 90,000 units of
product B. Fixed costs are $800,000 per annum.

The management of PL is considering reducing the selling price per unit to $48. The
estimated levels of demand at the revised selling price and the probabilities of them
occurring are as follows:

Selling price of $48

Demand Probability
100,000 units 0·40
120,000 units 0·60

The estimated variable costs per unit at either of the higher levels of demand and the
probabilities of them occurring are as follows:

Variable cost (per unit) Probability

$21 0·25
$19 0·75

The level of demand and the variable cost per unit are independent of each other.

Calculate the probability that the profit will increase from its current level if the selling
price is reduced to $48.

8.12

A marketing manager is trying to decide which of four potential selling prices to charge
for a new product. The state of the economy is uncertain and may show signs of
recession, growth or boom. The manager has prepared a regret matrix showing the regret
for each of the possible outcomes depending on the decision made.

Regret Matrix
State of the economy Selling price
$40 $45 $50 $55
Boom $10,000 $0 $20,000 $30,000
Growth $20,000 $10,000 $0 $20,000
Recession $0 $10,000 $20,000 $30,000

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If the manager applies the minimax regret criterion to make decisions, which selling price
would be chosen?

A $40
B $45
C $50
D $55

8.13

A decision maker that makes decisions using the minimax regret criterion would be
classified as:

A Risk averse
B Risk seeking
C Risk neutral
D Risk spreading

8.14

FP can choose from three mutually exclusive projects. The net cash flows from the
projects will depend on market demand. All of the projects will last for only one year.
The forecast net cash flows and their associated probabilities are given below:

Market demand Weak Average Good

Probability 0.30 0.50 0.20
$000 $000 $000
Project A 400 500 600
Project B 300 350 400
Project C 500 450 650

(i) Calculate the expected value of the net cash flows from each of the THREE projects.
(ii) Calculate the value of perfect information regarding market demand.

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8.15

A company is deciding which of four potential selling prices it should charge for a new
product. Market conditions are uncertain and demand may be good, average or poor. The
company has calculated the contribution that would be earned for each of the possible
outcomes and has produced a regret matrix as follows.

Regret Matrix
State of the economy Selling price
$140 $160 $180 $200
Good $20,000 $60,000 $0 $10,000
Average $50,000 $0 $40,000 $20,000
Poor $0 $30,000 $20,000 $30,000

If the company applies the minimax regret criterion to make decisions, which selling
price would be chosen?

A $140
B $160
C $180
D $200

8.16

A company is deciding whether to launch a new product. The initial investment required
is $40,000. The estimated annual cash flows and their associated probabilities are shown
in the table below.

Probability Year 1 Year 2 Year 3

High 0.20 $20,000 $24,000 $18,000
Medium 0.50 $14,000 $16,000 $15,000
Low 0.30 $9,000 $12,000 $10,000

The company’s cost of capital is 10% per annum. You should assume that all cash flows
other than the initial investment occur at the end of the year. The expected present value
of the year 1 cash flows is

A $12,453
B $(27,547)
C $15,070
D $13,700

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8.17

Nile Limited is preparing its sales budget for 2004. The sales manager estimates that
sales will be 120,000 units if the Summer is rainy, and 80,000 units if the Summer is dry.
The probability of a dry Summer is 0.4.

What is the expected value for sales volume for 2004?

A 96,000 units
B 100,000 units
C 104,000 units
D 120,000 units

The following data relate to both questions 8.18 and 8.19:

TX Ltd can choose from five mutually exclusive projects. The projects will each last for
one year only and their net cash inflows will be determined by the prevailing market
conditions. The forecast net cash inflows and their associated probabilities are shown
below.

Market Conditions Poor Good Excellent

Probability 0.20 0.50 0.30

$000 $000 $000

Project L 500 470 550
Project M 400 550 570
Project N 450 400 475
Project O 360 400 420
Project P 600 500 425

8.18

Based on the expected value of the net cash inflows, which project should be undertaken?

8.19

Calculate the value of perfect information about the state of the market.

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8.20

A company has estimated the selling prices and variable costs of one of its products as
follows:
Selling price per unit Variable cost per unit
$ Probability $ Probability
40 0.30 20 0.55
50 0.45 30 0.25
60 0.25 40 0.20

Given that the company will be able to supply 1,000 units of its product each week
irrespective of the selling price, and that selling price and variable cost per unit are
independent of each other, calculate the probability that the weekly contribution will
exceed $20,000.

The following data are to be used when answering questions 8.21 and 8.22:

A company expects to sell 1,000 units per month of a new product but there is
uncertainty as to both the unit selling price and the unit variable cost of the product. The
following estimates of selling price, variable costs and their related probabilities have
been made:
Selling Price Unit Variable Cost
£ per unit Probability £ per unit Probability
20 25% 8 20%
25 40% 10 50%
30 35% 12 30%

There are specific fixed costs of £5,000 per month expected for the new product.

8.21

The expected value of monthly contribution is

A £5,890
B £10,300
C £10,890
D £15,300

8.22

The probability of monthly contribution from this new product exceeding £13,500 is

A 24.5%
B 30.5%
C 63.0%
D 92.5%
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8.23

A baker is trying to decide the number of batches of a particular type of bread that he
should bake each day. Daily demand ranges from 10 batches to 12 batches. Each batch of
bread that is baked and sold yields a positive contribution of £50, but each batch of bread
baked that is not sold yields a negative contribution of £20.

Assuming the baker adopts the minimax regret decision rule; calculate the number of
batches of bread that he should bake each day. You must justify your answer.

8.24

A company has determined its activity level and is now predicting its costs for the quarter
ended 31 March 2008. It has made the following predictions:

Variable costs Probability Fixed costs Probability

$560,000 0·3 $440,000 0·15
$780,000 0·5 $640,000 0·55
$950,000 0·2 $760,000 0·30

Calculate the expected value of total cost and its standard deviation.
2
Σ(x – x)
Note: SD =
n

8.25

A company is considering its costs in respect of a new product. The following tables
show the predictions made by the company, together with their associated probabilities:

Fixed costs
$ Probability
100,000 0.35
130,000 0.45
160,000 0.20
Variable costs
$ Probability
70,000 0.40
90,000 0.35
110,000 0.25

Calculate the expected value of total costs.

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8.26

The owner of a van selling hot take-away food has to decide how many burgers to
purchase for sale at a forthcoming outdoor concert. The number of burgers sold will
depend on the weather conditions and any unsold burgers will be thrown away at the end
of the day.

The table below details the profit that would be earned for each possible outcome:

Weather Number of burgers purchased

1,000 2,000 3,000 4,000
Bad $1,000 $0 ($1,000) ($3,000)
Average $3,000 $6,000 $7,000 $6,000
Good $3,000 $6,000 $9,000 $12,000

(i) If the van owner applies the maximin rule how many burgers will he purchase?

(ii) If the van owner applies the minimax regret rule how many burgers will he purchase?

8.27

A company is considering investing in a new project. The following table shows the
project’s estimated cash inflows and cash outflows, together with their associated
probabilities. The cash inflows and cash outflows are totally independent.

Cash Inflows Cash Outflows

$ Probability $ Probability
120,000 0.30 50,000 0.25
140,000 0.45 60,000 0.35
160,000 0.25 70,000 0.40

Calculate the probability of net cash flows being $90,000 or greater.

8.28

A company has to choose between three mutually exclusive projects. Market research has
shown that customers could react to the projects in three different ways depending on
their preferences. There is a 30% chance that customers will exhibit preferences 1, a 20%
chance they will exhibit preferences 2 and a 50% chance they will exhibit preferences 3.
The company uses expected value to make this type of decision.

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The net present value of each of the possible outcomes is as follows:

Probability Project A Project B Project C

$000 $000 $000
Preferences 1 0.3 400 800 500
Preferences 2 0.2 500 300 600
Preferences 3 0.5 700 200 400

A market research company believes it can provide perfect information about the
preferences of customers in this market.

Calculate the maximum amount that should be paid for the information from the market
research company.

8.29

A marketing manager is deciding which of four potential selling prices to charge for a
new product. Market conditions are uncertain and demand may be good, average or poor.
The contribution that would be earned for each of the possible outcomes is shown in the
payoff table below:

Demand level Selling price

$40 $60 $80 $100
Good $50,000 $60,000 $40,000 $30,000
Average $20,000 $30,000 $30,000 $20,000
Poor $30,000 $30,000 $20,000 $10,000

If the manager applies the maximin criterion to make decisions, which selling price
would be chosen?

A $40
B $60
C $80
D $100

8.30

A company is considering whether to develop and market a new product. The cost of
developing the product is estimated to be $150,000. There is a 70% probability that the
development will succeed and a 30% probability that the development will be
unsuccessful.

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If the development is successful the product will be marketed. There is a 50% chance that
the marketing will be very successful and the product will make a profit of $250,000.
There is a 30% chance that the marketing will be reasonably successful and the product
will make a profit of $150,000 and a 20% chance that the marketing will be unsuccessful
and the product will make a loss of $80,000. The profit and loss figures stated are after
taking account of the development costs of $150,000.

The expected value of the decision to develop and market the product is:

A $154,000
B $4,000
C $107,800
D $62,800

8.31

A company is considering whether to invest in a new project. The probability distribution

of the net present value of the project is as follows:

Net present value Probability

$2,800 0.25
$3,900 0.40
$4,900 0.35

Calculate the expected value of the net present value of the project and its standard
deviation.
Note:

8.32

A decision maker who makes decisions using the maximin criterion would be classified
as:

A Risk averse
B Risk seeking
C Risk neutral
D Risk spreading

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8.33

NG is deciding which of four potential venues should be used to stage an entertainment

event. Demand for the event may be low, medium or high depending on weather
conditions on the day. The management accountant has estimated the contribution that
would be earned for each of the possible outcomes and has produced the following regret
matrix:
Regret Matrix

Venue Ayefield Beefield Ceefield Deefield

$ $ $ $
Demand
Low 0 200,000 300,000 450,000
Medium 330,000 110,000 0 150,000
High 810,000 590,000 480,000 0

If the company applies the minimax regret criterion the venue chosen would be

A Ayefield
B Beefield
C Ceefield
D Deefield

The following data are given for questions 8.34 and 8.35 below:

XY can choose from four mutually exclusive projects. The projects will each last for one
year and their net cash inflows will be determined by market conditions. The forecast net
cash inflows for each of the possible outcomes are shown below.

Market Conditions Poor Average Good

$ $ $
Project A 440 470 560
Project B 400 550 580
Project C 360 400 480
Project D 320 380 420
8.34

If the company applies the maximin criterion the project chosen would be:

A Project A
B Project B
C Project C
D Project D

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8.35

If the company applies the maximax criterion the project chosen would be:

A Project A
B Project B
C Project C
D Project D

8.36

The table below shows the possible outcomes, the probability of their occurrence and the
expected value of the net present value for Project A:

Net present value Probability Expected value

$2 million 30% $0.6 million
$3 million 20% $0.6 million
$4 million 50% $2.0 million
$3.2 million

Calculate the standard deviation of the net present value for Project A.

Note:

The following information should be used for 8.37 and 8.38:

A famous sports car company is considering whether or not to exhibit their cars at a
motor show in Birmingham, which is to held later in the year. The total cost of setting up
and holding the show would be £10,000. Sales will be dependent on the turn out of new
models by competitors, there is a 0.4 chance competition will be better in comparison and
a 0.6 chance that it will be worse.

If competition is better, the company expects to sell 4 cars at the exhibition. If the
competition is worse, they expect to sell 8 cars at the exhibition. The contribution per car
is on average £15,000.

If the company does not set up an exhibition at the show, they believe 4 of the above cars
would be sold anyway during the year.

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8.37

The expected net gain from exhibiting the show would be?

A £26,000
B £86,000
C £96,000
D £109,000

8.38

The owner can pay for a specialist car marketing company that claims that 70% of the
time it can accurately predict whether or not the competition will be better or worse. The
maximum amount that would be paid to the firm of consultants, compared with not
purchasing it and not attending the exhibition would be?

A £89,600
B £59,800
C £29,200
D £19,800

8.39

K Plc is about to launch a new training centre in London the cost of doing so will be
£20,000. There is a 60% chance it will be successful and a 40% chance it will be
unsuccessful. If it is successful it is estimated that there is a 50% chance it will be very
successful and generate contribution of £60,000 and a 50% chance that it will be
moderately successful and generate contribution of £30,000. What is the expected value
of the new centre launch?

A £27,000
B £15,000
C £7,000
D £42,000

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 Chapter 9 - Linear programming

9.1

Which of these does not relate to shadow pricing?

A Shadow price is only relevant of there is a scarce resource

B It is the extra contribution for one more unit of the scarce resource
C It would also be the maximum price you would pay
D It is the maximum premium that would be paid for a unit of scarce resource

9.2

Which of these is true about linear programming?

A It is a technique using lines which are not straight

B Used for production forecasting
C It’s main aim is to illustrate several solutions
D It’s main aim is to illustrates constraints

9.3

Product A and product B each need 17 mins of labour and 23 mins of labour respectively.
“a” = number of product A produced, “b” = number of product B produced. We have
1,956 labour hours at our disposal. The labour constrain would be written as:

A 17a + 23b < or = 1956

B 17a + 23b > or = 1956
C 0.2833a + 0.3833b < or = 1956
D 0.2833a + 0.3833b > or = 1956

9.4

In a final simplex tableau the cell which meets the row for variable r (this is product R)
and the column for slack variable j (material J) is -0.56 this means:

A Every extra unit of R made would use up 0.56 units more of material J
B Every extra unit of R made would use up 0.56 units less of material J
C Every extra unit of material J would produce 0.56 more of product R
D Every extra unit of material J would produce 0.56 less of product R

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9.5

ABC Ltd manufactures three products from a single machine, which is in limited supply.

Product details for the current period are as follows:

Product A Product B Product C

Maximum demand (units) 800 1,200 3,000

Optimum planned production nil 1,200 2,500
Unit contribution £5.00 £7.00 £8.40
Machine cost per unit
(£0.70 per hour) £1.40 £0.35 £2.10

The planned production optimises the use of 8,100 machining hours that are available
within this period. However another company has been found which can outsource
another 2,000 machine hours to ABC Ltd.

What would be the maximum price that ABC Ltd should be prepared to pay for the
additional 2,000 machine hours?

A £6,050
B £6,250
C £6,450
D £6,850

9.6

W Plc has skilled labour available every week of 560 hours and unskilled labour of 860
hours every week. It produces two products, details of the required labour time per unit:

Product A Product B
Skilled labour 0.75 Hours 0.4 Hours
Unskilled labour 1.6 Hours 0.2 Hours

Using simultaneous equations, the number of each product to produce in order to

maximise contribution, assuming the above constraints are intersecting at the optimum
point would be (to the nearest unit)

A 789 Product A only

B 678 Product A and 345 Product B
C 567 Product A and 459 Product B
D 473 Product A and 513 Product B

164 | P a g e
9.7

Using linear programming, the amount left unused for a product that is not a binding
constraint is called

A The feasible region

B Shadow price
C Maximum price
D Slack

9.8

In linear programming which of these if any would explain the area where the solution
is?

The feasible region

Objective function
Surplus resources
Dual price
Slack variable
The feasible line
Maximum price
Minimum price

9.9

What is a shadow price?

Dual price
Extra contribution earned
A scarce resource
A limiting factor
Slack variable
The feasible region
Maximum price
A unit of a constraint

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9.10

What are non-negativity or logic constraints?

A limiting factor
They identify the main objectives
Show the limits of resources available
Where the answer is always positive
Slack variable
The feasible region
Where the answer is always negative

9.11

What is the maximum price?

A Dual price plus the orginal cost of the limiting factor to make one more unit
B Contribution plus fixed costs to make one more unit
C Shadow price plus the variable cost to make one more unit
D Shadow price plus the material cost to make one more unit

9.12

A company produces two products, Product F and Product G, using the same resources.
The company is determining the production plan for this month. It has been established
that there are two resources used by the company that are constraints on the amounts that
can be produced and sold. The contribution for each unit of F is $43 and the contribution
for each unit of G is $52, where F and G represent the units of each product that can be
produced.

What production plan will generate the maximum contribution?

The resource constraints are represented by the following:

Material C: 2F + 3G ≤ 10,800
Labour: 3F + 2G ≤ 10,000

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9.13

A company manufactures three products D, E and F. The company currently has a

shortage of skilled labour, with total hours restricted to 5,400. Details of these products
are:

D E F
Demand (units) 2,400 2,200 3,000
Contribution per unit £54 £72 £35
Skilled labour hrs per unit 1 1.5 0.5

The mix of products that will maximise contribution is:

A (2,200 x E) + (2,100 x D)
B (1,000 x E) + (2,400 x D) + (3,000 x F)
C (2,200 x E) + (600 x D) + (3,000 x F)
D (2,400 x D) + (2,200 X E) + (3,000 x F)

9.14

Which of the letters in the graph show the optimal solution?

T
2,000

1,600

1,400

1,200

1,000
A
800

600
B C
400

200 E
D

500 1,000 1,500

R

167 | P a g e
9.15

A company has done the following analysis:

Product L M
$ per unit $ per unit
Selling price 70 90
Direct labour ($7 per hour) (28) (14)
Direct material ($5 per kg) (10) (45)
Machine hours ($10 per hour) (10) (20)
Contribution 22 11

Demand for L and M is 400 units and 700 units respectively. Material is in short supply
and there is only 6,000 kg avaialble. What is the optimum contribution that can be
earned?

A $8,800
B $17,150
C $6,347
D $15,147

9.16

A company has done the following analysis:

Product R T
$ per unit $ per unit
Selling price 130 160
Direct labour ($8 per hour) (24) (40)
Material A ($3 per kg) (15) (12)
Material B ($7 per litre) (14) (7)
Machine hours ($10 per hour) (30) (40)
Contribution 47 61

Demand for R and T is 750 ans 1,150 respectively. Labour hours is in short supply and
there is only 7,500 hrs available, however we must fulfil a commercial customer order
first of 250 R’s and 350 T’s before we can produce what we wish to make.

What is the optimm production plan of R and T’s to make?

A R = 250, T = 350
B R = 300, T = 1,150
C R = 750, T = 1,050
D R = 500, T = 500
168 | P a g e
9.17

The limiting factor is material M1.

P4 P6 C3 C5
$ $ $ $
Selling price 125 175 75 95

Variable cost (55) (75) (44) (45)

Contribution 70 100 31 50

Material M1 used per

0.75 0.50 0.25 0.50
unit

Rank in order of production.

169 | P a g e
170 | P a g e
 Chapter 10 - Relevant costing

10.1

Relevant costs need to be considered in decision making.

Which of the following if any are characteristics of relevant costs?

Future costs
Sunk costs
Incremental costs
Avoidable costs
Fixed costs
Common costs
Differential costs

10.2

Z Plc has 400kg of material in stock that had cost £1,750. The company no longer uses
the material and if sold for scrap would earn £1.75 a kg.

Z Plc however is considering taking on a special order from a customer, which would
require 500kg of this material. The current price of the material at present is £4.50 per kg.

When using relevant costing, the cost of this material is:

A A sunk cost of £1,750

B An opportunity cost of £700 and an incremental cost of £450
C An incremental cost of £1,150
D A sunk cost of £1,750 and an incremental cost of £450

10.3

Which of these is a non-relevant cost?

A Variable costs
B Committed costs
C Product specific fixed costs
D Incremental costs

171 | P a g e
10.4

Which of these costs if any are not relevant in short term decision making?

Head office overheads

Depreciation
Rent agreement on a building to be confirmed
The cost of material bought last year
Managers salary of factory
Pre-paid elcectric and gas bill
Labour costs of staff who are working on a job

10.5

The cost of a scarce resource is:

A Variable costs of scarce resource and market price of resource

B Contribution lost by using this resource and therefore depriving another product
of its use
C Variable costs of scarce resource and fixed costs of existing product it would be
used on
D Replacement value of the scarce resource

10.6

Opportunity cost is best described as:

A The costs incurred in choosing the next best alternative

B The most expensive alternative not undertaken
C The next best alternative foregone by you choosing to make a future decision
D The least expensive alternative undertaken

10.7

A company has some material in stock and it has no further use for it. Which of these is
not a possible opportunity cost?

A Current replacement cost of material

B Scrap value of material
C Material cost saved if used on another project
D Special order request using this material for a customer on an internet auction site

172 | P a g e
10.8

In what order does the decision making process normally occur?

A Identify objectives, identify course of action, evaluate course of action, select best
option, compare actual v budget
B Identify course of action, evaluate course of action, identify objectives, select best
option, compare actual v budget
C Compare actual v budget, identify course of action, evaluate course of action,
identify objectives, select best option
D Identify course of action, identify objectives, evaluate course of action, select best
option, compare actual v budget

10.9

If a company has a high operating gear ration this means:

A It has high variable costs in comparison total costs

B Profits are more variable to sales volume changes
C Profits are less variable to sales volume changes
D It has low fixed costs in comparison total costs

10.10

A company is considering the acceptance of a one-year contract, which requires the use
of two skilled employees. They would be recruited on a one-year contract at a cost of
£45,000 per employee. An existing manager earning £80,000 a year, approximately
taking up 20% of her time, would also supervise them.

Instead of this plan above the company could instead retrain there existing employees
who currently earn £35,000 a year. This would require training costs of £20,000 in total
and the current existing employees would need to be replaced at a cost to the company of
£60,000 in total. This would therefore not require any management time.

The relevant cost of the contract would be:

A £90,000
B £80,000
C £106,000
D £170,000

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10.11

ZYP Ltd has a current customer order which requires the use of a machine which was
purchased two years ago and currently has a net book value of £9,000. ZYP Ltd could
sell the machine now for £8,500, but if the machine is used on the above contract it
would require a complete reconditioning if it is to be used again, hence ZYP Ltd will
have to pay someone £1,000 to dismantle it and it could not therefore be sold anymore.
The cost of operating the machine (variable cost) for the customer would be £4,500 for
the job. The minimum price ZYP Ltd should quote the customer should be?

A £5,500
B £6,000
C £7,500
D £14,000

10.12

Qualitative data is concerned with:

A Infinite numbers
B Opinions
C Internal data
D Finite numbers

10.13

A by-product is:

A A product which has a high sales value at the split-off point

B A product where the costs are not apportioned to it on completion of process
C Leather when slaughtering a cow
D Beef when slaughtering a cow

10.14

The skilled labour is currently employed by your company and paid at a rate of $8.00 per
hour. If a new job were undertaken it would be necessary either to work 25 hours’
overtime, which would be paid at time plus one half, OR in order to carry out the work in
normal time, reduce production of another product that earns contribution of $13.00 per
hour.

Calculate the relvant cost of skilled labour for the new job.

174 | P a g e
10.15

Which THREE of the following are categories of relevant costs?

Incremental costs
Committed costs
Sunk costs
Differential costs
Absorbed fixed costs
Opportunity costs

10.16

A company is preparing a quotation for a one-off job that would require 1,200 kg of
Material B. There are 900 kg of Material B in inventory that were bought at a cost of $3
per kg. The company does not foresee any other use for the material. The material held in
inventory could be sold for $3.50 per kg. The current purchase price of Material B is
$4.50 per kg.

The relevant cost of Material B to be included in the cost estimate is:

A $4,050
B $4,500
C $4,200
D $5,400

10.17

When deciding whether to further process a product, what information is required?

Select ALL that apply.

The common costs of the joint process

The further processing costs of the product
The unit selling price of the product at the point of separation
The unit selling price of the product after further processing
The percentage losses of further processing the product
The actual output of the product from the joint process

175 | P a g e
10.18

Which of the following is NOT a valid reason why the costs used for decision making
may be different from the costs used for profit reporting?

Costs used for decision making include only costs that are affected by the
decision.
Costs used for decision making never include fixed costs.
Costs used for decision making do not include past costs.
Costs used for decision making include opportunity costs.

10.19

A company makes three components, X, Y and Z. The costs to manufacture the

components are as follows:

Component X Component Y Component Z

$ $ $
Variable cost 5 16 10
Fixed cost 4 16.60 7.50
Total unit cost 9.00 32.60 17.50

The fixed costs are an allocation of general fixed overheads.

A supplier has offered to supply the components at the following prices:

Component X at $8 Component Y at $14 Component Z at $11

Which components should the company buy in order to minimise total costs?

A Components X and Z
B Component Y only
C None of the components
D All of the components

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10.20

The performance of the three divisions of a company is detailed below:

Division W Division X Division Y Total

$000 $000 $000 $000
Sales 700 840 300 1,840
Variable costs 560 420 240 1,220
Contribution 140 420 60 620
Fixed overheads 525
Net profit 95

40% of the fixed overheads are specific to the individual Divisions. Each division incurs
the same level of specific fixed overheads.

Which of the divisions should continue to operate if the company's objective is to

maximise profits?

A All of the divisions

B Division W and Division X only
C Division X only
D Division X and Division Y only

10.21

When deciding whether to replace a non-current asset, which of the following if any is
NOT relevant?

Tax balancing charge or allowance on the existing asset

Net book value of the existing asset
Effect on working capital requirements
Removal cost of the existing asset

10.22

Which one of the following is not a relevant cost?

A Incremental cost
B Committed
C Avoidable cost
D Differential cost

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10.23

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

A Sunk cost
B Historical cost
C Notional cost
D Differential cost

10.24

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

A Cash
B Future
C Incremental
D Notional

10.25

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

A Historical costs
B Current costs
C Notional costs
D Future c osts

10.26

Alan Salt purchased some used mobile phones 6 motnhs ago and one of his regular
custoemrs wants to buy them off him but doesnot know what to quote him.

He originally bought them for £6,500 and if he put them on Ebay today he’d get £3,500.
He could also melt down the phones and use the metal and plastic to manufacture retro
computers for his fans. He would have to buy this material in normally for £1,000.

What is Alan’s relvant cost here if he were to sell the phones to his regular cusotmer?

A £6,500
B £3,500
C £1,000
D Not possible to say

178 | P a g e
10.27

The cost of a supervisor is based on a monthly salary of $3,500 multiplied by 10% as the
the project time estimate = $350. If the supervisor cannot complete this project work
within his normal hours he will work overtime but he is not paid for this.

What is the relevant cost for the project?

A $3,500
B $350
C $0
D Not enough information to calculate this

10.28

It will be necessary to hire specialist machine for a project. In total the project will
require the machine for 5 days but it is difficult to predict exactly which five days the
machine will be required within the overall project time of one month.

One option is to hire the machine for the entire month at a cost of $5,000 and then sub-
hire the machine for $150 per day when it is not required. It is expected that we would be
able to sub-hire the machine for 20 days.

Alternatively we could hire the machine on the days we need it and its availability would
be guaranteed at a cost of $500 per day.

What is the relevant cost?

10.29

The overhead absorption rate in a company is £20 per hour and includes power costs
which are directly related to machine usage. If a job were undertaken, it is estimated that
the machine time required would be ten hours. The machines incur power costs of £0.75
per hour. There are no other overhead costs that can be specifically identified with this
job.

What is the relevant cost?

A £200
B £207.50
C £7.50
D £0

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10.30

We need 500 square metres of steel for a project. The steel is regularly used, and has a
current stock value of $5.00 per square metre. There are currently 100 square metres in
stock. The steel is readily available at a price of $5.50 per square metre.

What is the relevant cost?

A $2,500
B $2,750
C $2,200
D $2,000

10.31

The skilled labour is currently employed by your company and paid at a rate of $18.00
per hour. If a new job were undertaken it would be necessary either to work 35 hours’
overtime, which would be paid at time plus one half, OR in order to carry out the work in
normal time, reduce production of another product that earns contribution of $24.00 per
hour.

What is the relevant cost?

10.32

The cost of the estimating time of $400 is that attributed to the four hours taken by a
manager to analyse information to determine the cost estimate given. It is company
policy to add 20% of $1,000 to the production cost as an allowance for administration
costs associated with the jobs accepted. The brass fittings would have to be bought
specifically for this job: a supplier has quoted the price of $20 for the fittings required.
The semi-skilled labour that is needed for the job is $460; currently the company has
sufficient paid idle time to be able to complete this work.

What is the relevant cost here?

$20
$400
$1,080
$880
$460
$480
$0

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10.33

Product Selling price after Selling price after Further variable

common process further processing processing cost
$/litre $/litre $/litre
M 6·25 8·40 1·75
N 5·20 6·45 0·95
P 6·80 7·45 0·85

Calculate which products are finacnially worthwhile processing further?

10.34

Henry Ford owns a coach which cost him $12,000. The coach today is worth $8,000.
Enzo Ferrari has asked if he can borrow the coach. If Enzo borrowed the coach then it
would be out of use for Henry for eight days. At the same time Henry has a two day a
contract which has already been accepted which contains a significant financial penalty
clause. This contract earns a contribution of $250 per day. A replacement coach could be
hired for $180 per day.

What is the relevant cost?

10.35

Ronnie Biggs a bank robber needs a driver to drive the getaway car for a day. He already
has a driver who he pays $60,000 a month, but he is needed by his boss Tony Soprano on
a 5 day heist. If Tony uses the driver then Ronnie will need to replace him. The
replacement driver would be hired from a recruitment agency that charges $400 per day
for a suitably qualified driver.

What is the relevant cost to Ronnie if he has to give his driver to Tony?

10.36

General overheads of $2,000 are based upon the overhead absorption rate of $10 per unit
as set in the budget. The only general overhead cost that can be specifically identified
with the job is the time that has been spent in considering the costs of the job and
preparing the quotation. This amounted to $250.

What is the relevant cost?

181 | P a g e
10.37

Z can sell products R, S or T after this common process or they can be individually
further processed and sold as RZ, SZ and TZ respectively. The market prices for the
products at the intermediate stage and after further processing are:

Market prices per

kg:

$
R 3.00
S 5.00
T 3.50
RZ 6.00
SZ 5.75
TZ 6.75

The specific costs of the three individual further processes are:

Process R to RZ variable cost of $1.40 per kg, no fixed costs
Process S to SZ variable cost of $0.90 per kg, no fixed costs
Process T to TZ variable cost of $1.00 per kg, fixed cost of $600 per month based on
prodcutoon levels of 1,200kg.

Produce calculations to determine whether any of the intermediate products should be

further processed before being sold.

10.38

DVDBusters Ltd is a national chain of film rental shops carrying the latest from the silver
screen. Recently they are finding it difficult financially to maintain all their shops and are
considering shutting down some of them. Which of the following should they consider if
they are basing their decision on relevant costing?

A Shops which have a loss should be discontinued

B Shops making a contribution loss should be discontinued provided this will not
increase sales in other shops
C Shops with a contribution loss should be discontinued
D Shops with a contribution loss should not be discontinued if this will make
profitable shops bear a portion of the closed down shops overheads

182 | P a g e
10.39

David Peckham is evaluating whether to purchase a BMW 320 or continue to use his
Rover 75. Both cars are identical in David’s opinion. The BMW costs $25,000 has an
estimated service life of ten years, has no scrap value, and will have maintenance costs of
$500 per year.

The Rover 75 was $12,000 when he bought it brand new and has an existing book value
of $6,500. It has an estimated remaining service life of ten years and has no scrap value at
the end of ten years. It has a current disposal value of $3,500 and will have maintenance
costs of $2,650 per year.

Ignoring present value and tax considerations, what should David do?

A Buy the BMW 320

B Cannot be determined
C Be indifferent between both cars
D Keep the Rover 75

10.40

Usain wishes to discontinue his Broadband Division as he belives it is making losses. The
division has contribution margin of $10,000 and allocated overhead of $26,000 (of which
$7,000 cannot be eliminated). This shut down would:

A Decrease operating income by $10,000

B Decrease operating income by $9,000
C Increase operating income by $10,000
D Increase operating income by $9,000

10.41

Alan Sweet has 2,000 defective units of a product that cost $4 per unit to manufacture,
and can be sold for $2 per unit. These units can be reworked for $1 per unit and sold at
their full price of $6 each. If Alan reworked the defective units, how much extra benefit
will he obtain?

A $2,000
B $6,000
C ($6,000)
D $12,000

183 | P a g e
10.42

An additional cost that results from a particular course of action is known as a(an):

A Sunk cost
B Opportunity cost
C Incremental cost
D Net present cost

10.43

Stuart Brand 17,000 defective units of a product that cost $3 per unit to manufacture, and
can be sold for $1 per unit. These units can be reworked for $3 per unit and sold at their
full price of $5 each. Should Henny-Penny rework the defective units, how much
incremental net return will result?

A $85,000
B ($34,000)
C $0
D $17,000

10.44

The cost to produce 8,000 units at 70% capacity is:

 Direct materials: $16,000

 Direct labour: $8,000
 Factory overhead, all fixed: $12,000
 Selling expense (40% variable, 60% fixed): $8,000

What unit price would the company have to charge to make $2,000 on a sale of 500
additional units that would be shipped out of the normal market area?

A $7.40
B $7.80
C $8.90
D $7.00

184 | P a g e
 Chapter 1 Solutions - Classification of costs and maths for budgets

1.1 Answer is D

Remove inflation from the costs:

$21,000 / 1.05 = $20,000

$26,780 / 1.03 = $26,000

Use high/low technique to extract the vatriable cost element:

The variable cost per unit = ($26,000 - $20,000) / (16,000 – 12,000) = $1.50

Now apply inflation:

$1.50 x 1.08 = $1.62

1.2 Answer is B

Variable cost per unit

= ($2,840,000 – $2,420,000) / (190,000 – 160,000)
= $420,000 / 30,000
= $14 per unit

Fixed costs
= $2,840,000 – (190,000 x $14)
= $180,000

Total costs at 205,000 units

= (205,000 x $14) + $180,000
= $3,050,000

1.3 Answer is C

Cost before stepped increase = $2,840,000 - $30,000 = $2,810,000

Variable cost per unit

= ($2,810,000 - $2,420,000) / (190,000 – 160,000)
= $390,000 / 30,000
= $13

Fixed costs at 190,000 units = $2,840,000 – (190,000 x $13) = $370,000

Total costs at 175,000 units

= (175,000 x $13) + ($370,000 - $30,000)
= $2,615,000
185 | P a g e
1.4 Answer is $484,000

Using the high-low method to separate fixed and variable costs:

Variable cost per unit = ($392,000 - $304,000) / (35,000 – 24,000) = $8 per unit

Fixed costs = $304,000 – (24,000 x $8) = $112,000

At 45,000 units:

Variable costs = 45,000 x $8 x 0.95 = $342,000

Fixed costs = $112,000 + $30,000
Total costs = $484,000

1.5 Answer is A

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

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

Y= a + bX

Work out variable cost

Units Overhead cost (£)
3,500 16,200
2,000 12,000
1,500 4,200

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

Work out fixed cost

Use either 3,500 or 2,000 units to work out the fixed cost as a balancing figure.
£16,200 = Fixed cost + (3500 x £2.80)
£16,200 = Fixed cost + (£9,800)
Fixed cost = £6,400

186 | P a g e
Therefore
a = £6,400
b = £2.80
The budget for 4,000 units
Y = £6,400 + (£2.80 x 4,000)
Y = £17,600

1.6 Answer is C

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

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

Work out variable cost

Units Overhead cost (£)

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

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

Work out fixed cost

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

Therefore
a = £20,000
b = £2

The budget for 5,750 units

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

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1.7

Part (i)

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

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

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

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

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

Part (ii)

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

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

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

OR

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

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

188 | P a g e
1.8 Answer is B

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

$10,500 / 1.05 = $10,000

$13,390 / 1.03 = $13,000

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

Units produced Total cost ($)

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

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

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

$1.50 x 1.06 = $1.59

1.9 Answer is A

Step 1 Identify the variable cost

Compare the change in activity to the change in cost. Use only the highest and lowest
activities given and ignore all other activities given as data.

Units produced Total cost ($)

100,000 290,000
64,000 200,000
36,000 90,000

$90,000 / 36,000 units = $2.50 direct cost per unit produced

Step 2 Identify the fixed cost as the balancing item

Use either 100,000 or 64,000 units above to work out fixed cost as the balancing figure.

189 | P a g e
Total Cost = Fixed Cost + (Variable Cost per unit x units produced)
TC = FC + (VC per unit x units produced)

290,000 = FC + (2.50 x 100,000)

290,000 = FC + 250,000
FC = 290,000 – 250,000
FC = $40,000

Forecast of total cost at 85,000 units:

TC = 40,000 + (2.50 x units produced)

TC = 40,000 + (2.50 x 85,000)
TC = $252,500

1.10 Answer is A

3,500 19,875
2,500 17,625
1,000 2,250

2,250/1,000 = 2.25 VC per unit

At 3,500 units 19,875 = FC + 2.25 (3,500) therefore FC = 12,000

At 2,000 units TC = 12,000 + 2.25 (2,000) = £16,500

1.11 Answer is B

4,000 x 6.00 = £24,000

6,000 x 5.17 = £31,020
2,000 £7,020

7,020/2,000 = 3.51 VC PER UNIT

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

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

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1.12 Answer is D

High-low technique

High 75 180
Low 20 70
55 110

Variable cost £110/55 = £2

Fixed cost £180 = FC + (75 x £2)

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

Therefore for 70 rooms cleaned

TC = £30 + (£2 x 70)
TC = £170

1.13 Answer is C

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

VC £163,100/136,000 = £1.20

FC = £2,341,600 - (£1.20 x 1,118,000)

FC = £1,000,000

1.14 Answer is A

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

£3,450/230 = £15

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1.15 Answer is B

1.16 Answer is B

1.17 Answer is A

3,500 19,875
2,500 17,625
1,000 2,250

2,250/1,000 = 2.25 VC per unit

At 3,500 units 19,875 = FC + 2.25 (3,500) therefore FC = 12,000

At 2,000 units TC = 12,000 + 2.25 (2,000) = £16,500

1.18 Answer is B

4,000 x 6.00 = £24,000

6,000 x 5.17 = £31,020
2,000 £7,020

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

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

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

1.19 Answer is A

1.20 Answer is C

45 rooms x 0.5 hours = 22.5 hours

22.5 hours / 0.8 = 28.125 hours

28.125 x £5 an hour = £140.63

1.21 Answer is D

CIMA definition of a cost unit

1.22 Answer is B

Comparing actual results against budget

This is done by the management account
192 | P a g e
1.23 Answer is C

Applying accounting standards to transactions

All the rest are roles undertaken by the management accountant

1.24 Answer is C

Prepared to assist in decision making for departments

All the rest are financial accounts preparation

1.25 Answer is A

Preparing budgets for the departments

This is undertaken by the management accountant

1.26 Answer

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

1.27 Answer

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

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1.28 Answer

High-low technique

High 1,200 $19,600

Low 500 $14,000
700 $5,600

$8 per
Variable cost $5,600/700 = unit

Total cost $14,000= FC + (500 x $8)

Total cost $14,000= FC + $4,000
Total cost $14,000 - Variable cost $4,000 = FC
FC = $10,000

Therefore for 100 units the budget cost allowance;

TC = $10,000 + ($8 x 1,000 units)
TC = $18,000

1.29 Answer is B

1.30 Answer is B

1.31 Answer is B

1.32 Answer is $2 per unit

High-low technique

High 54,000 $206,000

Low 44,000 $186,000
10,000 $20,000

Variable overhead absorption rate $20,000/10,000 = $2 per unit

1.33 Answer is A

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 Chapter 2 Solutions - Advanced mathematics for budgets

2.1

Quarter Trend sales Actual sales Variation

units units units
1 13,000 14,000 +1,000
2 16,000 18,000 +2,000
3 19,000 18,000 -1,000
4 22,000 20,000 -2,000

Year 2 Quarter 1 = 10,000 + (3,000 x 5) = 25,000 + 1,000 = 26,000 units

Year 2 Quarter 2 = 10,000 + (3,000 x 6) = 28,000 + 2,000 = 30,000 units
Year 2 Quarter 3 = 10,000 + (3,000 x 7) = 31,000 - 1,000 = 30,000 units
Year 2 Quarter 4 = 10,000 + (3,000 x 8) = 34,000 - 2,000 = 32,000 units

2.2 Answer is A

1. First work out the average contribution.

2. Then work out the average breakeven contracts.
3. Work out how many contracts of each type are represented in the breakeven.
4. Multiply these contracts by their respective selling price to get revenue needed to
breakeven.
Superior Standard Basic
SP $1,000 $750 $400
VC ($450) ($250) ($180)
Contribution $550 $500 $220

Average contribution = (20% x $550) + (30% x $500) + (50% x $220) = $370

Breakeven (units) = Fixed costs / Contribution per unit = $1,000,000 / $370 = 2,703

Sales
Superior = 20% x 2,703 = 541
Standard = 30% x 2,703 = 811
Basic = 50% x 2,703 = 1,352

Revenue at breakeven point

Superior = 541 x $1,000 = $541,000

Standard = 811 x $750 = $608,250
Basic = 1,352 x $400 = $540,800
Total $1,690,050

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2.3

Revenue Contribution
£m £m
Product X (given) 10 1.5
Product Y (given) 20 2.0
30 3.5
Product Z (balance) 12 3.0
Budgeted contribution 6.5
Fixed overhead 5.5
Budgeted profit 1.0

Revenue for Product Z

(£3.0m contribution ÷ 0.25 C/S ratio) = £12m

2.4 Answer is B

Take the individual C/S ratios and then take their portions as in the new mix to find the
new average C/S ratio and then compare to the old C/S ratio.

R 6,000/10,000 x 0.2 = 0.12

S 6,000/15,000 x 0.5 = 0.20
T 10,000/20,000 x 0.3 = 0.15
0.47

Old contribution = $45,000 - $23,000 = $22,000

Old C/S = $22,000 / $45,000 = 0.489

The new average C/S ratio is lower than the old C/S ratio, and therefore the answer is B.

2.5 Answer is 47.6%

Sales (£) Contribution (£)

Basic 37,500 15,000
Standard 45,000 22,500
Advanced 40,500 21,000
Total 123,000 58,500

C/S = £58,500 / £123,000 = 0.476 or 47.6%

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2.6 Answer is 49.1%

Total number of contracts = 750 + 450 + 300 = 1,500

If equal numbers were sold then 500 contracts would be sold for each type.

Sales (£) Contribution (£)

Basic 25,000 10,000
Standard 50,000 25,000
Advanced 67,500 35,000
Total 142,500 70,000

C/S = £70,000 / £142,500 = 0.491 or 49.1%

2.7 Answer is D

Break-even revenue = Fixed overhead / C/S ratio

Therefore: $2,500,000 / 0.35 = $7,142,857

2.8 Answer make 400 Z units, 240 X units and 270 Y units.

Product X Y Z
Contribution per unit $7 $9 $11
Materials per unit (kg) $6/$10 = 0.6 $8/£10 = 0.8 $6/$10 = 0.6
Contribution per kg $7 / 0.6 = $11.67 $9 / 0.8 = $11.25 $11 / 0.6 = $18.33
Rank 2 3 1

We have 600kgs of material available.

1. Make as much of product Z first.

0.6kg x 400 units = 240kg of material would be used. We would now have 360kgs of
material left.

2. Make as much of product X now.

0.6kg x 240 units = 144kg of material would be used. We would now have 216kgs of
material left.

3. Make as much of product Y now.

How many Y’s can be made: 216kgs / 0.8kg per unit = 270 units.

Therefore make 400 Z units, 240 X units and 270 Y units.

197 | P a g e
2.9 Answer is B

When we are at the break-even point this means that we make no profit and no loss,
therefore at this point fixed costs will be equal to contribution.

Therefore:

If fixed costs = £320,000 then this must also be contribution.

C/S ratio = £320,000 / £800,000 = 0.4

Revenue needed to achieve target profit = (Fixed costs + desired profit) / C/S ratio

Therefore:

Revenue needed to achieve £50,000 profit = (£320,000 + £50,000) / 0.4 = £925,000

2.10 Answer is C

We need to calculate the C/S ratio in order work out the increase in sales needed to have
a profit of £100,000.

Contribution ($’000) = 400 – 240 = 160

C/S ratio = 160 / 400 = 0.4

Fixed costs will not change with sales and so the extra contribution will achieve the
desired profit.

Extra contribution needed is £40,000 and therefore using the C/S ratio we can calculate
the increase in sales needed.

Therefore:

$40,000 / 0.4 = $100,000 extra sales needed.

Percentage increase in sales = $100,000 / $400,000 x 100% = 25%

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2.11

Tip : The forecast for total cost is expressed as

Y = a + bX

a = fixed cost (cost incurred regardless of the activity level).

B = variable cost (the cost of each order).
X = the activity level (the number of orders forecast)

Y = £10,000 + £0.25x

The trend for the number of orders (X) expressed as

a = 100,000 + 30b

a = the number of orders forecast

b = the month

This is the forecast trend for orders e.g. the long-term movement of orders forecast
over time. This forecast represents ‘deseasonalised data’ and therefore must be
adjusted by a seasonalised index value of 108 (or 1.08) in order to predict accurately
the number of orders forecast.

Once the trend for the number of orders has been forecast and adjusted for the
seasonal variation, the value ‘X’ can be found and this will therefore enable you to
forecast the total cost.

1. Work out the trend for the number of orders forecast

a = 100,000 + (30 x 240) = 107,200

2. Adjust this for the seasonal variation

107,200 x 1.08 = 115,776

3. X therefore equals 115,776. Include this now in your forecasting model for
cost

Y = £10,000 + (£0.25 x 115,776) = £38,944 or £39,000 to the nearest £1,000.

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2.12

This is a simple limiting factor question. They have identified that direct labour cost is
our limiting factor and so we need to work contribution per $ of direct labour cost then
rank them in order of profitability.

Service J H N
SP $84 $122 $145

Direct materials $12 $23 $22

Direct labour $15 $20 $25
Variable overhead $12 $16 $20
Variable cost per unit $39 $59 $67

Contribution per unit $45 $63 $78

Direct labour cost per unit $15 $20 $25

Contribution per unit of LF $45/$15 =$3 $63/$20 = $3.15 $78/$25 = $3.12

Ranking 3 1 2

2.13

Tip : The forecast for future unit sales is expressed as

Y = a + bX

a = fixed sales regardless of the activity level (time)

b = variable sales driven by the activity level (time)
x = the activity level (time)

Y = 25,000 + 6,500X

This represents the forecast trend for unit sales. The long-term movement of sales
units forecast over time which would be ‘deseasonalised data’ and therefore must be
adjusted by a seasonalised index value of 150 (or 1.5) in order to predict accurately
the number of sales units forecast. The index value of 150 would be used because we
are estimating sales for the third quarter of year 7.

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 1. Work out the forecast trend for sales units

Y = 25,000 + 6,500X
Y = 25,000 + 6,500 (27*)
Y = 25,000 + 175,500
Y = 200,500 units

2. Adjust this for the seasonal index value of 150

200,500 x 1.5 = 300,750 units

* (6 years x 4 quarters) + 3 quarters in year 7 = 27 quarters

2.14 Answer is C

Characterized by curving lines, as opposed to rectilinear which has straight lines.

2.15 Answer is D

Tip: Multiplicative model

TS = T x SV (a decimal or index value) (given in your exam)

Trend (T) or Y = a + bX

Seasonal variations are found by the process of dividing actual data (‘TS’ or time
series, also known as seasonalised data) by the trend (deseasonalised data). The
seasonal variations over a period (one year in this case) should cancel each other out.
Therefore the index of seasonal variations should come to 400 for this period (if using
a decimal for seasonal variations it should total 4.0 for the period).

Quarter Index value

Q1 80
Q2 80
Q3 110
Q4 130 (balance)
400 Total

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2.16 Answer is B

Tip: Only sales and variable cost (and therefore contribution) will rise and fall with
sales volume, fixed cost will remain constant.

% %
Revenue 100 x 60% 60
Variable cost 30 x 60% 18
Contribution 70 x 60% 42
Fixed cost 22 (constant) 22
Profit 48 20

Revised profit as a percentage of revised revenue would be (20 ÷ 60) = 33.3%.

2.17

They have identified that cooking time is our limiting factor and so we need to work out
contribution per minute of cooking time and then rank them in order of profitability.

Meal K L M
SP $5 $3 $4.40
Ingredients ($2) ($1) ($1.30)
Variable conversion costs ($1.60) ($0.80) ($1.85)
Contribution $1.40 $1.20 $1.25
Cooking time per meal 10 4 8
Contribution per minute $1.40/10 = $0.14 $1.20/4 = $0.30 $1.25/8 = $0.16
Rank 3 1 2

2.18 Answer 500 medium pies and 250 large pies

This is a limiting factor question. They have identified that fruit is our limiting factor and
so we need to work out contribution per kg of fruit and then rank them in order of
profitability.

Meal Small Medium Large

SP $3.00 $5.00 $9.00
Ingredients ($1.80) ($2.40) ($4.60)
Direct labour ($0.40) ($0.50) ($0.60)
Variable overhead ($0.30) ($0.50) ($0.80)
Contribution $0.50 $1.60 $3.00
Kgs of fruit per pie 0.2 0.3 0.6
Contribution per kg $0.50/0.2 = $2.50 $1.60/0.3 = $5.33 $3.00/0.6 = $5.00
Rank 3 1 2
202 | P a g e
We have 300kgs of fruit available.

1. Make as much of the medium pies first.

0.3kg x 500 pies = 150kg of fruit would be used. We would have 150kgs of fruit left.

2. Make as much of the large pies now.

How many pies can be made: 150kgs / 0.6kgs per pie = 250 pies.

Therefore make 500 medium pies and 250 large pies.

2.19

The forecast model is:

Y = Ax (to the power of 0.6)

Y = cumulative sales units

A = sales units in month 1
x = month number

June 2007 = month 1

Sales for June 2007 are 1,500 units

Cumulative units to July 2007

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

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

Cumulative units to Aug 2007

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

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

203 | P a g e
2.20 Answer D

Tip : The forecast for quarterly sales units is expressed as

BU = 4,000 + 80Q
BU = base sales units
Q = the quarterly period number
This represents the forecast trend for sales units. Once the forecast trend has been
found for a particular quarter then this would then need adjusting for seasonal
variation occurring in that quarter. Therefore multiply your answer by the appropriate
percentage index.

Work out the forecast trend for quarter 3

BU = 4,000 + (80 x 3)
Y = 4,000 + 240
Y = 4,240
Adjust for seasonality in quarter 3
4,240 x 95% = 4,028 units
Work out the forecast trend for quarter 4
BU = 4,000 + (80 x 4)
Y = 4,000 + 320
Y = 4,320

Adjust for seasonality in quarter 4

4,320 x 120% = 5,184 units

Increase in sales units of 5,184 – 4028 = 1,156

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2.21 Answer is 78,720 units

If quarter 1 of year 1 is time period 1 for the value of “x”, and then quarter 2 of year 1
will be x = 2, then if we count all the way to quarter 3 year 6 then x must equal 23.
Therefore sales based on the trend equation is:

y = 15,000 + (2,200 x 23) = 65,600 units

Then include seasonality for quarter 3:

65,600 x 1.2 = 78,720 units

2.22 Answer is A

Year 2, quarter 3 is period 7

Trend sales = 22,000 + 800 (7) = 27,600 units

Adjusted for seasonal variations = 27,600 x 1.30 = 35,880 units

2.23 Answer is B

Trend sales for quarter 2 year 1 = 22,000 x 800 (2) = 23,600 units

Actual sales for quarter 2 year 1 = 23,600 x 90% = 21,240 units

Seasonal variation using additive model = 21,240 – 23,600 = - 2,360

2.24 Answer is B

(0.1 x 0.3) + (0.68 x 0.4) + (0.28 x 0.3) = average C/S ratio 0.386

The breakeven revenue would be 345,000/0.386 = £893,782

205 | P a g e
2.25 Answer is A

The minimum sales value must be satisfied first

Sales Contribution
Product X 100 x 0.3 30
Product Y 200 x 0.25 50
Product Z 300 x 0.4 120
200

To breakeven the fixed cost of £450,000 needs to be met. £200,000 contribution has
already been met using the minimum sales values, therefore an additional £250,000
contribution still needs to be raised. The most profitable sales in order to minimise sales
would be to produce the products with the highest C/S ratios. In order Z, X, Y.

Sales Contribution
Product X 100 x 0.3 30
Product Y 200 x 0.25 50
Product Z 300 x 0.4 120
Product Z (remaining sales 500 – 300) 200 x 0.4 80
Product X (Balance) 566.7 x 0.3 170
1,366.7 450

2.26 Answer is A

Margin of safety 25%

So breakeven sales 6,000 – (25% 6,000) = 4500 units

Breakeven x Contribution = Fixed Cost

(4,500 x £250 x 60%) = Fixed Cost
Fixed Cost = £675,000

2.27 Answer is C

(0.5 x 0.2) + (0.45 x 0.3) + (0.3 x 0.5) = 0.385

600,000/0.385 = £1,558,442

206 | P a g e
2.28 Answer is D

To produce a limiting factor analysis for each product you would need the calculation for
the contribution per unit first. The profit includes the deduction of general fixed
overhead therefore if this is added back it will give the contribution per unit.

Profit 10.00 16.50 40.00

Fixed overhead 4.00 2.00 12.00
Contribution per unit 14.00 18.50 52.00

Kg raw material per unit 5 10 5

Contribution per kg £2.80 £1.85 £10.40

The most to the least profitable product produced would be C, A, B.

2.29 Answer is B

If both sales price and variable cost rises by 20% then contribution would also rise by
20% therefore the breakeven point would decrease (fixed overhead shared amongst a
greater contribution per unit.

2.30 Answer is A

Current breakeven 450,000/(50 x 10% C/S ratio) = 90,000 units

New breakeven 500,000/(50 x 20% C/S ratio) = 50,000 units

Decreases by 40,000 units

2.31 Answer is A

2.32 Answer is C

3 (26) + 350 = 428 x 0.9 = 385

2.33 Answer is D

Y = 20 (35) + 560
Y = 1,260

1,260 x 0.85 = 1071

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2.34 Answer is C

a (or the trend T) = 50,000 + 40 (250) = 60,000 x 1.23 (SV) = forecast labour hours of
73,800

Forecast cost £20,000 + £0.50 (73,800) = £56,900

2.35 Answer is A

SP £50.00
VC -£20.00 £50 x 0.4
C per unit £30.00 £50 x 0.6

£400,000/£30 = 13,333 units

or

£400,000/0.6 = £666,667

£666,667 / £50 = 13,333 units

2.36 Answer is C

SP £50.00
VC -£20.00 £50 x 0.4
C per unit £30.00 £50 x 0.6

(£400,000 + £200,000)/£30 = 20,000 units

or

(£400,000 + £200,000)/0.6 = £1,000,000

£1,000,000 / £50 = 20,000 units

208 | P a g e
2.37 Answer is D

SP £50.00
VC -£20.00 £50 x 0.4
C per unit £30.00 £50 x 0.6

£400,000/£30 = 13,333 units

or
£400,000/0.6 = £666,667

£666,667 / £50 = 13,333 units

MOS = 25,000 - 13,333 = 11,667 units

or

11,667/25,000 47%

2.38 Answer is D

A B C
Contribution per unit £15.00 £18.00 £55.00

Hours required per unit 2.5 5.0 2.5

Contribution per labour hour £6.00 £3.60 £22.00

Ranking Second Third First

2.39 Answer is C

£600,000/(£100-£45) = 10909

£700,000/(£100-£30) = 10000

Change in break even units sold 909

209 | P a g e
2.40 Answer is A

X Y Z
Contribution per unit £5.00 £35.00 £10.00

Hours required per unit 3.0 5.0 4.0

Contribution per labour hour £1.67 £7.00 £2.50

Ranking Third First Second

2.41 Answer is B

2.42 Answer is D

Interpolation is used to calculate the IRR.

2.43 Answer is C

It is a decreasing, downward, negative sloping line, therefore negatively correlated. E.g.

as you increase along the horizontal axis, the values along the vertical axis begin to fall,
therefore moving in the opposite direction.

2.44 Answer is B

This is positively correlated - a change in the value of b would mean that d would also
change by 96% in the same positive direction.

2.45 Answer is A

n = 5, ∑X = 128, ∑Y = 6,040, ∑X2 = 3,408, ∑XY = 160,560, ∑Y2 = 7,568,800

Correlation Coefficient (r) = n∑XY – (∑X)(∑Y)

√ ((n∑X2 – (∑X)2)( n∑Y2 – (∑Y)2))

r= 5(160560) – (128)(6040)
√ ((5(3408) – (128)2)( 5(7568800) – (6040)2))

r= 802800 – 773120
√ (656)(1362400)

r= 0.993

210 | P a g e
2.46 Answer is A

Coefficient of determination = r2 = 0.562 = 0.3136 or 31.36%

2.47 Answer is B

It is an increasing, upward, positive sloping line, therefore positively correlated. E.g. as

you increase along the horizontal axis, the values along the vertical axis begin to increase,
therefore moving in same direction.

2.48 Answer is D

Coefficient of determination (r2) tells us the proportion explained by a variable by

another variable.

2.49 Answer is B

y = 10 + 2.9x

If marketing costs are now £6,000 then sales will be:

y = 10 + (2.9 x 6,000) = 17,410

Previously they were £2,000 which had sales at:

y = 10 + (2.9 x 2,000) = 5,810

Therefore the extra sales generated through increased marketing costs are:

£17,410 - £5,810 = £11,600

2.50 Answer is A

Cyclical variations are not always in equal intervals or similar patterns. Examples of
which are economic recessions or economic recovery.

2.51 Answer is C

y = 73 – 0.78x

y = 73 – 0.78 (7) = 67.54

Seasonality of 1.05:

67.54 x 1.05 = 70.9

211 | P a g e
2.52 Answer is D

10,456 – 36.44 = 10,420

2.53 Answer is A

y = 26 + 5.3x

y = 26 + 5.3 (26) = 163.8

Seasonality of -46.52:

163.8 – 46.52 = 117.28

2.54 Answer is A

First remove seasonality for Q1:

145 units / 1.25 = 116 units

Now add seasonality for Q2;

116 x 1.35 = 156.6 units

2.55 Answer is D

Seasonal variations (SV) are the adjustment to the trend due to as an example weather
factors.

2.56 Answer is A

Linear regression does not rely on future data.

212 | P a g e
2.57 Answer is B

Y = a + bX

b = n∑XY – (∑X)(∑Y)
n∑X2 – (∑X)2
a = Y – bX

b = (14)(240345) – (167)(900)
(14)(8345) – (1672)

b = 3364830 – 150300
116830 – 27889

b = 3214530
88941

b = 36.14

a = 430 – (36.14 x 10)

a = 68.6

Y = 68.6 + 36.14x

2.58 Answer is D

Extrapolation should be reliable and accurate. This is not true as it may not be reliable
and accurate.

2.59 Answer is D

T = 0.0003w2 + 0.5w + 67.4

T = 0.0003(2000)2 + 0.5(2000) + 67.4

T = 2267.4

Seasonality is 1.23:

2267.4 x 1.23 = 2789

2.60 Answer is A

213 | P a g e
2.61 Answer is C

Multiplicative model is Time Series (TS) = Trend (T) x Seasonal variation (SV)

TS = £265,000
T = £375,000
Therefore SV = £265,000 / £375,000 = 0.701

2.62 Answer is 35%

If volume changes then variable costs will change but not fixed costs. Therfore the new
profit will be:

80% - (0.8 x 40%) - 20% = 28%

This as a percedntage of sales:

28% / 80% x 100% = 35%

2.63 Answer is $10,000

C/S Ratio = $2,000 / $20,000 = 0.2

Breakeven point = $2,000 / 0.2 = $10,000

2.64 Answer

Cost and
revenue £
Sales revenue

Semi-variable costs

Variable costs
Fixed costs
Margin
of
safety
Break- Budgeted Output (units)
0 even
point sales

2.65 Answer is

(40% x 40) + (25% x 50) + (35% x 54) = 47.4%

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 Chapter 3 Solutions - Budgeting

3.1 Answer is B

3.2 Answer is C

Cash paid from previous period 540,000

Purchases for this budget period 6,800,000
7,340,000
Purchases not paid until next period ($6,800,000 x 75% x 1/12) (425,000)
Total cash paid 6,915,000

3.3 Answer is $560,000

Production budget for Product D

Units
Opening inventory 6,000
Production (balance figure) 33,000
39,000
Sales (36,000)
Closing inventory 3,000

Closing inventory = 36,000 / 12 = 3,000

Note: Production = closing stock + sales – opening stock

Purchases budget for raw material C kg

Kg
Opening inventory 2,000
Purchases (balance figure) 70,000
72,000
Useage (33,000 x 2kg) (66,000)
Closing inventory (3,000 x 2kg) 6,000

The purchases budget for raw material C is therefore:

70,000 kg x $8 per kg = $560,000

3.4 Answer is C

September cash sales (204,000 x 40%) $81,600

August credit sales (200,000 x 60% x 97%) $116,400
Total cash received $198,000

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3.5 Answer is B

$
20% of October sales 56,000
65% of November sales 162,500
15% of December sales x 0.95 42,750
Total cash paid 261,250

3.6 Answer is D

3.7 Answer is $4,933,500

Units
Opening inventory 6,500
Production (balance figure) 149,500
156,000
Sales (144,000)
Closing inventory 12,000

149,500 x 2 hours per unit = 299,000 hours

80% x 299,000 = 239,200 hours x $15 = $3,588,000
20% x 299,000 = 59,800 hours x ($15 x1.5) = 1,345,500
Total labour cost budget = $4,933,500

3.8 Answer is $2,112,000

Labour hours for production

36,000 units x 4 hours = 144,000 hours

Idle time = 10% of total available hours, therefore total available hours need to be:

144,000 hours / 0.9 = 160,000 hours

Labour cost budget ($)

160,000 hours x 20% = 32,000 hours x ($12 x 1.50) = $576,000
160,000 hours x 80% = 128,000 hours x $12 = $1,536,000
Total labour cost budget = $2,112,000

3.9 Answer is C

An example of a feedback control system is a budgetary control system. This would

gather information on past performance from the output of the system e.g. actual
financial performance, and compare this to a predetermined standard or plan (budget)
using any deviations e.g. variances, as a basis of improving future performance through
control action taken.

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Feedback contrasted to feed-forward control is like closing the door after the horse has
already bolted, in other words there is little you can do about it now, except try and
rectify the situation to avoid it happening again. Feed-forward control is more prevention
than appraisal, controlling a system by making adjustments now to the system in advance
before any exceptions occur. It does this by trying to predict what will happen in the
future.

Feedback can be transformed into feed-forward control by being more proactive and
predictive as to what will happen in the future, rather than being reactive or backward
looking by historical reflection on the past.

Target costing

Market price to achieve desired market share XX

TARGET COST (Balance) (XX)

Desired profit XX

Used by Nissan, Sony and Toyota and many other Japanese companies, who sought not
what a product ‘does’ cost (which is what most UK companies used as the method of
pricing) but rather what it ‘should’ cost.

Traditional approaches were to develop a product, determine its cost, add mark up and
determine a price. This therefore ignored competition or demand.

Target costing combines the use of JIT, TQM, cost reduction, value analysis and
benchmarking. The idea is that a product price is determined by the market place, costs
are then reduced to enable the product to be sold at that price.

3.10 Answer is C

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3.11 Answer is $656,400

Production budget
Units
Opening inventory 500
Production (balance) 25,500
26,000
Sales (24,000)
Closing inventory (W1) 2,000

Raw materials budget

Kg
Opening raw materials 300
Purchases (balance) 54,700
55,000
Less: usage (W2) (51,000)
Closing raw materials (W3) 4,000

Raw materials purchases = 54,700 kg x $12 = $656,400

Workings

W1 – Closing inventory
Closing inventory at the end of each month would be 1 months of sales.
Therefore: 24,000 units / 12 months = 2,000 units

W2 – Raw material usage

25,500 units x 2 Kg = 51,000 Kg

W3 – Closing raw materials

2,000 units x 2 Kg = 4,000 Kg

3.12 Answer is C

Flexible budgets are amended or flexed if the actual level of activity turns out to be
different from the budgeted level of activity. A flexible budget is therefore flexed to
correspond to the actual activity level for a period. When a budget is flexed it would give
an appropriate level of revenue and cost as a yardstick to compare on a like for like basis
to actual results, meaningful variances or exceptions to the budget, can then be
highlighted for management attention.

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3.13

Tip: The difference between the absorption and marginal costing approach is that the
marginal costing approach makes no attempt to ‘absorb’ fixed production overhead into a
standard cost unit or the income statement. It treats production overhead as a period cost
only and charges it entirely to the income statement for each period.

It is equally important to remember that marginal costing organisations would also value
inventory at variable production cost only never full production cost, when contrasted
with an absorption costing company.

Contribution = $20 - $6 - $3.50 = $10.50

Number of units sold = 400 + 5,000 – 900 = 4,500

Marginal costing $
Sales (4,500 units x $20) 90,000
Variable costs (4,500 units x $9.50) (42,750)
Contribution (4,500 units x $10.50) 47,250
Fixed production costs (29,500)
Net profit 17,750

3.14

The only reason why profits will differ under both methods of costing is due to the way
that each method values finished goods inventory. The marginal costing method values
inventory at variable production cost only never full production cost. The absorption
costing method values inventory at full production cost.

$
Absorption costing profit 20,700
Marginal costing profit 17,750
Difference 2,950

Fixed overhead absorption rate = $29,500 / 5,000 units = $5.90

Inventory levels rise (closing inventory > opening inventory) therefore a greater amount
of fixed overhead under absorption costing is being carried forward to the following
period within the valuation of the closing inventory, therefore creating a higher profit
than marginal costing.

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Increase in inventory = 900 – 400 = 500 units

Therefore the increase profit under absorption costing = 500 units x $5.90 = $2,950

3.15

Production budget
Units
Closing inventory (6,000 x 0.90) 5,400
Add: Sales 80,000
85,400
Less: Opening stock (6,000)
Production needed 79,400

3.16

Materials budget
Kg
Closing inventory 75,000
Add: Production (79,400 x 6 kg) 476,400
551,400
Less: opening inventory (60,000)
Purchases needed 491,400

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

3.18 Answer is D

3.19 Answer is C

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3.20 Answer is $395,000

Kg
Opening inventory 3,000
Material purchases (balance) 49,400
52,400
Less material usage (W1) 48,000
Closing inventory (W2) 4,400

Value of purchases $
$8 per Kg x 49,000 Kg 392,000
$7.50 x 400 Kg 3,000
395,000

Workings

W1 - Material usage
Production 12,000 x 4 Kg = 48,000 Kg

W2 – Closing inventory
Closing inventory at the end of each month would be 110% of next month’s production.

Therefore:
12,000 units/12 x 4 Kg = 4,000 Kg.
4,000 Kg x 1.1 = 4,400 Kg.

3.21 Answer is D

Budgetary slack or padding is a term used to describe the difference between the
minimum necessary expenditure required and the actual estimate or forecast submitted.

It is the intentional over estimation of costs and / or under estimation of revenue in a

budget.

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3.22 Answer is D

10% of units will be wasted so therefore we need to gross up budgeted units:

24,000 x 100/90 = 26,666.67 units

Therefore labour hours needed:

26,666.67 x 3hrs = 80,000 hrs

Labour cost budget

Overtime at 50% premium: 80,000 x 10% x £15 x 1.5 = £180,000
Overtime at 100% premium: 80,000 x 5% x £15 x 2 = £120,000
Normal time: 80,000 x 85% x £15 = £1,020,000
£1,320,000

3.23 Answer is $19,800

Credit sales is one month after sale and 3% bad debts

April May
Revenue 20,000 20,400
Cash received (x 40%) 8,000 8,160
Credit sales cash for May (20,000x 60% x 97%) 11,640
Total cash received in May (8,160 + 11,640) 19,800

3.24 Answer is $109,200

December
$
Invoices paid in the month after sale
November ($130,000 x 60% x 90%) 70,200
Invoices paid in the second month after sale
October ($120,000 x 20%) 24,000
Invoices paid in the third month after
sale
September ($100,000 x 15%) 15,000

109,200

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 3.25 Answer is (i) £76,000, (ii) £86,000, (iii) £106,000

Mark-up is (Gross profit ÷ Cost of Sales) = 25%

Sales (cost + gross profit) (balance) 125

Cost (assumed) 100
Gross profit (25% of cost) 25

Then Sales Margin (Gross profit ÷ Sales)

(25 ÷ 125) = 20%

Cost of sales are (100 ÷ 125) = 80% of sales

Cost of sales
July £100,000 x 80% = 80,000
August £90,000 x 80% = 72,000
September £125,000 x 80% = 100,000
October £140,000 x 80% = 112,000

July August September October

Opening stock 40,000 36,000 50,000 56,000
Add: Purchases 76,000 86,000 106,000 ?
116,000 122,000 156,000 ?
Less: Closing stock (50% of next months COS) 36,000 50,000 56,000 ?
Cost of sales 80,000 72,000 100,000 112,000

i. July purchases £76,000 will be paid in August

ii. August purchases £86,000 will be paid in September
iii. September purchases £106,000 will be paid in October

3.26

£
Cash sales £108,000 x 20% 21,600
Within 1 month £120,000 x 80% x 40% x 98.5% 37,824
Within 2 months £105,000 x 80% x 30% 25,200
Within 3 months £90,000 x 80% x 28% 20,160
Brought forward 6,000
Total receipts in month 4 110,784

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3.27 Answer is A

The expected gain on the disposal of the land is an accounting calculation and not a cash
flow item. The sales proceeds from the disposal of the asset would be included in the
cash forecast.
All the other items are actual cash inflows or outflows.

3.28 Answer is D

A cash budget is prepared to see if the organisation has sufficient cash.

3.29 Answer is $60,162

$ April 08 May 08 June 08

Sales (x 1.02) 60,000 61,200 62,424

Cash sales x 50% 31,212

Cash from April 60,000 x 50% x 20% 6,000
Cash from May 61,200 x 50% x 75% 22,950
Cash received in June 60,162

3.30 Answer is C
$
Cash received from previous period 460,000
Sales for this budget period 5,400,000
5,860,000
Credit sales not paid until next period (360,000)
($5,400,000 x 80% x 1/12)
Total cash received 5,500,000

3.31 Answer is C

28,000 x 0.1 = 2,800

25,000 x 0.6 = 15,000
30,000 x 0.15 = 4,500
22,300

3.32 Answer is A

50,000 x 0.6 x 0.85 = 25,500

45,000 x 0.2 = 9,000
40,000 x 0.1 = 4,000
38,500

3.33 Answer is A

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3.34 Answer is B

3.35 Answer is A

3.36 Answer is A
£
Opening stock 6,000
+ Purchases 15,000
- Closing stock (bal fig) (13,000)
COGS 8,000

3.37 Answer is C

3.38 Answer is A

3.39 Answer is D

Budget (Kg)
Opening Stock 400

Purchases (Balance) 3433

3833

Usage (1000 x 3 Kg) -3000

Wastage (3000 x 10%/90%) -333

Closing stock 500

3.40 Answer is D

3.41 Answer is B

3.42 Answer is A

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3.43 Answer

To allow comparisons between the budge and actual results and then any
major differences can be investigated.

 To allows mangers to be responsible for the management of resources that

they have been allocated in the budget, and as a result assessed on the
success of resource management.

To allow a more efficient production of goods and services because they can
be linked with one another.

To allow judgements to be made on the performance of the managers by

comparing the actual results with the budget.

To allow targets to be created for managers that they will want to achieve.

 To allow everyone to understand what resources are available and how they
are to be allocated to different budgets.

3.44 Answer

 How budgets or standards affect people within an organisation

How budgets or standards affect costs
How budgets or standards affect profits
How budgets or standards affect the environment
How budgets or standrads affect resource allocation

3.45 Answer

Which of these relate to feedback control?

 Feedback can be negative (adverse) or positive (favourable)

 Feedback is based on comparing actual to a standard of performance
It isa pre-emptive reaction to actual change
Examples of feedback control is a rolling budget
 Control action would be ‘closing the stable door after the horse has bolted’

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3.46 Answer

Which of these relate to feedforward control?

 Forecasting ahead and doing something now before the event occurs
 They are good for adaptive planning
Examples of feedforward control is variance analysis
 Control action would be ‘closing the stable door before the horse bolts’
Part of the output of a system is measured and returned as input to regulate
the systems further output.

3.47 Answer

High Level
Controller
(Human)

Effector Comparator
(Takes control (Compares
action) actual to
standard)

Input Process Sensor Output

(Data) (Calculate, (Data (Information)
sort, amend) collected and
measured)

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3.48 Answer

Which of these if any describe a double feeback loop system? Select all that apply if any.

 It is an open loop control system

 Corrective action is not automatically taken
Environmental factors are not considered before any control action
 It is not a closed loop control sytem
 It includes human intervention

3.49 Answer

Which if these if any describe a single feedback loop system? Select all that apply if any.

It is an open loop control system

 Corrective action is automatically taken
 Environmental factors are not considered before any control action
 It is a closed loop control sytem
It includes human intervention

3.50 Answer is D

3.51 Answer is A

3.52 Answer

Input Sales being generated by sales reps

Comparator Comparisons are made between the target level of sales expected
by sales reps and the actual results

Output The report showing level of sales and commissions earned by

different sales reps

Effector Sales manager takes action over those sales reps that did not meet
their sales targets

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3.53 Answer

Effector The sales manager will review the level of sales and production and
in conjunction with the production manager and together agree on
appropriate action to increase or decrease raw materials levels to
ensure that a satisfactory level of production is reached to support
sales.

Comparator Comparisons are made between the actual level of sales and actual
level of production of finished goods.

Sensor This is a quality control procedure of the finished product to ensure it

meets certain standards.

Output These are the products themselves which are sold customers.

Process The raw materials are used in the production process.

Input Raw materials being delivered to a factory to go into production.

3.54 Answer is B

3.55 Answer is C

3.56 Answer

 Stifle innovation and creativity.

 consume large amounts of management time to set
 Too internal in focus
 Ceate barriers within departments
 Too short-term in focus

3.57 Answer

 Variance analysis
Cash flow forecasting
Target costing
Budget setting process

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3.58 Answer is $12,000

If produce 36,000 units over 2 years then per month = 1,500 units
If it is 2kg per unit then to hold enough to make next month = 3,000kg

We will have opening raw materials of 2,000kg therefore only need to purchases 1,000kg

Material purchase budget = 1,000kg x $12per kg = $12,000

3.59 Answer is $12.54

15% of $2,000,000 = $300,000 required annual return

Annual return per unit = $300,000 / 55,000 units = $5.45

Therefore target cost per unit = $18 - $5.45 = $12.54

3.60 Answer is D

3.61 Answer

Fixed A budget that is set prior to the control period and not subsequently
changed in response to changes in activity, costs or revenues

Rolling A budget that is continuously updated by adding a further accounting

period when the earliest accounting period has expired

Flexible A budget that is changed in response to changes in the level of

activity

Incremental A budget that is based on the previous budget or actual results for
changes in the activity and inflation

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 Chapter 4 Solutions - Absorption, marginal and activity based costing

4.1 Answer is C

Product R Product S Total

Budgeted production per annum (units) 80,000 60,000 140,000
Number of batches 800 1,200 2,000
Number of machine set-ups 2,400 3,600 6,000
Total processing time (minutes) 240,000 300,000 540,000

Cost driver rate = $108,000 / 540,000 = $0.20

Total processing costs = $0.20 x 240,000 = $48,000
Processing costs per unit = $48,000 / 80,000 = $0.60

4.2 Answer is B

Cost driver rate = $180,000 / 6,000 = $30 per set up

Total set-up costs = $30 x 3,600 = $108,000
Set up cost per unit =$108,000 / 60,000 = $1.80

4.3 Answer is $102,118

Costs that varied with number of parcels = $194,400 x 70% x 60% = $81,648
Cost per parcel last year = $81,648 /15,120 = $5.40
Parcel related cost for next year = $5.40 x 1.03 x 18,360 = $102,118

4.4 Answer is $59,699

Costs that vary with kilometres travelled = $194,400 x 70% x 40% = $54,432
Cost per km = $54,432 / 120,960 = $0.45
Distance related costs for next year = $0.45 x 1.03 x 128,800 = $59,699

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4.5 and 4.6

Budgeted number of batches

Product D 100,000 ÷ 100 = 1000
Product R 100,000 ÷ 50 = 2000
Product P 50,000 ÷ 25 = 2000
5000
Budgeted number of machine set-ups
Product D 1000 batches x 3 3000
Product R 2000 batches x 4 8000
Product P 2000 batches x 6 12000
23000
Budgeted number of purchase orders
Product D 1000 batches x 2 2000
Product R 2000 batches x 1 2000
Product P 2000 batches x 1 2000
6000
Budgeted number of processing minutes
Product D 100,000 x 2 = 200,000
Product R 100,000 x 3 = 300,000
Product P 50,000 x 3 = 150,000
650,000

4.7 Answer is £1.12

Budgeted cost per set up

£150,000 ÷ 23000 = £6.52 per set-up

Budgeted cost per order

£70,000 ÷ 6000 = £11.67 per order

Budgeted cost per minute of processing

£80,000 ÷ 650,000 = £0.123 per minute

Overhead unit cost for product R

£
Set-up (£6.52 x 4 set-ups) ÷ 50 units 0.52
Order (£11.67 x 1 order) ÷ 50 units 0.23
Processing £0.123 x 3 minutes 0.37
1.12

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4.8 Answer is A

Tip: Marginal costing

The difference between absorption and marginal costing organisations, is that the
marginal costing organisation makes no attempt to ‘absorb’ fixed production overhead
into a standard cost unit or the income statement. It treats production overhead as a
period cost only and charges it entirely to the profit and loss account for each period. It
is equally important to remember that marginal costing organisations would also value
stock at variable production cost only not full production cost, when contrasted with an
absorption costing company.

£ £
Sales revenue 820,000

Less:
Variable production cost 300,000
Closing stock (W1) (45,000)
255,000
Variable selling cost 105,000
360,000
Contribution 460,000

Fixed production cost 180,000

Fixed selling cost 110,000
290,000
Profit 170,000

W1 Closing stock valuation

(£300,000 ÷ 1,000 units) x 150 units = 45,000

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4.9 Answer is B

Tip: Marginal costing

The difference between the absorption and marginal costing approach, is that the
marginal costing approach makes no attempt to ‘absorb’ fixed production overhead
into a standard cost unit or the income statement. It treats production overhead as a
period cost only and charges it entirely to the income statement for each period.

It is equally important to remember that marginal costing organisations would also

value inventory at variable production cost only never full production cost, when
contrasted with an absorption costing company.

£
Material 40,000
Labour 12,600
Variable overhead 9,400
62,000

Variable production cost per unit

£62,000 ÷ 2,000 units = £31.00

Valuation of closing inventory

£31.00 x (2,000 units – 1,750 units sold) £7,750

4.10 Answer is A

Tip: The throughput accounting approach aims to maximise contribution whilst

minimising conversion e.g. labour and overhead cost. It is essentially the same
principle as marginal costing, but assumes the only true variable cost when
calculating throughput contribution is the material and component cost only of
making a product. It therefore values inventory at material cost only.

Throughput contribution
= sales less material cost only ‘the only true variable cost’

Material production cost per unit

£40,000 ÷ 2,000 units = £20.00

Valuation of closing inventory

£20.00 x (2,000 units – 1,750 units sold) £5,000

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4.11 Answer is B

Tip: The only reason why profits differ under both methods of costing is due to the
different way that each method values inventory. Marginal costing organisations
value inventory at variable production cost only never full production cost, when
contrasted with an absorption costing company.

When production > sales

Stock levels rise (closing stock > opening stock) therefore a greater amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating a higher profit than
marginal costing.

When production < sales

Stock levels fall (closing stock < opening stock) therefore a smaller amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating lower profit than marginal
costing.

When production = sales

Stock levels remain unchanged (closing stock = opening stock) therefore both
methods would give exactly the same profit.

Valuation of inventory
£
Variable direct cost per unit 6.00
Variable production overhead per unit 3.50
Total variable production cost per unit 9.50 MC valuation per unit
Fixed overhead absorbed per unit
£29,500 ÷ 5,000 units = 5.90
Total production cost per unit 15.40 AC valuation per unit

Under the absorption costing method, a greater amount of fixed overhead would be
carried forward to the next financial period, due to closing stock being higher than
opening stock (production > sales). (900 units – 400 units x £5.90) = £2,950. Therefore
using absorption costing, profit would be £2,950 greater than it would be using marginal
costing.

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 4.12

Budgeted unit cost for product Z £

Direct material 21.50
Direct labour (W1) £16 x 0.3 hours = 4.80
Fixed overhead absorbed (W2) £11.00 x 0.3 hours = 3.30
29.60

W1 Labour rate per hour

£128,000 ÷ 8,000 hours = £16.00

W2 Fixed overhead absorption rate per hour

£
Set-up cost 22,000
Quality testing cost 34,000
Other overhead cost 32,000
88,000

Budgeted direct labour hours 8000

Fixed overhead absorbed per labour hour (£88,000 ÷ 8,000 hrs) = £11.00

4.13

Budgeted unit cost for product Z £

Direct material 21.50
Direct labour £16 x 0.3 hours = 4.80
Set-up cost (£250 x 2 per batch) ÷ 30 units per batch = 16.67
Quality testing (£850 per test ÷ 75 units each test) = 11.33
Other overhead cost (£4 per labour hour x 0.3 hours per unit) = 1.20
55.50

Cost drivers
Set-up cost (£22,000 ÷ 88 set-ups) = £250 per set-up

Quality testing (£34,000 ÷ 40 tests) = £850 per test

Other overhead cost (£32,000 ÷ 8,000 labour hours) = £4 per labour hour

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4.14

Tip: The ABC approach recognises the complexity and diversity of how different
products consume different resources and therefore fixed overhead. This gives a
better overall understanding of product costing when contrasted to the simple
absorption costing approach. Four implications for management of using ABC have
been provided below; however the question only requires two.

The ABC approach could lead to a higher cost absorbed, if a product consumes far more
resources and therefore shares a higher proportion of the cost drivers e.g. set-up, quality
testing etc. Rather than just how much labour time each product consumes when
contrasted to absorption costing.

 More efficient management of resources by a greater understanding of what

drives fixed overhead to be incurred e.g. increase batch sizes to reduce unit cost.
 Better costing information for planning, control or decision making.
 More realistic pricing to cover fixed overhead being incurred by different
products.
 Better profitability analysis of different products.

4.15 Answer is B

Tip: A marginal costing system would value inventory at variable production cost
only not full production cost, when contrasted with to an absorption costing system.
The different methods of stock valuation explains why there would be profit
differences.
When production > sales
Stock levels rise (closing stock > opening stock) therefore a greater amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating a higher profit than
marginal costing.

When production < sales

Stock levels fall (closing stock < opening stock) therefore a smaller amount of fixed
overhead under absorption costing is being carried forward to the following period
within the valuation of the closing stock, therefore creating lower profit than marginal
costing.

When production = sales

Stock levels remain unchanged (closing stock = opening stock) both methods would
give exactly the same profit.

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Fixed overhead absorption rate included in the value of stock for an absorption costing
system equals £250 per unit (£500,000 ÷ 2,000 units).

Under the absorption costing method, a lower amount of fixed overhead would be carried
forward to the next financial period, due to closing stock being lower than opening stock
(production < sales). (800 units – 500 units x £250 per unit) = £75,000. Therefore
using absorption costing, profit would be £75,000 lower than it would be if using
marginal costing.

4.16

Process of absorption

Step 1
Allocate (give directly to) or apportion (share/divide) budgeted fixed production
overhead between cost centres used by the organisation at the start of the financial
period.

Step 2
After the first process above reapportion the budgeted fixed production overhead
allocated or apportioned to service cost centres to production cost centres. This
eliminates any fixed overhead apportioned to service cost centres in Step 1.

Step 3
Absorb (charge) the budgeted fixed production overhead from production cost
centres directly to cost units, work-in-progress accounts or jobs undertaken during
the financial period by the organisation, using budgeted fixed overhead absorption
rates calculated for the different production cost centres.

There are three methods of reapportioning production overhead from service cost
centres to production cost centres.

Direct method
Any work that service cost centres do for other service cost centres is ignored
completely when reapportioning service cost centre overhead to production cost
centres.

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 Step method
Work that service cost centres do for other service cost centres would be recognised,
but only those service cost centres which are the most widely used or have the largest
overhead allocated or apportioned to them. The more immaterial service cost centres
would reapportion overhead to production cost centres only.

Note: if not clear in your exam, you would normally reapportion the service cost
centre with the largest overhead only to both production as well as service cost
centres.

Repeated or continuous distribution method

All work service cost centres do for one another would be recognised when
reapportioning service cost centre overhead to production cost centres. This process
will involve continuous distribution of fixed overhead to and from the different service
and production cost centres until the amounts left within service cost centres are so
small they can be materially ignored.

During the financial period the actual fixed overhead incurred is recorded within the
production overhead control account
Debit Production overhead control account
Credit Creditor (or cash)
During the financial period fixed overhead is absorbed (charged) from the production
overhead control account to jobs or work-in-progress accounts (ultimately ending up
being charged as an expense in the income statement).
Debit Income statement (as a fixed overhead expense)
Credit Production overhead control account
At the end of the financial period the fixed overhead ‘absorbed’ is compared to the
actual production overhead recorded and incurred for the period.

Any shortfall in fixed overhead absorbed during the financial period to the income
statement would be an ‘under absorption’ of production overhead
Debit Income statement (as a fixed overhead expense)
Credit Production overhead control account

Absorbed fixed overhead + Under absorption = Actual production overhead

239 | P a g e
 Any surplus in fixed overhead absorbed during the financial period to the income
statement would be an ‘over absorption’ of production overhead

Debit Production overhead control account

Credit Income statement (as a fixed overhead expense)

Absorbed fixed overhead – Over absorption = Actual production overhead

Assembly Finishing Stores Maintenance

£ £ £ £
Budgeted fixed production overhead 100,000 150,000 50,000 40,000
Reapportion maintenance overhead
£40,000 x 40%:45%:15% 16,000 18,000 6000 -40,000
116,000 168,000 56,000 0
Reapportion stores overhead
£56,000 x 60%:40% 33,600 22,400 -56,000
149,600 190,400 0

Budgeted fixed overhead absorption rate

£149,600 ÷ 100,000 budgeted units = £1.496

Production fixed overhead control account (Assembly)

Actual production 120,000 units x £1.496

Actual production overhead £180,000
= F/OH charge during the period £179,520

Under absorption £480

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4.17

W X Y
£ £ £
200.0
Selling price 0 183.00 175.00
Direct material 50.00 40.00 35.00
Direct Labour 30.00 35.00 30.00
120.0
Contribution 0 108.00 110.00
Overhead allocated using ABC
W1 Receiving/inspecting
W (1200 ÷ 10,000 units) x £280 33.60
X (1800 ÷ 15,000 units) x £280 33.60
Y (2000 ÷ 18,000 units) x £280 31.11
W2 Production/machine set up
W (240 ÷ 10,000 units) x £1,500 per set up 36.00
X (260 ÷ 15,000 units) x £1,500 per set up 26.00
Y (300 ÷ 18,000 units) x £1,500 per set up 25.00
Profit per unit 50.40 48.40 53.89

W1 Receiving/inspecting
£1,400,000 ÷ (1,200 + 1,800 + 2,000) = £280 per
requisition

W2 Production/machine set up
£1,200,000 ÷ (240 + 260 + 300) = £1,500 per set up

4.18 Answer is A

Under absorption means that more production overheads were actually needed than
expected based on actual output. Therefore “flexed” production overheads (budget cost
based on actual output) can be found by subtracting the under absorption from the actual
production overheads.

Actual production overheads = £481,250

Under absorption = £19,250
Flexed production overheads = £481,250 - £19,250 = £462,000

The overhead absorption rate (OAR) used can be calculated by dividing flexed
production overheads by actual standard hours.

OAR = £462,000 / 38,500 = £12 per hour

241 | P a g e
 Budgeted production overheads = £12 x 38,000hrs = £456,000

4.19 Answer is £7.50 per unit of product Y

Product X Y Z
Production units 15,000 25,000 20,000
Batch size 2,500 5,000 4,000
Number of set ups required 15,000 / 2,500 25,000 / 5,000 20,000 / 4,000
=6 =5 =5

Total number of set ups required = 6 + 5 + 5 = 16

Cost per set up = £600,000 / 16 = £37,500
Machine set up costs attributed to product Y = £37,500 x 5 = £187,500
Set up cost per unit of Y = £187,500 / 25,000 = £7.50

4.20 Answer is D

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

OAR = ($450,000 ÷ 900,000hrs) = $0.50 per labour hr

Standard labour hours per unit = 900,000 hours / 50,000 units = 18 hours per unit
Standard hours flexed for actual output = 18 hours x 60,000 units = 1,080,000 hours
Over absorption of fixed overheads for the period is $65,000.

Production fixed overhead control account

Actual production (1,080,000 hours) x OAR ($0.50)

Actual production overhead $475,000
= F/OH charge during the period $540,000
Over absorption
($540,000 - $475,000) $65,000

242 | P a g e
4.21 Answer is A
Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

*Std Overhead absorption rate per unit (£330,000 ÷ 220,000) = £1.50

Production fixed overhead control account

Actual production (200,000 units) x *O.A.R £1.50

Actual production overhead £260,000
= F/OH charge during the period £300,000

Over absorption
(£300,000 - £260,000) £40,000

Over absorption of fixed overheads for the period is £40,000.

4.22 Answer is C

4.23 Answer is D

Absorption costing is a method of costing that assigns fixed production overhead to cost
units, jobs or work-in progress accounts during a period, by using pre-determined
overhead absorption rates. Because overhead absorption rates are pre-determined at the
beginning of a financial period and fixed overhead is charged by the process of
absorption below, it is likely a difference or balance within the production overhead
control account will arise at the end of a financial period, this balance is referred to as an
under or over absorption.

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 Production overhead control account

Absorption of fixed overhead

Actual production overhead X for the financial period
Actual activity level x O.A.R X

Over absorption? X Under absorption? X

Any deficit in fixed overhead absorbed during the financial period to the income
statement would be an ‘under absorption’ of production overhead
Debit Income statement (to reduce fixed overhead absorbed)
Credit Production overhead control account

Absorbed production overhead

add
under absorption
=
Actual production overhead expense for the period.

4.24 Answer is B

An inventory management method that concentrates effort on the most important items.

4.25 Answer is D

4.26 Answer is D

4.27 Answer is A

4.28 Answer is A

OAR = 5,775/550 = £10.50 per inspection

Absorbed (468 x £10.50) 4,914

Actual overhead 4,500
Over absorption 414

244 | P a g e
4.29 Answer is D

Number of batches (50,000/1,000 = 50) + (30,000/300 = 100) = 150 batches

Number of set ups (50 x 7) + (100 x 5) = 850

Therefore £55,250/850 = £65 a set up

4.30 Answer is D

OAR = 120,000/12,000 = £10 per unit

Absorbed (12,300 x £10) 123,000

Actual overhead 128,000
Under absorption 5,000

4.31 Answer is C

4.32 Answer is A

If the activity were 1,000 hours lower then the variable overhead would also be (£4.50 x
1,000 = £4,500) lower as well, therefore no under recovery of variable overhead would
have occurred. However the under recovery of fixed production overhead would have
been £2.50 x 1,000 hours = £2,500 under absorbed.

4.33 Answer is A

Prime cost (7.50 + 6.50 + 2.00) = 16.00

Sales (9,000 x 40) = 360,000

Prime cost (9,200 x 16) = (147,200)
Closing stock (200 x 16) = 3,200
Contribution 216,000
Fixed overhead (56,750)
Profit 159,250

4.34 Answer is B

Prime cost (7.50 + 6.50 + 2.00) = 16.00 + OAR 5.00 = £21.00

Sales (9,000 x 40) = 360,000

Prime cost (9,200 x 16) = (147,200)
Absorbed fixed overhead (9,200 x 5) (46,000)
Closing stock (200 x 21) = 4,200
Under absorption (56,750 – 46,000) (10,750)
Profit 160,250

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Alternatively if the marginal costing profit was £159,250 production exceeds sales by
200 units therefore 200 x £5.00 = £1,000 fixed overhead carried forward to the next
period under absorption costing therefore the profit will be £1,000 more than marginal
costing.

4.35 Answer is C

Stock levels rose by 6,000 units and absorption costing profit is £60,000 higher.
Therefore fixed production overhead per unit included in stock was £60,000/6,000 units =
£10 per unit of stock.

The budgeted level of activity was £100,000/£10 OAR = 10,000 units

4.36 Answer is A

4.37 Answer

 Product made is unique or specific to the customer’s request

Products are heterogeneous
 Identical or homogenous products produced
 Production possible and normally complete within a single accounting period
Products are always intangible

4.38 Answer is D

If sales margin (Profit/Sales = 20%) then

Selling price assume 100%

Cost of job (80%)
Estimated profit 20%

Profit as a percentage of cost would therefore be 20%/80% = mark-up of 25% on cost

Sales as a percentage of cost would therefore be 100%/80% = 125% cost

Selling price 500 (125% of cost)

Cost of job (400)
Estimated profit 100 (25% cost or 20% of sales)

4.39 Answer

 Product made is unique or specific to the customer’s request

 Products are heterogeneous
 Identical or homogenous products produced
 Production possible and normally complete within a single accounting period
 Products are always intangible
246 | P a g e
4.40 Answer is D

Actual salaries £320,000

Over absorption £24,000
Overhead absorbed £344,000

£344,000/16,000 hours £21.50 OAR

4.41 Answer is B

4.42 Answer is C

4.43 Answer is 30 minutes

Cycle time = throughput time (30000 minutes) ÷ WIP (1000 customer enquires)
= 30 minutes average cycle time.

4.44 Answer is A
Valuation of inventory
£
Direct cost per unit 5.00
Variable overhead per unit 3.00
Total variable production cost per unit 8.00 MC valuation per unit
Fixed overhead absorbed per unit
£30,000 ÷ 5000 units = 6.00
Total production cost per unit 14.00 AC valuation per unit

Under the absorption costing method, a greater amount of fixed overhead would be
carried forward to the next financial period, due to closing inventory being higher than
opening inventory (production > sales). (1000 units – 400 units x £6.00) = £3,600.
Therefore using absorption costing, profit would be £3,600 greater than it would be using
marginal costing.

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4.45 Answer is A

A marginal costing organisation would value inventory at variable production cost

only never full production cost, when contrasted with an absorption costing company.
The selling a distribution expenses are non-production related and therefore would not be
included in the valuation of closing inventory.

£
Material 30,000
Labour 20,000
Variable production overhead 10,000
60,000

Variable production cost per unit

£60,000 ÷ 2000 units = £30.00

Valuation of closing inventory

£30.00 x (2000 units - 1750 units sold) £7,500

4.46 Answer is D

4.47 Answer is D

If sales margin (Profit/Sales = 20%) then

Selling price assume 100%

Cost of job (80%)
Estimated profit 20%

Profit as a percentage of cost would therefore be 20%/80% = mark-up of 25% on cost

Sales as a percentage of cost would therefore be 100%/80% = 125% cost

Selling price 500 (125% of cost)

Cost of job (400)
Estimated profit 100 (25% cost or 20% of sales)

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4.48 Answer is $4,944

$
Direct materials ($1,000 + $400) 1,400
Direct labour (20 x $10) + (30 x $7) = 410
Production overhead (20 x $5) + (30 x $5) = 250
2,060
Administration (2,060 x 20%) = 412
Total cost 2,472
Profit mark-up 100% (W1) 2,472
The selling price 4,944

The problem is that you are told sales margin (profit as a % of sales), but you need mark-
up (profit as a % of cost).

So if profit is 50% of selling price…

If selling price is 100 (assume) then profit is 50% of that much (50) therefore cost must
be the difference = 50 cost. Therefore mark-up 50 profit ÷ 50 cost = 100% mark-up on
cost.

4.49 Answer is D

Assume selling price 100

Then profit would be 40% x 100 = (40)
Cost of sales 60

If sales margin is 40/100 = 40%. Then mark-up (profit as a % of cost of sales) would be
40/60 = 66.67%. Therefore take £20 cost and add 66.67% mark-up to cost = (20 x
1.6667) = £33.33.

4.50 Answer is B

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4.51 Answer is D

A B C
Total numbe of batches 80,000/100 100,000/50 50,000/25
=800 =2,000 =2,000

Number of set ups 800 x 3 2,000 x 4 2,000 x 6

=2,400 =8,000 =12,000

Total number of set ups = 2,400 + 8,000 + 12,000 = 22,400

Machine cost per set up = $150,000 / 22,400 = $6.70

Machine set up cost per batch B = $6.70 x 4 = $26.80

Machine set up cost per unit of B = $26.80 / 50 = $0.54

4.52 Answer is $20,700

400 + 5,000 – 900 = 4,500 units sold

Gross profit = $4.60 x 4,500 = $20,700

4.53 Answer

Marginal costing is appropriate for long-term pricing decisions.

 Marginal costing is appropriate for short-term pricing decisions.

 Absorption costing when used for pricing decisions includes the 'total-cost'
of the product.

Marginal costing ensures the recovery of all costs incurred in selling prices.

 Marginal costing is more appropriate than absorption costing for use in one-
off pricing decisions.

Absorption costing is more appropriate than marginal costing for use in one-
off pricing decisions.

250 | P a g e
4.54 Answer

4th Take action to adjust the capacity of resources to match the projected supply

3rd Determine the resources that are required to perform organisational activities

1st Estimate the production and sales volume by individual products and
customers

2nd Estimate the demands for organisational activities

4.55 Answer

Cost Classification
Purchase order processing costs Batch level activities

Product advertising costs Product sustaining activities

Factory rent and rates Facility sustaining activities

Direct labour costs Unit level activities

Product redesign costs Product sustaining activities

Material handling costs Batch level activities

4.56 Answer is $120

Number of batches = (50,000 / 250) + (25,000 / 100) + (20,000 / 400) = 500

Material cost per batch = $60,000 / 500 = $120

4.57 Answer

Number of production units

Number of machine hours
Number of labour hours
 Number of set-ups

4.58 Answer is B

4.59 Answer is C

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4.60 Answer is $6

$111,000 ÷ 18,500 hours = $6 per direct labour hour

4.61 Answer is B

Production overhead now charged on the percentage of budgeted direct labour cost?

Production overhead $10 million.

Budgeted labour cost ($2,000/100 hours budgeted labour cost given) = $20 an hour.
Budgeted direct labour hours for the period was 200,000 hours, therefore budgeted total
labour cost = $20 an hour x 200,000 hours = $4 million.

Production overhead $10 million/$4 million x 100 = 250% of direct cost is how
production overhead would now be allocated to this job.

$
Direct materials 4,000
Direct labour:
Budgeted labour time (100 hours) 2,000
Overtime incurred 900
Production overhead 250% x $2,000 labour cost 5,000
Revised cost of the job 11,900

The answer would be no difference to the existing cost of this job. The overtime paid is
not direct cost and therefore would not be used to absorb production overhead.

252 | P a g e
 4.62 Answer is B

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

OAR = (£245,000÷ 122,500 hours) = £2 per machine hour.

Over absorption of fixed overheads for the period would be £10,600.

Production fixed overhead control account

Actual hours (119,200 hours) x OAR (£2)

Actual production overhead £249,000
= Overhead charged during the period £238,400
Under absorption
(£249,000- £238,400) £10,600

4.63 Answer is D

4.64 Answer is D

4.65 Answer is A

253 | P a g e
4.66 Answer is £132,000

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. hours, in order to find an overhead
absorption rate (OAR). This simple method allows fixed overhead to be absorbed (or
‘charged’) for a period, in this case it would have been £138,000 absorbed (see below).

Production fixed overhead control account

Actual absorption of overhead (balance) £138,000

Actual production overhead £134,500

Over absorption £3,500

The overhead absorption rate (OAR) would be £138,000 absorbed ÷ 11,500 actual hours
= £12 per hour OAR. Therefore if budgeted labour hours were 11,000 hours (500 below
actual labour hours), then budgeted production overhead for the period would have been
11,000 hours x £12 per hour OAR = £132,000.

4.67 Answer is B

Over absorption of fixed production overheads (DR Fixed Production Overhead Control
Account and CR Income Statement), leads to a direct reduction to overhead charged in
the income statement for the period.

Given the OAR is calculated as

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

Only one of two situations (or both) can cause an over absorption of fixed production
overheads, that is ‘budgeted production overhead is lower than expected’ or the
‘normal/budget level of activity is more than expected’, hence too much fixed overhead
would be charged for the period (ignoring any overspending which may have arisen).

254 | P a g e
4.68 Answer is £2600

Overhead absorption rate (OAR) = Budgeted production overhead

Budget level of activity (hours)

* Overhead absorption rate per unit ($650,000 ÷ 50000 hours) = £13.00 per hour.
If labour $1,200 has been budgeted then divided by the hourly labour rate ($300,000 ÷
50,000 hours) = $6 an hour = 200 hours actually worked.
Therefore production overhead absorbed would be 200 hours actually worked x £13.00
per hour OAR = £2600.

4.69 Answer is £56

The direct cost of making product X = £25 per unit

2 machine hours x £5 per machine hour = £10 per unit
£35 per unit
£35 per unit x 20% = £7 per unit
£42 per unit
£42 x mark-up 33.33% (W1) £14 per unit
Selling price £56

W1
The total cost per unit is £42. Sales margin (profit as a percentage of sales) is 25%, but
given we have cost, then we need mark-up (profit as a percentage of cost) to establish a
selling price. Assume Sales = 100, then if sales margin is 25% then profit would be 25.
Therefore cost would be (balance) 100 – 25 = 75. Therefore mark-up would be 25/75 =
33.33% mark-up.

4.70 Answer is 100% mark-up on cost

Assume selling price 100

Then profit would be 50% x 100 = (50)
Cost of sales 50

If sales margin is 50P/100S = 50%. Then mark-up (profit as a % of cost) would be

50P/50C = 100% mark-up on cost.

255 | P a g e
4.71 Answer is £24.33

ROI = Profit
Capital employed

12% (0.12) = Profit

£1,500,000

Profit therefore was 12% £1,500,000 = £180,000

Add back fixed overhead of £400,000 = £580,000 total contribution

Average contribution for each unit sold

£580,000 total contribution/30,000 units = £19.33 a unit

Price for each unit sold

£19.33 contribution per unit + £5 variable cost per unit = £24.33 price per unit sold.

Or £580,000 total contribution + (30,000 units x £5 variable cost per unit) = £730,000
sales revenue. £730,000 ÷ 30000 units = £24.33 price per unit sold.

4.72 Answer is £51.67

Marginal cost pricing adds a mark-up to variable production cost only.

£
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Total variable costs for X for August 62,000
£62,000 ÷ 2000 units produced (not sold) = £31 variable cost per unit + 66.67% mark-up
on cost = £31 x 1.6667 = £51.67.
Assume selling price 100
Then profit would be 40% x 100 = (40)
Cost of sales 60
If sales margin is 40P/100S = 40%. Then mark-up (profit as a % of cost) would be
40P/60C = 66.67% mark-up on cost.

256 | P a g e
4.73 Answer is £70.42
Full cost pricing cost pricing adds a mark-up to variable and fixed (total) production cost.

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

£84,500 ÷ 2000 units produced (not sold) = £42.25 full cost per unit + 66.67% mark-up
on cost = £42.25 x 1.6667 = £70.42.

Assume selling price 100

Then profit would be 40% x 100 = (40)
Cost of sales 60

If sales margin is 40P/100S = 40%. Then mark-up (profit as a % of cost) would be

40P/60C = 66.67% mark-up on cost.

4.74 Answer
£
Direct materials 35,000
Direct labour (3400 x £7.50 per hour) 25,500
Variable Overhead 4,500
Production overhead (3400 x £5) 17,000
82,000
Administration (82,000 x 20%) = 16,400
Total cost 98,400
Profit mark-up 100% on cost (W1) 98,400
The selling price 196,800

(W1) The problem is that you are told sales margin (profit as a % of sales), but you need
mark-up (profit as a % of cost). So if profit is 50% of selling price…

If selling price is 100 (assume) then profit is 50% of that much (50) therefore cost must
be the difference = 50 cost. Therefore mark-up 50 profit ÷ 50 cost = 100% mark-up on
cost.

4.75 Answer

Identical or homogenous product produced

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

257 | P a g e
4.76 Answer is D

Actual salaries £320,000

Over absorption £24,000
Overhead absorbed £344,000

£344,000/16,000 hours £21.50 OAR

4.77 Answer is B

10% discount is offered to students who pay on enrolment and 50% of customers pay on
enrolment; therefore 50% x 10% = 5% sales lost before you receive £20,000. Therefore
£20,000/0.95 = £21,053 or if £20,000 represents 95% then 100% of sales would be
(100%/95%) x £20,000 = £21,053.

PROOF: £21,053 x 50% get discount x 10% discount = £1,053 discounts given.

Therefore sales £21,053 - £1,053 discounts given = £20,000 received.

4.78 Answer is £10 per bed per overnight stay

400 beds x 90% capacity x 365 days = composite cost units of 131400 bed overnight
stays. £1.314 million ÷ 131400 patient overnight stays = £10 per bed per overnight stay.

4.79 Answer is A

4.80 Answer

Cost per sales visit = $50,000 / 200 = $250

Cost per order = $70,000 / 700 = $100
Cost per normal delivery = $120,000 / 240 = $500
Cost per urgent delivery = $60,000 / 30 = $2,000

258 | P a g e
4.81 Answer

B D

Costs $000 $000

Sales visits $500 x 30 = 15 $500 x 12 = 6

Orders processing $400 x 43 =17.2 $400 x 30 = 12

Normal deliveries $700 x 70 = 49 $700 x 45 = 31.5

Urgent deliveries $3,000 x 25 = 75 $3,000 x 4 = 12

Total costs 156.2 61.5

4.82 Answer is D

4.83 Answer

Statements True or False

If products are uniform and

customers are similar in their True
demands, activity based costing ABC is most effective when there are variations in
may not offer a significant batch size, processes, or customer demands.
advantage over machine hours
when assigning overhead.

True
In activity based costing, the For example, a setup cost of £900 is associated with
manufacturing overhead cost per the batch of items that will be processed. A large
unit will depend partially on the quantity of items processed will mean a low setup cost
number of units in a batch. per unit. A small quantity of items being processed
will mean a high setup cost per unit.

The cost to set up production False

equipment is best allocated Setup costs should not be allocated directly to
directly to products via machine products via machine hours. Setup costs should be
hours. allocated to the batch of products that will be run after
the setup occurs.

259 | P a g e
4.84 Answer is C

It is highly unlikely that machine hours will correlate with the indirect labor cost.

It is highly unlikely that direct labor hours will correlate with the indirect labor cost.

4.85 Answer

Costs allocated to service departments using the reciprocal costing method

Committed fixed costs
 Direct costs of materials
Variable non-manufacturing costs
Manufacturing fixed overhead costs

ABC cost allocation systems can be used to allocate either variable or fixed
manufacturing overhead, to allocate joint costs, or to reallocate service department costs
to outputs. Direct costs of materials and labour do not need to be allocated to specific cost
objects.

4.86 Answer

Which of the following, if any, is true of an activity based costing system?

 An activity based costing system will provide a more accurate apportionment

of overheads to products than absorption costing

An activity based costing system will cost less to administer than an

absorption costing system

The activity based costing system will be less detailed than an absorption
costing system

An activity based costing system is easier to administer than an absorption

costing system

260 | P a g e
4.87 Answer

Statements True or False

Under ABC, indirect manufacturing costs are

predominantly assigned on the basis of direct False
machine hours.

True

Setup cost is an example of a batch-level cost. Setting up a machine is directly

associated with the batch of items that
will be processed after the setup occurs.

In ABC the assumption is that prodcuts use False

resources or cause costs.
It is activities and not products.

4.88 Answer is C

£385,000 / £4.25 = £90,588, therefore £90,560

4.89 Answer is A

Since the equipment is automated, direct labour hours would be the least favorable basis.

ABC is the most favorable basis for allocating a variety of services provided by indirect
labour.

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262 | P a g e
 Chapter 5 Solutions - Standard costing and variance analysis

5.1 Answer is B

Material Price Plannning Variance

= (Old Standard Price – Revsied Standard Price) x Standard Quantity Flexed

($4 - $5) x (10,000 units x 3 kg) = $30,000 A

5.2 Answer is C

Material Price Variance

= (Standard Price – Actual Price) x Actual Quantity Purchased

($5 - $4.80) x 32,000 kg = $6,400 F

5.3 Answer is A

5.4 Answer is $38,500 (A)

The labour rate planning variance for August

(22,000 units x 0.5) x ($17.50 - $14) = $38,500 (A)

5.5 Answer is £22,800 (F)

The labour rate operational variance for August

11,400 hrs x ($17.50 - $15.50) = $22,800 (F)

5.6 Answer is $7,000 (A)

The labour efficiency operational variance for August

((22,000 x 0.5 hour) - 11,400 hrs) x $17.50= $7,000 (A)

5.7 Answer is C

The labour rate variance is:

26,000 x 2.8 ($10.00 - $10.40) = $29,120 A

5.8 Answer is C

The labour efficiency variance is:

(26,000 x (3.0 - 2.8)) x $10.00 = $52,000 F

263 | P a g e
5.9 Answer is B

Labour efficiency variance

Hours
Actual production did take 8,000
Actual production should take (11,000 units x 0.75 hrs) (8,250)
250
x £20
Labour efficiency variance £5,000 (F)

Shorter method Labour efficiency variance (8,000 – 8250 x £20) = £5,000 (F)

Tip: This variance calculation always uses the actual hours worked never hours paid if
there is a difference between the two within a question.

5.10 Answer is C

Variable overhead expenditure variance

£
Did spend (actual hours worked x actual OH rate) 132,000
Should spend (8000 hrs x £15) (120,000)
Variable overhead expenditure variance 12,000 (A)

Tip: Variable overhead expenditure within a question will be assumed to be driven by

labour hours worked never paid if there is a difference between the two e.g. if production
stops and staff are idle then no variable overhead should be incurred.

5.11 Answer is £257 (F)

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

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

Y= a + bX

264 | P a g e
Work out variable cost

Machine hours Overhead cost (£)

18,000 16,242
10,000 13,468
8,000 2,774
£2,774/8000 = £0.34675 per machine hour variable cost.

Work out fixed cost

Use either 18000 or 10000 machine hours to work out the fixed cost as a balancing
figure.

£16,242 = Fixed cost + (18000 x £0.34675)

£16,242 = Fixed cost + (£6,242)
Fixed cost = £10,000

Therefore
a = £10,000
b = £0.34675

The budget for 13,780 machine hours

Y = £10,000 + (£0.34675 x 13,780)
Y = £14,778

The total overhead expenditure variance

Did spend £14,521
Should spend £14,778
Variance £257 (F)

265 | P a g e
5.12 Answer is £49.20 (F)

Tip: A material usage variance can be subdivided into a mix and yield variance where
there exists two or more ingredients that can be substituted for one another. The sum
of the material mix and yield variances will total the sum of the material usage
variance. The material mix variance can be calculated by using two different methods
and in this case the examiner has not specified which one to use, so I would
recommend the individual valuation basis because it is the easiest to apply. Both
methods give the same answer as a total sum, but the individual values to arrive at this
total will be different.

Individual valuation basis (proforma)

Actual output Did use Should use Standard price Variance

(at std mix)

Material X X x £x = £x (F)
Material X X x £x = £x (A)
X X £x (A)

 If you use a quantity of material which is more than standard mix there would
be an adverse variance
 If you use a quantity of material which is less than standard mix there would
be a favourable variance

Individual valuation basis

Based on actual production 72 units of TRD100

Did use Should use Standard price Variance

(litres) (litres) £
Material X 984 885.6 W1 x £2.50 = 246.00 (A)
Material Y 1230 1328.4 W2 x £3.00 = 295.20 (F)
2214 2214.0 49.20 (F)

W1 2214 litres x 12 ÷ (12 + 18) = 885.6

W2 2214 litres x 18 ÷ (12 + 18) = 1328.4

266 | P a g e
5.13 Answer is £151.20 (A)

Tip: Yield or productivity variance (proforma)

Actual material used did produce X
Actual material used should produce X
Over/(under) produced X
x standard cost of one unit of output x £x
£X (A)/(F)

Yield variance
Units of TRD100
2214 litres of X and Y did yield 72.0
2214 litres of X and Y should yield (2214 ÷ 30 litres per unit) 73.8
Under produced 1.8

x standard cost of one unit x £84

£151.20 (A)

5.14 Answer is D

Tip: Labour rate variance

Did spend (actual hours paid x actual rate) X

Should spend (actual hours paid x standard rate) (X)
Labour rate variance X

This variance calculation always uses the actual hours paid for never hours worked if
there is a difference between the two within a question.

Labour rate variance

£
Did spend (actual hours paid x actual rate) 336,000
Should spend (24,000 x £15) (360,000)
Labour rate variance 24,000 (F)

267 | P a g e
5.15 Answer is A

Tip: Variable overhead efficiency variance

Hours
Actual production did take X
Actual production should take (actual production x standard hours) (X)
X
x standard v/oh overhead rate £x
Variable overhead efficiency variance X

This variance calculation always uses the actual hours worked never hours paid if there
is a difference between the two within a question; the proforma is similar to the labour
efficiency variance

Variable overhead efficiency variance

Hours
Actual production did take 24,000
Actual production should take (11000 x 2 hours) (22,000)
2,000
x standard v/oh overhead rate x £6
Variable overhead efficiency variance £12,000 (A)

5.16 Answer is A

268 | P a g e
5.17 and 5.18

Tip: Planning variances are caused by the original budget and standard at the
planning stage being wrong. The original budget and standard used would therefore
need revising to make operational variances more realistic. Planning variances are
sometimes referred to as revision variances.

Operational variances are your normal expenditure or efficiency variance calculations,

assuming all planning errors within the original budget and standard have been
adjusted for and removed.

Process of calculating planning variances

1. Calculate the planning variance and adjust the original budget within the
operating statement for this before any operational variances are calculated.
2. Adjust the standard used in the original budget from ex ante to ex post
(revised) standard.
3. Now that the original budget and standard have been adjusted, the operational
variances can be calculated and are more realistic for control purposes.

The effect of this analysis is to sub-divide a variance into two parts

1. The planning variance, beyond the control of staff e.g. due to planning errors.
2. The operational variance, more likely to be within the control of staff.

£
Original budget (600 x £72) = 43,200
Planning sales price variance (W1) 6,000 (F)
Revised budget (600 x £82) 49,200
Original sales price variance (W2) 2,400 (F)
Actual sales (600 x £86) 51,600

W1 Planning sales price variance

600 x (£82 - £72) = £6,000 (F)

W2 Operating sales price variance

600 x (£82 - £86) = £2,400 (F)

269 | P a g e
5.19 Answer is $2,400 (A)

Tip: A material usage variance can be subdivided into a mix and yield variance where
there exists two or more ingredients that can be substituted for one another. The sum
of the material mix and yield variances will total the sum of the material usage
variance. The material mix variance can be calculated by using two different methods
and in this case the examiner has not specified which one to use, so I would
recommend the individual valuation basis because it is the easiest to apply. Both
methods give the same answer as a total sum, but the individual values to arrive at this
total will be different.

Individual valuation basis (proforma)

Actual output Did use Should use Standard price Variance

(at std mix)

Material A X X x £x = £x (F)
Material B X X x £x = £x (A)
X X £x (A)

 If you use a quantity of material which is more than standard mix there would
be an adverse variance
 If you use a quantity of material which is less than standard mix there would
be a favourable variance

Individual valuation basis

Based on actual production of 9,100 litres

Did use Should use Standard price Variance

(litres) (litres) $
D 4,300 4,000 W1 x $9 = 2,700 (A)
E 3,600 3,500 W2 x $5 = 500 (A)
F 2,100 2,500 W3 x $2 = 800 (F)
10,000 10,000 2,400 (A)

W1 10,000 litres x 4 ÷ (4 + 3.5 + 2.5) = 4,000 litres

W2 10,000 litres x 3.5 ÷ (4 + 3.5 + 2.5) = 3,500 litres
W3 10,000 litres x 2.5 ÷ (4 + 3.5 + 2.5) = 2,500 litres

270 | P a g e
5.20 Answer is $650 (F)

Tip : Yield or productivity variance (proforma)

Actual material used did produce X

Actual material used should produce X
Over/(under) produced X
x standard cost of one unit of output x £x
£X (A)/(F)

Yield variance
Litres of output
10000 litres input did yield 9,100
10000 litres input should yield (10,000 x 0.9) 9,000
Under produced 100

x standard cost of one litre (W1) x $6.50

$650 (F)

W1 The standard cost of 9 litres of output is $58.50 therefore the standard cost of one
litre of output is $58.50 ÷ 9 litres = $6.50.

5.21 Answer is A

Tip : The forecast for total operating cost is expressed as

Y = a + bX

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

Y = £800 + £0.0002x2

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

271 | P a g e
 1. Work out the forecast ‘budgeted’ trend for the number of miles given
Y = £800 + £0.0002 (4,1002)
Y = £800 + £0.0002 (16,810,000)
Y = £800 + £0.0002 (16,810,000)
Y = £800 + £3,362
Y = £4,162
2. Adjust this for inflation
£4,162 x 1.03 = £4,287 flexed budgeted cost for 4,100 miles
3. Compare to actual operating cost to calculate the variance
Did cost £5,000
Should cost £4,287
Variance £713 (A)

5.22 Answer is C

Tip: Variable overhead efficiency variance

Hours
Actual production did take (actual hours worked) X
Actual production should take (actual production x standard hours) (X)
X
x standard v/oh overhead rate £x
Variable overhead efficiency variance X

This variance calculation always uses the actual hours worked never hours paid if there
is a difference between the two within a question e.g. idle time; the proforma is similar
to the labour efficiency variance.

Measures the difference between the variable overhead cost budget flexed on actual
labour hours and the variable overhead cost absorbed by output produced. Actual
output drives standard hours and therefore the absorption of variable production
overhead.

272 | P a g e
5.23 Answer is B

5.24 Answer is D

5.25 Answer is B

Tip: Planning variances are caused by the original budget and standard at the planning
stage being wrong. The original budget and standard used would therefore need
revising to make operational variances more realistic. Planning variances are
sometimes referred to as revision variances. These will ensure staff are not assessed on
variances which are caused by poor planning rather than their own operational
efficiency. This will improve motivation and performance by the removal of
uncontrollable factors when assessing staff performance.

Operational variances are your normal expenditure or efficiency variance calculations,

assuming all planning errors within the original budget and standard have been adjusted
for and removed.

Process of calculating planning variances

1. Calculate the planning variance and adjust the original budget within the
operating statement for this before any operational variances are calculated.
2. Adjust the standard used in the original budget from ex ante to ex post (revised)
standard.
3. Now that the original budget and standard have been adjusted, the operational
variances can be calculated and are more realistic for control purposes.

The effect of this analysis is to sub-divide a variance into two parts

1. The planning variance, beyond the control of staff e.g. due to planning errors.
2. The operational variance, more likely to be within the control of staff.

$
Flexed budget (10,000 units x 3kg x $4) = 120,000
Planning material price variance (W1) 30,000 (A)
Revised budget (10,000 units x 3kg x $5) = 150,000

Flexed budget (10,000 units x 3kg x $5) = 150,000

Operating material usage variance (W2) 10,000 (A)
Operating material price variance (W3) 6,400 (F)
Actual cost of material (32,000 kg x $4.80) = 153,600

273 | P a g e
W1 Planning material price variance

10,000 x 3kg x ($5 - $4) = $30,000 (A)

W2 Operating material usage variance

Kg
Did use 32,000
Should use (10,000 units x 3kg) 30,000
2,000
x
x Standard price per kg $5.00
10,000 (A)

W3 Operating material price variance

$
32,000 kg did cost (32,000 kg x $4.80) = 153,600
32,000 kg should cost (32,000 kg x $5.00) = 160,000
6,400 (F)

274 | P a g e
5.26 Answer is B

Tip: Variances are transferred to the income statement as either a debit (expense
increase) or credit (expense decrease) for an adverse or favourable variance
respectively. These variances represent the difference between expenses being
recorded at actual cost on the debit side and transfers during the period from these
accounts at standard cost on the credit side.
The fact that all material purchased was used for the period of February, means it
would not be necessary to adjust the actual cost of goods produced for the closing
stock of material.

£
Standard cost of goods produced 128,500

Variances F A
Material price 2,400
Material usage 8,400
Labour rate 5,600
Labour efficiency 3,140
Variable production overhead 2,680
Fixed production overhead 3,192
14,732 10,680
4,052 (F)
Actual cost of goods produced 124,448

275 | P a g e
5.27 Answer is C
Absorption costing is a method of costing that assigns fixed production overhead to cost
units, jobs or work-in progress accounts during a period, by using pre-determined
overhead absorption rates. Because overhead absorption rates are pre-determined at the
beginning of a financial period and fixed overhead is charged by the process of
absorption below, it is likely a difference or balance within the production overhead
control account will arise at the end of a financial period, this balance is referred to as an
under or over absorption.

Production overhead control

account
Absorption of fixed overhead
Actual production overhead X for the financial period
Actual activity level x O.A.R X

Over absorption? X Under absorption? X

Any surplus in fixed overhead absorbed during the financial period to the income
statement would be an ‘over absorption’ of production overhead
Debit Production overhead control account
Credit Income statement (to reduce fixed overhead absorbed)
Absorbed production overhead
less
Over absorption
=
Actual production overhead expense for the period.

276 | P a g e
5.28 Answer is $500 (F)

Tip: A material usage variance can be subdivided into a mix and yield variance where
there exists two or more ingredients that can be substituted for one another. The sum
of the material mix and yield variances will total the sum of the material usage
variance. The material mix variance can be calculated by using two different methods
and in this case the examiner has not specified which one to use, so I would
recommend the individual valuation basis because it is the easiest to apply. Both
methods give the same answer as a total sum, but the individual values to arrive at this
total will be different.

Individual valuation basis (proforma)

Actual output Did use Should use Standard price Variance

(at std mix)

Material A X X x £x = £x (F)
Material B X X x £x = £x (A)
X X £x (A)

 If you use a quantity of material which is more than standard mix there would
be an adverse variance
 If you use a quantity of material which is less than standard mix there would
be a favourable variance

Individual valuation basis

Based on actual production of 1,910 Kg of Product S
Did use Should use Standard price Variance
(Kg) (Kg) $
D 1,030 1,000 W1 x $75 = 2,250 (A)
E 560 600 W2 x $100 = 4,000 (F)
F 410 400 W3 x $125 = 1,250 (A)
2,000 2,000 500 (F)
W1 2,000 Kg x 5 ÷ (5 + 3 + 2) = 1,000 Kg
W2 2,000 Kg x 3 ÷ (5 + 3 + 2) = 600 Kg
W3 2,000 Kg x 2 ÷ (5 + 3 + 2) = 400 Kg

277 | P a g e
5.29 Answer is $11,305 (F)

Tip: Yield or productivity variance (proforma)

Actual material used did produce X

Actual material used should produce X
Over/(under) produced X
x standard cost of one unit of output x £x
£X (A)/(F)

A word of caution favourable variances, especially when dealing with mix and yield
do not necessarily mean you have improved the organisation e.g. adding far more
water and less flavouring could improve both mix and yield when making soft drinks,
but would do little to improve the quality of the drink being made.

Yield variance
Kg of Product S
2,000 Kg of P, Q and R did yield 1,910
2,000 Kg of P, Q and R should yield (2000 Kg x 90%) 1,800
Under produced 110

x standard cost of one Kg (W1) x $102.77

$11,305 (F)
W1 Standard cost of one kilogram of Product S

£9,250 (standard cost of 100 Kg of input) ÷ 90 Kg (output) = $102.77

278 | P a g e
5.30 Answer is £49,500 (A)

Tip: Labour idle time variance

Hours
Actual hours paid X
Actual hours worked (X)
Idle time X
x standard rate per hour
Labour idle time variance X
The difference between labour hours paid and worked. Always adverse if no idle
time is expected in the budget.

Labour idle time variance

(61,500 hours – 56,000 hours) = 5,500 hours x £9 (W1) per hour = £49,500 (A).

Standard rate per hour = £540,000 ÷ 60,000 hours = £9 per hour.

5.31 Answer is £23,400 (F)

Tip: This variance calculation always uses the actual hours worked never hours paid
if there is a difference between the two within a question. A labour efficiency
variance is the difference between how long your workforce did and should have
taken according to actual production volume, valued at standard rate.

Labour efficiency variance

Hours
Actual production did take 56,000
Actual production should take (14,650 units x (W1) 4 hrs) (58,600)
2,600
x £9
Labour efficiency variance £23,400 (F)

Shorter method: Labour efficiency variance (56,000 – 58,600 x £9) = £23,400 (F).

W1 60,000 hours ÷ 15,000 units = 4 hours standard hours per unit.

5.32 Answer is B

8200 x (£31-£26) = £41,000 (F)

279 | P a g e
 5.33 Answer is A

(8,200 – 8,700) x £12 Standard profit per unit = £6,000 (A)

£
Std Selling price per unit 26
Std Variable cost per unit (10)
Std Overhead absorption rate per unit (£34,800 ÷ 8,700) (4)
Std profit per unit 12

5.34 Answer is A

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

*Std Overhead absorption rate per unit (£34,800 ÷ 8,700) = £4

Production fixed overhead control account

Actual production (8200 units) x *O.A.R £4

Actual production overhead £37,000
= F/OH charge during the period £32,800

Under absorption (£37,000 - £32,800) £4,200

The sum of the fixed overhead expenditure and volume variance would be equal to the
under or over absorption. F/OH Expenditure variance (£34,800 - £37,000) = £2,200 (A)
+ F/OH Volume variance (see below) £2,000 (A) = Under absorption of fixed overhead
for the period £4,200 (A).

Std Overhead absorption rate per unit (£34,800 ÷ 8,700) = £4

(8,200 – 8,700) x £4 OAR per unit = £2,000 (A)

280 | P a g e
 5.35 Answer is B

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or work-in-progress

Overhead absorption rate (OAR) = Budgeted production overhead

Normal/budget level of activity

*Std Overhead absorption rate per unit (£1m ÷ 200,000 units) = £5

The total fixed production overhead variance is £100,000 (A) this represents the under
absorption of fixed overhead for the period.

Production fixed overhead control account

Actual production (?) x *O.A.R £5

Actual production overhead £1,300,000
= F/OH absorbed or charged during
the period (Balance) £1,200,000

Under absorption £100,000

Fixed overhead absorbed £1,200,000 ÷ £5 OAR = 240,000 units actually produced.

The sum of the fixed overhead expenditure and volume variance would be equal to the
under absorption £100,000 (A). F/OH Expenditure variance (£1.0m - £1.3m) = £300,000
(A) + F/OH Volume variance ((240,000 – 200,000 units) x £5 OAR) = £200,000 (F) =
Under absorption of fixed overhead for the period £100,000 (A).

5.36 Answer is £4,200 (A)

281 | P a g e
5.37 Answer is £3,600 (A)

Tip: Process of calculating planning variances

1. Calculate the planning variance and adjust the original budget within the
operating statement for this before any operational variances are calculated.
2. Adjust the standard used in the original budget to the new (revised) standard.
3. Now that the original budget and standard have been adjusted, the operational
variances can be calculated and are more realistic for control purposes.

The effect of this analysis is to sub-divide a variance into two parts

1. The planning variance, beyond the control of staff e.g. due to planning errors.
2. The operational variance, more likely to be within the control of staff.

Note: All possible variances have been calculated below to allow further revision,
however you were only required in the exam to calculate the material price planning
variance and the operational material usage variance.

£
Original budget (1,500 units x 7kg x £4.10) = 43,050
Planning material price variance (W1) 4,200 (A)
Revised budget (1,500 units x 7kg x £4.50) = 47,250

Flexed budget (1,600 units x 7kg x £4.50) = 50,400

Operating material usage variance (W2) 3,600 (A)
Operating material price variance (W3) 1,800 (F)
Actual cost of material (32,000 kg x $4.80) = 52,200

W1 Material price planning variance

1,500 units x 7kg x (£4.10 - £4.50) = 4,200 (A)

W2 Operating material usage variance

Kg
Did use 12,000
Should use (1,600 units x 7kg) 11,200
800
x Standard price per kg x £4.50
3,600 (A)

282 | P a g e
W3 Operating material price variance
£
12,000 kg did cost (12,000 kg x £4.35) = 52,200
12,000 kg should cost (12,000 kg x £4.50) = 54,000
1,800 (F)

5.38
Hours
Actual production did take (balance) 60,000
Actual production should take
(11,500 units x 5 hours) (57,500)
2,500
x standard labour rate per hour x £12
Labour efficiency variance 30,000 (A)

Using the labour efficiency variance calculation we can work out actual hours paid (and
worked) during the period. 60,000 hours can now be used to work out the actual labour
cost for the period.
£
Did spend (60,000 hours paid x actual rate) Balance 765,000
Should spend (60,000 hours paid x £12) (720,000)
Labour rate variance 45,000 (A)

The actual rate paid per direct labour hour = £765,000 ÷ 60,000 hours paid = £12.75

5.39 Answer is D

Fixed
Actual fixed overhead expenditure X
overhead
Budgeted fixed overhead expenditure (X)
expenditure
Fixed overhead expenditure variance X
variance

£2,010,000 - £2,500,000 = £490,000 (F)

283 | P a g e
5.40 Answer is C

units
Did produce (actual quantity produced) X
Should produce (budget quantity produced) (X)
Fixed
X
overhead
x overhead absorption rate (O.A.R)
volume
Fixed overhead volume variance X
variance
This variance calculation is only applicable if the organisation uses
absorption costing, never when marginal costing.

Std Overhead absorption rate per unit (£2,500,000 ÷ 500,000) = £5

(500,000 – 440,000) x £5 OAR per unit = £300,000 (A)

5.41 Answer is $84 (A)

Tip: A material usage variance can be subdivided into a mix and yield variance where
there exists two or more ingredients that can be substituted for one another. The sum
of the material mix and yield variances will total the sum of the material usage
variance. The material mix variance can be calculated by using two different methods
and in this case the examiner has not specified which one to use, so I would
recommend the individual valuation basis because it is the easiest to apply. Both
methods give the same answer as a total sum, but the individual values to arrive at this
total will be different.

Individual valuation basis (proforma)

Actual output Did use Should use Standard price Variance

(at std mix)

Material X X x $x = $x (F)
Material X X x $x = $x (A)
X X $x (A)

 If you use a quantity of material which is more than standard mix there would
be an adverse variance
 If you use a quantity of material which is less than standard mix there would
be a favourable variance

284 | P a g e
Individual valuation basis

Based on actual production 1,280 units

Did use Should use Standard price Variance

(kg) (kg) $
Material X 600 640 (W1) x $5 = 200 (F)
Material Y 380 384 (W2) x $6 = 24 (F)
Material Z 300 256 (W3) x $7 = 308 (A)
1,280 1,280 84 (A)
Workings
(W1) 1,280 kgs x 500 / 1,000 = 640
(W2) 1,280 kgs 300 / 1,000 = 384
(W3) 1,280 kgs 200 / 1,000 = 256

5.42 Answer is $456 (A)

Tip: Yield or productivity variance (proforma)

Actual material used did produce X

Actual material used should produce X
Over/(under) produced X
x standard cost of one unit of output x $x
$X (A)/(F)

Yield variance
Units
1,280 kgs of X, Y and Z did yield 960
1,280 kgs of X, Y and Z should yield (1,280 x 80%) 1,024
Under produced 64

Yield variance = under or over production x standard cost of one unit (W1)
= 64 units x $7.125
= $456 adverse
Workings

(W1) Standard cost of one unit

Material X 500kg x $5 per kg = $1,400
Material Y 300kg x $6 per kg = $1,800
Material Z 200kg x $7 per kg = $2,500
Total material input cost = $5,700

Standard cost of material per unit = $5,700 / 800kg = $7.125

285 | P a g e
5.43 Answer is C

An adverse fixed production overhead total variance means that the overheads have been
under absorbed. This means that actual overheads were greater than budgeted overheads.

We need to find out how much of the fixed overheads have been absorbed into
production and then dividing this by the budget overhead absorption rate (OAR) we can
find out actual production level.

Actual fixed production overhead costs = £1,950,000

Fixed production overhead total variance = £150,000
Fixed overheads absorbed = £1,950,000 - £150,000 = £1,800,000

OAR = £1,500,000 ÷ 300,000 units = £5 per unit

Actual production level = £1,800,000 ÷ £5 per unit = 360,000 units

5.44 Answer is £55,000 (A)

Sales price variance

Did sell = 110,000 units x £9.50 = £1,045,000

Should sell = 110,000 units £10 = £1,100,000
Sales price variance = £1,045,000 - £1,100,000 = £55,000 (A)

5.45 Answer is £20,000 (F)

Sales volume profit variance

Did sell 110,000 units

Should sell 100,000 units
Difference 10,000 units
Std profit per unit £10 - £8 = £2
Sales volume profit variance 10,000 units x £2
= £20,000 (F)

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5.46 Answer is A

Tip: This variance calculation always uses the actual hours worked never hours paid
if there is a difference between the two within a question. A labour efficiency
variance is the difference between how long your workforce did and should have
taken according to actual production volume, valued at standard rate.

Labour efficiency variance

Hours
Actual operation did take 80
Actual operation should take (370 x 12 mins or 0.2 hours) (74)
6
x standard labour rate per hour x £10
Labour efficiency variance £60 (A)

Shorter method: Labour efficiency variance (56,000 – 58,600 x £9) = £23,400 (F).

W1 60,000 hours ÷ 15,000 units = 4 hours standard hours per unit.

5.47 Answer is C

5.48 Answer is A

5.49 Answer is B

Sales price Did sell (actual quantity sold x actual price) X

variance Should sell (actual quantity sold x standard price) (X)
Sales price variance X

15,750 x ($6.60 - £6) = $9,450 (F)

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5.50 Answer is A

Did sell (actual quantity units sold) X

Should sell (budget quantity units sold) (X)
X
x standard profit per unit*
Sales volume profit variance X
Sales
volume
*Standard profit would be used if the organisation uses absorption
profit
costing methods, when using marginal costing methods, the
variance
standard contribution volume variance, rather than standard
volume profit variance would be used. The proforma above
would be the same however the difference in units above would be
multiplied by the standard contribution per unit rather than standard
profit per unit.

Budgeted sales = $15,650 / 1.05 = 15,000 units

(15,750 – 15,000) x $2 Standard contribution per bar = $1,500 (F)

5.51 Answer is B

When production > sales

Stock levels rise (closing stock > opening stock) therefore a greater amount of fixed
overhead under absorption costing is being carried forward to the following period within
the valuation of the closing stock, therefore creating a higher profit than marginal costing.

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5.52 Answer is B

In order to work out the expenditure variance we need to compare the budgeted
expenditure at 87% bed occupancy to the actual expenditure. We will calculate the
variable cost for each 1% increase in bed occupancy by comparing the costs of the flexed
budgets given.
Machine hours Cost ($)
82% 410,000
94% 429,000
12% 19,200

$19,200/12 = $1,600 per 1% increasing bed occupancy

Therefore the budget cost at 87% occupancy is the cost at 82% plus 5% of costs.

$410,000 + ($1,600 x 5) = $418,000.

The expenditure variance = $430,000 - $418,000 = $12,000 adverse

5.53 Answer is A

Internal benchmarking

5.54 Answer is A

(7300-6780) x 5.00 = sales volume variance £2,600 (A)

6780 x (13.00-13.80) = sales price variance £5,424 (F)

5.55 Answer is C

(27.50-30.00) x 770 = £1,925 (A)

5.56 Answer is A

(0.4 x £30.00) x (770-800) = £360 (A)

5.57 Answer is D

Actual mix Standard mix Difference Price £

Steak 852 921 -69 (3.50-5.60) 145 (F)
Kidney 990 921 +69 (3.50-1.40) 145 (F)
1842 1842 290(F)

Weighted average standard price per kg (0.6/1.2 x £5.60) + (0.6/1.2 x £1.40) = £3.50
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5.58 Answer is C

1842kg should yield (1842/1.2kg) 1535

1842kg did yield 1350
185
x £4.20
777(A)
5.59 Answer is A

Using high/low method to separate fixed and variable cost

High 18,000 £41,000

Low 10,000 £25,000
8,000 £16,000

Variable cost £16,000/8,000 = £2.00

Therefore fixed cost (18,000 x 2 = 36,000) – 41,000 = 5,000

Therefore 12,750 hours should cost ((12,750 x 2) + 5,000) 30,500

12,750 hours did cost 32,560
2,060 (A)

5.60 Answer is A

2,386/5.60 = 426 variance in labour hours

Should take 4hrs x 4,260 units = 17,040 hours therefore if adverse it took 426 hrs longer
than expected.

17,040 + 426 = 17,466 hours

5.61 Answer is D

Adverse variance £4,875/6.50 = 750kg variance in usage.

Should have used 3,000 units x 2kg = 6,000kg

Therefore actual usage 6,000kg + 750kg = 6,750kg

Closing stock rose by 800kg therefore must have purchased 6,750kg + 800kg = 7,550kg

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5.62 Answer is A

Flexed budget 950 x 4kg x £12.50 = £47,500

Revised budget 950 x 4kg x £13.00 = (£49,400)
Planning price variance £1,900(A)

3,800kg of material P did cost = £50,160

3,800kg of material P should cost
(3,800kg x revised standard £13.00) = (£49,400)
£760(A)

5.63 Answer is A

68 hours did produce 60.0 units

68 should produce (68/1.1hrs) 61.8 units
1.8
x £5.20
£9.36 (A)

5.64 Answer is C

Planning rate variance

40 hours x £7.50 (original standard) £300
40 hours x £5.50 (revised standard) £220
£80(F)

Operational rate variance

40 hours x £5.50 (revised standard) should cost £220
40 hours did cost £270
£50(A)
5.65 Answer is A

Planning
60 x 0.6 (old standard) x £5.50 an hour £198
60 x 0.5 (new standard) x £5.50 an hour £165
£33(F)
Operational
60 units did take 40 hours
60 units should take (x 0.5) 30 hours
10 hours
x £5.50
£55(A)

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 Chapter 6 Solutions - Modern manufacturing methods

6.1 Answer is A

6.2 Answer is D

Throughput contrbution = $28.50 - $9.25 = $19.25

Return per hour = ($19.25 / 7.8) x 60 = $148.08

6.3 Answer is C
Cost of Sales
DR CR
£ £
1000 units x £100 100,000 Income statement 105,000
Conversion (W1) 5,000

105,000 105,000

W1 Standard cost per unit is £100 of which £45 is raw material. Therefore the standard
cost of conversion per unit is (£100 - £45 = £55). 1000 units x £55 = £55,000 conversion
charged to cost of sales, which means if £60,000 conversion was actually incurred
(£60,000 - £55,000) = £5,000 further charge to cost of sales for the period.

Conversion
DR CR
£ £
Bank 60,000 Cost of sales (£55 x 1000 units) 55,000
Variance to cost of sales 5,000

60,000 60,000

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 6.4

Part (a)

Machine 1 Machine 2 Machine 3

Product A 50 units x 5.0 hrs 250 50 units x 5.0 hrs 250 50 units x 2.5 hrs 125

Product B 50 units x 2.0 hrs 100 50 units x 5.5 hrs 275 50 units x 1.0 hrs 50

Product C 60 units x 1.5 hrs 90 60 units x 1.5 hrs 90 60 units x 0.5 hrs 30

440 615 205

Capacity 400 400 400

Utilisation 110% 154% 51%

Part (b)
The bottleneck machine (or limiting factor) would be machine 2. It is the most binding
constraint on production e.g. the most restricting of all machines to meet the estimated
sales demand given. It has the highest utilisation rate of all three machines of 154%.

6.5

Part (a)

1) Identify a systems bottleneck or most limiting factor that restricts the flow of
throughput.
2) Focus attention on achieving higher throughput from the bottleneck e.g. exploit or
alleviate it.
3) Subordinate all other resources to this bottleneck e.g. operate the bottleneck
resource at 100% capacity, whilst running non-bottleneck resources at a speed
that matches this which may not be 100%.
4) Elevate the bottleneck e.g. try and increase throughput from it either by improving
its efficiency or procuring more of it if possible.
5) Repeat steps 1-4 as once the bottleneck is eliminated another will become
apparent and take its place.

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 Part (b)
Product A Product B Product C

Contribution per unit (£) 36.00 28.00 18.00

Machine hours per unit 5.00 5.50 1.50

Contribution per hour 7.20 5.09 12.00

Ranking 2nd 3rd 1st

Machine 2 hours used
Product C 60 units x 1.5 hrs = 90.00
Product A 50 units x 5.0 hrs = 250.00
340.00
Capacity of machine 2 400.00
Remaining hours 60.00
The remaining 60 hours for machine 2 will be used to produce product B given the
maximum sales demand of the other two products have been satisfied. 60 hours ÷ 5.5
hours = 10.9 units of product B that would be produced (or 10 whole units).

6.6 Answer L, J, K, M (in rank order)

J K L M
£ £ £ £
SP 2,000 1,500 1,500 1,750
Material cost (410) (200) (300) (400)
Throughput contribution 1,590 1,300 1,200 1,350

Minutes on Machine X 120 100 70 110

Contribution 1,590/120 1,300/100 1,200/70 1,350/110

per unit of LF =£13.25 = £13 = £17.14 = £12.27

Ranking 2 3 1 4

6.7 Answer is D

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6.8 Answer is A
.

Tip: Computer-integrated manufacturing (CIM) is manufacturing supported by

computers. The total integration of computer aided design, manufacturing and other
business operations and databases e.g. quality control and purchasing.

Tip: Flexible manufacturing system (FMS) consists of several machines along with
part and tool handling devices such as robots, arranged so that it can handle any
family of products or parts for which the system has been designed and developed.
Such systems aim to achieve greater economies of scope for the manufacturer, the
capability of economic production of small batches of a variety of products or parts
with minimal set up time. These systems are computerised and highly integrated.

Tip: EDI is a computer-to-computer data interchange (fixed point to point system).

An agreed format for parties, for the sending and receiving of information, this would
require investment from both parties and can be very costly. EDI is the electronic
invoicing, billing and payment of transactions between the organisation and its
suppliers or customers. An extranet is a form of internet based EDI. Both aim to
achieve a paperless system of information exchange.

FMS- an example of technology and an alternative layout

The idea of an FMS was proposed in England (1960s) under the name “System 24”, a
flexible machining system that could operate without human operators 24 hours a day
under computer control. From the beginning the emphasis was on automation rather than
the “reorganization of workflow”.

Early FMSs were large and very complex, consisting of dozens of Computer Numerical
Controlled machines (CNC) and sophisticate material handling systems. They were very
automated, very expensive and controlled by incredibly complex software. There were
only a limited number of industries that could afford investing in a traditional FMS as
described above.

Currently, the trend in FMS is toward small versions of the traditional FMS, called
flexible manufacturing cells (FMC).

Today two or more CNC machines are considered a flexible cell and two ore more cells
are considered a flexible manufacturing system.

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6.9

Z1 Z2
Department 1 480 minutes ÷ 12 = 40.0 480 minutes ÷ 16 = 30.0
Department 2 840 minutes ÷ 20 = 42.0 840 minutes ÷ 15 = 56.0

Department 1 is the limiting factor/bottleneck. It is the most binding constraint on

production due to its limitation of being able to produce less of both products than
department 2.

6.10

Z1 Z2
Selling price 50.00 65.00
Less:
Direct material 10.00 15.00
Direct labour 10.40 6.20
Variable overhead 6.40 9.20
Contribution per unit (£) 23.20 34.60

Department 1 (minutes per unit) 12 16

Contribution per minute (£) 1.93 2.16

Ranking 2nd 1st

Given there is no maximum sales demand for product Z2 the total of 480 minutes each
day for department 1 should be allocated to making this product. The maximum
contribution earned would therefore be 480 minutes x £2.16 contribution earned per
minute = £1,036.80 contribution per day. 480 minutes would make (480 minutes ÷ 16
minutes) 30 units of product Z2.

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6.11

Tip: Throughput accounting aims to maximise contribution whilst minimising

conversion e.g. labour and overhead cost. It is essentially the same principle as
limiting factor analysis, but assumes the only true variable cost when calculating
throughput contribution is the material and component cost only of making a product.

Throughput Contribution
=
sales less material cost only ‘the only true variable cost’

Z1 Z2
Selling price 50.00 65.00
Less:
Direct material 10.00 15.00
Throughput contribution per unit (£) 40.00 50.00

Department 1 (minutes per unit) 12 16

Throughput contribution per minute (£) 3.33 3.13

Ranking 1st 2nd

Given there is no maximum sales demand for product Z1 the total of 480 minutes each
day for department 1 should be allocated to making this product. The maximum
throughput contribution earned would therefore be 480 minutes x £3.33 throughput
contribution earned per minute = £1,598.40 throughput contribution per day. 480
minutes would make (480 minutes ÷ 12 minutes) 40 units of product Z1.

6.12 Answer is B

Cost of Sales
DR CR
£ £
Cost of finished goods sold 1,700,000 Income statement 1,750,000
Conversion (W1) 50,000

1,750,000 1,750,000

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W1 £840,000 conversion was allocated (or charged) during the period to finished goods
produced. If £890,000 conversion was actually incurred then (£890,000 - £840,000) =
£50,000 further would need to be charged to cost of sales for the period e.g. a conversion
under absorption or variance.
Conversion
DR CR
£ £
Bank 890,000 Finished good produced 840,000
Under absorption to cost of sales 50,000

890,000 890,000
There would be (£1,795,000 - £1,700,000) = £95,000 closing inventory for the period,
included within finished goods produced.

6.13 Answer is B

6.14 Answer is A

6.15 Answer is B

Tip: The JIT philosophy requires that products should only be produced if there is an
internal or external customer waiting for them. Traditionally manufacturers
stockpiled. JIT aims ideally for zero stock e.g. raw materials delivered immediately
at the time they are needed, no build up of work-in-progress during production and
finished goods only produced if there is a customer waiting for them.

1. Closer relationships with suppliers need to be maintained

2. Smaller more frequent deliveries need to be managed
3. Higher quality machines with regular maintenance required to avoid delays
4. Involvement and training of staff to maintain flexibility e.g. empowerment and
multi-skilling

Tip: Flexible manufacturing system (FMS) consists of several machines along with
part and tool handling devices such as robots, arranged so that it can handle any
family of products or parts for which the system has been designed and developed.
Such systems aim to achieve greater economies of scope for the manufacturer, the
capability of economic production of small batches of a variety of products or parts
with minimal set up time. These systems are computerised and highly integrated.

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 Tip: Materials requirement planning (MRP I) is an information system which
provides an automated list of components and materials required for the type and
number of products entered. This allows better production planning and stock
management.

6.16

Tip: The throughput accounting approach aims to maximise contribution whilst

minimising conversion e.g. labour and overhead cost. It is essentially the same
principle as marginal costing, but assumes the only true variable cost when
calculating throughput contribution is the material and component cost only of
making a product. This system also values inventory at material cost only.

Throughput contribution
=
sales less material cost only ‘the only true variable cost’

W X Y
£ £ £
Selling price 200 150 150
Direct materials 41 20 30
Throughput contribution per unit 159 130 120

Bottleneck (minutes) 9 10 7

Throughput contribution per minute £17.67 £13.00 £17.14

Ranking First Third Second

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6.17

Tip: Throughput accounting aims to maximise contribution whilst minimising

conversion e.g. labour and overhead cost. It is essentially the same principle as
limiting factor analysis, but assumes the only true variable cost when calculating
throughput contribution is the material and component cost only of making a product.
Throughput contribution
=
sales less material cost only ‘the only true variable cost’
Return per factory hour is similar to the concept of contribution maximisation; you
should notice the following calculation is similar to the contribution per unit of a
limiting factor used in short-term decision-making

Return per factory hour = Sales less material cost only

Usage (in hours) of the bottleneck resource

A B C
£ £ £
Selling price 200 150 150
Direct materials 41 20 30
Throughput contribution per unit 159 130 120

Bottleneck (minutes) 12 10 7

159 / 12 130 / 10 120 / 7

Return per factory minute = £13.25 = £13.00 = £17.14

Return per factory hour (x 60mins) £795 £780 £1,028

6.18 Answer is A

6.19 Answer is B

A marginal costing system would value inventory at variable production cost only not
full production cost.

Variable production costs = $20,000 + $6,300 + $4,700 = $31,000

Closing inventory = 400 units

Closing inventory should be valued as a proportion of variable production cots.

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Therefore:

Value of closing inventory = $31,000 x (400 units / 4,000 units) = $3,100

6.20 Answer is D

The throughput accounting approach is essentially the same principle as marginal costing,
but values inventory at material cost only.

Direct materials = $20,000

Value of closing inventory = $20,000 x (400 units / 4,000 units) = $2,000

6.21

Return per factory hour is similar to the concept of contribution maximisation; you
should notice the following calculation is similar to the contribution per unit of a limiting
factor used in short-term decision-making

Return per factory hour = Sales less material cost only

Usage (in hours) of the bottleneck resource

= ($12 - $5) / 0.75 hours = $9.33 per hour

Throughput accounting (TA) ratio demonstrates how much benefit or contribution per
hour we are receiving compared to our costs per hour when we manufacture a product. A
ratio of less than 1 means that costs per hour is greater than contribution per hour. A ratio
of greater than 1 means that contribution per hour is greater than costs per hour.

TA ratio = Contribution (sales less material cost only) per hour

Conversion cost per hour (or cost per factory hour)

= $9.33 / ($144,000 / 12,000 hours) = $9.33 / $12 = 0.78

The TA ratio is less than 1 and so costs per hour are greater than contribution per hour
and therefore should not be produced.

6.22 Answer is D

This a throughput accounting question as indicated by reference to “bottleneck resource”

and “product return per minute”. We need to work out the “throughput contribution” first
and then “throughput contribution per bottleneck resource” or “product return per
minute” in this case.

Throughput contribution = selling price less material costs only

Throughput contribution = $45 - $14 = $31

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Product return per minute = throughput contribution / time on bottleneck resource

Product return per minute = $31 / 10 mins = $3.10

6.23 Answer is C

Customer compensation costs are costs that have been incurred after the product has left
the company, and so therefore is an external failure cost.

Test equipment running costs are costs to do with the assessment of quality and so
therefore an appraisal cost.

6.24 Answer is A
W X Y
Selling price 180 150 150
Less:
Direct material 41 20 30
Direct labour 30 20 50
Variable production overheads 24 16 20
Contribution per unit (£) 85 94 50

Bottleneck machine (minutes per unit) 7 10 7

85/7 94/10 50/7

Contribution per minute (£) = 12.14 = 9.4 = 7.14

Ranking 1st 2nd 3rd

6.25 Answer is B
W X Y
Selling price 180 150 150
Less:
Direct material 41 20 30
Throughput contribution per unit (£) 139 130 120

Bottleneck machine (minutes per unit) 7 10 7

139/7 130/10 120/7

Throughput contribution per minute (£) = 19.86 = 13 = 17.14

Ranking 1st 3rd 2nd

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6.26 Answer is D

6.27 Answer is C

Product D Product E Product F

Contribution per unit ($) 12.00 14.00 10.00

Time in Process A 20 25 15
(mins per unit)

Contribution per min ($) 12 / 20 = 0.60 14 / 25 = 0.56 10 / 15 = 0.667

Ranking 2nd 3rd 1st

6.28 Answer is D

Product D Product E Product F

Throughput contribution 22.00 20.00 16.00

per unit ($)

Time in Process A 20 25 15
(mins per unit)

Throughput contribution 22 / 20 = 1.10 20 / 25 = 0.80 16 / 15 = 1.07

per min ($)

Ranking 1st 3rd 2nd

6.29 Answer is D

A strong customer focus and flexibility to meet customer requirements

6.30 Answer is A

Examples of internal failure costs

6.31 Answer is D

Economically producing small batches of a variety of products with the same machines

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6.32 Answer is D

Kaizen is a measure of quality

6.33 Answer is A

Mass production techniques

6.34 Answer is D

Training staff to reduce defects during the production process

6.35 Answer is B

Job

6.36 Answer is C

Elimination of waste

6.37 Answer is 3,000 minutes

Throughput time

= work-in-process (1,000 customer enquires) x cycle time (30 minutes average duration)

= 30,000 minutes total throughput time

6.38 Answer is services, qualtity and cost

6.39 Answer is B

Total productive maintenance

6.40 Answer is C

Focus factories

6.41 Answer is A

Lean synchronisation

6.42 Answer is A

Removal of waste

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6.43 Answer is D

Prevention and continuity

6.44 Answer is A

Quality circles

6.45 Answer is D

Transaction

6.46 Answer B

Feedback Control

6.47 Answer is regular inspection and routine servicing of equipment, supplier

quality assurance schemes, TQM culture of staff.

6.48 Answer is customer complaint departments, poor brand reputation, cost of free
repairs under gurantee.

6.49 Answer is C

Focus factory production

6.50 Answer is C

Materials requirement planning

6.51 Answer is B

Work with a supplier to improve quality and reduce costs

6.52 Answer is C

A prevention of quality failures through equipment faults

6.53 Answer is D

Removal of waste

6.54 Answer is C

Inventory management

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6.55 Answer is A

External failure costs

6.56 Answer is C

Internal failure costs

6.57 Answer is D

To meet customer expectations

6.58 Answer is A

Just-in-time (JIT)

6.59 Answer is C

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 Chapter 7 Solutions - Environmental cost accounting

7.1 Answer is A

Zero impact or positive impact on the ecological environment

7.2 Answer

Increased costs over the long term

 Increaed revenues
 Improved decision making
Reduced customer value due to greater costs
 Improved company image
Less opportutnites for premium pricing

7.3 Answer

 Noise from built up traffic areas

 Aesthetic impacts on the local landscape from unsightly factory plants
Increased material costs due to global prices
 Health impact through carbon dioxide emissions from companies
Increased labour costs due to shortage of skiils

7.4 Answer

 Allocation of environmental costs to the material flows of a firm’s operations

 Allocation of environmental costs to physical aspects of a firm’s operations
Provides consistency between environmental goals and non-financial goals
Environmental improvement does not lead to financial improvement

7.5 Answer

Ignoring the effect on the environment by company’s activities

 Identifying the costs and revenues from the environment
Developing performance measures to encourage more sales creation
Organisations commitment and attitude towards the environment is senstivei
and should not be disclosed

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7.6 Answer

 Landfill tax
 Income tax
Court imposed fine on illegal dumping of waste
 Road tax

7.7 Answer

A one off tax on company profits to pay for new recycle bins
 Company fine for using toxic illegal chemcials in manufacture
Increased fuel duty
A tax on tobacco to fund additional hospitals in the UK

7.8 Answer

 Increase productivity
 Reduces pollution
 Increases profits
 Increases goodwill with customers

7.9 Answer

 Allows businesses to use more non-renewable resources

Allows businesses to understand what the polluting emissions are
 Allows businesses to sell products and services at a premium price
Allows businesses to support local produce

7.10 Answer

Energy and water consumption have proven to be both very costly to businesses as well
as having significant impact on the environment through increased carbon emissions.
Businesses should look towards ways of conserving the use of these resources as far as
practicable. Energy and water consumption are closely linked as energy is needed to heat
up water and so a reduction in water useage would mean a reduction in energy useage as
well.

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7.11 Answer

 Lights should be turned off when leaving the office

Not cleaning windows to conserve energy in water consumption
 Regularly servicing and checking machinery
Opening windows to cool down a building whilst the heating is on
 Lights should be turned on in all rooms whether they are used or not
Windows should be opened when the air conditioning is on to help circulate
and control the temperature
Equipemt not in use should be kept remain on in standby mode so as to
facilitate JIT production
 Fixing leaky pipes will reduce water consumption

7.12 Answer

Energy bills should be reviewed on a regular basis

 Allowing people to smoke outside will save on heating in the office as they
can warm up with a cigarette
 Doors should be kept open to allow heat to travel to other rooms
Windows should be shut when the air conditioning is on
 Not fixing dripping taps will reduce enrgy consumption
Office heating should be monitored and reductions in temperature should be
considered

7.13 Answer

Automatically reveals environment driven costs

 Costs can be more accurately integrated within manufacturing planning,
control
Allows businesses to gain non-sustainable competitive advantage
 Integrates environmental cost accounting into the strategic management
process

7.14 Answer

 Tracking systems for environmental wastes are needed in order to assign costs
It does not allows us to use cost data to develop superior strategies
Does not allow intangible and uncertain environmental factors to be brought
into the decision-making framework
 Requires clear definition of environmental costs

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7.15 Answer

International agreement linked with climate change

 Contribution analyisis technique
Binding targets for countries for reducing greenhouse gas emissions
 Similar to TQM

7.16 Answer

Emissions trading
 Transfer pricing
Clean development mechanism
Joint implementation

7.17 Answer

Spare emissions units can be sold to other countries

 Being able to launch an emission reduction project
 Earn emission reduction units from an emission removal project
It is known as carbon trading

7.18 Answer

 Allows the earning of saleable certified emission reduction credits

Allows the earning emission reduction units
Allows the sale of sapre emissions units
 An example is a rural electrification project using solar panels

7.19 Answer

 Allows a country to earn emission reduction units

 It can count towards its Kyoto target
Allows countries to combine renewable and non-renewable resources
A country is required to jointly with other countries sell emissions units

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 Chapter 8 Solutions - Decision theory

8.1 Answer is $7,000

Expected value of profit with marketing campaign

($300,000 x 0.90) + (-$80,000 x 0.1) = $262,000 - $50,000 = $212,000

Expected value of profit without marketing campaign

($300,000 x 0.75) + (-$80,000 x 0.25) = $205,000

It is therefore worthwhile for the company to undertake the marketing campaign as the
increase in the expected value of profit is $7,000

8.2 Answer is 68.75%

We need to work out the probability of earning more than or equal to a contribution of
$40. Therefore we need to select those outcomes which will yield this and select their
respective probabilities to multiply to make the combined probabilities.

The following combinations comply with our requirements:

Selling price Variable Contribution Selling Variable cost Combined

cost probability probability probability
$60 $20 $40 0.30 0.25 0.0750
$64 $20 $44 0.25 0.25 0.0625
$64 $24 $40 0.25 0.40 0.1000
$68 $20 $48 0.45 0.25 0.1125
$68 $24 $44 0.45 0.40 0.1800
$68 $26 $42 0.45 0.35 0.1575
Total 0.6875

P(earning more than or equal to $40 contribution) = 0.6875 or 68.75%

8.3 Answer is $680,000

The expected value of cost of the warranty claims is:

$2,000,000 x 15% = $300,000

$6,000,000 x 3% = $180,000
$10,000,000 x 2% = $200,000
Total $680,000

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8.4 Answer is $110

The minimum profit at a selling price of $80 is $50,000

The minimum profit at a selling price of $90 is $60,000
The minimum profit at a selling price of $100 is $70,000
The minimum profit at a selling price of $110 is $75,000

Therefore if the manager wants to maximise the minimum profit a selling price of $110
would be chosen.

8.5 Answer is $100

A regret matrix can be produced as follows:

Competitor Selling price

Reaction
$80 $90 $100 $110
Strong $10,000 $0 $10,000 $5,000
Medium $30,000 $20,000 $10,000 $0
Weak $10,000 $0 $10,000 $20,000

The maximum regret for:

 $80 is $30,000
 $90 is $20,000
 $100 is $10,000
 $110 is $20,000

Therefore if the manager wants to minimise the maximum regret a selling price of $100
would be chosen.

8.6 Answer is B

8.7 Answer is B

This is looking at the best of the worst case scenairios.

The minimum outcome for a fee of $600 is $360k

The minimum outcome for a fee of $800 is $400k
The minimum outcome for a fee of $900 is $360k
The minimum outcome for a fee of $1,000 is $320k

Therefore if the committee wants to maximise the minimum cash inflow it will set a fee
of $800.

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8.8 Answer is A

A regret matrix can be produced as follows:

Membership level
Membership Fee Low Average High
$000 $000 $000
$600 40 0 0
$800 0 40 60
$900 40 75 45
$1,000 80 100 120

The maximum regret for:

 $600 is $40k
 $800 is $60k
 $900 is $75k
 $1,000 is $120k

Therefore if the manager wants to minimise the maximum regret a fee of $600 a selling
price of $100 would be set.

8.9 Answer is C

8.10 Answer is C

A regret matrix can be produced as follows:

Staffing mix Fee level

Deluxe High Standard Low
X $5,000 $0 $2,500 $20,000
Y $15,000 $5,000 $0 $5,000
Z $35,000 $20,000 $7,500 $0

The maximum regret for:

 Deluxe is $35,000
 High is $20,000
 Standard is $7,500
 Low is $20,000

Therefore the standard fee strategy minimises the maximum regret.

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8.11 Answer is 90%

The fixed costs will remain the same therefore the contribution has to exceed $2,880,000.

The outcomes that comply with this and the probability of them occurring are given
below:

100,000 x ($48 - $19) = $2,900,000 Joint probability is 0.40 x 0.75 = 0.30

120,000 x ($48 - $21) = $3,240,000 Joint probability is 0.60 x 0.25 = 0.15
120,000 x ($48 - $19) = $3,480,000 Joint probability is 0.60 x 0.75 = 0.45
0.90

The probability therefore that the contribution will exceed $2,880,000 is 90%.

8.12 Answer is B

The maximum regret at selling price:

 $40 is $20,000
 $45 is $10,000
 $50 is $20,000
 $55 is $30,000

Therefore if the manager wants to minimise the maximum regret, a selling price of $45
will be selected.

8.13 Answer is A

8.14 Ansswer is (i) $490,000, $345,000, $505,000 (ii) Value of PI = $25

(i)
Expected values ($000)
Project A ($400 x 0.3) + ($500 x 0.5) + ($600 x 0.2) = $490
Project B ($300 x 0.3) + ($350 x 0.5) + ($400 x 0.2) = $345
Project C ($500 x 0.3) + ($450 x 0.5) + ($650 x 0.2) = $505

(ii)
Value of perfect information ($000)
If weak select Project C = ($500 x 0.3) = $150
If average select Project A = ($500 x 0.5) = $250
If good select Project C = ($650 x 0.2) = $130
Value of perfect information is ($530 – $505) = $25

316 | P a g e
8.15 Answer is D

The maximum regret at a selling price

 $140 is $50,000
 $160 is $60,000
 $180 is $40,000
 $200 is $30,000

Therefore if AP wants to minimise the maximum regret it will select a selling price of
$200

8.16 Answer is A

Year 1 cash flows Probability Expected value

Year 1
High $20,000 0.20 $4,000
Medium $14,000 0.50 $7,000
Low $9,000 0.30 $2,700
$13,700

Discount the expected value at 10%:

$13,700 x 0.909 = $12,453

8.17 Answer is C

(120,000 units x 0.6*) + (80,000 units x 0.4) = 104,000 units

* The probability of being dry is 0.4 therefore the probability of being rainy is (1.0 – 0.4)
= 0.6. The sum of your probabilities must always come to 1.0.

Tip: An expected value works out a long-run average based upon a decision repeated
over and over again, based upon the values forecast and probability assigned to each
value.

Example

An ice cream sales van if it is hot will earn £10,000 a day in sales and if it is cold only
£2,000 a day in sales, the probability of the weather cycle all year round is 10% hot and
90% cold.

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Solution

An expected value calculates a long-run average value assuming the decision is repeated
over and over again e.g. the ice cream van does not just go once but many times over and
over again.

Long-term expected value

(£10,000 a day x 1 day) + (£2,000 a day x 9 days) = £28,000 total sales over 10 days

£28,000/10 days = average sales or expected value of £2,800 a day in sales

or
(£10,000 x 0.1) + (£2,000 x 0.9) = £2,800 expected value a day in sales

8.18

Project EV
L (500 x 0.2) + (470 x 0.5) + (550 x 0.3) = $500,000
M (400 x 0.2) + (550 x 0.5) + (570 x 0.3) = $526,000
N (450 x 0.2) + (400 x 0.5) + (475 x 0.3) = $432,500
O (360 x 0.2) + (400 x 0.5) + (420 x 0.3) = $398,000
P (600 x 0.2) + (500 x 0.5) + (425 x 0.3) = $497,500

Project M should be undertaken as it has the highest expected value.

8.19

Market conditions Best projects Probability Net cash EV

in market inflows
condition
Poor P 0.20 $600,000 $120,000
Good M 0.50 $550,000 $275,000
Excellent M 0.30 $570,000 $171,000
EV with perfect information $566,000
EV without perfect information ($526,000)
Value of perfect information $40,000

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8.20

Answer is 45%

We need to work out the probability of earning more than a weekly contribution of
$20,000. Therefore we need to select those outcomes which will yield this and select their
respective probabilities.

We are producing 1,000 units per week so therefore contribution must be greater than
$20 per unit, in order for us to earn more than $20,000 per week.

Selling price Selling Variable cost Variable cost Combined

probability probability probability
$50 0.45 $20 0.55 0.25
$60 0.25 $30 0.25 0.06
$60 0.25 $20 0.55 0.14
Total 0.45

P(earning more than $20,000 contribution per week) = 0.45 or 45%

8.21 Answer is D

To find the monthly expected value we must multiply the probabilities by their respective
unit sales values or unit variable cost values. This will give us our expected unit sales and
variable cost values.

Expected unit sales value = (£20 x 0.25) + (£25 x 0.40) + (£30 x 0.35) = £25.50
Expected unit variable cost value = (£8 x 0.20) + (£10 x 0.50) + (£12 x 0.30) = £10.20

Subtract the expected variable cost value from the sales value which would result in the
monthly unit contribution.

Expected unit contribution = £25.50 - £10.20 = £15.30

Total expected monthly contribution = 1,000 units x £15.30 = £15,300

319 | P a g e
8.22 Answer is C

In order to achieve a monthly contribution of greater than £13,500 and we expect to sell
1,000 units then each unit must sell for more than £13.50. We should select the
combinations which offer us that and then add up their respective probabilities.

Selling price Variable cost Contribution Select Probability

£20 £8 £12 No
£20 £10 £10 No
£20 £12 £8 No
£25 £8 £17 Yes 0.4 x 0.2 = 0.08
£25 £10 £15 Yes 0.4 x 0.5 = 0.20
£25 £12 £13 No
£30 £8 £22 Yes 0.35 x 0.2 = 0.07
£30 £10 £20 Yes 0.35 x 0.5 = 0.175
£30 £12 £18 Yes 0.35 x 0.3 = 0.105

P(Monthly contribution exceeds £13,500) = 0.08 + 0.20 + 0.07 + 0.175 + 0.105 = 0.63

8.23 Answer is make 12 batches

The key point to understand here is that you need to find the solution that will minimise
the maximum opportunity cost or if you like regret. We need to first find what
contributions can be earned by the different combinations.

Sold

Made 10 11 12
10 500 500 500
11 500 – 20 = 480 550 550
12 500 – 40 = 460 550 – 20 = 530 600

Now we work out how much contribution we would lose for those items we did not
make. Please note this is the £50 contribution per batch and the £20 negative contribution
per batch.
Sold

Made 10 11 12
10 0 50 100
11 20 0 50
12 40 20 0

Compare the best outcomes in the first table with the maximum opportunity cost or regret
in the second for each batch of bread made. Select the batch with the most amount of
contribution left.

320 | P a g e
 10 batches = 500 – 100 = 400
11 batches = 550 – 50 = 500
12 batches = 600 – 40 = 540

Therefore the answer is to make 12 batches as this will minimise the opportunity cost or
regret.

8.24 Answer is expected value = $1,394,000, S.D. = $171,930

Variable Fixed Total cost Probability Expected (000’s) (000’s)

costs costs (x) (p) value _ _
($000) ($000) ($000) (px) (x - x)² p(x - x)²
560 440 1,000 0.3 x 0.15 = 0.045 45 155,236 6,986
560 640 1,200 0.3 x 0.55 = 0.165 198 37,636 6,210
560 760 1,320 0.3 x 0.3 = 0.090 118.8 5,476 493
780 440 1,220 0.5 x 0.15 = 0.075 91.5 30,276 2,271
780 640 1,420 0.5 x 0.55 = 0.275 390.5 676 186
780 760 1,540 0.5 x 0.3 = 0.150 231 21,316 3,197
950 440 1,390 0.2 x 0.15 = 0.03 41.7 16 0
950 640 1,590 0.2 x 0.55 = 0.110 174.9 38,416 4,226
950 760 1,710 0.2 x 0.3 = 0.060 102.6 99,856 5,991
_
Expected value or arithmetic mean = x = Σ (px) = $1,394,000
_
Therfore to work out (x – x)² for the first row in table = (1,000 - 1,394)² = 155,236
_
Σ p(x - x)² = 29,560,000,000

Σp=1
_
Standard deviation or S.D. = √ Σ p(x - x)² / Σ p = √29,560,000,000 / 1= $171,930

8.25 Answer is $212,500

Fixed Probability Expected

costs ($) value ($)
100,000 0.35 35,000
130,000 0.45 58,500
160,000 0.20 32,000
Total EV 125,500

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 Variable Probability Expected
costs ($) value ($)
70,000 0.40 28,000
90,000 0.35 31,500
110,000 0.25 27,500
Total EV 87,000

Expected value for total costs = $125,500 + $87,000 = $212,500

8.26

Part (i)

The maximin rule states that we should consider the worst consequence of each possible
course of action and choose the one that has the least bad consequence.

Therefore in the scenario the worst consequence is having bad weather and the least bad
consequence would be to purchase 1,000 burgers as this gives the most profit being
$1,000.

Part (ii)

The key point to understand here is that you need to find the solution that will minimise
the maximum opportunity cost or if you like regret.

We work out how much contribution we would lose for those burgers we did not sell. For
example if we have actual bad weather then we would sell 1,000 burgers and had we
purchased 1,000 burgers then the profit earned would be $1,000 (according to the table in
question) with no regret or cost of unsold burgers, net regret being $0.

If however the actual weather was bad then again we would sell 1,000 burgers but this
time we had purchased 2,000 burgers then the profit earned would be $0 but regret or
cost would $1,000, net regret being $1,000.

We can apply the same logic if we had purchased 3,000 or 4,000 burgers. See table
below:
No of burgers purchased
If actual weather is: 1,000 2,000 3,000 4,000
Bad $0 ($1,000) (£2,000) ($4,000)
Average ($4,000) ($1,000) $0 ($1,000)
Good ($9,000) ($6,000) ($3,000) $0

322 | P a g e
The maximum regret for:
 1,000 burgers is $9,000
 2,000 burgers is $6,000
 3,000 burgers is $3,000
 4,000 burgers is $4,000

Therefore to minimise the maximum regret he should purchase 3,000 burgers.

8.27 Answer is 36.25%

We need to work out the probability of earning net cash flows $90,000 or more.
Therefore we need to select those outcomes which will yield this and select their
respective probabilities. The combinations which will comply are:

Cash Probability Cash Probability Combined

inflows outflows probability
$140,000 0.45 $50,000 0.25 0.45 x 0.25 = 0.1125
$160,000 0.25 $50,000 0.25 0.25 x 0.25 = 0.0625
$160,000 0.25 $60,000 0.35 0.25 x 0.35 = 0.0875
$160,000 0.25 $70,000 0.40 0.25 x 0.40 = 0.1
Total 0.3625

P(earning net cash flows of $90,000 or more) = 0.3625 or 36.25%

8.28 Answer is $140,000

Project EV
A (400 x 0.3) + (500 x 0.2) + (700 x 0.5) = $570,000
B (800 x 0.3) + (300 x 0.2) + (200 x 0.5) = $400,000
C (500 x 0.3) + (600 x 0.2) + (400 x 0.5) = $470,000

Project A has the highest expected value being £$70,000.

To calculate the value of perfect information with respect to the preferences:

Preferences Best projects Probability Net cash EV

in inflows
preferences
1 B 0.3 $800,000 $240,000
2 C 0.2 $600,000 $120,000
3 A 0.5 $700,000 $350,000
EV with perfect information $710,000
EV without perfect information ($570,000)
Value of perfect information $140,000

323 | P a g e
8.29 Answer is B

Risk averse managers (maximin managers or “pessimist”) assume always the worse
outcome will arise, therefore aim to maximise the returns from the worst outcomes.
Therefore, the marketing manager would choose selling price of $60 as the worst case
scenario is $30,000 contribution being earned which is the best of all the worst case
scenarios.

8.30 Answer is D

The expected value of the decision:

EV of development succeeding + EV of development not succeeding

If development is successful then the company will market the product and therefore we
need to work out the EV of marketing success.

Marketing success rate EV

Very (250,000 x 0.7 x 0.5) = $87,500
Reasonably (150,000 x 0.7 x 0.3) = $31,500
Unsuccessful (-80,000 x 0.7 x 0.2) = -$11,200
Total EV of marketing $107,800

If development is unsuccessful then we need to work out the EV of development costs

only. This is because there will be no expenditure on marketing for an unsuccessful
development.

The expected value of the development costs = -$150,000 x 0.3 = -$45,000

The EV of the decision = $107,800 + -$45,000 = $62,800

8.31 Answer is EV = $3,975 and standard deviation = $804.29

This is a probability distribution and therefore the squared deviations (column 5 below)
have to be weighted by the probabilities. We cannot do the usual operation of dividing
the squared deviations by the number of data items (being 3 in this case) as the three
NPV’s do not have equal chance of occurrence and therefore must be reflected in the
calculation.

_ _ _ Weighted
NPV($) Probability EV or x ($) x-x (x – x)² Deviations
2,800 0.25 700 -1,175 1,380,625 345,156.25
3,900 0.40 1,560 -75 5,625 2,250
4,900 0.35 1,715 925 855,625 299,468.75
3,975 646,875

The expected value = $3,975

Standard deviation = √646,875 = $804.29
324 | P a g e
8.32 Answer is A

Manager’s attitude to risk

Risk averse managers (maximin managers or “pessimist”) assume always the worse
outcome will arise, therefore aim to maximise the returns from the worst outcomes.

Risk seeking managers (maximax managers or “optimist”) go for the best outcome
ignoring the probability of actually attaining it, when making decisions, therefore aim to
maximise the maximum or best return from a decision.

Risk neutral managers go for the most likely return and will use expected values in
order to make a decision.

Risk spreading is not a manager’s attitude to risk.

8.33 Answer is Deefield

The minimax regret criterion is to find the solution that will minimise the maximum
opportunity cost or regret of decisions made. The question gives us the regret or
opportunity cost we would suffer if we chose any of the venues. For each venue we need
to select the most regret that we would suffer, and then from this select the venue with the
lowest of these maximum regrets, i.e. minimise the maximum regrets.

Ayefield maximum regret = $810,000

Beefield maximum regret = $590,000
Ceefield maximum regret = $480,000
Deefield maximum regret = $450,000

Deefield should be picked as the venue to stage the event as it minimises the maximum
regrets.

8.34 Answer is A

The maximin rule states that we should consider the worst consequence of each possible
course of action and choose the one that has the least bad consequence. Therefore in the
scenario the worst consequence is having a poor market condition and the outcomes are:

Project A $440,000
Project B $400,000
Project C $360,000
Project D $320,000

The best of the worst outcomes is project A.

325 | P a g e
8.35 Answer is B

The maximax rule states go for the best outcome ignoring the probability of actually
attaining it, when making decisions, therefore aim to maximise the maximum or best
return from a decision.

Therefore go for project B as it gives the highest possible return of $580,000.

8.36 Answer is $871,780

NPV Probability Deviation from Squared deviation Weighted

expected value amounts
$m $m $m
2 30% -1.2 1.44 0.432
3 20% -0.2 0.04 0.008
4 50% 0.8 0.64 0.320

Total weighted amounts = $0.432m + $0.008m + $0.320m = $0.760m

Standard deviation = √$0.760m = $0.871780m or $871,780

8.37 Answer is A

4 x £15k = 60k
0.4
A (10k)
£96k 0.6 8 x £15k = 120k

N
£86k 4 x £15k = £60k
A = Attend show
N = Not attend show

The decision to go to the show yields contribution after the £10,000 running cost of
£86,000, compared to the contribution of selling 4 cars without going to the show
generating £60,000 contribution. The expected net gain therefore would be £86,000 -
£60,000 = £26,000.

326 | P a g e
8.38 Answer is D
A = Attend show and pay for market research
N = Not attend show and do not pay for market research

4 x £15k = 60k

0.4 4 x £15k = 60k

Right 0.6 8 x £15k = 120k

£90k -10k = 110k
0.7
A
£90k 4 x £15k = 60k
0.4 -10k = 50k

£90k Wrong
0.3 8 x £15k = 60k
£90k 0.6

Therefore the most you will pay for the market research with imperfect information
would be £90,000 – £60,000 = £30,000.

Other decision trees could have represented the decision differently e.g. could have
shown better or worse first and then right or wrong for the market research company last
on the decision tree

Evaluation:

The market research company is right (0.7) and the competition is going to be better (0.4)
you therefore do not go as you will sell 4 cars anyway.

The market research is right and the competition is worse (0.6) you therefore do go and
sell 8 cars but will have to incur 10k exhibition costs.

The market research is wrong (0.3) and the competition you find is better (0.4), you
would not have gone had you been told this, but you would go because they were wrong
so you would sell 4 cars and incurred 10k exhibition costs for doing so.

The market research is wrong (0.3) and the competition is worse (0.6), you would have
gone but seeing as they predicted the competition would be better, you would have stayed
away, sold 4 cars anyway, but incurred no exhibition costs.

327 | P a g e
In the above decision you would have always sold 4 cars any way so you could have
excluded the 4 cars sold at every stage of the decision process.

The decision tree is the same as above but ignores 4 cars sold (earning £60k contribution,
every stage of each decision. This would also allow you to calculate the answer quicker.

£0
£0
0.4
N

Right
0.7 £30k 0.6 £50k
A
£19.8 -£10k
0.4

£19.8 Wrong
0.3
-£4k 0.6
£0

Probability of attending the show and finding competition is worse than you
= 0.7 x 0.6 = 0.42.

Incremental contribution 8 cars – 4 cars sold anyway = £60k -£10k cost = £50k.

Probability of attending the show and finding the competition is better than you
= 0.3 x 0.4 = 0.12.

Incremental contribution 4 cars – 4 cars sold anyway = £0k –10k cost = -£10k.

(0.42 x 50k) + (0.12 x –10k) = 19.8k

328 | P a g e
8.39 Answer is C

£0
0.4
£60k
-20k
£27k 0.5
£7k 0.6

£45k 0.5 £30k

329 | P a g e
330 | P a g e
 Chapter 9 Solutions - Linear programming

9.1 Answer is C

9.2 Answer is B

9.3 Answer is C

9.4 Answer is D

9.5 Answer is D

Contribution per hour for each product:

Product A Product B Product C

£2.50 £14.00 £2.80

We would want to produce in the order B, C, A.

We currently produce already 1200 of product B and 2500 of product C, using up the
maximum of 8100 machine hours.

If a further 2000 machine hours were offered we could produce another 500 of product C
and 250 of product A (product C will use 500 units x 3hrs a unit = 1500, the balance of
500 hrs would use 2 hrs a unit for product A

The shadow price would be (500 units x £8.40) + (250 units x £5.00) = £5,450 also this
would be the contribution earned. However the contribution is arrived at after the
deduction of the normal cost of a machine hour so to get the maximum price we must add
the normal cost of 2000 machine hours (2000 x £0.70 = £1,400). Therefore the maximum
price will be £1,400 + £5,450 = £6,850

9.6 Answer is D

(1) 0.75A + 0.4B = 560

(2) 1.6A + 0.2B = 860

Multiply equation (2) through by 2. Therefore (2) becomes:

3.2A +0.4B =1720

331 | P a g e
 Subtract equation (1) from the above equation. Therefore:

3.2A + 0.4B = 1720 -

0.75A + 0.4B = 560
2.45A = 1160
A = 1160/2.45
A = 473

Substitute A = 473 into equation (1). Therefore:

0.75 (473) + 0.4B = 560

355 + 0.4B = 560
B = 205/0.4
B = 513

9.7 Answer is D

9.8 Answer

 The feasible region

Objective function
Surplus resources
Dual price
Slack variable
 The feasible line
Maximum price
Minimum price

9.9 Answer

Dual price
 Extra contribution earned
A scarce resource
A limiting factor
Slack variable
The feasible region
Maximum price
A unit of a constraint

332 | P a g e
9.10 Answer

A limiting factor
They identify the main objectives
Show the limits of resources available
 Where the answer is always positive
Slack variable
The feasible region
Where the answer is always negative

9.11 Answer is A

9.12 Answer is F = 1,680 units, G = 2,480

Whre the constraints intercept each other is our optimal solution. We will need to solve
using simultaneous equations.

2F + 3G = 10,800 (equation 1)
3F + 2G = 10,000 (equation 2)

Multiply equation1 by 2 and then also equation 2 by 3

4F + 6G = 21,600
9F + 6G = 30,000

Subtract equation 2 from equation 1

4F + 6G = 21,600
9F + 6G = 30,000
-5F = -8,400
F = 1,680

Substitute F = 1,680 into equation 1

2 (1,680) + 3G = 10,800
3,360 + 3G = 10,800
3G = 7,440
G = 2,480

333 | P a g e
9.13 Answer is B
D E F
Contribution per hour (£54 / 1) = £54 (£72 / 1.5) = £48 (£35 / 0.5) = £70
Rank 2 3 1

Make F first: 3,000 x 0.5 hrs = 1,500 hrs used

Make D second: 2,400 x 1 hr = 2,400 hrs used
Make E last: Hrs left = 5,400 – 1,500 – 2,400 = 1,500 hrs
1,500 / 1.5 = 1,000 E units can be made

Therefore:
(1,000 x E) + (2,400 x D) + (3,000 x F)

9.14 Answer is B

9.15 Answer is D

Product L M
Material per unit 10/5 = 2 kg 45/5 = 9kg
Contribution per kg 22/2 = $11 11/9 = $1.22

Rank in order of production 1 2

Amount of material available is 6,000 kg.

Kg used
L 400 units x 2 kg 800
M 6,000 kg – 800 kg = 5,200 kg 5,200 kg / 9 kg = 577 units 5,193
5,993

Optimum production plan

Production
L 400
M 577

Contribution from production plan

L 400 x $22 = $8,800

M 577 x $11 = $6,347
Contribution $15,147

334 | P a g e
9.16 Answer is C

Product R T

Labour hrs per unit 24/8 = 3 hrs 40/8 = 5 hrs

Contribution per labour hour 47/3 = 15.67 61/5 = 12.20

Rank in order of production 1 2

Commercial Labour hours per Labour hours

contract unit used
R 250 3 750
T 350 5 1,750
Total 2,500

Amount of labour hours available after commercial contract is 5,000 hrs.

Labour
hrs used
R 500 units x 3 hrs 1,500
T 5,000 hrs – 1,500 hrs = 3,500 hrs 3,500 hrs / 5 hrs = 700 units 3,500
5,000

Optimum production plan

Commercial contract Production Total

R 250 500 750
T 350 700 1,050

9.17 Answer is P6, C3, C5, P4

P4 P6 C3 C5
$ $ $ $

Contribution 70/0.75 100/0.50 31/0.25 50/0.50

per square metre = $93.33 = $200 = $124 = $100

Rank in order
4 1 2 3
of production

335 | P a g e
336 | P a g e
 Chapter 10 Solutions - Relevant costing

10.1 Answer

 Future costs
Sunk costs
 Incremental costs
 Avoidable costs
Fixed costs
Common costs
 Differential costs

10.2 Answer is B

400kg in stock – if not used could be sold for (400 x £1.75) £700
100kg extra required – at current cost (£4.50 x 100) £450
£1,150

The extra 100kg is an extra or ‘incremental cost’ £450

The 400 kg could have earned £700 and therefore is an ‘opportunity cost’
The past cost for the stock of £1,750 is a ‘sunk cost’ and is irrelevant

10.3 Answer is B

10.4 Answer

 Head office overheads

 Depreciation
Rent agreement on a building to be confirmed
 The cost of material bought last year
 Managers salary of factory
 Pre-paid elcectric and gas bill
Labour costs of staff who are working on a job at full capacity

10.5 Answer is B

10.6 Answer is C

10.7 Answer is A

10.8 Answer is A

10.9 Answer is B

337 | P a g e
10.10 Answer is B

2 new employees needed:

Recruit (2 x £45,000 = £90,000)

Or retrain existing employees (£20,000 + £60,000) = £80,000

The lowest cost option would be to retrain the existing employees therefore the relevant
cost is £80,000

Salaries of existing staff and the manager’s apportioned salary cost is irrelevant when
decision-making.

10.11 Answer is D

The minimum price that ZYP Ltd should accept for the above contract , using relevant
costing would be:

Variable cost £4,500

Opportunity cost £8,500
Cost to dismantle after use £1,000
Minimum price £14,000

The net book value is an ‘historical cost’ and therefore not relevant when decision
making

10.12 Answer is B

10.13 Answer is B

10.14 Answer is $300

Skilled labour can either be obtained by asking staff to do overtime or stop production of
another product, because there is no skilled labour available.

Cost of overtime = 25hrs x $8p/h x 1.5 = $300

Stop existing production

= labour costs + lost contribution
= (25hrs x $8p/h) + (25hrs x $13p/h) = $525

Choose the cheapest option which would be paying staff overtime, therefore $300.

338 | P a g e
10.15 Answer

 Incremental costs
Committed costs
Sunk costs
 Differential costs
Absorbed fixed costs
 Opportunity costs

10.16 Answer is B

900kg x $3.50 = $3,150

300kg x $4.50 = $1,350
Total $4,500

10.17 Answer

The common costs of the joint process

 The further processing costs of the product
 The unit selling price of the product at the point of separation
 The unit selling price of the product after further processing
 The percentage losses of further processing the product
The actual output of the product from the joint process

10.18 Amswer

Costs used for decision making include only costs that are affected by the
decision.
 Costs used for decision making never include fixed costs.
Costs used for decision making do not include past costs.
Costs used for decision making include opportunity costs.

10.19 Answer is B

Compare the company’s variable costs for each compnonet with supplier’s price to see
which is cheaper to buy in. Fixed costs are ignored as they are sunk.

339 | P a g e
10.20 Answer is B

40% of fixed overheads are relevant and need to be deducted to find the real contrbutions
earned. This is because they are specific costs that have to be spent by each divison if
they are to manufacture.

40% x 525 = $210

Each divison will get an equal share of $210, therefore $70 each. Now work out
contribution:

Divison W = $140 - $70 = $70

Divison X = $420 - $70 = $350
Divison Z = $60 - $70 = ($10)

Therefore only continue with divsinos W and X.

10.21 Answer

Tax balancing charge or allowance on the existing asset

 Net book value of the existing asset
Effect on working capital requirements
Removal cost of the existing asset

10.22 Answer is B

10.23 Answer is D

10.24 Answer is D

10.25 Answer is D

10.26 Answer is B

You take the higher of the scrap value and what you can save in material if you can use it
in another project or production.

Ignore the histtorical purchase price as this is not relevant.

Therfore the answer is £3,500.

10.27 Answer is C

340 | P a g e
10.28 Answer is $2,000

The machine hire cost is based on 5 days multiplied by a hire charge of $500 per day.
However, this is not the relevant cost because there is a lower cost option available.

If the machine is hired for an entire month at a cost of $5,000 and then sub hired for $150
per day for 20 days (total $3,000) the net cost of this option is $2,000. Therefore the
relevant cost is $2,000.

10.29 Answer is C

The overheads are fixed and therefore ignored, but the machine power costs will be
incurred as a result of this job, and so therefore we should include these costs. £0.75 x
10hrs = £7.50.

10.30 Answer is B

It is a direct material which is regularly used and therefore we would need to use the
replacement cost to value it for the quote. 500m² x $5.50 = $2,750

10.31 Answer is $945

Skilled labour can either be obtained by asking staff to do overtime or stop production of
another product, because there is no skilled labour available.

Cost of overtime = 35hrs x $18p/h x 1.5 = $945

Stop existing production

= labour costs + lost contribution
= (35hrs x $18p/h) + (35hrs x $24p/h) = $1,470

Choose the cheapest option which would be paying staff overtime, therefore $945.

10.32 Answer

 $20
$400
$1,080
$880
$460
$480
$0

341 | P a g e
10.33 Answer is M and N only

To work out the optimal processing plan we need to also consider the extra benefit
compared to the extra cost involved in processing M, N and P further.

Products Extra revenue Extra cost Net benefit

M $8.40 - $6.25 = $2.15 $1.75 $0.40
N $6.45 – $5.20 = $1.25 $0.95 $0.30
P $7.45 - $6.80 = $$0.65 $0.85 ($0.20)

The optimal processing plan is to make products M and N further as they yield further
profits, but not product P as it yields a further loss.

10.34 Answer is $360

If we were to go ahead with this contract we would need to obtain a replacement coach to
cover existing obligations. If this is ignored then we lose contribution and incur
significant penalties on existing obligations.

Replacement coach costs = $180 x 2 days = $360 or if we don’t honour our current
obligations then we would lose contribution of $250 x 2 days = $500. It is cheaper to hire
replacement coach for $360.

10.35 Answer is $400

Ronnie only needs his driver for a 1 day bank robbery. All the other days he is not
required. Therefore we need to hire a replacement driver for 1 day to cover the bank
robbery. Therefore $400 x 1 day = $400.

10.36 Answer is $0

These are to be ignored as they are not relevant to the quote.

342 | P a g e
 10.37 Answer is make RZ, TZ and S

We need to work out the extra benefit of making RZ, SZ and TZ and then compare these
to the extra cost involved. We should make those which give a net extra benefit.

Product Extra benefit Extra variable Extra fixed cost Net

cost
RZ $6.00 - $3.00 = $3.00 $1.40 Nil $1.60
SZ $5.75 - $5.00 = $0.75 $0.90 Nil ($0.15)
TZ $6.75 - $3.50 = $3.25 £1.00 $600 / 1200 kg = $0.50 $1.75

Products R and T should be further processed to produce products RZ and TZ

respectively as they provide and extra net benefit of $1.60 and $1.75 per kg respectively.

Product S should not be further processed to make product SZ as there is net cost of
$0.15 per kg every time an SZ is produced.

10.38 Answer is C

Shops that are making contribution losses should be shut down and overheads are sunk
and so therefore their apportionment is irrelevant.

10.39 Answer is C

BMW = $25,000 + ($500 x 10) - $3,500 = $26,500

Rover 75 = $2,650 x 10 = $26,500

10.40 Answer is B

The real benefit gained here will be the elminarion of a loss.

This would be the $10,000 less the $19,000 of specific fixed overheads, therefore $9,000
loss which will now not be incurred if shut down.

(To get $19,000 remove the $7,000 from the $26,000 of overheads to be left with the
specific fixed overheads which is relevant).

343 | P a g e
10.41 Answer is B

Sales after reworking: 2,000 x $6 = $12,000

The cost to rework: 2,000 x $1 = $2,000

The opportunity cost of not making new units: 2,000 x $2 = $4,000

The net return of reworking: $12,000 - ($2,000 + $4,000) = $6,000

The net return of scrapping: 2,000 x $2 = $4,000

10.42 Answer is C

The definition given applies to an incremental cost; an additional cost that will result
when a particular course of action is taken.

10.43 Answer is D

Sales after reworking: 17,000 x $5 = $85,000

The cost to rework: 17,000 x $3 = $51,000

The opportunity cost of not making new units: 17,000 x $2 = $34,000

The net return of reworking: $85,000 - ($51,000 + $34,000) = $0

The net return of scrapping is 17,000 x $1 = $17,000

10.44 Answer is A

The unit cost:

Materials = $16,000 / 8,000 = $2
Labour = $8,000 / 8,000 = $1
Fixed overhead = $0 because they are sunk
Selling expenses, variable only = $8,000 x 40% = $3,200 / 8,000 = $0.40

Variable cost per unit:

$2.00 + $1.00 + $.40 = $3.40

Total variable cost = $3.40 x 500 = $1,700

Selling price = $1,700 + $2,000 = $3,700 / 500 = $7.40

344 | P a g e
 Mock Exam 1

M1.1

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

A The variable cost per unit rises

B The total variable cost will rise
C The variable cost will become curvilinear
D The total cost per unit will rise

M1.2

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

A Total fixed costs will rise

B Total fixed costs will remain constant
C Total fixed costs will fall
D The fixed cost per unit would increase

M1.3

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

A Economic cost
B Fixed cost
C Variable cost
D Semi-variable cost

345 | P a g e
M1.4

The data below has been extracted from the cost accounting records of a company. The
data shows the total cost and the inflation index relevant to the period in which the costs
were incurred.

Output level Total cost Inflation index

3,000 units $9,167 1.03
4,000 units $11,760 1.05

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

A $2.44
B $2.75
C $2.30
D $3.14

M1.5

The costs for a company at different levels of output are as follows:

Output Total costs

34,000 units $404,000
40,000 units $456,800
42,000 units $476,000

The variable cost per unit will reduce by 5% for output levels above 45,000 units. The
reduced cost per unit will apply to all units.

If the high-low method is used to estimate costs, the budgeted total costs for an output
level of 50,000 units is:

A $522,800
B $427,500
C $525,500
D $480,000

346 | P a g e
M1.6

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

A A break-even chart
B A profit-volume chart
C A variable cost chart
D A semi-variable cost chart

M1.7

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

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

M1.8

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

A A break-even chart
B A profit-volume chart
C A variable cost chart
D A semi-variable cost chart
347 | P a g e
M1.9

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

A Shift to the right

B Shift to the left
C Disappear off the chart
D Remain constant on the same point

M1.10

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

A Shift to the right

B Shift to the left
C Disappear off the chart
D Remain on the same point

M1.11

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

A Shift upwards
B Shift downwards
C Disappear off the chart
D Remain on the same point

348 | P a g e
M1.12

A company has the following budgeted profit for the period:

£ £

Sales revenue 250,000

Less:

Direct Materials & Labour 30,000

Variable Production Overhead 10,000

Fixed Production Overhead 20,000

60,000

Gross Profit 190,000

Less

Variable Sales and Distribution Costs 40,000

Fixed Sales and Distribution Costs 50,000

90,000

Net Profit 100,000

What is the margin of safety (in units) if budgeted output for the period is 85,000
units?

M1.13
A college offers discounts of 10% to students who pay on enrolment and 50% of
customers pay on enrolment. The extra sales needed to increase cash receipts by £20,000
would be?

A £20,000
B £21,053
C £22,000
D £44,000

349 | P a g e
M1.14

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

40% 60%

Direct materials ($) 67,500 101,250

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

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

M1.15

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

A Changes in levels of finished goods inventory

B Changes in levels of work-in-progress
C Changes in levels of raw materials
D Changes in levels of idle time and wastage

M1.16

A company has the following budgeted details for sales receipts

Opening trade receivables £20,000.

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

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

Total budgeted receipts for the entire year would be?

A £212,800
B £232,800
C £237,600
D £240,000

350 | P a g e
M1.17

A Ltd has the following production budget for garden gnomes:

Budgeted raw material plastic inventory for making garden gnomes:

 Opening inventory 2,000kg

 Closing inventory 5,000kg
Each garden gnome produced requires 0.4kg of raw material plastic. Each Kg of plastic
costs A Ltd £3.50.

Budgeted finished units inventory of garden gnomes:

 Opening inventory 12,000 units

 Closing inventory 15,000 units
Budget sales garden gnomes for the next month are forecast to be 26,000 units.

Calculate for the following month

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

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

M1.18

Which of the following sentences is the best representation of the behavioural aspects of
budgeting?

A If budget targets are unrealistic there may be a negative reaction from individuals
B It is seldom necessary to involve employees in the budgetary process
C Budgets will always improve motivation
D Budgets will always improve participation

351 | P a g e
M1.19

Which of the following sentences is the best description of zero-base budgeting?

A Zero-base budgeting starts with the figures of the previous period and assumes a
zero rate of change

B Zero-base budgeting requires a completely clean sheet of paper every year, on

which each part of the organisation must justify the budget it requires

C Zero-base budgeting is a technique applied in government budgeting in order to

have a neutral effect on policy issues

D Zero-base budgeting is a short-term planning technique targeted at zero profit or

loss

M1.20

Which of the following is not a broad cost classification category typically used in
activity based costing?

A Unit level
B Batch level
C Product sustaining level
D Operational level

M1.21

In an activity based costing system, direct labour used would typically be classified as a:

A Product sustaining cost

B Batch level cost
C Unit level cost
D Facility level cost

M1.22

Which of the following is least likely to be classified as a batch level activity in an

activity based costing system?

A Dispatching
B Receiving and inspection
C Income tax
D Quality assurance

352 | P a g e
M1.23

In an activity based costing system materials receiving would typically be classified as a:

A Unit level activity

B Facility level activity
C Product sustaining activity
D Batch level activity

M1.24

Tyson is developing a new range of vacuum cleaners that use turbine power technology.
The research costs for this technology are said to come from:

A Unit level activity

B Facility level activity
C Product sustaining activity
D Batch level activity

M1.25

Which of the statements if any are true regarding product sustaining activities?

They must be done for each batch of product that is made

They must be done for each unit of product that is made
They are needed to support an entire product line

M1.26

Which of the following is least likely to be classified as a facility level activity in an

activity based costing system?

A Machine processing cost

B Property taxes
C Plant maintenance
D Plant management salaries

M1.27

The salaries of the finance department staff in a manufacturing company are from:

A Unit level activity

B Facility level activity
C Product sustaining activity
D Batch level activity

353 | P a g e
M1.28

Place the following costs in the correct coulumn for batch level activity and facility level
activity, select all that apply.

 Shipping
 Plant depreciation
 Inspection
 Quality assurance
 Plant maintenance
 Direct materials
 Material handling
 Property taxes
 Insurance

Batch Level Activity Facility Level Activity

The following information applies to M1.29 and M1.30:

Battersea tyres uses an activity based costing system to compute the cost of making
premium tyres and delivering the tyres to garages. Staff costs are £80,000 and make and
deliver the tyre. Other general overheads are £70,000.

These costs are allocated as follows:

Tyre manufacture Delivery Other

Staff costs 70% 20% 10%
General overheads 50% 30% 20%

There will be 40,000 tyres and 6,000 deliveries in the year.

354 | P a g e
M1.29

What is the staff costs and general overheads that would be charged to each tyre?

A £0.88
B £1.40
C £2.28
D Some other amount

M1.30

What is the staff costs and general overheads that would be charged to each delivery?

A £6.17
B £2.67
C £3.50
D Some other amount

M1.31

SRK combines all manufacturing overheads into one single cost pool and allocates this
overhead to products based on machine hours.

Activity based costing would show that with SRK’s current procedures:

A The low volume products have too much overheads in them

B The high volume products have too much overheads in them
C All products have too much overheads in them
D The high volume products do not have enough overheads in them

M1.32

JJB is changing from a traditional costing system to an activity based system. Which of
the following costs would change from indirect to direct?

A Direct materials
B Factory supplies
C Production setup
D Production setup, finished-goods inspection, and product shipping

355 | P a g e
M1.33

A hospital administrator is in the process of implementing an activity-based-costing

system. Which of the following tasks would not be part of this process?

A Identification of cost pools

B Calculation of cost application rates
C Assignment of cost to services provided
D None of the above

M1.34

Consider the following; all figures are in £’000s:

Direct materials = £4,120

Plant rent = £1,734
New technology design engineering = £3,111
Materials receiving = £400
Manufacturing set up = £150
Machinery depreciation = £56
General management salaries = £2,563

Determine the cost of unit level, batch level, product sustaining, and facility level
activities.

M1.35

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

A £112.50
B £135.00
C £140.63
D £160.00

356 | P a g e
M1.36

The budget for the cost of medical supplies in a hospital, based on a percentage of
maximum bed occupancy is shown below:

Bed occupancy 82% 94%

Medical supplies cost $410,000 $429,200

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

The medical supplies expenditure variance was

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

M1.37

A company's annual sales budget includes 1,500 units of a product at a selling price of
$400. Each unit has a budgeted contribution to sales ratio of 30%. Actual sales were
1,630 units at an average selling price of $390. The actual contribution to sales ratio was
28%.

The sales price variance to the nearest $1 is:

A $16,300 A
B $15,000 A
C $16,200 A
D $17,604 A

M1.38

Which of the following are possible causes of an adverse direct material usage variance?

Select ALL that apply.

Output was higher than budgeted therefore more material was used
Labour was of a lower skill than standard
The standard material usage was set unrealistically high
Material was of a lower quality than standard
Output was higher than budgeted
Output was lower than budgeted

357 | P a g e
M1.39

A company's sales budget includes 800 units of a product at a selling price of $300. Each
unit has a budgeted contribution to sales ratio of 30%. Actual sales were 720 units at an
average selling price of $275. The actual contribution to sales ratio was 32%.

The sales volume contribution variance (to the nearest $1) is:

A $7,200 A
B $24,000 A
C $7,680 A
D $7,040 A

M1.40

BB mixes two materials R and S in proportions 2:1. The standard price is $4 kg for R and
$3kg for S. There is a 2% normal loss. Last week 40,400 kg of R at a cost of $121,200
and 19,000kg of S at a cost of $76,000 were input to produce 60,000 kg of output.

For the whole process for last week the material mix variance is $

M1.41

Which of the following statements about standard costing is NOT true?

A Standard costing is useful where products are non-standard or are customised to a

customer's specifications.

B Standard costing provides useful information for cost control purposes.

C Standard costing simplifies the task of inventory valuation and profit

measurement.

D Standard costing provides a basis for the prediction of future costs which can be
used for decision making and planning purposes.

M1.42

In the context of quality costs, free replacements to customers and training costs are
classified as:

Free replacements Training costs

A External failure cost Appraisal cost
B External failure cost Prevention cost
C Internal failure cost Appraisal cost
D Internal failure cost Prevention cost
358 | P a g e
M1.43

The following company uses a backflush accounting system. During May, 2,500 units
were produced and sold, the standard cost per unit being £50 (of which includes material
of £30 per unit). During May, £52,500 conversion cost was incurred.

The debit balance on the cost of goods sold account for the above period was?

A £125,000
B £127,500
C £75,000
D £177,500

M1.44

Which of the following is not a likely example of a bottleneck when planning for
production capacity

A Resources available
B Physical space
C Lead time to organise expansion
D Sales demand

M1.45

Which ONE of the following would NOT be considered part of the lean philosophy
approach?

A Centralisation of management decision making

B Elimination of waste
C Involvement of staff in the operation
D The drive for continuous improvement

M1.46

Which of the following are NOT likely to be factors that can restrict productive capacity
of a firm? Select THREE only.

Physical space
JIT systems
Efficiency
Waste
Over-production
Outsourcing
Defects
Resource availability
359 | P a g e
M1.47

Optimised production technologies (OPT) is an operations management system which

aims to

A improve distribution networks

B improve supply sourcing alternatives
C integrate operations and quality assurance
D reduce production bottlenecks

M1.48

CIMA's definition of just-in-time (JIT) production is:

A A system which is driven by demand for finished products, whereby each

component on a production line is produced only when needed for the next stage.

B A system in which material purchases are contracted so that the receipt and usage
of material, to the maximum extent possible, coincide.

C A system where the primary goal is to maximise throughput while simultaneously

maintaining or decreasing inventory and operating costs.

D A system that converts a production schedule into a listing of the materials and
components required to meet that schedule, so that adequate stock levels are
maintained and items are available when needed.

M1.49

What is “carbon footprint”?

The size of the plant or factory of a business

The amount non-renewable resounrces used to manufacture products
The amount of carbon not used in the manufacturing process
The amount of energy used from renewable resources
The quantity of waste and emissions that is generated from the manufacturing
process

360 | P a g e
M1.50

Which of the following environmental costs would be classified as environmental

external failure costs?

Select ALL that apply.

Inspection of products to ensure regulatory compliance

Training of employees
Cleaning up contaminated soil
Government penalties and fines
Disposing of toxic material
Recycling of waste products

M1.51

A company is considering whether to develop and market a new product. The cost of
developing the product is estimated to be $200,000. There is a 60% probability that the
development will succeed and a 40% probability that the development will be
unsuccessful, and the development costs will be lost.

If the development is successful the product will be marketed. There is a 50% chance that
the marketing will be very successful and the product will make a profit of $250,000.
There is a 30% chance that the marketing will be reasonably successful and the product
will make a profit of $150,000 and a 20% chance that the marketing will be unsuccessful
and the product will make a loss of $80,000. The profit and loss figures stated are after
taking account of the development costs of $200,000.

The expected value of the decision to develop and market the product is:

A $154,000
B ($46,000)
C $92,400
D $12,400

361 | P a g e
M1.52

A company can choose from three mutually exclusive projects. The net cash flows from
the projects will depend on market demand. All of the projects will last only for one
year. The forecast net cash flows, their associated probabilities and the expected value of
the projects are given below:

Market demand Weak Average Good Expected value

Probability 0.3 0.5 0.2 1

Project A $400 $500 $600 $490

Project B $300 $350 $400 $345
Project C $500 $450 $650 $505

The maximum amount that should be paid for perfect information regarding market
demand is $

M1.53

A decision maker using the maximin decision criterion will:

A Assume that risk can be ignored and will choose the outcome with the highest
expected value.

B Assume that he will regret not having chosen another alternative and will
therefore minimise the possible loss under this assumption.

C Assume that the worst outcome will always occur and will select the largest
payoff under this assumption.

D Assume that the best payoff will always occur and will therefore select the option
with the maximum payoff.

M1.54

If 2 products H and J use 13kg and 60kg of a material respectively to make a whole
product, and the amount of material avaible was 3,000kg, which of the follwoing is the
correct constraint?

A 13H + 60J ≥ 3,000

B 60J + 13H ≤ 3,000
C 60J + 13H = 3,000
D 13H + 60J < 3,000

362 | P a g e
M1.55

How do you find the optimal solution on a graph?

A Move towards the origin

B Select the constraint which intercepts the vertical axis at the top
C Move away from the origin
D Select the constraint which intercepts the horizontal axis on the furthest right

M1.56

An opportunity cost is the cost of

A Unplanned new business

B Obtaining new business opportunities
C Lost business
D The next best alternative course of action

M1.57

Which of the following costs is not relevant when considering the closure of a department
within a factory?

A Variable overheads
B Fixed overheads
C Direct materials
D Direct labour

M1.58

Which of the following may form the basis for the price a company (working at full
capacity) should charge for a one-off order?

A Variable costs
B Direct and indirect costs
C Opportunity costs plus marginal costs
D Direct labour plus materials costs

M1.59

In a make versus buy decision which of the following factors is not relevant?

A Opportunity cost of alternative activities

B Reliability of supplier
C Reliability of bought-in products
D Fixed production costs
363 | P a g e
M1.60

A department makes a product whose contribution per unit is £1,000, and which takes 20
hours machine time. A component used in this product with a marginal cost of £300
(taking 5 hours of machine time) could be purchased from an external supplier. The
department is working at full capacity. What is the maximum price that the company may
pay to buy the component from an external supplier?

A £550
B £600
C £575
D £500

364 | P a g e
 Mock Exam 1 - Answers

M1.1 Answer is B

M1.2 Answer is B

M1.3 Answer is D

M1.4 Answer is A

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

$9,167 / 1.03 = $8,900

$11,760 / 1.05 = $11,200

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

Units produced Total cost ($)

4,000 11,200
3,000 8,900
1,000 2,300

$2,300 / 1,000 units = $2.30 direct cost per unit produced

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

$2.30 x 1.06 = $2.44

M1.5 Answer is C

Work out variable cost

Output Cost
42,000 units $476,000
34,000 units $404,000
8,000 units $72,000

Variable cost per unit = $72,000 / 8,000 units = $9

Work out fixed cost

Use either 42,000 or 34,000 units to work out the fixed cost as a balancing figure.
$476,000 = Fixed cost + (42,000 x $9)
$476,000 = Fixed cost + ($378,000)
Fixed cost = $98,000

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Therefore at 50,000 units:

Total cost = $98,000 + (50,000 x $9 x 0.95) = $525,500

M1.6 Answer is B

M1.7 Answer

Fixed cost $100,000 + target profit $250,000 = $350,000

$350,000/ (C/S) ratio 40% (0.4) = sales revenue $875,000

M1.8 Answer is A

M1.9 Answer is B

M1.10 Answer is D

M1.11 Answer is A

M1.12 Answer 50,000 units

 Fixed cost equals £20,000 + £50,000 = £70,000

 Variable cost equals £30,000 + £10,000 + £40,000 = £80,000
 Contribution equals £250,000 (sales) less £80,000 (variable cost) = £170,000
 Contribution per unit equals £170,000 ÷ 85,000 units = £2 per unit
 Break-even volume = Fixed cost (£70,000) ÷ £2 contribution per unit equals =
35,000 units
 Margin of safety = budgeted units (85,000) less break-even units (35,000) =
50,000 units

M1.13 Answer is B

10% discount is offered to students who pay on enrolment and 50% of customers pay on
enrolment; therefore 50% x 10% = 5% sales lost before you receive £20,000. Therefore
£20,000/0.95 = £21,053 or if £20,000 represents 95% then 100% of sales would be
(100%/95%) x £20,000 = £21,053.

PROOF: £21,053 x 50% get discount x 10% discount = £1,053 discounts given.

Therefore sales £21,053 - £1,053 discounts given = £20,000 received.

366 | P a g e
M1.14 Answer is $275,500

40%
Direct materials ($) 67,500
Direct labour ($) 33,500
Production overhead ($) 45,000
146,000 x (70%/40%) = 255,500
Other fixed overhead ($) 20,000 Fixed = 20,000
Flexed budget at 70% activity level 275,500

M1.15 Answer is A

M1.16 Answer is B
In the year… try relating the answer to a calendar year to understand it better!
Opening trade receivables would all pay in Jan and Feb (in the year) 20,000
12 months sales x £20,000 (say Jan-Dec) = 240,000
However trade receivables still outstanding for Nov-Dec? (W1) -22,400
Cash discounts in the year (W2) -4,800
Cash and credit sales received Jan-Dec 232,800

W1
 November monthly sales are £20,000 x 80% credit sales x 40% will settle 2
months after sale (not paying this year) = £6,400.
 December monthly sales are £20,000 x 80% credit sales (not paying this year) =
£16,000.
 Trade receivables outstanding at the end of the year £6,400 + £16,000 = £22,400.

W2
Cash discounts for the year £20,000 x 12 months x 20% of customers will pay by cash
and will be given a 10% discount, therefore cash discount = £4,800

367 | P a g e
M1.17 Answer

(i) The raw material usage (Kg) for the month would be 11600 kg

(ii) The value of budgeted material purchases (£) for the month would be 14600 kg x
£3.50 = £51,100.

WORKINGS:

Production Budget:

Opening inventory 12000 units

Add: Production (balancing figure) 29000 units

41000 units

Less: Sales (given) 26000 units

Closing inventory 15000 units

Production budget will drive material usage.

Raw Materials Budget:

Opening inventory 2000 kg

Add: Purchases (balancing figure) 14600 kg

16600 kg

Less: Material usage (0.4kg x 29000 units) 11600 kg

Closing inventory 5000 kg

M1.18 Answer is A

M1.19 Answer is B

M1.20 Answer is D

M1.21 Answer is C

M1.22 Answer is C

M1.23 Answer is D

M1.24 Answer is C
368 | P a g e
M1.25 Answer

They must be done for each batch of product that is made

They must be done for each unit of product that is made
 They are needed to support an entire product line

M1.26 Answer is A

M1.27 Answer is D

M1.28 Answer

Batch Level Activity Facility Level Activity

Shipping Property taxes
Inspection Insurance
Quality assurance Plant depreciation
Material handling Plant maintenance

Direct materials is a unit level activity and therefore not included in the above.

M1.29 Answer is C

Staff costs = £80,000 x 70% = £56,000

General overheads = £70,000 x 50% = £35,000
Total cost for tyres = £56,000 + £35,000 = £91,000
Cost per tyre = £91,000 / 40,000 = £2.28

M1.30 Answer is A

Staff costs = £80,000 x 20% = £16,000

General overheads = £70,000 x 30% = £21,000
Total cost for delivery = £16,000 + £21,000 = £37,000
Cost per delivery = £37,000 / 6,000 = £6.17

M1.31 Answer is B

M1.32 Answer is D

M1.33 Answer is D

369 | P a g e
M1.34 Answer

Unit level costs = direct materials = £4,120

Batch level costs = materials reciving + manufacturing set up = £550

Product sustaining costs = new technology design engineering = £3,111

Facility level costs

= plant rent + machinery depreciation + general management salaries = £4,353

M1.35 Answer is C

45 rooms x 0.5 hours = 22.5 hours

22.5 hours / 0.8 = 28.125 hours

28.125 x £5 an hour = £140.63

M1.36 Answer is B

In order to work out the expenditure variance we need to compare the budgeted
expenditure at 87% bed occupancy to the actual expenditure. We will calculate the
variable cost for each 1% increase in bed occupancy by comparing the costs of the flexed
budgets given.
Machine hours Cost ($)
82% 410,000
94% 429,000
12% 19,200

$19,200/12 = $1,600 per 1% increasing bed occupancy

Therefore the budget cost at 87% occupancy is the cost at 82% plus 5% of costs.

$410,000 + ($1,600 x 5) = $418,000.

The expenditure variance = $430,000 - $418,000 = $12,000 adverse.

M1.37 Answer is A

Sales price variance = (390 – 400) x 1,630 = $16,300 A

370 | P a g e
M1.38 Answer

Output was higher than budgeted therefore more material was used
 Labour was of a lower skill than standard
The standard material usage was set unrealistically high
 Material was of a lower quality than standard
Output was higher than budgeted
Output was lower than budgeted

M1.39 Answer is A

Sales volume profit variance

Did sell 720 units

Should sell 800 units
Difference 80 units
Std contirbution per unit 30% of £300 =
£90
Sales volume contribution 80 units x £90
variance = £7,200 A

M1.40 Answer is $800 (A)

Did use Should use Standard price Variance

(litres) (litres) $
Material R 40,400 39,600 W1 x $4 = 3,200 (A)
Material S 19,000 19,800 W2 x $3 = 2,400 (F)
59,400 59,400 800 (A)

W1 59,400kg x 2/3 = 39,600kg

W2 59,400kg x 1/3 = 19,800kg

M1.41 Answer is A

M1.42 Answer is B

M1.43 Answer is B

£50 x 2,500 units = £125,000 at standard cost + under absorption (£52,500 – ((£50-£30) x
2,500) = £2,500) = £127,500

M1.44 Answer is A

371 | P a g e
M1.45 Answer is A

Centralisation of management decision making

M1.46 Answer

 JIT systems
 Over-production
 Outsourcing

M1.47 Answer is D

Reduce production bottlenecks

M1.48 Answer is A

M1.49 Answer

The size of the plant or factory of a business

 The amount non-renewable resounrces used to manufacture products
The amount of carbon not used in the manufacturing process
The amount of energy used from renewable resources
 The quantity of waste and emissions that is generated from the manufacturing
process

M1.50 Answer

Inspection of products to ensure regulatory compliance

Training of employees
 Cleaning up contaminated soil
 Government penalties and fines
Disposing of toxic material
Recycling of waste products

372 | P a g e
M1.51 Answer is D

50% $250,000

30%
60% $150,000
20%
$154,000
Spend
40% ($80,000)
$12,400
$12,400
($200,000)
$0

Not $0
spend

M1.52 Answer is $25

If we had perfiect information then expected value is:

Market conditions Best projects Probability Net cash EV

in market inflows
condition
Weak C 0.3 $500 $150
Average A 0.5 $500 $250
Good C 0.2 $650 $130
EV with perfect information $530
EV without perfect information ($505)
Value of perfect information $25

M1.53 Answer is C

M1.54 Answer is B

M1.55 Answer is C

M1.56 Answer is D

M1.57 Answer is B

M1.58 Answer is C

M1.59 Answer is D

373 | P a g e
M1.60 Answer is A

The maximum price is the material cost of buying in the material and the machine time
taken to process. This machine time will result in lost contribution of the the current
products being made as the company is at full capacity.

Each machine hour is worth 1,000 / 20 = £50 of lost contribution

Therefore the maximum price to pay to buy in the component:

£300 + (£50 x 5 hours) = £550

374 | P a g e
 Mock Exam 2

M2.1

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

A Total cost would decrease

B Total fixed costs will remain constant
C Variable cost per unit would increase
D Fixed cost per unit would increase

M2.2

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

A A direct labour cost

B A direct overhead expense
C An indirect expense
D An indirect labour expense

M2.3

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

A The total variable cost will rise

B The variable cost per unit falls
C The total fixed cost will remain the same
D The fixed cost per unit falls

M2.4

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

A Variable cost
B Fixed cost
C Semi-variable cost
D Stepped fixed cost

375 | P a g e
M2.5

The following budgeted information exists about a company;

Output Costs
(units) (£)
1,200 34,000
1,800 46,000

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

The forecast budgeted cost next year for an output of 1,500 units would be?

M2.6

A company sells three products:

Product E has a contribution to sales ratio of 25%.

Product F has a contribution to sales ratio of 20%.
Product G has a contribution to sales ratio of 30%.

Monthly fixed costs are $400,000.

If the ratio of the total sales value is as follows:

E:30% F:50% G:20%

What is the monthly breakeven sales revenue?

Give your answer to the nearest $.

M2.7

Which of the following are the only figures required to determine the total breakeven
sales value in a multi-product environment?

Select ALL that apply.

Individual product contribution to sales ratios

The total general fixed costs
The individual product sales revenue
The product mix ratio
The method of apportionment of general fixed costs
The average contribution to sales ratio

376 | P a g e
M2.8

An accountancy firm provides a number of different services to its clients. Fixed costs are
$50 per client hour based on a budgeted activity level of 100,000 hours each period.

The average contribution to sales ratio of the services provided is 35%.

What is the breakeven fee income for each period?

M2.9

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

Production (units) 2,500 3,500

Production cost (£) 17,625 19,875

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

A 4,364 units
B 5,333 units
C 7,909 units
D 9,999 units

M2.10

Which of the following, if any, are characteristics of break even charts?

The break even point can be identified where the sales line intersects the
fixed cost line

The break even point can be identified where the sales line intersects the
variable cost line

The fixed cost runs horizontal from the vertical axis

The sales line starts from the origin

M2.11

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

The actual profit for the period was?

377 | P a g e
M2.12

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

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

M2.13

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

(i) Having insufficient cash to settle trade payables;

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

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

A (i) and (ii)

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

M2.14

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

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

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

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

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

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

378 | P a g e
M2.15

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

A Depreciation of non-current assets

B A bad debt write off for a customer
C Funds from a long-term bank loan
D Bank interest on overdraft

M2.16

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

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

Credit purchases ($)

January 35,000
February 40,000
March 15,000

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

A $15,000
B $27,880
C $36,660
D $38,000

M2.17

A car factory had the following budgeted details for a period

Cars
Opening finished goods 10,000
Closing finished goods 15,000
Sales 35,000

Each car requires 60 hours of assembly labour time, however idle time will be 20% of
total labour hours. Cars as part of quality control procedures are checked and normal
reject rates of 25% of assembled cars are normally returned.

The budgeted direct labour assembly hours per car would be?

379 | P a g e
M2.18

The following details exist for a company:

Credit sales (£)

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

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

M2.19

Finished goods
Opening inventory 6,000 units
Closing Inventory 6,300 units
Budgeted sales 26,700 units

Each unit produced takes 5 hours of labour time and 10% of units are rejected after
production. Production staff are paid $8 per hour.

The total direct labour cost budgeted for this period would be?

A $1,068,000
B $1,080,000
C $1,186,667
D $1,200,000

380 | P a g e
M2.20

Which of the following statements is correct?

A Activity based costing uses a number of activity cost pools, each of which is
allocated to products on the basis of direct labour hours

B An activity based costing system is generally easier to implement and maintain

than traditional costing system

C Activity rates in activity based costing are computed by dividing costs from the
first-stage allocations by the activity measure for each activity cost pool

D One of the goals of activity based management is the elimination of waste by

allocating costs to products that waste resources

M2.21

All of the following are examples of batch level activities except:

A Worker recreational facilities

B Purchase order processing
C Setting up equipment
D Clerical activity associated with processing purchase orders to produce an order
for a standard product

M2.22

The estimated total cost and expected activity for a company's activity cost pools are as
follows.

Total cost Hrs for Product A Hrs for Product B

£150,000 500 700

The activity rate under the activity based costing system for this activity is closest to:

A £300
B £125
C £214
D £140

381 | P a g e
M2.23

A company uses activity-based costing to compute product costs. The company applies
overheads using a predetermined overhead rate for each activity cost pool.

Budgeted costs were £20,000 and budgted activity was 1,250. Actual activity for the
current year was 3,000. The amount of overhead applied for this activity during the year
was closest to:

A £42,000
B £26,780
C £48,000
D £34,190

M2.24

All of the following are examples of product level activities except:

A Parts administration
B Advertising a product
C Testing a prototype of a new product
D Human resource management

M2.25

A company has two products, X and Y. The annual production and sales level of product
X is 17,000 units. The annual production and sales level of product Y is 13,000. The
company uses activity based costing and has prepared the following analysis showing the
estimated total cost and expected activity for each of its three activity cost pools.

Activity cost pool Budgeted overhead cost Hrs for Hrs for Total
Product X Product Y
Alpha $15,000 800 300 1,200
Beta $30,000 400 700 1,100
Gamma $45,000 100 2,300 2,400

The ABC overhead absorption rate for Gamma is:

A $29.32
B $19.57
C $18.75
D $17.66

382 | P a g e
M2.26

A company has two products, G and H. The annual production and sales level of product
G is 9,000 units. The annual production and sales level of product H is 20,000. The
company uses activity based costing and has prepared the following analysis showing the
estimated total cost and expected activity for each of its three activity cost pools.

Activity cost pool Budgeted overhead cost Hrs for Hrs for Total
Product G Product H
Alpha $24,000 800 300 1,200
Beta $88,000 400 700 1,100
Gamma $12,000 100 2,300 2,400

The overhead cost per unit of product G under activity based costing is:

A $5.39
B $3.56
C $10.45
D $7.56

M2.27

A company has three activity cost pools and applies overhead using predetermined
overhead rates for each activity cost pool. Estimated costs and activities for the current
year are presented below for the three activity cost pools:

Activity cost pool Budgeted costs Hrs for product V

G £45,000 6
H £10,000 70
I £25,000 130

The ABC overhead rates for G, H and I to the nearest whole number:

A G = £396, H = £300, I = £450

B G = £143, H = £7,500, I = £192
C G = £450, H = £261, I = £396
D G = £7,500, H = £143, I = £192

383 | P a g e
M2.28

When there are batch level or product level costs, in comparison to a traditional cost
system, an activity based costing system ordinarily will shift costs from:

A Standardised to specialised products

B High volume to low volume products
C Specialised to standardised products
D Low volume to high volume products

M2.29

The following are steps in ABC:

Calculation of cost application rates

Identification of cost drivers
Assignment of cost to products
Identification of cost pools

M2.30

Shah Rukh Khan’s production company writes songs for Indian films.

During a recent period, his company wrote 10,000 songs which cost £145,000. If 3,312 of
these songs were sad songs and the remainder were happy songs, what would be the costs
allocated to the happy songs?

A £96,976
B £48,024
C £145,000
D £10,000

M2.31

Which of the following apply if any?

ABC systems:

Use a single volume based cost driver

Assign overheads to products only based on the products' use of labour
Often reveal products that were under or overcosted by traditional costing systems
Typically use fewer cost drivers than more traditional costing systems
Have a tendency to distort product costs

384 | P a g e
M2.32

Which of the following cannot use ABC?

Manufacturers
Financial-services firms
Book publishers
Hotels
None of the above, as all are able to use this costing system

M2.33

Which of the following statements about ABC is false?

ABC cannot be used by service businesses

ABC can help a company eliminate (or reduce) non-value added costs
ABC results in less cost “averaging” of various diversified activities compared to
traditional absorption costing
ABC results in more costs being classified as direct costs
ABC tends to reduce cost distortion among product lines

M2.34

Which of the following is not normally associated with ABC?

A Calculation of cost application rates

B Minimising the use of cost drivers
C Identification of cost drivers
D Assignment of cost to products

M2.35
Moogle Plc uses 3kg of raw material Alpha into the production process to produce one
unit of output, but have calculated that this would be after 25% wastage of the raw
material. The cost of 1kg of Alpha is £25.

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

A 3 kg
B 4 kg
C 5 kg
D 6 kg

385 | P a g e
M2.36
F Ltd uses an absorption costing system in which labour hours are used as the basis of
recovering overhead costs. Its accounting year is divided into 13 four-week periods, with
fixed production overhead costs budgeted to be incurred at a constant rate of £300,000
per four-week period. Budgeted labour hours per four-week period were 40,000 hours.

In the accounting period of quarter 2, actual hours worked were 37,576 and the output
was 39,000 standard hours.

Given that actual fixed overhead expenditure was £315,000, what would have been the
fixed overhead expenditure and volume variance for the above period?

Fixed overhead expenditure Fixed overhead volume

A £15,000 Adverse £7,500 Adverse
B £15,000 Favourable £9,500 Favourable
C £15,000 Adverse £10,680 Adverse
D £15,000 Favourable £18,180 Adverse

M2.37

The following data is for XYZ plc.

Budget Actual

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

The material usage variance is?

A £2,240 favourable
B £2,000 adverse
C £2,000 favourable
D £2,300 favourable

386 | P a g e
M2.38

The following data is for ABC plc.

Budget Actual

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

The material price variance is?

A £3,900 adverse
B £4,020 adverse
C £7,590 adverse
D £9,300 adverse

M2.39

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

8 Hrs @ £7.60 £60.80

The budgeted and actual number of units produced for this period was 4,000 and 4,260
units respectively, to meet production for the period 32,450 hours were worked.

The labour efficiency variance for the period was?

A £12,388 favourable
B £3,420 adverse
C £12,388 adverse
D £3,420 favourable

M2.40

Benchmarking to compare an internal function to that of the best in the world rather than
the industry the organisation operates within, would normally be described as

A Internal benchmarking
B Functional benchmarking
C Competitive benchmarking
D Strategic benchmarking

387 | P a g e
M2.41

Which of the following is not associated with TQM:

A Get it right first time philosophy

B Zero defects
C Redesign of existing processes
D Continuous improvement is the aim

M2.42

Which of these is NOT an external failure cost of quality?

A Administration of customer complaints

B Administration of customer service
C Inspection of processes
D Repairs and replacements

M2.43

Which of these is a prevention cost of quality?

A Failure analysis e.g. reasons why and faults

B Training and development of quality culture
C Losses/scrap of materials and finished goods
D Lost goodwill/reputation

M2.44

A bundle of machines that can reprogrammed to switch from one production run to
another is an example of:

A Flexible manufacturing system

B Computer aided manufacturing
C Manufacturing resource planning
D Enterprise resource planning

M2.45

An information systems which provides a list of parts and materials required for the type
and number of products entered, allowing for better stock management is an example of:

A Materials requirement planning

B Computer aided manufacturing
C Enterprise resource planning
D Optimised production technology
388 | P a g e
M2.46

A bottleneck is described as a:

A Limited resource
B Unlimited resource
C Expensive resource
D Inferior resource

M2.47

The TA ratio is described as:

A Throughput contribution per hour / conversion cost per hour

B Conversion cost per hour / throughput contribution per hour
C Throughput contribution per hour / bottleneck resource usage
D Bottleneck resource usage / throughput contribution per hour

M2.48

Throughput contribution is:

A Sales less variable costs

B Sales less material costs
C Sales less fixed costs
D Sales labour costs

M2.49

Sustainability within operations management is:

Preserving natural resources for future generations

Zero impact on the ecological environment
Is a short term initiative
Positive impact on the ecological environment

M2.50

Which of these if any are practices for reducing long term harm to the environment?

Reduction in the use of toxic substances

Reduced reliance on wind energy
Use of naturally non-renewable materials
Reduced use of biodegradable materials
Growing foods with synthetic fertilizers and pesticides
Fair trade methods used in manufacture
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M2.51

A risk seeker is an individual who:

A Selects the alternative which has the highest level of risk

B Selects the option with the lowest level of risk
C Selects the option with the highest return but with the lowest level of risk
D Selects the option with the highest return regardless of the level of risk

M2.52

Project M has possible results of £3, £10 or £25 with probabilities of 0.3, 0.3, 0.4
respectively. The expected profit is:

A £12.30
B £13.90
C £15.60
D £25

M2.53

Project A will earn £1.5m or £3m with probabilities of 0.4 and 0.6 respectively and
project B will earn £0.8m with probability of “g” or alternatively £3.2m. The value of “g”
if both projects are equally attractive under expected value is:

A 0.256
B 0.356
C 0.333
D 0.312

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M2.54

Which letter represnts the feasible region ?

T
2,000

1,600

1,400

A
1,200

1,000
E
800

D
600 B

400
C
200

500 1,000 1,500

R

M2.55

If 2 products A and B sell for £15 and £20 respectively, the variable costs are £4 and £6
repectively and the fixed costs are £1 and £3 respectively. Which of the following is the
correct objective function?

A 11A + 14B
B 10A + 11B
C 14A + 17B
D 4A + 6B

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M2.56

Which of the following if any is a relvant cost?

The cost of inventory when looking at selling it or retaining it

The cost of a speciasl gas installation for an asset when looking at its purchase

The salary of a manager who will be transferred to the West Nottingham branch
after the closure of the East Nottingham branch

M2.57

Which of the following if any best describes a relevant cost?

A past cost that is the same compared to other alternatives

A past cost that is different from alternatives
A future cost that is the same compared to other alternatives
A future cost that is different from alternatives
A cost that is based on past experience

M2.58

In the short-term decision-making which of the following if any would be a relevant cost?

The original cost of materials already in the store which will be used on the
project
Depreciation of existing fixed assets
Specific development costs incurred
General expenditure already incurred
Cost of specific materials which will be purchased

M2.59

The decision-making process requires:

A The use of large amounts of historical data

B A disregard of non-relevant costs
C A disregard of forecasts
D Analysis of the most recent income statement of the business

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M2.60

Which of the following costs is relevant in decision-making?

A Ccommitted costs
B Accounting costs
C Cash costs
D Historical costs

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394 | P a g e
 Mock Exam 2 - Answers

M2.1 Answer is B

M2.2 Answer is A

M2.3 Answer is B

M2.4 Answer is C

M2.5 Answer is £39,000

1,800 46,000
1,200 34,000
600 24,000

12,000/600 = 20 VC per unit

At 1,800 units 46,000 = FC + (20 x 1800) therefore FC = 10,000.

Next year forecast production of 1500 units.

£
1,500 units x (£20 VC x 0.90) given forecast decrease of 10% = 27,000
Fixed cost £10,000 x 1.2 (given forecast increase of 20%) = 12,000
39,000

M2.6 Answer is $1,702,128

Average C/S Ratio = (30% of 25) + (50% of 20) + (20% of 30) = 23.5%

Breakeven sales = $400,000 / 0.235 = $1,702,128

M2.7 Answer

Individual product contribution to sales ratios

 The total general fixed costs
The individual product sales revenue
The product mix ratio
The method of apportionment of general fixed costs
 The average contribution to sales ratio

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M2.8 Answer is $14,285,714

Fixed costs are $50 x 100,000 = $500,000

Therfore breakeven = $500,000 / 0.35 = $14,285,714.29

M2.9 Answer is A

3,500 19,875
2,500 17,625
1,000 2,250

2,250/1,000 = 2.25 VC per unit

At 3,500 units 19,875 = FC + 2.25 (3,500) therefore FC = 12,000

At 2,000 units TC = 12,000 + 2.25 (2,000) = £16,500

Breakeven point = £12,000 / (£5.00 - £2.25) = 4,364 units

M2.10 Answer

The break even point can be identified where the sales line intersects the
fixed cost line

The break even point can be identified where the sales line intersects the
variable cost line

 The fixed cost runs horizontal from the vertical axis

 The sales line starts from the origin

M2.11 Answer is £47,588

The contribution margin ratio, is sometimes called the profit-volume ratio, or

contribution-sales ratio, it indicates the percentage of each sales available to cover fixed
costs and perhaps a target profit as well.

Sales for a period of £189,780 x 40% = contribution £75,912

Fixed costs for the period of £28,324
Actual profit £47,588

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M2.12 Answer is 55,814 units

If 25% of total cost is variable cost then $50 x 25% = $12.50 variable cost per unit.

Contribution per unit = (selling price) $120 – (variable cost) $12.50 = $107.50
contribution per unit.

($5m fixed cost + $1m target profit) ÷ $107.50 contribution per unit = 55,814 units.

M2.13 Answer is C

(i) Having insufficient cash to settle trade payables;

The entity is failing to pay its suppliers by the normal due dates, this means they are
deliberately paying them late, they do have sufficient cash. If there are insufficient funds,
then the entity can’t help it, they can only pay when they have enough cash available.

(ii) Difficulty in obtaining credit from new suppliers;

Delaying payments will affect the entities credit ratings and therefore obtaining goods on
credit from new suppliers who will be reluctant to offer credit.

(iii) Reduction in credit rating;

Delaying payments will affect credit ratings.

(iv) Settlement of trade receivables may be delayed.

This has nothing to do with the trade payables

M2.14 Answer is B
Revision - trade receivable days (turnover)

Year end trade receivables x 365 days

Credit sales

Therefore year end trade receivables = Trade receivable days / 365 x credit sales

DY’s trade receivables at the beginning of the period $22,000

DY’s trade receivables at the end of the period $39,000

– 49 days / 365 days x $290,510

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 Trade receivables control account
$ $
Bal b/f 22,000 Bal c/f 39,000
Credit sales 290,510
Cash received (bal 273,510
fig)

Total 312,510 Total 312,510

M2.15 Answer is A

M2.16 Answer is C
March
January invoices $35,000 x 0.4 x 0.99 = $13,860
February invoices $40,000 x 0.6 x 0.95 = $22,800
Total payments to suppliers in March $36,660

M2.17 Answer is 100 hours

60 hours (productive or active) is 80% of total assembly hours, before rejects.

Therefore 60 hours x (100%/80%) = 75 hours.

Then you have to account for rejects, if 25% of cars are returned then 75 hours is 75% of
total hours required. Therefore 75 hours x (100%/75%) = 100 hours.

The information about sales and opening and closing finished goods are irrelevant since
the question asks for the budgeted direct labour assembly hours per car.

M2.18 Answer is £93,800

April (£)
January 100,000 x 10% = 10,000
February 125,000 x 20% = 25,000
March 98,000 x 60% = 58,800
93,800

Bad debts do not form part of the % receipts for calculation, therefore can be ignored.

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M2.19 Answer is D

Production budget
OS FGs 6,000
+ Production (balance) 27,000
33,000
- Sales 26,700
CS FGs 6,300

27,000 ‘good production’ x (100%/90%) = 30,000 units of total production before 10%
of units are rejected. 30,000 units x 5 hours of labour time x $8 = $1,200,000.

M2.20 Answer is C

Rather than using a single allocation base (such as direct labor hours), activity based
costing uses a number of allocation bases for assigning costs to products (thus statement
A is false).

Generally, an activity based costing system is harder (rather than easier) to implement
and maintain than a traditional costing system (thus statement B is false).

Rather than eliminating waste by allocating costs to products that waste resources,
activity based management is a management approach that focuses on managing
activities as a way of eliminating waste and reducing delays and defects (thus statement
D is false).

Statement C is true.

M2.21 Anwer is A

Batch level activities are activities that are performed each time a batch of goods is
handled or processed, regardless of how many units are in a batch. Further, the amount of
resources consumed depends on the number of batches run rather than on the number of
units in the batch.

Worker recreational facilities relate to the organization as a whole rather than to specific
batches and, as such, would not be considered a batch level activity. On the other hand,
purchase order processing, setting up equipment, and the clerical activities described are
activities that are performed each time a batch of goods is handled or processed, and, as
such, are batch level activities.

M2.22 Answer is B

£150,000 / (500 + 700) = £125

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M2.23 Answer is C

Determine the budgeted activity rate

Activity rate = £20,000 / 1,250 = £16.00

Determine the amount of overhead applied to actual activity of 3,000

Actual amount of overhead applied = 3,000 x $16.00 = £48,000

M2.24 Answer is D

Product level activities are activities that relate to specific products that must be carried
out regardless of how many units are produced and sold or batches run. Human resource
management activities relate to the organization as a whole rather than to specific
products and, as such, would not be considered a product level activity. On the other
hand, advertising, testing of prototypes and parts administration are activities that relate
to specific products, and, as such, are product level activities.

M2.25 Answer is C

$45,000 / 2,400 = $18.75

M2.26 Answer is B

Alpha = ($24,000 / 1,200) x 800 = $16,000

Beta = ($88,000 / 1,100) x 400 = $32,000
Gamma = ($12,000 / 2,400) x 100 = $500

Total overhead cost of product G = $16,000 + $32,000 + $500 = $48,500

Cost per unit of product G = $48,500 / 9,000 = $5.39

M2.27 Answer is D

G = £45,000 / 6 = £7,500
H = £10,000 / 70 = £143
I = £25,000 / 130 = £192

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M2.28 Answer is B

Under traditional costing methods, overhead costs are allocated to products on the basis
of some measure of volume such as direct labour hours or machine hours. This results in
most of the overhead cost being allocated to high volume products. In contrast, under
activity based costing, some overhead costs are allocated on the basis of batch level or
product level activities. This change in allocation bases results in shifting overhead costs
from the high volume products to low volume products.

M2.29 Answer

3 Calculation of cost application rates

2 Identification of cost drivers
4 Assignment of cost to products
1 Identification of cost pools

M2.30 Answer is A

OAR = £145,000 / 10,000 = £14.50 per song

Happy songs = 10,000 – 3,312 = 6,688
Total cost for happy songs = £14.50 x 6,688 = £96,976

M2.31 Answer

Use a single volume based cost driver

Assign overheads to products only based on the products' use of labour
 Often reveal products that were under or overcosted by traditional costing systems
Typically use fewer cost drivers than more traditional costing systems
Have a tendency to distort product costs

M2.32 Answer

Manufacturers
Financial-services firms
Book publishers
Hotels
 None of the above, as all are able to use this costing system

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M2.33 Answer

 ABC cannot be used by service businesses

ABC can help a company eliminate (or reduce) non-value added costs
ABC results in less cost “averaging” of various diversified activities compared to
traditional absorption costing
ABC results in more costs being classified as direct costs
ABC tends to reduce cost distortion among product lines

M2.34 Answer is B

M2.35 Answer is B

% of one unit of output

Kg
3 kg after wastage 3 75%
or 25%/75% x
1 kg of wastage 1 25% 3kg
Standard usage per unit of output 4 100%

3 kg (after wastage of 25%) x 100%/75% (after wastage) = 4 kg

4 kg = 100% before wastage

M2.36 Answer is A

OAR = £300,000/40,000 = £7.50

Standard hours would be the standard labour time per unit x the number of units actually
produced, therefore the company would have absorbed fixed overhead for the period of
39,000 x £7.50 = £292,500

Fixed overhead expenditure variance

Budgeted expenditure £300,000
Actual expenditure (£315,000)
£15,000 (A)

Fixed overhead volume variance

Budgeted expenditure to be absorbed (£7.50 x 40,000 hours) = £300,000
Actual expenditure absorbed for the period (£7.50 x 39,000) = £292,500
£7,500 (A)

or 40,000 – 39,000 x £7.50 = £7,500 (A)

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M2.37 Answer is D

Did use
2,300 x 3.3 kg = 7,590
Should use
2,300 x 3.5 kg = 8,050
460
x
x Standard price £5.00

Material usage variance £2,300.00 (F)

or 2,300 x (3.3 kg - 3.5 kg) x £5.00 = £2,300.00 (F)

M2.38 Answer is B

Did purchase
6,700 kg x (£7.60 - £ 7.00) = £4,020 (A)

M2.39 Answer is A

Did work 32,450

Should work
4,260 x 8 hours = 34,080
1,630
x
x Standard price £7.60

Material usage variance £12,388 (F)

M2.40 Answer is B

M2.41 Answer is C

M2.42 Answer is C

M2.43 Answer is B

M2.44 Answer is A

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M2.45 Answer is A

M2.46 Answer is A

M2.47 Answer is A

M2.48 Answer is B

M2.49 Answer

 Preserving natural resources for future generations

 Zero impact on the ecological environment
Is a short term initiative
 Positive impact on the ecological environment

M2.50 Answer

 Reduction in the use of toxic substances

Reduced reliance on wind energy
Use of naturally non-renewable materials
Reduced use of biodegradable materials
Growing foods with synthetic fertilizers and pesticides
 Fair trade methods used in manufacture

M2.51 Answer is D

M2.52 Answer is B

M2.53 Answer is C

Expected value of project A is (£1.5m x 0.4) + (£3m x 0.6) = £2.4m

Expected value of project B is the same as project A therefore the expected value of
Project B is:

(£0.8m x g) + (£3.2m x (1 – g)) = £2.4m

£0.8g +£3.2m - £3.2g = 2.4
-2.4g + 3.2 = 2.4
-2.4g = -0.8
g = 0.333
M2.54 Answer is C

M2.55 Answer is A

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M2.56 Answer

 The cost of inventory when looking at selling it or retaining it

 The cost of a speciasl gas installation for an asset when looking at its purchase

The salary of a manager who will be transferred to the West Nottingham branch
after the closure of the East Nottingham branch

M2.57 Answer

A past cost that is the same compared to other alternatives

A past cost that is different from alternatives
A future cost that is the same compared to other alternatives
 A future cost that is different from alternatives
A cost that is based on past experience

M2.58 Answer

The original cost of materials already in the store which will be used on the
project
Depreciation of existing fixed assets
 Specific development costs incurred
General expenditure already incurred
 Cost of specific materials which will be purchased

M2.59 Answer is B

M2.60 Answer is C

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