TEST 1 (30th Nov 2022)

Question 1
Broad Co produces quarterly rolling budgets and had forecast the costs of material purchases for the
next four quarters (quarters 1, 2, 3 and 4). Purchases for quarter 1 were budgeted to be $220,000
and it was anticipated that the cost of materials would rise at a rate of 2% per quarter.

At the end of quarter 1: Actual material purchases were recorded as $210,000. This was due to a
change of material supplier during the quarter.
• A revised estimate for the increase in material purchase costs was made. The rise was now
predicted to be only 1% per quarter.
• The budget was updated.

What estimate for total annual material purchases should be recorded in the updated budget (to the
nearest whole $)?
$ __________

Question 2
Which TWO of the following activities are environmental INTERNAL failure costs?
A. Quality control inspections to monitor pollution levels in water leaving a production process
B. Water purification treatment to clean waste water before it leaves the factory
C. Fitting of carbon filters to machine processes to reduce carbon emissions
D. Power usage measuring system to monitor energy consumption within the factory
E. Payment of fines for breaching environmental regulations in the industry
F. Insulation of heating pipes in the factory to reduce heat loss
G. Public relations costs to remedy reputational damage caused by accidental river pollution
H. Capturing and recycling of waste exhaust gases to generate energy

Question 3
A company had budgeted sales of $30.9 million within a market worth $61.8 million. When the
budget was drafted, it was assumed that inflation would be 3%. After the end of the budget period,
it was discovered that inflation had been 2% and that the market had been worth $65 million. What
is the sales revenue figure which should be used when assessing company performance (to one
decimal place)?
$ ____________ million

Question 4
Which THREE of the following statements about activity-based costing (ABC) and traditional costing
systems (absorption costing and marginal costing) are correct?

A. No over-absorption or under-absorption of overheads can occur under ABC

B. ABC is useful for businesses which have high overheads in their cost structure
C. ABC is not suitable for use in businesses that provide services
D. Marginal costing understates the true cost of a product when compared to ABC
E. ABC is better than absorption costing in understanding what causes costs to be incurred
F. Both ABC and marginal costing treat all fixed costs as product costs
Question 5
Which TWO of the following bases for setting a transfer price are most likely to result in goal
congruent behaviour by BOTH the selling and receiving divisions?

A. Opportunity cost
B. Market price
C. Actual cost
D. Standard full cost plus

Question 6
A manufacturing company uses machine C, which is operational for five hours a day to manufacture
four products: W, X, Y and Z. Factory costs are $150,000 per day. The company uses throughput
accounting, and its objective is to maximise profits.

Information relating to these products is as follows:

Product Production rate per Selling price per Material cost per Conversion cost
machine hour (units) unit ($) unit ($) per unit ($)
W 200 350 120 40
X 500 190 95 25
Y 400 270 160 20
Z 350 215 75 35

If the company is not able to increase the availability of machine C's operational hours, what is the
production ranking of product Y?

A. First
B. Second
C. Third
D. Fourth

Question 7
The cost of running a company's IT department is $2.4m per annum. 90% of the processing time in
the department is spent on recording accounting transactions and 10% on responding to online
information requests from managers.

There are two types of information request: full reports and specific queries. A full report takes twice
the processing time as a specific query and each month there are 4,000 specific queries and 500
requests for full reports. Costs are apportioned on the basis of processing time.
What is the estimated cost per specific query (to the nearest $)?

A. $4
B. $20
C. $48
D. $40
Question 8
Product C currently sells 8,000 units per year at a price of $50 per unit. Market research shows that
an increase in price of $2 would decrease annual sales by 800 units.
What is the marginal revenue at an output level of 6,000 units (to the nearest $)?

Question 9
A company's actual production figures for a batch of products are as follows:
Kg $
Material 2,000 10,000
Labour and overhead 26,000
2,000 36,000
Normal loss 10% (200)
1,800 36,000
Abnormal loss (100) (2,000)
Good output 1,700 34,000

In terms of environmental cost categorisations, how would the normal and abnormal losses be
described?
A. Normal loss = Potentially hidden costs, Abnormal loss = Conventional costs
B. Normal loss = Potentially hidden costs, Abnormal loss = Contingent costs
C. Normal loss = Conventional costs, Abnormal loss = Contingent costs
D. Normal loss = Conventional costs, Abnormal loss = Contingent costs

Question 10
Which TWO of the following statements about forecasting based on simple linear regression are
correct?
A. It can account for the effect of multiple independent variables
B. It assumes that historical data is a reliable guide to the future
C. It is not suitable when the variables show strong negative correlation
D. Cost forecasts using extrapolation are less accurate than those using interpolation

The following information are relating to Question 11 to Question 15

Midhurst Co
Midhurst Co manufactures air conditioning units and is considering an investment in a new unit that
will be used in modern office buildings. Advances in technology mean that this unit is more sensitive
to changes and variations in temperature and therefore it can regulate airflow and heating more
efficiently. Midhurst Co's competitors currently do not have an equivalent product that can offer these
features.

Midhurst Co expects to sell 10,000 units over the predicted five-year life cycle of the unit. The finance
director has just prepared the initial costings for the unit as follows:
$'000
Research and development costs 6,200
 Design costs 33,450
Marketing costs 177,685
Variable production cost per unit 42
Fixed production cost 98,470
Variable distribution cost per unit 9
Fixed distribution cost 10,300
Variable selling cost per unit 4
Fixed selling cost 7,790
Administration cost 23,450

The finance director plans to use life-cycle costing to measure the profitability of the new product.
The chief executive has asked for more information about life-cycle costing, as she is not sure whether
it is the right method to use.

The production director has reviewed the costings in detail and suggested a couple of changes. He is
enthusiastic about the product and believes that modifications could be made to prolong the product's
life but wonders when the best time would be to make changes to the product.

Question 11
According to the life-cycle costing method, which TWO of the following statements regarding the
stages of the life-cycle are true?

A. At the introduction stage, further capital expenditure will be needed as production capacity
will need to increase to meet demand
B. The maturity stage occurs when the market has reached 'saturation point' and bought
enough of the product
C. The majority of a product's life-cycle costs are determined by decisions which are made at
the design and development stage
D. The growth stage, when sales will have reached their peak and become stable, will be the
most profitable stage

Question 12
What is the cost per unit for the new air conditioning unit using life-cycle costing (to the nearest $)?

A. $35,740
B. $51,847
C. $88,390
D. $90,735

Question 13
The production director has suggested the following change for the costing of the new unit:

Currently material costs are 20% of the variable production costs per unit. One of the materials used
is stainless steel which is budgeted at $2,000 per unit but an alternative corrosion-resistant metal
costing 25% less can be used. The production director believes a 15% discount can be negotiated for
the remainder of the materials.

What would be the revised material cost per unit (to the nearest whole $)?
$ ____________

Question 14
The production director has also asked about the implications for production planning if the
company wishes to extend the product's life-cycle.

At what stage of the life-cycle is the new unit most likely to undergo product development?

A. Introduction
B. Growth
C. Maturity
D. Decline

Question 15
The chief executive wants to be briefed on the advantages of using life-cycle costing.

Which of the following statements relating to the advantages of life-cycle costing are correct?

(1) It draws management's attention to all costs related to a product which other costing
methods usually treat as period costs
(2) It focuses on measuring a product's costs from concept to withdrawal rather than reviewing
costs on a period by period basis
(3) It focuses on what consumers are prepared to pay for a product and establishes cost
budgets based on an expected selling price
(4) It aids understanding of the relationship between decisions at the design stage and the cost
of other functions, such as marketing

A. 2, 3 and 4 only
B. 1, 2 and 4 only
C. 1 and 3 only
D. 1, 2, 3 and 4