The following information relates to questions 21 and 22.

G Ltd makes the following purchases and sales:

1 January Purchases 4,000 units for £10,000
31 January Purchases 1,000 units for £2,000
15 February Sales 3,000 units for £13,000
28 February Purchases 1,500 units for £3,750
14 March Sales 500 units for £1,200

21 At 31 March which of the following closing inventory valuations using FIFO is correct?
A £8,000
B £7,500
C £7,000
D £6,500 LO 1c

22 At 31 March which of the following closing inventory valuations using LIFO is correct?
A £6,500
B £7,000
C £7,500
D £8,000 LO 1c

23 With all average price systems where it is required to keep prices up to date, the average
price must be re-calculated
A each time an issue is made
B each accounting period
C each time a purchase is made
D each time an inventory count is carried out LO 1c

The following information relates to questions 24 and 25

Inventory Item 2362 X
Receipts Issues
Price per Price
Date Units unit Value Units per unit Value
£ £ £ £
1 June Opening inventory 100 5.00 500
3 June Receipts 300 4.80 1,440
5 June Issues 220
12 June Receipts 170 5.20 884
24 June Issues 300

ICAEW 2019 Chapter 2: Calculating unit costs (Part 1) 19

 24 Using the cumulative weighted average price method of inventory valuation, the cost of the
materials issued on 5 June was
A £1,056
B £1,067
C £1,078
D £1,100 LO 1c

25 Using the cumulative weighted average price method of inventory valuation, the value of
closing inventory on 30 June was
A £248
B £250
C £251
D £260 LO 1c

26 A wholesaler buys and resells a range of items, one of which is the Kay. Each Kay is resold
for £3 per unit and opening inventory for June was 400 units valued at £1.80 per unit. The
wholesaler purchased a further 600 units on 10 June for £2.10 per unit, and sold 800 units
on 25 June.
What gross profit would be recorded for the sale of Kays during June, using the FIFO
method of inventory valuation?
FIFO gross profit
A £780
B £960
C £840
D £1,560 LO 1c

27 A wholesaler buys and resells a range of items, one of which is the Kay. Each Kay is resold
for £3 per unit and opening inventory for June was 400 units valued at £1.80 per unit. The
wholesaler purchased a further 600 units on 10 June for £2.10 per unit, and sold 800 units
on 25 June.
What gross profit would be recorded for the sale of Kays during June, using the LIFO
method of inventory valuation?
LIFO gross profit
A £840
B £720
C £780
D £1,620 LO 1c

20 Management Information: Question Bank ICAEW 2019

 28 At the beginning of week 5 there were 600 units of material M held in inventory, valued at
£6 per unit.
The following purchases and issues occurred during the subsequent four week period.
Purchases Issues to production
Week Units Cost per unit Units
£
5 – 350
6 400 8 –
7 – – 300
8 100 9 –
Inventory is valued using a periodic weighted average price calculated at the end of each
four week period.

To the nearest £, the value of the inventory at the end of week 8 is

A £3,150
B £3,431
C £3,450
D £3,690 LO 1c

ICAEW 2019 Chapter 2: Calculating unit costs (Part 1) 21

22 Management Information: Question Bank ICAEW 2019
Chapter 3: Calculating unit costs (Part 2)
1 Which of the following decribes a cost centre?
A Units of a product or service for which costs are ascertained
B Amounts of expenditure attributable to various activities
C Functions or locations for which costs are ascertained and related to cost units for
control purposes
D A section of an organisation for which budgets are prepared and control is exercised
LO 1c

2 Which of the following is a valid reason for calculating overhead absorption rates?
A To reduce the total overhead expenditure below a predetermined level
B To ensure that the total overhead expenditure does not exceed budgeted levels
C To attribute overhead costs to cost units
D To attribute overhead costs to cost centres LO 1c

3 Which of the following is known as spreading common costs over cost centres on the basis
of benefit received?
A Overhead absorption
B Overhead apportionment
C Overhead allocation
D Overhead analysis LO 1c

4 The process of overhead apportionment is carried out so that

A costs may be controlled
B cost units gather overheads as they pass through cost centres
C whole items of cost can be charged to cost centres
D common costs are shared among cost centres LO 1c

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 23

 5 The following information is available for the two production departments (machining and
assembly) and one service department (the canteen) at Wilmslow.
Machining Assembly Canteen
Budgeted overheads £15,000 £20,000 £5,500
Number of staff 30 20 5
After reapportionment of the service cost centre costs, what will be the overhead cost of the
machining department cost centre?
A £3,300
B £17,750
C £18,000
D £18,300 LO 1c

6 The works manager of a company is fully occupied in running the production lines in the
factory. The logistics manager spends some time on production and some time organising
distribution.
How would their salaries be dealt with when calculating a fixed overhead absorption rate
for the factory?
Works manager
A Allocated to factory
B Apportioned to factory
Logistics manager
C Allocated to factory
D Apportioned to factory LO 1c

7 The following extract of information is available concerning the four cost centres of EG
Limited.
Service
cost
Production cost centres centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 –
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned £28,500 £18,300 £8,960 £8,400
The overhead cost of the canteen is to be re-apportioned to the production cost centres on
the basis of the number of employees in each production cost centre.
After the re-apportionment, the total overhead cost of the packing department, to the
nearest £, will be
A £1,200
B £9,968
C £10,080
D £10,160 LO 1c

24 Management Information: Question Bank ICAEW 2019

 8 Which three of the following statements on the determination of overhead absorption rates
are correct?
A Costs can be allocated where it is possible to identify which department caused them.
B Supervisors' salaries are likely to be apportioned rather than allocated.
C Costs need to be apportioned where they are shared by more than one department.
D There is no need for a single product company to allocate and apportion overheads in
order to determine overhead cost per unit.
E Apportionment always produces the correct result. LO 1c

9 Which of the following bases of apportionment would be most appropriate for

apportioning heating costs to production cost centres?
A Floor space occupied in square metres
B Volume of space occupied in cubic metres
C Number of employees
D Labour hours worked LO 1c

10 A company makes three products in a period.

Quantity (units) Labour hours per unit
Product A 1,000 4
Product B 2,000 6
Product C 3,000 3
Total 6,000

Overheads for the period are £30,000 and they are absorbed on the basis of labour hours.
What is the fixed overhead cost absorbed by a unit of Product B?
A £30.00
B £5.00
C £7.20
D £1.20 LO 1c

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 25

 The following information relates to questions 11 and 12
Budgeted information relating to two departments in JP Ltd for the next period is as follows.
Production Direct Direct Direct Machine
Department overhead material cost labour cost labour hours hours
£ £ £
1 27,000 67,500 13,500 2,700 45,000
2 18,000 36,000 100,000 25,000 300
Individual direct labour employees within each department earn differing rates of pay,
according to their skills, grade and experience.

11 What is the most appropriate production overhead absorption rate for department 1?
A 40% of direct material cost
B 200% of direct labour cost
C £10 per direct labour hour
D £0.60 per machine hour LO 1c

12 What is the most appropriate production overhead absorption rate for department 2?
A 50% of direct material cost
B 18% of direct labour cost
C £0.72 per direct labour hour
D £60 per machine hour LO 1c

13 Budgeted fixed overheads for cost centre 1 during the last accounting period were £64,800
for apportioned overheads and £95,580 for allocated overheads. A predetermined
machine hour rate is used to absorb fixed overheads into product costs. Budgeted machine
hours during the period were 1,800. Actual fixed overheads were £178,200 and actual
machine hours for the period were 1,782.
What was the fixed overhead absorption rate per machine hour?
A £89.10
B £90.00
C £99.00
D £100.00 LO 1c

26 Management Information: Question Bank ICAEW 2019

 14 The following information is recorded in the machinery department relating to activity levels
and overheads in period 1.
Machine hours Overheads
£
Budget 22,000 460,000
Actual 27,000 390,000
Overheads are absorbed on the basis of machine hours.
What is the overhead absorption rate for the machinery department to two decimal places?
A £14.44
B £17.04
C £17.73
D £20.91 LO 1c

15 Which of the following statements about overhead absorption rates are true?
(1) They are usually determined in advance for each period.
(2) They are used to charge overheads to products.
(3) They are normally based on actual data for each period.
(4) They are used to control overhead costs.
A (1) and (2) only
B (1), (2) and (4) only
C (2), (3) and (4) only
D (3) and (4) only LO 1c

16 A product requires four hours of direct labour at £5.25 per hour, and requires direct
expenses of £53.50. In its production, it requires 24 minutes of complex welding.
Possible overhead absorption rates have been calculated to be £7.10 per direct labour
hour or £41.50 per welding machine hour.
Using the direct labour hour basis of overhead absorption, calculate to the nearest penny
the total product cost.
A £81.90
B £91.10
C £102.90
D £119.50 LO 1c

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 27

 17 Lerna Ltd produces hydras in three production departments and needs to apportion
budgeted monthly overhead costs between those departments. Budgeted costs are as
follows.
£
Rent of factory 2,000
Rates for factory 1,000
Machine insurance 1,000
Machine depreciation 10,000
Factory manager's salary 7,000
21,000

The following additional information is available.

Department A Department B Department C
Area (square metres) 3,800 3,500 700
Value of machinery (£'000) 210 110 80
Number of employees 34 16 20
The total budgeted monthly overhead cost for Department C is
A £1,837.50
B £4,462.50
C £6,000.00
D £7,000.00 LO 1c

18 A company manufactures two products, J and K, in a factory divided into two production
cost centres, Primary and Finishing. In order to determine a budgeted production overhead
cost per unit of product, the following budgeted data are available.
Primary Finishing
Allocated and apportioned production overhead costs £96,000 £82,500
Direct labour minutes per unit
Product J 36 25
Product K 48 30
Budgeted production is 6,000 units of product J and 7,500 units of product K. Production
overheads are to be absorbed on a direct labour hour basis.
The budgeted production overhead cost per unit for product K is
A £10.00
B £13.20
C £14.00
D £14.60 LO 1c

28 Management Information: Question Bank ICAEW 2019

 19 Which of the following statements about predetermined overhead absorption rates are
true?
(1) Using a predetermined absorption rate avoids fluctuations in unit costs caused by
abnormally high or low overhead expenditure or activity levels.
(2) Using a predetermined absorption rate offers the administrative convenience of being
able to record full production costs sooner.
(3) Using a predetermined absorption rate avoids problems of under/over absorption of
overheads because a constant overhead rate is available.
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D (1), (2) and (3) LO 1c

20 Bumblebee Co absorbs production overhead costs on a unit basis. For the year just ended,
Bumblebee Co's production overhead expenditure was budgeted at £150,000 but was
actually £148,000 while the budgeted activity level (production units) was 30,000 units and
29,000 units were actually produced.
Which of the following is true?
A Fixed overheads were under absorbed by £5,000, this being the difference between
budgeted expenditure and 29,000 units at £5 per unit.
B Fixed overheads were under absorbed by £5,000, this being the difference between
budgeted and actual production at £5 per unit.
C Fixed overheads were over absorbed by £3,000, this being partly the difference
between budgeted and actual expenditure and partly the production shortfall of 1,000
units.
D Fixed overheads were under absorbed by £3,000, this being partly the difference
between budgeted and actual expenditure and partly the production shortfall of 1,000
units. LO 1c

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 29

 21 A manufacturing company, Leyton Friday, has three production departments X, Y and Z. A
predetermined overhead absorption rate is established for each department on the basis of
machine hours at budgeted capacity. The overheads of each department consist of the
allocated costs of each department plus a share of the service department's overhead
costs. All overheads are fixed costs.
The table shows incomplete information available relating to the period just ended.
Production department Z
Budgeted allocated overhead expenses £61,500
Budgeted service department apportionment £42,000
Budgeted machine capacity (hours) ?
Pre-determined absorption rate per machine hour ?
Actual machine utilisation (hours) 10,000
Over/(under) absorption of overhead £(11,500)
Actual overhead expenditure incurred in each department was as per budget.
Budgeted capacity and the absorption rate per hour in department Z were
A Budgeted capacity 11,111 hours, absorption rate per hour of £10.35
B Budgeted capacity 11,111 hours, absorption rate per hour of £9.20
C Budgeted capacity 11,250 hours, absorption rate per hour of £10.35
D Budgeted capacity 11,250 hours, absorption rate per hour of £9.20 LO 1c

22 The budgeted overhead absorption rate for variable production overheads in department
X of Lublin's factory is £3.00 per direct labour hour and for fixed overhead is £4.50 per
direct labour hour. Actual direct labour hours worked exceeded the budget by 500 hours.
If expenditures were as expected for variable and fixed overheads, the total over-absorbed
overhead for the period would be
A £507.50
B £1,500.00
C £2,250.00
D £3,750.00 LO 1c

23 The finishing department has budgeted labour hours of 3,250 and budgeted overhead
costs of £14,950.
The actual labour hours were 3,175 and actual overheads were £14,810.
The overheads for the period were
A under-absorbed by £140
B over-absorbed by £140
C under-absorbed by £205
D over-absorbed by £205 LO 1c

30 Management Information: Question Bank ICAEW 2019

 24 A company absorbs overheads on a machine hour basis. Actual machine hours were
20,000, actual overheads were £480,000 and there was over absorption of overheads of
£95,000.
What is the overhead absorption rate?
A £19.25 per unit
B £19.25 per hour
C £28.75 per unit
D £28.75 per hour LO 1c

25 Budgeted and actual data for the year ended 31 December 20X1 is shown in the following
table.
Budget Actual
Production (units) 5,000 4,600
Fixed production overheads £10,000 £9,500
Sales (units) 4,000 4,000
Fixed production overheads are absorbed on a per unit basis.
Why did under/over absorption occur during the year ended 31 December 20X1?
A The company sold fewer units than it produced.
B The company sold fewer units than it produced and spent less than expected on fixed
overheads.
C The company produced fewer units than expected.
D The company produced fewer units than expected and spent less on fixed overheads.
LO 1c

26 Budgeted overheads for a period were £340,000. At the end of the period the actual labour
hours worked were 21,050 hours and the actual overheads were £343,825.
If overheads were over absorbed by £14,025, how many labour hours were budgeted to be
worked?
A 20,000
B 20,225
C 21,050
D 21,700 LO 1c

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 31

 27 The budgeted absorption rate for variable production overhead in department X of
Wiggipen Ltd's factory is £2.50 per direct labour hour and for fixed overhead is £4 per
direct labour hour. Actual direct labour hours worked fell short of budget by 1,000 hours.
If expenditures for the actual level of activity were as expected for variable and fixed
overheads, the total under or over absorbed overhead for the period would be
A £4,000 under-absorbed
B £4,000 over-absorbed
C £6,500 under-absorbed
D £6,500 over-absorbed LO 1c

28 AB produces two products, A and B. Budgeted overhead expenditure for the latest period
was £54,500. Overheads are absorbed on the basis of machine hours. Other data for the
period are as follows:
Product A Product B
Actual results: Units Units
Opening inventory 400 700
Sales 1,800 2,400
Closing inventory 500 500
Production 1,900 2,200
Budgeted results:
Production 1,700 2,500
Machine hours per unit 2 3
If actual overhead expenditure for the period was £55,400, what was the under- or over-
absorption of overhead for the period?
A £900 under-absorbed
B £900 over-absorbed
C £3,400 under-absorbed
D £3,400 over-absorbed LO 1c

29 In activity based costing (ABC), what is a cost driver?

A A mechanism for accumulating the costs of an activity
B An overhead cost that is caused as a direct consequence of an activity
C A factor which causes the costs of an activity
D A cost relating to more than one product or service LO 1c

32 Management Information: Question Bank ICAEW 2019

 30 Which two of the following statements are correct?
A Just-in-time (JIT) purchasing requires the purchase of large quantities of inventory
items so that they are available immediately when they are needed in the production
process.
B Activity based costing (ABC) is concerned only with production overhead costs.
C Activity based costing (ABC) derives accurate product costs because it eliminates the
need for arbitrary cost apportionment.
D Activity based costing (ABC) involves tracing resource consumption and costing final
outputs.
E Just-in-time (JIT) systems are referred to as 'pull' systems because demand from a
customer pulls products through the production process. LO 1c, 1d

31 Which of the following is an aspect of a just-in-time (JIT) system?

(1) The use of small frequent deliveries against bulk contracts
(2) Flexible production planning in small batch sizes
(3) A reduction in machine set-up time
(4) Production driven by demand
A (1) only
B (1), (2), (3) and (4)
C (1), (2) and (4) only
D (1) and (4) only LO 1d

32 Which two of the following statements are correct?

A When target costing is used, the selling price of a product or service determines its
target cost.
B An activity based costing (ABC) system makes some use of volume-related cost drivers.
C A JIT system tends to cause increased storage costs because high inventories are held
to ensure that materials are available just as they are needed in production.
D Life cycle costing does not track costs that are incurred once production has ceased,
since there are no revenues against which to match the costs.
E A product's target cost takes no account of the external market conditions. LO 1d

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 33

 33 Which of the following would not normally result from the adoption of a JIT purchasing
system?
A Closer relationship with the suppliers
B Lower levels of inventory
C Lower levels of receivables
D Better quality supplies obtained LO 1d

34 Select the costing method that would be appropriate in each of the following industries.
Brewing Motorway construction
A Process D Job
B Job E Batch
C Batch F Contract
Plumbing repairs Shoe manufacture
G Process J Process
H Job K Job
I Contract L Batch LO 1d

35 Which two of the following statements are correct?

A In process and batch costing the cost per unit of output is found indirectly by dividing
total costs by the number of units produced.
B In process and job costing the cost per unit of output is found directly by accumulating
costs for each unit.
C Costing is irrelevant because the same level of detailed information can be extracted
from the financial accounts.
D The procedures used to calculate unit costs in manufacturing industries can equally be
applied to service industries. LO 1d

36 Which two of the following items used in costing batches are normally contained in a typical
batch cost?
A Actual material cost
B Actual manufacturing overheads
C Absorbed manufacturing overheads
D Budgeted labour cost LO 1d

34 Management Information: Question Bank ICAEW 2019

 37 Which of the following industries would not normally use process costing?
A The brewing industry
B The oil industry
C The steel industry
D The construction industry LO 1d

38 Which of the following statements about contract costing are correct?

(1) Work is undertaken to customer's special requirements
(2) Work is usually undertaken on the contractor's premises
(3) Work is usually of a relatively long duration
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D (1), (2) and (3) LO 1d

39 A firm makes special assemblies to customers' orders and uses job costing, with overheads
being absorbed based on direct labour cost.
The data for a period are:
Job A Job B Job C
£ £ £
Opening work in progress 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
Job B was completed during the period, during which actual overheads were the same as
the budgeted figure of £126,000.
What was the approximate value of closing work-in progress at the end of the period?
A £58,575
B £101,675
C £217,323
D £227,675 LO 1d

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 35

 40 Job number 352 requires 270 hours of active labour. It is expected that 10% of labour's
total time will be idle time. The wage rate is £8 per hour.
What is the labour cost for the job?
A £300
B £2,160
C £2,376
D £2,400 LO 1d

41 For each of the following industries select the appropriate method to establish the cost of
products.
Oil refining Clothing Car repairs
A Process D Process G Process
B Job/contract E Job/contract H Job/contract
C Batch F Batch I Batch LO 1d

36 Management Information: Question Bank ICAEW 2019

Chapter 4: Marginal costing and absorption costing
1 The following cost details relate to one unit of product MC.
£ per unit
Variable materials 9.80
Variable labour 8.70
Production overheads
Variable 1.35
Fixed 9.36
Selling and distribution overheads
Variable 7.49
Fixed 3.40
Total cost 40.10

In a marginal costing system the value of a closing inventory of 4,300 units of product MC
will be
A £85,355
B £117,562
C £125,603
D £172,430 LO 1c

2 A company manufactures product S and product T.

The following information relates to the latest period.
Product S Product T
Variable labour cost per unit £60 £48
Other variable production costs per unit £70 £50
Budgeted production units 3,400 4,000
Labour hours 17,000 16,000
Variable labour is paid at £12 per hour.
Fixed production overhead incurred of £214,500 was the same as budgeted for the period.
Fixed production overhead is absorbed on the basis of labour hours.
Fixed production overhead absorption rate = £214,500/(17,000 + 16,000)
= £6.50 per labour hour
The value of the closing inventory of product S using absorption costing was £65,000.
If marginal costing had been used the value of this inventory would have been
A £52,000
B £53,150
C £260,000
D £442,000 LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 37

 3 Ticktock Ltd makes clocks with a selling price of £50 per clock. Budgeted production and
sales volume is 1,000 clocks per month. During September 1,000 clocks were made and
800 clocks were sold. There was no opening inventory.
The variable cost per clock is £25. Fixed costs in September were, as budgeted, £5,000.
Using marginal costing the contribution and profit for September would be calculated as
A Contribution: £25,000, Profit: £20,000
B Contribution: £20,000, Profit: £15,000
C Contribution: £20,000, Profit: £16,000
D Contribution: £25,000, Profit: £16,000 LO 1c

4 Which three of the following statements concerning marginal costing are true?
A Marginal costing is an alternative method of costing to absorption costing.
B Contribution is calculated as sales revenue minus fixed cost of sales.
C Closing inventories are valued at full production cost.
D Fixed costs are treated as a period cost and are charged in full to the income statement
of the accounting period in which they are incurred.
E Marginal cost is the cost of a unit which would not be incurred if that unit were not
produced. LO 1c

5 Which two of the following statements concerning marginal costing systems are true?
A Such systems value finished goods at the variable cost of production.
B Such systems incorporate fixed overheads into the value of closing inventory.
C Such systems necessitate the calculation of under- and over-absorbed overheads.
D Such systems write off fixed overheads to the income statement in the period in which
they were incurred. LO 1c

6 A company budgets during its first year of operations to produce and sell 15,900 units per
quarter of its product at a selling price of £24 per unit.
Budgeted costs are as follows:
£ per unit
Variable production costs 8.50
Fixed production costs 2.50
Variable selling costs 6.00
In the first quarter the unit selling price, variable unit cost and expenditure on fixed
production costs were as budgeted. The sales volume was 16,000 units and closing
inventory was 400 units.

38 Management Information: Question Bank ICAEW 2019

 The absorption costing profit for the quarter was
A £110,750
B £112,000
C £112,250
D £113,250 LO 1c

7 Which of the following statements about profit measurement under absorption and
marginal costing is true (assuming unit variable and fixed costs are constant)?
A Profits measured using absorption costing will be higher than profits measured using
marginal costing.
B Profits measured using absorption costing will be lower than profits measured using
marginal costing.
C Profits measured using absorption costing will be either lower or higher than profits
measured using marginal costing.
D Profits measured using absorption costing may be the same as, or lower than, or
higher than profits measured using marginal costing. LO 1c

8 If the number of units of finished goods inventory at the end of a period is greater than that
at the beginning, marginal costing inventory will result in (assuming unit variable and fixed
costs are constant)
A less operating profit than the absorption costing method
B the same operating profit as the absorption costing method
C more operating profit than the absorption costing method
D more or less operating profit than the absorption costing method depending on the
ratio of fixed to variable costs LO 1c

9 Adams Ltd's budget for its first month of trading, during which 1,000 units are expected to
be produced and 800 units sold, is as follows:
£
Variable production costs 95,500
Fixed production costs 25,800
Selling price is £250 per unit

The profit calculated on the absorption cost basis compared with the profit calculated on
the marginal cost basis is
A £24,260 lower
B £5,160 higher
C £5,160 lower
D £24,260 higher LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 39

 10 Bright makes and sells boats. The budget for Bright's first month of trading showed the
following:
£
Variable production cost of boats 45,000
Fixed production costs 30,000
Production cost of 750 boats 75,000
Closing inventory of 250 boats (25,000)
Production costs of 500 boats sold 50,000
Sales revenue 90,000
Production cost of boats sold (50,000)
Variable selling costs (5,000)
Fixed selling costs (25,000)
Profit 10,000

The budget has been produced using an absorption costing system. If a marginal costing
system were used, the budgeted profit would be
A £22,500 lower
B £10,000 lower
C £10,000 higher
D £22,500 higher LO 1c

11 A company produces a single product for which cost and selling price details are as follows:
£ per unit £ per unit
Selling price 28
Variable material 10
Variable labour 4
Variable overhead 2
Fixed overhead 5
21
Profit per unit 7

Last period, 8,000 units were produced and 8,500 units were sold. The opening inventory
was 3,000 units and profits reported using marginal costing were £60,000.

The profits reported using an absorption costing system would be

A £47,500
B £57,500
C £59,500
D £62,500 LO 1c

40 Management Information: Question Bank ICAEW 2019

 12 Typo Ltd's budget for the year ended 31 December 20X8 is as follows.
Units £
Sales 1,200 24,000
Opening inventory 500
Production 1,000
1,500
Closing inventory (300)
Sold 1,200
Marginal cost per unit £15 (18,000)
Contribution 6,000
Fixed overhead (7,000)
Loss (1,000)

For absorption costing purposes, the fixed overhead absorption rate is set at £7 per unit for
20X8.
If absorption costing were to be used in inventory valuation throughout 20X8, what would
the profit (or loss) be for 20X8?
A £400 loss
B £400 profit
C £2,400 profit
D £2,400 loss LO 1c

13 A company had opening inventory of 48,500 units and closing inventory of 45,500 units.
Profits based on marginal costing were £315,250 and on absorption costing were
£288,250.
What is the fixed overhead absorption rate per unit?
A £5.94
B £6.34
C £6.50
D £9.00 LO 1c

14 In March, a company had a marginal costing profit of £78,000. Opening inventories were
760 units and closing inventories were 320 units. The company is considering changing to
an absorption costing system.
What profit would be reported for March, assuming that the fixed overhead absorption rate
is £5 per unit?
A £74,200
B £75,800
C £76,400
D £80,200 LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 41

 15 When comparing the profits reported under marginal and absorption costing when the
levels of inventories increased (assuming unit variable and fixed costs are constant)
A absorption costing profits will be lower and closing inventory valuations higher than
those under marginal costing
B absorption costing profits will be lower and closing inventory valuations lower than
those under marginal costing
C absorption costing profits will be higher and closing inventory valuations lower than
those under marginal costing
D absorption costing profits will be higher and closing inventory valuations higher than
those under marginal costing LO 1c

16 Which two of the following statements are advantages of marginal costing as compared
with absorption costing?
A It complies with accounting standards
B It ensures the company makes a profit
C It is more appropriate for short-term decision-making
D Fixed costs are treated in accordance with their nature (ie, as period costs)
E It is more appropriate when there are strong seasonal variations in sales demand LO 1c

17 When comparing the profits reported under marginal and absorption costing when the
levels of inventories decreased (assuming unit variable and fixed costs are constant)
A absorption costing profits will be lower and closing inventory valuations higher than
those under marginal costing
B absorption costing profits will be lower and closing inventory valuations lower than
those under marginal costing
C absorption costing profits will be higher and closing inventory valuations lower than
those under marginal costing
D absorption costing profits will be higher and closing inventory valuations higher than
those under marginal costing LO 1c

42 Management Information: Question Bank ICAEW 2019

 18 Which two of the following statements are correct?
A Absorption unit cost information is the most reliable as a basis for pricing decisions.
B A product showing a loss under absorption costing will also make a negative
contribution under marginal costing.
C When closing inventory levels are higher than opening inventory levels and overheads
are constant, absorption costing gives a higher profit than marginal costing.
D In a multi-product company, smaller volume products may cause a disproportionate
amount of set up overhead cost.
E Marginal unit cost information is normally the most useful for external reporting
purposes. LO 1c

19 Iddon Ltd makes two products, Pye and Tan, in a factory divided into two production
departments, Machining and Assembly. Both Pye and Tan need to pass through the
Machining and Assembly departments. In order to find a fixed overhead cost per unit, the
following budgeted data are relevant:
Machining Assembly
Fixed overhead costs £120,000 £72,000
Labour hours per unit: Pye 0.5 hours 0.20 hours
Tan 1.0 hours 0.25 hours
Budgeted production is 4,000 units of Pye and 4,000 units of Tan (8,000 units in all) and
fixed overheads are to be absorbed by reference to labour hours.
What is the budgeted fixed overhead cost of a unit of Pye?
A £18
B £20
C £24
D £28 LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 43

 20 Norbury plc has just completed its first year of trading. The following information has been
collected from the accounting records:
£
Variable cost per unit
Manufacturing 6.00
Selling and administration 0.20
Fixed costs
Manufacturing 90,000
Selling and administration 22,500
Production was 75,000 units and sales were 70,000 units. The selling price was £8 per unit
throughout the year.
Calculate the net profit for the year using absorption costing.
A £13,500
B £19,500
C £21,000
D £22,500 LO 1c

44 Management Information: Question Bank ICAEW 2019

Chapter 5: Pricing calculations
1 Product X is produced in two production cost centres. Budgeted data for product X are as
follows:
Cost centre A Cost centre B
Direct material cost per unit £60.00 £30.30
Direct labour hours per unit 3 1
Direct labour rate per hour £20.00 £15.20
Production overhead absorption rate per direct labour £12.24 £14.94
hour
General overheads are absorbed into product costs at a rate of 10% of total production
cost.
If a 20% return on sales is required from product X, its selling price per unit should be
A £271.45
B £282.31
C £286.66
D £298.60 LO 1e

2 A company manufactures two products for which budgeted details for the forthcoming
period are as follows:
Product L Product T
£ per unit £ per unit
Materials 6.00 9.00
Labour (£15 per hour) 30.00 22.50
Production overhead of £61,200 is absorbed on a labour hour basis. Budgeted output is
4,000 units of product L and 6,000 units of product T.
The company adds a mark up of 20% to total production cost in order to determine its unit
selling prices.
The selling price per unit of product L is
A £47.52
B £51.84
C £54.00
D £61.56 LO 1e

ICAEW 2019 Chapter 5: Pricing calculations 45

 3 Print Ltd manufactures ring binders which are embossed with the customer's own logo. A
customer has ordered a batch of 300 binders. The following data illustrate the cost for a
typical batch of 100 binders:
£
Variable materials 30
Wages (paid on a per binder basis) 10
Machine set up (fixed per batch) 3
Design and artwork (fixed per batch) 15
58

Print Ltd absorbs production overhead at a rate of 20% of variable wages cost. A further 5%
is added to the total production cost of each batch to allow for selling, distribution and
administration overhead.
Print Ltd requires a profit margin of 25% of sales value.
The selling price for a batch of 300 binders should be
A £189.00
B £193.20
C £201.60
D £252.00 LO 1e

4 A firm makes special assemblies to customers' orders and uses job costing.
The data for a period are:
Job A Job B Job C
£ £ £
Opening work in progress 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were £126,000 and these are absorbed on the
basis of labour cost.
Job B was completed and delivered during the period and the firm wishes to earn a 33 1/3%
profit margin on sales.
What should be the selling price of job B?
A £69,435
B £75,523
C £84,963
D £258,435 LO 1e

46 Management Information: Question Bank ICAEW 2019

 5 Halcow Ltd operates a job costing system and its standard net profit margin is 20% of sales
value.
The estimated costs for job 173 are as follows:
Direct materials 5 metres @ £20 per metre
Direct labour 14 hours @ £8 per hour

Variable production overheads are recovered at the rate of £3 per direct labour hour.
Fixed production overheads for the year are budgeted to be £200,000 and are to be
recovered on the basis of the total of 40,000 direct labour hours for the year.
Other overheads, in relation to selling, distribution and administration, are recovered at the
rate of £80 per job.
The selling price to be quoted for job 173 is
A £404
B £424
C £485
D £505 LO 1e

6 An item priced at £90.68, including local sales tax at 19%, is reduced in a sale by 20%.
The new price before sales tax is added is
A £58.76
B £60.96
C £72.54
D £76.20 LO 1e

7 Three years ago a retailer sold electronic calculators for £27.50 each. At the end of the first
year he increased the price by 5% and at the end of the second year by a further 6%. At the
end of the third year the selling price was £29.69 each.
The percentage price change in Year 3 was a
A 2.7% decrease
B 3.0% increase
C 3.0% decrease
D 3.4% decrease LO 1e

ICAEW 2019 Chapter 5: Pricing calculations 47

 8 At a sales tax rate of 12%, an article sells for £84, including sales tax.
If the sales tax rate increases to 17.5%, the new selling price will be
A £75.00
B £86.86
C £88.13
D £88.62 LO 1e

9 A greengrocer sells apples either for 45p per kg, or in bulk at £9 per 25 kg bag.
The percentage saving per kg from buying a 25 kg bag is
A 9%
B 11.25%
C 20%
D 25% LO 1e

10 A skirt which cost a clothes retailer £50 is sold at a profit of 25% on the selling price.
The profit is therefore
A £12.50
B £16.67
C £62.50
D £66.67 LO 1e

11 Sunita sells an item for £240 on which there is a mark-up of 20%.

What profit was made on this transaction?
A £40
B £48
C £192
D £200 LO 1e

48 Management Information: Question Bank ICAEW 2019

 12 A company calculates the prices of jobs by adding overheads to the prime cost and then
adding 30% to total costs as a profit mark up. Job number Y256 was sold for £1,690 and
incurred overheads of £694.
What was the prime cost of the job?
A £489
B £606
C £996
D £1,300 LO 1e

13 A company prices its product at the full cost of £4.75 per unit plus 70%. A competitor has
just launched a similar product selling for £7.99 per unit. The company wishes to change
the price of its product to match that of its competitor.
The product mark up percentage should be changed to
A 1.1%
B 1.8%
C 40.6%
D 68.2% LO 1e

14 Details from a retailer's records concerning product D for the latest period are as follows.
£
Sales revenue 60,000
Purchases 40,000
Opening inventory 12,000
Closing inventory 2,000
The profit margin for product D is
A 16.7%
B 20.0%
C 33.3%
D 50.0% LO 1e

15 The following data relate to the Super.

Material cost per unit £15.00
Labour cost per unit £52.05
Production overhead cost per machine hour £9.44
Machine hours per unit 7
General overhead absorption rate 8% of total production cost
The capital invested in manufacturing and distributing 953 units of the Super per annum is
estimated to be £136,200.

ICAEW 2019 Chapter 5: Pricing calculations 49

 If the required annual rate of return on capital invested in each product is 14%, the selling
price per unit of the Super must be
A £102.62
B £153.14
C £163.79
D £163.91 LO 1e

16 A product's marginal costs are 60% of its fixed costs. Selling prices are set on a full cost
basis to achieve a margin of 20% of selling price.
To the nearest whole number, which percentage mark up on marginal costs would produce
the same selling price as the current pricing method?
A 67%
B 108%
C 220%
D 233% LO 1e

17 A company determines its selling prices by adding a mark up of 100% to the variable cost
per unit.
If the selling price is increased by 50%, the quantity sold each period is expected to reduce
by 40% but the variable cost per unit will remain unchanged.
Which of the following statements is correct?
A The total revenue will increase and the total contribution will increase.
B The total revenue will increase and the total contribution will decrease.
C The total revenue will decrease and the total contribution will increase.
D The total will decrease and the total contribution will decrease. LO 1e

18 The following information is available for the latest period.

Fixed costs £160,000
Variable cost per unit £4
Profit £10,000
A 2% increase in selling price would not alter the number of units sold each period but the
profit would increase by £5,000.
The current selling price per unit is
A £0.08
B £10.00
C £12.50
D £12.75 LO 1e

50 Management Information: Question Bank ICAEW 2019

 19 A contract is agreed between a supplier and a buyer. The contract will take four weeks to
complete and the price to be charged will be agreed upon at the point of sale as the actual
costs incurred plus an agreed percentage mark up on actual costs. The buyer is to be
granted four weeks credit from the point of sale.
Which of the following best describes how the risk caused by inflation will be allocated
between the supplier and the buyer?
A The supplier and the buyer will each bear some of the inflation risk but not necessarily
equally.
B The supplier and the buyer will each bear equal amounts of the inflation risk.
C Only the supplier will bear the inflation risk.
D Only the buyer will bear the inflation risk. LO 1e

20 Which of the following statements is correct?

A A cost-plus pricing method will enable a company to maximise its profits.
B A selling price in excess of full cost will always ensure that an organisation will cover all
its costs.
C The percentage mark up with full cost plus pricing will always be smaller than the
percentage mark up with marginal cost-plus pricing.
D Since it is necessary to forecast output volume to determine the overhead absorption
rate, full cost-plus pricing takes account of the effect of price on quantity demanded.
LO 1e

21 The following data relate to Bailey plc, a manufacturing company with several divisions.
Division X produces a single product which it sells to division Y and also to external
customers.
Sales to division Y External sales
£ £
Sales revenue
At £25 per unit 250,000
At £20 per unit 100,000
Variable costs at £12 per unit (60,000) (120,000)
Contribution 40,000 130,000
Fixed costs (20,000) (50,000)
Profit 20,000 80,000

A supplier offers to supply 5,000 units at £18 each to division Y.

If division Y buys from the external supplier and division X cannot increase its external sales,
the change in total profit of Bailey plc will be a
A £10,000 decrease
B £30,000 decrease
C £10,000 increase
D £30,000 increase LO 1f

ICAEW 2019 Chapter 5: Pricing calculations 51

 22 Which two of the following criteria should be fulfilled by a transfer pricing system?
A Should encourage dysfunctional decision-making
B Should encourage output at an organisation-wide profit-maximising level
C Should encourage divisions to act in their own self interest
D Should encourage divisions to make entirely autonomous decisions
E Should enable the realistic measurement of divisional profit LO 1f

23 Which of the following best describes a dual pricing system of transfer pricing?
A The receiving division is charged with the market value of transfers made and the
supplying division is credited with the standard variable cost.
B The receiving division is credited with the market value of transfers made and the
supplying division is charged with the standard variable cost.
C The receiving division is charged with the standard variable cost of transfers made and
the supplying division is credited with the market value.
D The receiving division is credited with the standard variable cost of transfers made and
the supplying division is charged with the market value. LO 1f

24 A company has two divisions, A and B. Division A transfers one third of its output to B and
sells the remainders to the external market for £14 per unit. The transfers to division B are
made at the transfer price of cost plus 20%.
Division B incurs costs of £4 per unit in converting the transferred units before selling them
to external customers for £20 per unit.
Division A costs amount to £10 per unit and the budgeted total output for the period is 270
units. There is no budgeted change in inventories for either division.
The reported profits for the period will be
Division A Division B
A £900 profit £360 profit
B £900 profit £720 profit
C £900 profit £1,440 profit
D £1,332 profit £72 loss LO 1f

52 Management Information: Question Bank ICAEW 2019

 25 Division P produces plastic mouldings, all of which are used as components by Division Q.
The cost schedule for one type of moulding, item 103, is shown below.
Direct material cost per unit £3.00
Direct labour cost per unit £4.00
Variable overhead cost per unit £2.00
Fixed production overhead costs each year £120,000
Annual demand from Division Q is expected to be 20,000 units
Two methods of transfer pricing are being considered:
(1) Full production cost plus 40%
(2) A two-part tariff with a fixed fee of £200,000 each year
The transfer price per unit of item 103 transferred to Division Q using both of the transfer
pricing methods listed above is:
(1) Full production cost plus 40% (2) Two-part tariff with a fixed fee of £200,000 each
year
A £12.60 £9
B £12.60 £19
C £21.00 £9
D £21.00 £19 LO 1f

26 A and B are two divisions of company C. A manufactures two products, the X and the Y. The
X is sold outside the company. The Y is sold only to division B at a unit transfer price of
£410. The unit cost of the Y is £370 (variable cost £300 and absorbed fixed overhead £70).
Division B has received an offer from another company to supply a substitute for product Y
at a price of £330 per unit. Assume Division A and B have spare operating capacity.
Which of the following statements is correct with regard to the offer from the other
company?
A The offer is not acceptable from the point of view of company C and the manager of
Division B will make a sub-optimal decision.
B The offer is not acceptable from the point of view of company C and the manager of
Division B will not make a sub-optimal decision.
C The offer is acceptable from the point of view of company C and the manager of
Division B will make a sub-optimal decision.
D The offer is acceptable from the point of view of company C and the manager of
Division B will not make a sub-optimal decision. LO 1f

ICAEW 2019 Chapter 5: Pricing calculations 53

 27 Division J manufactures product K incurring a total cost of £50 per unit. Product K is sold to
external customers in a perfectly competitive market at a price of £57, which represents a
mark up of 90% on marginal cost.
Division J also transfers product K to division R. If transfers are made internally then division
J does not incur variable selling costs which amount to 5% of the total variable cost.
Assuming that the total demand for product K exceeds the capacity of division J, the
optimum transfer price per unit between division J and division R is
A £54.50
B £55.50
C £56.72
D £57.00 LO 1f

28 In a contract to sell a commodity the selling price is agreed between the supplier and the
buyer to be the actual costs incurred by the supplier plus a profit mark-up using a fixed
percentage on actual costs. No credit period is offered by the supplier.
Which of the following best describes how the risk caused by inflation will be allocated
between the supplier and the buyer?
A The supplier and the buyer will each bear some of the inflation risk but not necessarily
equally
B Only the supplier will bear the inflation risk
C Only the buyer will bear the inflation risk
D The supplier and the buyer will each bear equal amounts of the inflation risk LO 1e

29 F and G are two divisions of a company. Division F manufactures one product, Rex. Unit
production cost and the market price are as follows:
£
Variable materials 24
Labour 16
Variable fixed overhead 8
48
Prevailing market price £64

Product Rex is sold outside the company in a perfectly competitive market and also to
division G. If sold outside the company, Rex incurs variable selling costs of £8 per unit.
Assuming that the total demand for Rex is more than sufficient for division F to manufacture
to capacity, what is the price per unit (in round £s) at which the company would prefer
division F to transfer Rex to division G?
A £64
B £56
C £40
D £48 LO 1f

54 Management Information: Question Bank ICAEW 2019